Politics of Money: A brilliant move, impeccable timing!

‘’The achievement we celebrate today is but a step, an opening of opportunity, to the greater triumphs and achievements that await us. Are we brave enough and wise enough to grasp this opportunity and accept the challenge of the future?’’ – Tryst with Destiny

Are we brave and wise enough to see this as an opportunity: The Pandora’s Box has been opened. A brilliant move and a death blow rolled into one. A shot straight to the gallery amidst all the wild cheering, with political doyens sensing a whiff of opportunity. Could there be a better time, could there be a better timing, and the answer is, it had to be now!

While Diwali in the U.S begins with the coronation of a fickle minded prince, the dhamaka has happened closer home:

Just like a land being prepared for harvest, the preparations completed well in time, be it the income declaration scheme or PAN being made mandatory for jewelry purchases above INR 2 Lakh and then the Dhamaka! The shock of the announcement for many was followed by the horror of their currency becoming paper with immediate effect, however the assumptions galore:-

•  Majority of the black money is in the form of cash sitting somewhere tightly guarded (surprise, surprise – no study ever has said so)
• The other form of investments (Gold, stocks) are clearly off the radar, or so we assume. Alarming here is the reports, studies which have time and again pointed at round tripping as a way of converting black to white (70% of money in Foreign exchange is FII (fly by the night) while the rest 30% is FDI approximately). Add to that the rampant smuggling of gold (PAN being made mandatory, high customs duty, excise duty) in the country, which will only exacerbate the situation further.

The risk of having a parallel economy is at its zenith now. Let the fun, games and DHAMAKA’s begin:

Dhamaka 1: Timing: There couldn’t have been a better time to drum to the gallery than now what with the biggest (% wise) and most influential state in the houses of power: Uttar Pradesh going for elections in January 2017: do we smell foul-play, not just yet! Lakhs of Crores is the election as a business worth in India, maybe a little less must be the State elections, Are the passive troubles (Joint sessions of parliament, region specific deals, yes, but hand of power, still a no) triggering a knee jerk now is a question to ponder! Not to forget is the lineup of non BJP ruled states going to elections in the coming 2 years.

Dhamaka 2: Costs:  The perfect assumption that majority of the black money is sitting as idle cash and that the benefits of this announcement (people running to banks and paying tax later) could offset the costs of printing (roughly INR 20,000 crores or more) new currency and add to that the speculation of advanced technology to track notes. What with the Public Sector Banks registering massive NPA’s, declining profits and full implementation of Basel 3 staring in the face by 2019.

Dhamaka 3: Bank deposits will rise, so will the lending: The paradox of the Indian economy lies in this: yes the bank deposits would rise (if people choose that way and the income tax hounding) but would the lending also rise, well it’s a sum total of variables beyond control (with services sector (mainly IT slowing down), uncertainty in the world buoying down growth and companies pushing investment decisions and no the ease of business ranking is just the beginning of horrors). So yes, the money might be there, but will productive activity prosper is a question best left to ponder. Worse it could lead to reckless lending and drive up property prices (which is being mooted to crash in the near term for it being the lifeline of the black money business) or lead to demand pull inflation for white goods, thanks to maybe increased government spending on defense, utilities, refinancing banks, offering loan waivers etc. Last in the basket of shocks is the CDR ratio declines plaguing the Indian economy?!

Dhamaka 4: Deflation: The assumption that the black money would idle away and lead to less funds and more goods (at current stage, horror being we are not a supply rich economy), thereby leading to reduction in prices of goods including Gold, stocks. The coming of trump and the inverse relation between Gold and dollar well established seem to be singing a different tune, with gold rising by Rs. 4000 in a day and Sensex nosediving by 1689 points while at day close just about losing 339 points. So where has the magic trick failed, where have the prices corrected or are we waiting for the long term?! The biggest deflation is apparently the real estate, since there would now be less buyers, true and not true (if banks do lend more, then not true else it might in the short term but only for sellers who have are also part of the daily finance business or the money rotation business)

Dhamaka 5: Double Shadow/Edge-sword Economy: The time window less, the gold smuggling at its highest, the horror of a shadow, much more murky world of currency markets stare at us in our face. Not to forget the chance slippage of going back to differentiating rates of exchange (official and market rates of exchange) or the horror of “tu puraana waala 60,000 de aur nayya waala 50,000 le”, a situation that a friend narrated. 

