A review of one of the worst books I have read

A CRITICAL DECADE- Published by : OXFORD UNIVERSITY PRESS EDITOR : RAJEEV MALHOTRA PRICE: RS.695 The Indian Economic Service (IES) was set up in 1961 to have a team of economists who would help the government in terms of economic advice, economic administration and many other things that Economists are supposed to do. To celebrate fifty years of IES, Mr. Rajeev Malhotra, Economic Adviser to the Finance Minister, Government of India has put together a compendium of essays. Mr.Malhotra talks about the period 2011 to 2020 as a critical decade in which the Indian economic growth settles to a higher plateau of nine percent plus GDP growth. These essays focus on what needs to be done in different areas of policy and administration, so that this ambitious growth can be sustained. Economics is perceived to be a very dry subject. An attempt to read this book will tell you why. Each chapter is scholarly to the extent that it starts with a summary, then the body and then an ending. The problem is that the writers are very much part of the administration that has formulated and administered the policies, so to that extent, existing policies do not attract criticism. No attempt is made to show an alternate path. Now, if you take topics that include a world view of economic circumstances and experiences, budget reforms, fiscal responsibility (or lack of it) of governments, budget making in India, inflation etc., , there is hardly anything worth writing about, unless there is something radical that one proposes. Most of the topics are written with an overdose of references, cross references, statistical tables and not many conclusions. From the main sentence you shift to the annexure and then to the appendix and then either skip it or start all over again. It is tough not to lose thread of what one is reading. The other thing that I found very irritating is the tendency to write sentences that are so long, that by the time you read the full sentence, you have lost the thread. I wonder if this is a deliberate thing that helps provide and escape route and provides so many qualifications to a simple statement. Let me give you a couple of sentences: “The policy response has to be well targeted and evidence- based, recognising contextual specifications in different parts of the country” whilst making a reference to the real level of reforms and making a claim ‘This book contributes to that objective”. I leave it to you interpret. Or take this : “To ensure proper proportionate balance of power between the lender and the borrower and limit unregulated commercialisation of microfinance, the Government of India needs to regulate MFI activities by introducing an appropriate formal statutory and regulatory framework”. There are only parables, tables and half hearted conclusions. There is no path breaking or radical thinking contained in the 454 pages between the covers of the book. And I also found out that economists are anything but economical with words, in their attempt to hedge and obfuscate. In many essays that relate to exchange rate, inflation, privatisation etc., I was disappointed at the simplistic explanations that offer no breakthroughs. Yes, in a couple of places the author/s do admit the problem about lack of authentic data (the recent degrading of growth rate came to mind), but none addressed the issue. Similarly, there is acceptance that the measure of inflation is wrong, but no hint about what is the alternative. Whilst discussing inflation, there is a hint of a ‘target’ rate that is around three percent! No comments however on whether it is a doable thing. Many interesting topics (interesting to people like things that are to do with economics such as exchange rates, competition law, privatisation etc) have been covered, but you sense some hesitancy in pronouncement of the right things to do. Clearly, there is a pro-establishment stance that runs through the book (the foreword is also by an Establishment man). Of course, there are some wonderful terms coined like “conceptual concordance” that left me scurrying for Google search pages and none the wiser at the end of it. Yes, this book is definitely NOT for the general person or ‘lay’ person. Coming from a background where I do need to keep up with some of the economics, I thought this book would be a breeze and I would be able to pick up a few things. Alas, I was disappointed. It was a real effort to finish the book and at the end of it, nothing gained, as far as I am concerned. I perhaps expected a bit too much, as the introduction and preface talks about how this book is authored by people who are in the midst of formulating and suggesting economic policies. I will not recommend this book to be a required or even an optional reading. R. Balakrishnan (balakrishnanr@gmail.com) April 16th, 2012 .

