Stakeholders hit back - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
Stakeholders hit back A  A  A

PRINTER FRIENDLY | ARCHIVES
18 JUNE 2011


There are lots of things happening in the world today, which have a bearing on economic performance and on investors and which are both confusing and worrying. Will Greece be bailed out or will there be a sovereign failure? Will the contagion spread to the other PIGS (Portugal, Ireland and Spain), all of whom are vulnerable? Why is the US economic growth tepid, after QE1 and QE2, with persistent high unemployment, and will there be a QE3? Why are oil prices rising, thus negating the benefits of QE2 led economic growth and will oil price rises sustain? Will the jasmine revolution topple more Middle Eastern regimes, particularly Saudi? Domestically, will inflation be contained, and how long would the RBI continue the rising interest rate cycle? (it hiked rates by 25 basis points last week; China's Central Bank rose by 50). Why has labour unrest cropped up again after a long lull (the Manesar, Haryana plant of Maruti Udyog had a strike that just ended).

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All these questions concern investors. To put things in a framework, they are a confluence of the forces of globalisation and shareholder capitalism. Till the 1980s, Japan and Germany were the rising economic powerhouses, and were threatening the economic hegemony of the US. Both nations practised forms of stakeholder capitalism, giving weightage to all stakeholders, including shareholders, customers, employees and suppliers. In the mid 80s the US countered by focusing on shareholder capitalism, in which the interests of providers of capital (shareholders and lenders) became paramount, and those of other stakeholders subservient, and would fall into place. The strategy worked!

The Japanese economy peaked in 1989, with the Nikkei hitting 40,000, and has slid ever since. Globalisation and telecommunication helped. Capital (or money) is the only factor of production (men, materials and machinery are the other three) which is capable of being digitised. It thus has a greater velocity of circulation, moving at the click of a mouse. Because of the greater velocity of circulation, its impact on economic activity is greater. This generated the belief that problems could be solved by pumping in more of it (QE1 and QE2, Greece bailout etc). and that innovation and productivity would provide the long term solutions.

The money for the QE1 and 2 bailouts came from borrowing. However, the efficiency of borrowed money has declined to the point it has become negative. This is called the marginal productivity of debt. In 1957 there was $ 1.86 of debt for every $ of national income. By 2006 it needed $ 4.60 to create a $ of national income The US now has $ 14 trillion of debt! It, alongwith other countries, (Italy has a public debt of 120% of its GDP, the highest amongst rich countries and Greece is 150%) needs to reduce it.

Yet, in order to keep the economic engine running it needs to take on more debt and spend the money, since consumption accounts for 70% of US GDP and private consumers are not spending after their savings in both financial assets and in houses have been severely eroded. It's the same in Greece. The IMF is likely to rescue Greece with a Euro 12b. package but requires the Government to cut spending by 78 b. Euros in the next 5 years. To do this, the Government has announced cuts to several spending schemes, including pension schemes, leading to street protests.

Meanwhile other stakeholders are striking back, as explained by Alan Kennedy in a book 'The End of Shareholder Value'. The strike at the Maruti plant in Manesar is a manifestation; the employee is hitting back. Chinese workers are also striking; there are some 140 m. migrant workers who move from rural areas to urban areas in search of jobs, using the money to remit home to sustain the rural household. Employees owe no loyalty to the company which practices, in the shareholder capitalism system a hire and fire policy to enhance returns to shareholders, as they did under the contrasting lifetime employment policy in the stakeholder capitalism system. Consumers, having the ability to do comparision shopping on the internet are forsaking loyalty to a brand. Suppliers, too, are revolting. Several companies whittled down suppliers to a handful, to cut costs and enhance returns and in some cases, such as auto component suppliers, the suppliers are financially stronger than the auto companies and able to dictate prices to them!

