Thursday, September 25, 2008

India Story Looks Ever So Strong - Really?

According to Indian central bank, Reserve Bank of India (RBI), foreign direct investments for the period April-July 2008 stood at $12.32 billion. This compares with foreign direct investments of just $5.70 billion recorded for the same period last year. Clearly, structural reforms undertaken by the incumbent government, coupled with increased confidence in the India Story has contributed to this incredible y-o-y growth of over 100% in foreign direct investments. If the run-rate sustains, we may well end up experiencing the highest inflow of foreign direct investments ever. Last year was a record $32.43 billion. However, the more volatile foreign portfolio investments have been a sadly negative $4.67 billion for the period April-July 2008. This compares with a record year set last year, when foreign portfolio investments were $14.3 billion for the period April-July 2008. RBI records indicate that while fiscal deficit has improved, revenue deficit has slightly worsened, when compared to last year. The data also indicates that trade deficit may well widen this year, and this may potentially cause weaker balance of payments position.

Ofcourse, oil is a major import item for India, and the continuing high price of oil is a major reason for the widening trade deficit. This is interesting, because since the reforms undertaken in the early 1990's, India's road to economic prosperity has been built around the central theme of 'devalue and export' mantra. The current prime minister was then at the helm of affairs, when that reform theory was designed. Is it time for India to revisit this core economic policy? - If we go by Dani Rodrik, professor of political economy at Harvard University, the answer may well be to rely less on exports to achieve economic prosperity. He points out to an imminent threat of slowdown in advanced economies, and the almost certain unwinding of global current-account imbalances, as a clear threat to export-dependent economies. Dani argues that the economics and politics of protectionism in the West is likely to cause a slow-down in exports. If exporting does become a tough business, then economies like India will be forced to rely on domestic demand to sustain economic growth.

But domestic demand fueled only by easy money has its own problems. M3 data, the broader indicator of money supply, indicates that money supply growth in India has far exceeded the GDP growth since 2005 - due to the central bank's active intervention in the currency markets. While this 'sterilization' process was successful in containing currency appreciation that was to be caused due to strong forex inflows - and thus help exports; the process did very little to help solve the trade imbalance, particularly in light of high oil prices. In addition, weaker domestic currency also meant higher input costs (oil being a significant input constituent), and this helped the already fueling inflation, partly led by easy money, and partly by high food and commodity prices. The net result of a high-inflation expensive credit economy is a potential slowdown in growth.

Is it time for the Indian central bank to stop excessive intervention in the forex market, and let the domestic currency on a more free float? I would argue on the affirmative, especially because (direct) investments continue to be buoyant. The challenge is for the government to push the pedal on structural reforms in such a way that it fosters not only investments, but also creates a healthy competition.

Saturday, September 20, 2008

Capitalism in Crisis?

At a time when financial markets globally appear nervous, and people increasingly look at the capitalist economic ideals with suspicion; I want to share some expert perspectives from the masters and proponents of capitalism, who had clearly forewarned us about the pitfalls that have caused the ongoing mess.

Authors Raghuram R. Rajan and Luigi Zingales, in their seminal work, 'Saving Capitalism from the Capitalists' conclude that “Politics—for better or worse—lays the foundations for markets, and thus for prosperity. For creative destruction, sustained by free markets, is the elixir that has let the free enterprise system flourish for so many years. Yet the disruptions that creative destruction spawns sometimes prove too big for a free society to survive without a safety net. Markets need to be preserved against their biggest enemy: Themselves. Markets need a heart for their own good.

Louis O. Kelso and Mortimer J. Adler in their book 'The New Capitalists' describe the functions of an investment banker under a financed capitalist plan as the following:

- “The investment-banker function in the present mixed economy has been aptly described by Professor Merwin H. Waterman as that of a “transporter” of funds from the “savers” to those who would use the funds in capital formation.

- “Far more important than the mere selling to corporations of their influence with or access to the owners of concentrated savings would be the functioning of the investment banker as the “attending physician” at the birth of new productive capital instruments and of new firms employing them. In this capacity, the investment banker would be charged with qualifying the stocks of new enterprises, or of existing enterprises seeking new capital, for financing through the financed-capitalist program. This function of investment bankers we might call their “entrepreneurial service” function. Thus their functions in this capacity would involve the articulation of the work of engineers, accountants, lawyers, marketing experts and all others whose services are required so to plan, design, and establish either a new enterprise or additions to existing enterprises that the newly formed capital will in fact “throw off” or produce the wealth that is expected of it. No service in the economy would be in greater demand or have greater importance than this function of the investment banker.