We want the money- Sorry about the ego

It is a given fact that our stock markets are driven by foreign investors. India and Indians simply do not have the wealth required to keep the markets going. Most of Indians wealth is either locked in gold or real estate and a large part of wealth is not accounted for. Hence, it is difficult for our markets to be sustained by Indian money from legitimate sources. Further, unlike most western nations, we do not have pension or provident fund money chasing dreams in the stock markets. Apart from mutual funds and insurance companies, the biggest movers are the foreigners. Similarly, our economy has a huge trade deficit that puts a huge downward pressure on the rupee dollar exchange rate. This gap is partly bridged by the remittances from those who have gone overseas to work and also by Foreign Direct Investment (FDI) that keeps flowing in to different sectors of industry and economy. Having understood that foreign money is the prime mover of India and holds the key to economic growth, it is important that our politicians provide a set of rules that are consistent and fair. More important, there should be clarity in the rules relating to taxation and cess. This is extremely important and the moment we create doubts in the minds of foreign investors, they will choose to neglect this country. We have to remember that India is one of more than 200 destinations. In spite of being large in size and numbers, we attract a very miniscule part of global money. The primary reason for this is our archaic restrictions on foreign investments in different sectors. We keep putting limitations on sectors like agriculture or retail thinking illogically that it will harm us. At the same time, the government refuses to channelize money in to these sectors to make it big. So, to keep the rupee and the markets stable, it is important that the government provide a set of rules that are simple and logical. The move of the government of India to introduce GAAR (General Anti-Avoidance Rules) created a confusion since it changed the rules of the investment game with retrospective effect from 1962!! Clearly, it looked like it was aimed at a single player and the collateral damage was terrible. Now, the government has ‘deferred’ the GAAR by a year or so. This is hardly any action. No investor like uncertainty. Sure, the government is fair to impose whatever rates of tax it wants on whatever transaction. However, it has to be with prospective effect and not with retrospective effect. This causes fear and anxiety ( I do not wish to say whether it is warranted or not) in the minds of investors, who would simply prefer not to write that cheque for an investment in India. No investor is under compulsion to invest in any country or market. So, if we are seekers of money, we have to bend to the demands of the giver. To put it bluntly, beggars cannot be choosers. I mean no disrespect to the economy, but it is a simple logic that one who has the chequebook, calls the shots. Whilst I personally think that GAAR will not mean anything negative to anyone when it comes to the final analysis, it has become an excuse in these uncertain times, for people to pull out or sell off. If GAAR had come in times of madness like 2007 or 2008, no one would have really been upset. After all, investors worldwide have too much money that is in search of safe havens. So they would have come in to India any way. However, given the economic conditions in the world, GAAR does look like a big negative, even if it is postponed to another day. Given our crying need for foreign money, both in real and financial markets, it is ideal that government regulations be clear and unambiguous. Capriciousness in regulations scares away global investors, who give a lot of weight to government policies and regulations. It causes fear about the safety of investments as well as safety of returns. No investor likes uncertainty. Surely, no one minds the due process of law being applied. In fact, one of the main selling points of India as an investment destination, used to be a legal system that was clear and transparent. GAAR comes in as a negation of this important selling point. We have hardly scratched the surface of global investment potential (if one looks at global inflow in to China) and the solution to all our economic problems lie in attracting global money and making good use of it. We need to put our “Welcome to India” sign in order.

Satyameva Jayate??

The Aamir Khan TV serial, Satyameva Jayate has made waves across the social media right after its first episode, thanks to Aamir Khan himself. The issue raised in the first episode, is not unknown to us. In fact, it was nice of Aamir Khan to showcase the two journalists of Sahara Samay, who had blown the lid off the doctors’ revenue model through sex determination killings, SEVEN YEARS AGO! I just want to highlight a few things: i) Aamir Khan has the star power to create awareness. Beyond that, will it bring about changes?; ii) We are very active when it comes to social networking or internet or media activism. Will we have it in us to take this forward? We are folks who are all busy making our ends meet (of course, we keep stretching the ends no sooner we bridge the gap) and will we take time off from this? iii) Anyone who takes on social change has a price to pay. This is negated or limited by having a family and commitments. We can merely nod our heads or give support via polls, candle light processions (after work please) etc., The response to Anna Hazare at Shivaji Park sums it all. Count on me, but do not bother me. iv) Aamir Khan has made no efforts to go beyond the TRP. There was a lady doctor, who had a supportive father. She could have been asked as to why she suffered the torture, without walking out. Surely that question was on every viewer’s mind; v) A petition to the government of Rajasthan to put the scam check on ‘fast track’ was the answer and the winding up of the show. We have seen our legal system in operation. It would have been nice if the programme gave a list of all the doctors/labs which were indicted by the sting operation. Even an online list would have helped to begin a social boycott. I am a sceptic when it comes to crooks getting punished in India. Our legal system of evidences and proofs ensure that the guilty escape. And punishments are never strong enough. As regards this episode, the silence of the Medical Council of India and the government of India for the last seven years, tells me the story. The optimistic view is that hopefully, these kind of shows will help increase awareness and reduce this kind of evils. Hopefully more mothers to be will be emboldened to take up the fight against the male oriented in laws and outlaws. Personally, I do not think a single doctor will get any punishment. He will fabricate enough evidence to justify the killings of the foetus. And the parents who ordered the killings are not going to speak. I hope that the celebrity status is used to create not just awareness ( I am sure all of India knew about this female child issue long before the episode and many also know of doctors/clinics which are party to this) but bring some crooks to book. Our social fabric has been spoilt too much for it to be mended in a hurry.