Simultaneously, the spread of globalisation and communication has increased the aspiration levels of peoples, which is why the jasmine revolutions are taking place. Tunisia and Egypt have seen regime change, and Libya, Bahrain, Syria and Yemen are in the throes of a people revolt. The worry is if it spreads to Saudi, the largest oil producer in the world. The shortage of fossil fuels has long been written about; here, too, shareholder capitalism has played a big part in exacerbating it. After earlier oil shocks, automobile companies saw their sales, and profit margins, dropping. The US Government sensibly mandated fuel efficiency norms (India's Government is doing so 30 years later!). However, the auto lobby succeeded in exempting gas guzzling SUVs (with the highest profit margins) from such norms! Shareholder profit won over ecological common sense.

So coming back to those questions. It's possible that Greece may be bailed out, for now, but that would be postponing the inevitable. The country has to bring down its debt level, improve its competitiveness and curtail its over generous pension schemes (it actually reduced retirement age at a time when Germany, which rescued Greece, was increasing its retirement age! Which meant Germans were working more to allow Greeks to bathe in the sun sooner!). The contagion is likely to spread to other PIGS.

The US economy is anaemic because marginal productivity of debt has sharply declined and the US consumer, with savings battered by the drop in asset prices of both homes and stocks, is wary of spending. This is actually a good sign for the long term but causes short term stress, as it should. Will there be a QE3? Well, this is the standoff between the Government, which wants Congress to raise the debt ceiling in order to borrow more, and the Congress. At the last moment Congress will be forced to raise the debt ceiling. The latest Economist says that Obama could lose the next general election, despite the poor quality of Republican candidates, simply because the economy is in the doldrums and jobs are not being created. This happened to George Bush senior in 1991, when he was coasting along to apparent victory, nipped in the bud in 1992 by a faltering economy. So Obama may well usher in QE3 to improve chances of re-election. Were that to happen, the markets would rally, like a drunk on being informed that happy hours were being extended.

Domestically will inflation be contained? Food inflation is a global concern and agricultural productivity, much like the marginal productivity of debt, is falling. In India's case, only 40% of farm area has canal irrigation. Groundwater levels have fallen to scary depths. Much more needs to be done for water harvesting and improving canal irrigation. Yet we have not focussed enough on agriculture and this can be a grave crisis in future. Inflation is unlikely to be tamed by interest rate hikes and the upward rate cycle may yet continue. The Government is thrilled at the tax collection, which is buoyant.

Corporate advance tax collection in the first quarter ended Jun 2012 is 75% higher than in Q1 last year, which is extremely encouraging. Indirect tax collections are also up. Customs duty collections are up 37%, excise 38% and service tax 27%. Given these, RBI would not be worried that an interest rate hike would slow growth. Where we fail is in utilising these buoyant tax revenues in the right manner, instead wasting them. It has taken years to do away with petrol subsidy, a truly foolish one which lowered the price of petrol and encouraged increase in consumption of a disappearing fossil fuel. Little effort is being made, and little money spent (not only in India but globally) on improving food productivity and in improving water supply and irrigation. All these require concentration and thought from political leaders who have other nonsensical things distracting them.

Last week the BSE-Sensex fell 418 points to end at 17870 and the NSE-Nifty declined 119 to end at 5366. Interestingly, in the first 4 days of the week, FIIs were net sellers every day whilst domestic financial institutions were net buyers every day!

It's likely that FIIs would continue being net sellers; they have withdrawn Rs 2152 crores in calendar 2011 to date. A Greek tragedy would move them. So there is more pain ahead before one can enter the market.

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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10 Responses to "Stakeholders hit back"
madhavan iyengar
Jun 24, 2011
very good points summarising whats happening currently

its good to point out where we are heading and the mistakes which are being committed day in and day out

what are the alternatives we are only talking of current and future problems is there no silver lining with this kind of negative outlook nobody will feel like looking at anything in this commercial world.