The Pandora’s Box has been opened, the effect will be felt, and the inconvenience neatly garbed in nationalism, all in all a brilliant move, with an impeccable timing. We can hope that this is just the start of the good measures and not a mere screw the classes below the rich while continuing to shield the biggest route of Black money (the super-rich) safe and sound to fill in party coffers.

Foreign Money driving markets: The beginning of the Bubble?!

‘’17000 crores pumped by foreign investors in Equities and Debt‘’

‘’Cabinet approves raising FDI to 15% in Indian Stock Exchanges, a depository, a banking company, an insurance company, a commodity derivative exchange’’

No to FDI before elections, fervent pitches and a slew of measures to attract FDI after elections. Political implications apart, are we in our greedy pursuit for foreign money putting the economy in a currency crisis like situation??!

Carry trade: A lot of FII money that comes into India has often been associated with P-notes while the rest has often been credited to the easy money policies of countries, which seems to the case now with the Shinzo Abe government of Japan planning to release a stimulus package of 265 Billion $ to stimulate the economy & The Bank of Britain expected to do the same in the near future. It is simple economics that a considerable part of investment would find its way to the bright spot in the World – India. The situation of the South East Asian currency crisis and where we are looks the same: Foreign investors pumping money, asset classes getting over valued and Indian retail investor participation increasing – Are we again headed to a situation where the valuations will rise and then the FII (fly by night money, as in popular nomenclature) money disappears causing a horrible crash! Scary are the eerie realities!

Foreign Exchange reserves: Adding to the worry is the fact that we have amassed one of the largest foreign exchange reserves in the world, chink in the armor the composition which is roughly 70% of FII money or fly by night money and the rest 30% FDI, thereby putting the delicate Current Account at a further risk

The situation may look grim, but the very prospect of not having 100% capital account convertibility could prove to be a blessing and an insulation against these vagaries. However there has to be a cautious approach to selectively open up rather than using it as a bandage effort to try repair/rebuild the economy.

The question however remains, are we as a country ready to embrace 100% capital account convertibility??? Read on the next article to know more!

Till then... 

Read, Ponder and Forget!

Pulses: Achilles Heel of Agriculture?!

164 Million Hectares of land under cultivation, 130 million hectares at the mercy of the rain god! Food insecurity in the 90’s to the recent dip in pulse availability – The majority employer of the economy – Agriculture never looked in a distress as good and bad as this!

Calls for a Green Revolution of pulses are a raging debate, so have the noises backed by research indicating the dip in productivity of the very lands that the Green Revolution blissfully wedded.

The Pulse shortage isn't in fact a recent phenomenon, but a continuum beginning to explode now, case in point being the fact that: 2001-2011 – Production – 158 Tonnes, Demand – 186 Tonnes – The Gap has only widened over time. The reasons many:

1.     Lack of productivity and the existence of the subsistence economy: Lack of developed forward and backward linkages have always meant a dead bargain for the agricultural community. Imagine 130 Million hectares of 164 Million hectares being left to the mercy of the rain god – an ode perhaps to the irony of development! Average holding of land is 1.4 hectares, but so is the rising issue of disguised un-employment in the villages leading to farm to mouth existence of the agricultural community leading to further depletion of stock. The above issues are only further exacerbated by the fact that no longer does the farmer community see agriculture as remunerative, as pointed by the declining re-investment in agriculture over time!

2.     Procurement & Minimum Support price: The concept of state intervention has always lead to market distortion, with the government left at the mercy of the ever powerful farmers lobby belonging to the green revolution belts. The irrational price hikes of Rice and Wheat have often been used as an election ploy to shore up votes, thereby acting as a discouragement to farmers to move away from other crops irrespective of the soil and climatic conditions required to support a crop.