Go for it- Direct equities are best

( A different version appeared in the Asian Age/Deccan Chronicle)
  Focused investing- Single Stock SIPs In the recent past, we have been flooded with articles that compare the returns on various types or forms of investment. There were also some ridiculous debates which went on to argue that fixed deposits gave a better return than equities. Of course, we can compare everything from returns on gold, sugar, US dollar or mutual funds. Of course, no one has still dissected the actual returns on a ULIP to an investor (perhaps because it is not worth mentioning).
 At the same time, each one of us knows of someone who has a pile of shares in some company that has given great returns. Either the person was lucky enough to have bought his shares before the markets were discovered (say, prior to 1994 or so) or has so much money that he has a high level of holdings in a lot of stocks. And of course, we only know of the winners. The losers are buried out of conversation.
I am sure that most of us dream of having sufficiently large number of stocks in a few high quality companies. For example, I would love to own a basket of shares in companies like ITC, HUL, HDFC, Colgate, Glaxo, Nestle etc.
 However, each time I look at the price, it either looks expensive or I am not able to muster enough money to buy enough. So, let us get down to building a dream portfolio of stocks that will help us to create serious wealth. I am not talking about buying some share at ten rupees and seeing it go to ten thousand. Of course, I would love to own something like that, but there are no recipes for this. What I aim instead, is to build a core portfolio of direct equities that will at some point be worth a small fortune.
 Today, I cannot imagine serious wealth being created through a mutual fund route. As each fund keeps getting larger, the funds are perforce mimicking each other. One is the herd mentality and second is the shape and size of our markets. When a fund is over a few thousand crores, it is not possible to merely buy a couple of crores worth of stocks in a few companies. Even if they were to make spectacular returns, there is unlikely to be a serious impact on the overall fund. So, mutual funds are forced to buy and hold stocks that are within the universe of, say, BSE 200 or NIFTY. This is to ensure that they can buy and sell decent quantities at short notice and at prices not too different from the quoted prices. For example, you would be able to buy RIL or Tata Steel to within five or ten paise of the prices on the screen, whereas, if you want to buy something like, say, MICO, there would be significant difference in the actual bid and offer prices. And, the fund manager may not be able to buy the quantity he wants for his fund.
 I must mention that the strategy I am suggesting is for the real long haul and is fraught with risks. Venture on this path only if you have already accumulated some money and have money to spare for the route I suggest. I would firstly see how much money I can spare every month, after meeting all my usual investment commitments etc., I will only use that portion of my monthly income that can be put away for the next generation or for twenty years or so. Let us say, this amount is around Rs.20,000 per month. I would now pick up two to four high quality stocks and buy them in equal proportions.
 Let us say, I choose four stocks. Then, I would allocate Rs.5,000 to each stock. I would, on the first (or any other day suitable to you) trading day of every month, buy the four stocks. My outlay on any one stock will not exceed Rs.5,000 and the total will thus stay within Rs.20,000, which is the amount I think I can put away. I will buy each month, for the next ten to twenty years. In each year, I have 12 buying dates. Thus, over a twenty year period, I would have 240 buying dates. I would be able to accumulate a fair number of stocks in four companies I have chosen. I would be buying through good times, bad times, bull markets and bear markets. So, in a bad market, I may get more number of shares and in a bull market, I would get lesser number of shares. The prices would surely average out over time.
 The important thing here is to pick up the right stocks. I do not have any magic for this, but I would make a list of some conditions that my ‘buying’ list companies should meet with. It would include:
 i) A good track record of at least ten to fifteen years;
ii) Never more than two years of losses;
 iii) Non controversial family ownership;
 iv) Return on shareholders’ money (PAT/Networth) in excess of 20%;
 v) Low to zero debt;
 vi) Consistently dividend paying company;
vii) Commonsense view that the company will be around in the next two to three decades at least;
viii) Good management reputation and no past ghosts;
 ix) No visible family issues ; and
x) No regular visits to the capital markets.
You can add your own filters. The ultimate idea is that you end up with a list of one, two or more companies that will let you sleep peacefully, under most normal circumstances. Surprises are still possible, but if you spend some time, it should not be difficult to make a short list. I am NOT asking you to do a valuation exercise. Simply a selection exercise.
Just to do a random check, I ran the numbers on the ITC stock. I ran the exercise from April 2000 and ran it for 145 instalments (up to April 2012). The results were very interesting. I assumed a maximum monthly investment of around Rs.5,600. After 145 months, I ended up with 16594 shares, at a total cost of Rs.7,78,866/- and a resultant market value on April 1st 2012 of Rs.37.69 lakh, giving a return of over 22% p.a.!!
Lucky? Perhaps yes, in choosing this stock. I am sure that the results would have been in this range for a few more companies like HDFC, Nestle, Colgate, Indian Shaving Products, Aventis, Maruti, L&T etc., Only when we start to think about companies for the next two to three decades, do we see the universe of equities suddenly shrinking to a handful. I must caution you that this route has its risks, but once you are covered for your basic needs and look to wealth creation, this would work well. You have to be extremely unlucky to pick long term losers. If you have to follow just two or three companies, you will find yourself reading more about the company and the industry. Take the first step slowly. But, once you start, do not miss a single instalment of buying for at least ten to twelve years. And do not get in to the temptation of increasing and decreasing your lot sizes. Leave that to the professionals.
R. Balakrishnan (balakrishnanr@gmail.com) April 27th, 2012

