What price, growth?

7 JANUARY 2012

My earlier columns have mentioned how 'shareholder capitalism' was encouraged as a means for the US to regain its economic hegemony, when, in the '80s, it was threatened by the 'stakeholder capitalism' followed by Japan and Germany. This resulted in the phenomenal growth of the mutual fund industry which now controls more assets than the banking industry. In fact, the funds under management by Blackstone, the largest fund house in the world, exceeds India's GDP. The stock of financial assets globally is three times global GDP of $ 65 trillion, and so the institutional investors managing these assets are able to exert a lot of pressure on corporate leaders as well as Government.

Since shareholder capitalism regards the interests of providers of capital as paramount, and assumes that interests of other stakeholders will fall into place, it seeks to ensure this by continuous growth. Earlier, productivity improvements also contributed to this growth but, over time, its contribution has reduced, and growth comes from expansion. This insistence on growth has several ramifications.---------------------------------------- Did you miss the Webinar? ----------------------------------------

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One is the inequality it has generated in executive compensation, thereby leading to the 'Occupy Wall Street' protest by the 99%ers against the top 1%ers. The more sensitive Governments, like Singapore's, have responded, by cutting the pay of the Prime Minister by 36%, something unlikely to happen in India, where politicians show an unbelievable rise in prosperity, with the IT Department turning a convenient blind eye, on the premise that the increase is due to tax free 'agricultural income'. One reform that would go a long way to tackling corruption is to make agricultural income taxable, with much higher exemption limits, so that it is not used as a route to conceal graft payments.

The other ramification is in the overuse of natural resources to fuel that growth. Nature is hitting back, whether it is via tsunamis that hit South East Asia a few years back, or Japan recently, or floods in Bangkok, Philipines or, recently, Brazil. This is a direct consequence of the rapid economic growth of the world's two most populous countries, China and India, and the consumption of resources this entails.

China's consumption has been fuelled by, and is directly proportional to, the rise in money supply especially in the US. This is brought out by the article by Darryl Schoon 'China, 2012 and Von Mises' crack up boom' As per the article, China, in 1995, also rapidly expanded its money supply "To offset the global collapse in demand, China expanded its money supply in 2008 by an extraordinary 150 %, an increase driven by China's need to maintain economic growth or risk losing political control"

The credit creation has gone into creating a real estate boom in China, which has now reached bubble proportions, awaiting a pinprick. The easy credit, together with the demand for greater shareholder returns by a massive institutionalised money system, is what led banks to relax lending standards and overlend to countries like Greece, Iceland, Ireland and others, the cause of today's Eurozone problems.

Everything has its price, including growth. We will have to pay that price. In terms of a collapse of the Chinese real estate market, which would cause a sharp slowdown in construction activity, leading to job losses and thence to social unrest, already being manifested. In terms of a default by Greece, even after the 'voluntary' haircut of 50% of private debt .Voluntary because it avoids the triggering off of insurance payments on credit default swaps, held mainly by European banks, which could start a run on them). In terms of the problems of Italy snowballing.

Should Italy be unable to institute reforms, it would be unable to refinance 500b. Euro of debt that falls due in the next 18 months, and that would surely lead to a major crisis in Europe George Soros, the legendary investor, says that the Euro crisis is bigger and more serious than the 2008 US crisis.

What is India doing?

A small measure is an accounting fudge. Companies that have borrowed heavily in foreign currency find their liabilities have shot up after the 15% fall in the rupee. If they were to mark these losses to market in their P&L accounts, corporate results for the December quarter would be a nightmare. So they have been allowed to show these in their Balance Sheets, as an increase in assets, to be amortised over the life of the loan.

Then there is the 'Honey I Shrunk the Fiscal Deficit' trick being played by the Ministry of Finance. The fiscal deficit is overshooting the targeted 4.6% of GDP, because of Government spending being incontinent. Because of the fall in stock markets, the disinvestment target of Rs 40,000 crores will not be met. So the scheme is to transfer, at a discount, the Rs 31,800 crores of shares held by SUUTI (the erstwhile Unit 64 scheme good assets), comprising 11.5% of ITC, 23.5% of Axis Bank and 8.2% of Larsen & Toubro (L&T), into an SPV (special purpose vehicle), ask public sector banks to hold the equity of the SPV, borrow from them against the Rs 31,800 crores of assets, and use the borrowed funds to buy out the shares that were to be divested. That's essentially a transfer from one pocket to another. The PSU banks have objected.

Perhaps the Government can re-work it. The SPV can become a mutual fund, and the public could be invited to take units in it. The Rs 31,800 shares would be sold at the same discount the Government is willing to give to the SPV, making it attractive for investors to buy units of a mutual fund at an initial discount to NAV. This could be done with a precondition that the shares be locked in for, say, three years, at the end of which the Government would have the right of first refusal at the market price. This way the consent of the PSU banks is not necessitated.

Another thing being done is that Securities and Exchange Board of India (SEBI) has opened up two new routes for IPOs. One is an institutional placement programme or IPP. The other is to offer shares for sale through a stock exchange to qualified institutional buyers.

In a more important way, the Government has permitted foreign individuals, pension funds and trusts to invest directly into Indian equity. This could, if implemented properly, be a game changer and the harbinger of a bull run in Indian stock markets. More so if Chinese real estate implodes.

A tertiary benefit of this permission is that it may assist in round tripping of Indian money held abroad, which is now finding it increasingly difficult to maintain anonymity. Were this to happen, the bull could start running on Dalal Street much before it runs in Pampalona, Spain, in July.