3.     Livestock integration: Last but not the least is the issue of livestock integration. World over it has been agreed that livestock acts as a counter cyclic buffer to the vagaries of agriculture cycles. It’s a pity that in spite of such diverse fauna, livestock contributes just around 30% while in other countries its close to 50%, thereby exposing the farmers to the vagaries of nature and life.

4.     Food Corporation of India or Fraud Corporation of India: Though a welcome step to hold stock to intervene rapid escalations, the concept of state procurement and subsequent storage in the FCI godown’s has been a disaster to say the least. The insufficiency of the cold chain facilities has only aggravated the mess. Its strange that rather than first ensuring the effective running of godwons and capacity management, the government has decided to procure 50,000 tonnes of pulses going forward.

5.     Import Route: Africa is the next growth pole and not too far behind are we, with the recent visit of the PM to Mozambique seen by many as a ploy to shore up additional pulse imports without un-settling the foreign reserves.

Knee Jerk solutions to pressing issues have only worsened the scenario in the country, be it the obsessive focus on green revolution or the concept of support prices. Perhaps the call of the day is improving the backward and forward linkages to make the agricultural sector remunerative.

B.R.E.X.I.T

The land of industrial revolution, the founders of democracy and the propounders of globalization, many names but a single address – Britain, U.K.

The ‘’ leave supporters ‘’ call it the revolution that will propel the country on the path of prosperity and give the locals a chance and no wonder have the leaders become the faces of the middle class resurgence. All in a referendum’s play, irony lies in Britain waking up the next day to search what could be the potential impact of leaving EU after the result, so much in this age of information.

Yes, the markets have shed blood, the pound has hit its lowest in 31 years, investors are moving to Gold and Dollar, throwing the emerging economies currencies in a tailspin – Economically yes the impact has been felt. Now that the referendum has passed, purists across the EU member states have regained their voices to leave in what they call an enforced bureaucracy with no control, with one fact very clear – balkanisation of the EU is slowly gaining ground and a reality not too far fetched! 

The planks are the same – Protectionism, need for more monetary and fiscal control and the fanned middle class angst, a revolution it is perhaps but with a bag of worms and mindless rhetoric.

The immigration to the U.K has no doubt doubled, but how can we forget the number of jobs created and the acceleration in GDP these very immigrants have pushed. But is the plank of immigration checks as a way to deal with the un-employment efficient – Well the answer has been a resounding NO, more focus on education perhaps, Boris says HELL NO!

Added source of worry is the export basket of Britain, with more than 50% of exports to the EU the hit is going to be massive, now with double set of laws in place. The Lisbon treaty does allow a 2 year period to negotiate, but looking at the movement of sentiments, its highly unlikely that Britain can expect an FTA or any sweeping sweet agreement for that matter without making major compromises. This in addition to firms having to deal with the double set of laws, new procedures and maybe restricted access to geography.

More independence over the finances, down goes the austerity – point taken. IMF and sections within the European Central Bank have slowly conceded ground on the in-effectiveness of the Austerity Measures. If one extreme is bad, the other is dangerous. Countries and their love for monetary easing and fiscal imprudence have often landed themselves in a soup which they themselves admit to at a later stage, what with economists worldwide despising the Keynesian way of dealing with slowing growth especially in a service dominated economy, with monetary easing only going to increase income disparity! 

The advantage of collective bargaining Britain gained as a result of the EU block at multilateral forums is something that stares at it right in the face and with many service oriented business specifically financial services threatening to shift shop if the new set of laws are not EU compliant has threatened to bring the economy to a grinding halt. 

Last but not the least the sometimes mindless rhetoric has found some ground in the fact that Countries which have adopted the Euro haven’t recovered completely from recession and are facing sever un-employment. But has Britain adopted it, NO! The 3.5 Million asking for a referendum will now have some soul searching and convincing to do. Till then Article 50 & Article 49 can grab headlines and all we can hope is the masters of democracy and initiators of economic prosperity and globalization ace the very lessons they taught the world.