Of Personal Guarantees and Kingfisher..

See this wonderful ruling. SBI and others have taken this "personal" guarantee, which is not only worthless, but also illegal, since a foreigner has stood guarantee for a loan>>>> -------------------------------------------- Commission to CMD for personal guarantee may be treated as “ploy to divert funds” The assessee claimed a deduction for the “guarantee commission” of Rs. 1.15 crores that it paid to its Chairman Shri. Vijay Mallya. The AO & CIT (A) disallowed the claim on the ground that the so-called guarantee was a mere signature on a document, not backed by specific assets and that as the commission payment exceeded Mr. Mallya’s net wealth of Rs. 70 lakhs, it was an “innovative method of diverting income from the company” and an “unwarranted benefit” to Vijay Mallya. However, the Tribunal allowed the claim. On appeal by the department, HELD reversing the Tribunal: None of the bankers had obtained details of the assets & liabilities of Vijay Mallya in India or abroad. He stood guarantor in respect of total borrowings of Rs. 115 crores and received commission of Rs. 1.15 crores even though his net worth was hardly Rs. 70.47 lakhs. Also, as he was a NRI, the permission of the RBI ought to have been taken which was not done. The assessee paid the MD commission “on the pretext” of paying guarantee commission and it is a “clear case” of “a ploy to divert the income of the companies under his management”. The payment was characterized as commission to overcome the RBI’s directions, the provisions of s. 309 of the Companies Act and was not a lawful payment and could not be allowed as a deduction u/s 37(1). CIT vs. United Breweries Ltd (Karnataka High Court)

Warren Buffet - will he or won't he-- Indian equities

I had written this piece nearly two years ago, for a magazine. Going through it, between then and now, the only thing that has happened is the discovery of the UPA being what it is now. Other than that, things have not changed much in terms of what is or what would be. Read on.................................... As far as I am concerned, the Warren Buffet Graham Dodd School of investment is a complete education in stock picking. Having seen the Indian markets over the last few years, the one thought that comes to mind is that if WB were operating in the Indian markets today, he would perhaps find it difficult to find companies. However, if you take a cycle of twenty years, he would have found many opportunities to buy. WB is associated with ‘value’ investing. India is a ‘growth’ story. ‘Growth’ means buying in at prices that a ‘value’ investor may not buy. If I look at WB/GD for inspiration, the key takeaway is the relevance of Return on Equity in conjunction with the ‘Margin of Safety’. If one uses these two financial measures, today’s markets are unlikely to throw up any investment worthy candidates. It is simply because our markets are today in an orbit that is being justified by the growth potential as well as the fact that when most of the world comprises of blind people, the one-eyed are looked upon with awe. If I look at some of the key qualitative attributes that WB/GD has listed out as pre-requisites for being included in the short list, the following things stand out: i) Find companies that have strong entry barriers and strengths that enable predictability of earnings. One of the examples in the WB domain is Coca Cola. In India, I have not come across an Indian company that has this attribute. It is only some of the multinationals operating in India that has this attribute. Clearly, India is not a business pioneer even in its homeland, forget globally. Companies like a L&T / HDFC come close, but one will have to search hard to find many more; ii) Management quality: Here again, most Indian companies suffer due to management being a family affair. Father passes it to son and so on. The best person for the job is not chosen. So, here again, the list of Indian companies is rather small.; iii) Forever companies: WB says that he would like to stay invested in a company forever. Here most Indian companies fail the test. Where are the Century’s / Nirlons’/ Mafatlals/Singhanias of the yesteryears? They were the blue chips then. Again, one has to stay content with an HDFC or most of the MNC’s who will be there a hundred years from today. You cannot bet on the longevity of an Indian company or management or family. Their capacity to surprise is immense. Apart from the key differences, the other issue is a WB approach may simply fail because we have two classes of shareholders, whose returns are different. The promoter shareholder gets his returns from many sources whereas the non promoter shareholder gets incidental benefits. Corporate governance and capital market regulations notwithstanding, the promoter only lets you see what he wants to let you see. SO, to gain from a WB approach, we need to have the ability to understand the management and take a call on what the odds are of riding his coat tails. The other most important thing, to my mind, is that we have to learn when to sell. The volatility in our markets (illiquid and shallow by characteristic) gives great opportunities. I like to make a shortlist of companies that I like and put against them, prices that I am comfortable paying. And then wait. Surely, in a person’s investment life span, anything from three to five opportunities will come. And the returns will be great. Much better than market returns if I may say so. One must not have the compulsion to invest everything in one go, like a fund manager. (R. Balakrishnan) (balakrishnanr@gmail.com) May 24th, 2010