The authors had forewarned us about the moral hazards of speculation and vested interests:

- “Speculation in stocks is both tolerated and encouraged today because of the lack of understanding of the nature of a capitalist economy. It is neither more necessary nor more justifiable to encourage speculation in securities representative of the means of production than it would be to gamble with the labor power of workers—the other active factor of production. The principles of economic justice, which are central to a capitalist economy, assert that wealth should be distributed to those who produce it. They also imply that the acquisition of wealth, other than through voluntary gifts, or genuine changes in value through changes in supply or demand, by those who contribute nothing to its production, is the height of injustice. The common justification for secondary-market speculation, aside from the necessity for orienting business transactions to ill-conceived tax laws, is that an active secondary market is necessary to “season” the securities of various corporations so that issuers can thereafter more easily obtain new capital when they seek it. This defense of the speculative stock market is almost groundless, since only a minute portion of new capital formation is derived from the issuance of stock to investors in the market.

- “However, the enticement to finance the acquisition of new capital estates would far more than offset the tendency to suppress speculation, in terms of the volume of securities handled by investment houses or brokerage houses and stock exchanges. One of the goals of a capitalist economy is the financing of new capital formation entirely through the issuance of equity stocks directly to individual investors. The extent to which this would increase the volume of securities outstanding is incalculably great. Nor can there be any doubt of the desirability of a sound and active secondary market, in which market value would reflect, predominantly if not exclusively, the wealth-producing history and prospects—in the opinion of buyers and sellers—of the capital represented by such stocks”.

Martin Wolf in a January 2008 article in FT explained that “the world has witnessed well over 100 significant banking crises over the past three decades. The authorities have even had to rescue important parts of the US financial system - on most counts, the world's most sophisticated - four times during the same period: from the developing country debt and "savings and loan" crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitized-credit crisis of 2007-08. No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials - particularly, central bankers - fail to come at once to their rescue when they get into (well-deserved) trouble. Yet they are right to expect rescue. They know that as long as they make the same mistakes together - as "sound bankers" do - the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.

Thanks Raghuram R. Rajan and Luigi Zingales; Martin Wolf of FT; and Louis O. Kelso and Mortimer J. Adler

Tuesday, September 16, 2008

A Lesson or Two in Customer Service

While working on one of my most recent assignment, I had the delightful opportunity to interact with top-notch professionals at Toshiba/Westinghouse, who thought me a lesson or two in customer service. This pleasant experience is in stark contrast to what I had heard from a dear friend in London about her experience with my erstwhile employers. Incidentally, the lady’s husband is one of my best friend, and a former colleague at the company. Story goes, the lady, representing a big buy-side company as marketing head, approached my former employer with a budget, but the inside sales team out-rightly refused to even entertain the prospective client, simply because the incentives associated with the ‘small deal’ was not attractive enough. I found it quite bizarre to learn that employees could actually act against the interest of their own employers on trivial issues, even in today’s day and age. Maybe their morale was low, or maybe the organizational systems and processes were inefficient. Whatever the reason for the poor customer service, the lady swears never to work again with my former employer, and the company has, in the process, lost out on a big-budget client.

Coming back to my Toshiba/Westinghouse experience, I had less than 48 hours to gather critical information on a breakthrough product the company was developing. I had my deadline to deliver a preliminary assessment, and I was desperately searching for answers. Since the product in question is still under development, the company has obviously not made a lot of information available to general public. However, I had a job to do, and I relied on the government agency, NRC, to gather the names and contact details of key people involved with the project. The tactic worked! Little did I realize that I had actually mass-mailed about twenty people asking for information about the product - to my utter surprise, and great delight, I received an overwhelming response from everyone at Toshiba/Westinghouse. Remember, I’m not even a customer. I’m just a representative of a prospective customer.

I must admit that i now have the pleasure of working with great professionals who are not only masters in their respective fields, but who have also mastered the art of customer service. What is even more interesting here is that the set of twenty people that I had mass-mailed belonged to different business units. I am impressed with Toshiba/Westinghouse organizational efficiency and collaboration, which seamlessly facilitated the agile responsiveness.

As we approach the Gandhi Jayanti, a national holiday celebrated in India on 2nd of October, to mark the occasion of the birthday of great Mahatma Gandhi, I recall the Mahatma’s famous words “A customer is the most important visitor on our premises, he is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.

Clearly, folks at Toshiba/Westinghouse have indeed lived upto Gandhi’s philosophy, and have delighted me as a customer.
I want to take this opportunity to say a BIG THANK YOU to - Brad Maurer, John Goossen, Richard Wright and Tony Grenci