whats the real solution and we are continuously mentioning that this should not have been done,

and we cannot afford not to act
Like 
Jonathan
Jun 22, 2011
Great piece.. very well written..! Like 
Manish Sehgal
Jun 22, 2011
Scary. Where do we go from here. No certainity in the markets and inflation will reduce the buying power Like 
neerajmahamana
Jun 21, 2011
tips for buy equity Like 
Prabhakar Yeturi
Jun 19, 2011
The column is very much educating. However, I feel that it would be better if the Equity Master can clearly indicate the sectors that will be hit harsh by this scenario so that the investors can be watchful. Like 
BAPTY.S
Jun 19, 2011
NICE ARTICLE. ON A MACRO LEVEL YES THE WORLD SEEMS TO BE PASSING THRU TROUBLED TIMES, USA,EUROPE, JAPAN WITH ITS NUCLEAR DISASTER. CHINA THOUGH ECONOMICALLY STRONG SEEMS TO HAVE ITS SHARE OF OTHER SOCIAL,& HUMAN PROBLEMS.THEY ARE LEARNING THRUTHE NET HOW INDIAN CIVIL SOCIETY IS TRYING TO TACKLE THRU PEACEFUL MEANS "CORRUPTION,BLACK MONEY, SWAIIS MONEY ETC.

COMING TO AFFAIRS BACK HOME, BIZ,TRADE, INDUSTRY, PROFESSIONALS ARE ALL PUMPING MORE INTO GOVE COFFERS.WHERE IS ALL THIS HARD EARNED MONEY GOING. ARE WE GIVING IT TO A DEFUNCT BANK, VERY POORLY ADMINISTERED,GOVERNED,FULLY CORRUPT, MOST OF THE TAXPAID MONEY GOING FOR UNPRODUCTIVE SALARIES & WAGES, TO POLITICIANS, ELECTION FUNDING FREE TRAVEL ALL OVER THE WORLD, OF MINISTERS,ADMINISTRATION, NO ACCOUNTABILITY.
YOU HAVE SAID CORRECTLY POOR AGRICULTURE, WATER TABLE GOING DOWN, POOR IRRIGATION ETC ETC.LIST GOES ON.NREGA SCHEMES PERMANENT AVENUES FOR LEAKS.
WHILE CORPORATES ARE BEING PULLED UP,WITH VARIOUS REGULATORY POLICIES,ADMIN MECHANISMS, INVESTIGATIONS ETC.WHERE DOES ALL THIS APPLY TO THE GOVT ITSELF.

WHY DONT YOU WRITE APAGE OR TWO EXCLUSIVELY HOW WELL GUJARAT GOVT UNDER NARENDRABHAI IS ADDRESSING ALL THESE,& RUNNING THE STATE SO WELL.WHILE MEDIA 7 TV AVOID AS MUCH AS POSSIBLE TALKING GOOD GOVERNANCE OF NARENDR MODI,AS AN ECONOMIC, & MARKET CIRCULAR YOU CAN HIGHLIGHT HOW IN OUR INDIA WITH THE SAME PEOPLE WE CAN DO GREAT THINGS IF WE HAVE "ALEADER WITH THE VISION, DESH BAKHT, INCORRUPTIBLE,& WHO HAS PLANS ON ALL ASPECTS FOR THE NEXT 20 YRS.
MOST IMPORTANTLY HE HAS SHOWN IT & PERFORMED IN 10 YRS WHAT NO C.M HAS DONE IN 60YRS. PL ATTEMPT TO WRITE AN ARTICLE.
Like 
gautam rankawat
Jun 18, 2011
Really this news is very awesome to me know more about the Oil and Market and Main is about the RBI and Saudi is no 1 oil producer in world. Like 
S.Chandra
Jun 18, 2011
Mr Mulraj. you have introduced us to an interesting number called marginal productivity of debt.

Can you share with us, this metric for India?

Like 
ndchawla
Jun 18, 2011
It is an excellent piece for investor education. In one page, Mulraj has covered issues and concerns for investors worldwide. I look forward to reading his columns in coming days. I have one query regarding flight to investment in gold. Could he please cover it in his forthcoming write-ups. Like 
Lt Col PVC Subba Rao
Jun 18, 2011
Hi'
This article is very interesting . info given is good.
Keep it up.
Like 
  
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