In corporate news of interest, Reliance has entered into a series of complicated deals to bail out debt laden Network 18 group. It is lending the promoters Rs 1500 crores in order to subscribe to rights issues, which would hopefully raise some Rs 3500 crores. Of this, Rs 2100 would be used to buy out a part of RIL's stake in Ushodaya, which it had bought in 2008 for Rs 2600 crores and which includes rights to some print and electronic media properties in the South. RIL would also get content for delivery, which it would use when it launches its 4G services through Reliance Infotel.

The Adani group has moved the Supreme Court, after losing in two earlier levels, asking for an agreement it had made, to supply 1000 MW of power, to a Gujarat utility, at a fixed price of Rs 2.35 per unit, for 25 years. It is unable now to supply power at this price because coal prices have shot up. Coal India has hiked prices by 12-15%. For imported coal, countries like Indonesia and Australia have imposed taxes on exports of coal. Other promoters who have entered into fixed rate agreements would follow suit. Unless the issue is resolved, it would exacerbate the already strained power situation.

Kingfisher Airlines has been declared a defaulter by State Bank of India (SBI) and Bank of India. New system driven NPA recognition norms would have resulted in an automatic declaration as such. The DGCA has also issued a safety warning. It thus seems strange that new Civil Aviation Minister, Ajit Singh, says that no airline would be allowed to close! If there are safety issues, it must either close or change hands. Several pilots have quit Kingfisher, for non payment of salary.

The BSE-Sensex gained 412 points last week, to end at 15857 and the NSE-Nifty ended the week at 4754, up 129.

The market is interestingly poised. If one believes that a European crisis will burst soon, then the market would collapse. The sensex level of 15,000 would then give way, and it could fall another 20%.

If, on the other hand, Indian money is attracted back home, through the anonymity of a watered down KYC (know your customer) approach of Foreign Institutional Investors (FIIs), as compared to Swiss banks, who are under the lens for greater scrutiny, then investors may be left lamenting 'yeh mauka na milega dubara'.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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2 Responses to "What price, growth?"


Jan 8, 2012

As an observer with little knowledge of economics, articles are quite interesting, readable. Its not Latin or Greek, though I don't understand all the details everytime. I read it hoping that over period of time things will start making sense. Since a few years have been observing the effect of economic reforms as reflected in our daily life....about 7-8years read an advert or two-loan for Diwali shopping,and similar one for travel. Nothing seemed so unusual to my husband - a banker , but to my mind it was a sign of culture which went way beyond the common man's understanding of not spending beyond means. And a whole generation in India has grown up with this new set of values. The results though not very alarming, were obvious in 2008 downturn when the dual income couples employed in call centres found it hard hitting....The price of growth ...( changing set of fundamental values....)
Now you see the great business icons of today likes of ,Ambanis & owners of kingfisher indulging by flaunting their wealth, having teams in IPL etc, but on other hand their top brass from going to jail (instead of them probably...!) or failing to pay their employees....( Totally explainable from the modern business perspective of personal wealth,company laws etc etc.) But the values of business leadership is reflected in these; and its just one segment of society. Be it political or business the leaders, being the drivers of growth(....????)have certain moral and ethical responsibility, because in today's scenario, the price being paid by many in different ways, Be it the seeds of crops, leading to eating food which resembles the names we know in English but a hybrid product and may not even know the complete health implications Example, seedless papayas - which natural fruit can be seedless? or the recent study where it claimed increasing the wheat allergy has been due to the experimentation with the crop that it no more resembles even what our grandparents ate...!!(price of growth...!),and ofcourse you mentioned the environment. As a person who happens to hold a business administration degree after studying a subject called microbiology,I don't claim much understanding of market economics. But there is a point in mind,( probably remnant of some age old values and facts of life learnt from a middle class businessman father of mine, who believed in employees being stakeholder much before any business book mentioned the word, and ensuring that cash earnings came to the family after paying salaries !!) - till gold was the binding factor behind currency, it made sense for the nature limited it. And by the basic principle of exchange value metal to currency extension was understandable logic to this non- specialised mind. Trying to fill in the gaps was difficult on this issue, and continuous prodding with my husband and my economist friends make me realise that enough of securities, systems etc have evolved etc for for currency value but as I understand the governments have more freedom to print currency now - subject to whatever parameters, (ofcourse then the political agendas..) and also subject to market cycles. HA!there lies the catch I thought, ( telling myself -stop trying to understand things which the high IQ, trained professionals with high salaries are paid to manage...so what if it affects one's life long earning being affected in split seconds!!) - Market cycles & freedom to print currency backed with whatever norms etc has a basic flaw behind it- Human greed which cannot be limited by nature.
The increasing lifestyle issues in developing countries and again a well known fact, and a recent discussion with dermatologist was an eye opener, as to how an indivdual believes can be altered to adopt habits of lifetime as simple as moisturing your skin...hammering of message from the industry.Yes there is price for everything, and eventually paid by each individual who is part of the "groth" oriented society in one way or other....only thing with integrated world economy, technology, 24X7 channels ( broadcasting either only the negative perspective of news, or hammering the message of the industry, its slightly difficult to keep the balance. Finding industry experts, be it finance or health field with credibility and right values is also becoming very difficult. It is also a price of growth we pay,if we can call it growth in real sense!!



Jan 7, 2012


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