Keeping away from Equities- Abstinence, sometimes, is healthy..

This article appears in today's Deccan Chronicle (16/4/2012) Uncertainty seems to be the buzz word going around. I am referring to the financial markets where several tussles are going on simultaneously. The fiscal budget did not attract much attention, being viewed by all as an ‘accountant’s” budget and nothing more. A deeper look in to the broad numbers, bring to fore the fear that we could perhaps be faced with a fiscal deficit that is likely to be higher than budgeted. The one chance that we could perhaps restrict it if the government is unable to complete its spending as planned. Given the set of controversies surrounding virtually every government spending actions, it is not unlikely that we could see the fiscal deficit being within budget, albeit for all the wrong reasons. Growth is getting hurt. Global economic condition is one of the reasons. In my earlier piece, I had talked about my dislike for PSU stocks. That is being fortified by the governments actions on cases like Coal India, Indraprastha Gas and the various retrospective amendments that the government is trying to enact. I fear the PSU banks are next in line, with a high probability that the rules for recognition of poor assets will be changed in order to show that the banks are healthier than they are. It would be like changing the name of a disease from cancer to a flu and saying that all is well. Investors do not like uncertainty. Yes, we do not mind going wrong on our assumptions of growth or profitability or the price earnings multiple that the market may assign to a stock. However, one reasonable expectation has to be that the regulators will not step in and take a destructive approach to pricing or controls which result in changing the basic assumptions. Regulatory risks are the worst deterrents to any form of investment. The Vodafone case (without passing a judgement on its merits) started the uncertainty and the other actions on PSU companies are like adding fuel to the fire. It is a well known fact that our equity markets have been thriving primarily on the FII flows that keeps seeking better returns from emerging markets. Our economic growth rates, till the recent couple of years, have justified the faith of the investors. Yes, a temporary drop or slowdown in profits is acceptable. At a time when it looked like we could be the beneficiaries of FII flows due to our relative growth prospects, the regulatory moves have put a ‘pause’ button in to play. I only hope that we do not see further action that could result in a ‘rewind’ button coming in to play. Inflation and interest rates continue to be a worry in this environment of sluggish growth. If revenue expectations of the budget are not met (considering weaker profits, high fuel prices, supply constraints etc) we will be staring at government borrowings over shooting the target. It is also possible that we could see expenditure plans getting pruned given the clouds on virtually all government spending. That could balance out the revenue shortfall, but it would shrink growth. When we are expecting interest rates to come down, we are witnessing the phenomenon of banks raising deposit rates even beyond the year end. Add to this the strain on the loan books of the banks, we are not going to see significant fall in interest rates. Our trade deficits continue to be high and the balancing act falls upon portfolio and FDI flows. That is in turn impacted by capricious government policies. Oil prices continue to remain high. All of this could see inflation being stubborn and stall cut in interest rates. For investors, the options are becoming smaller, with equities looking weak. An entire universe of PSU stocks (oil, coal, gas, banks etc) have been recipients of swings in government policies driven by populism. Quality stocks (FMCG, Pharma etc) continue to remain expensive. The markets that ran up before the budget, seem to be losing steam and could drift lower. A double digit returns from here, in the next ten to twelve months, looks difficult, unless there is a resumption of FII flows. Fixed income continues to be my preferred option for the next one year or so. I will put my money in to bonds that give me a yield of over 11% p.a. In fact, even the tax free bonds look tempting, with yields of near about 9% on a post tax basis. In the event the clouds clear over the equity markets, one of the accompanying factors has to be falling interest rates. If interest rates start to fall, one can look for some capital appreciation in the bonds also. We then sell the bonds (earning the yield plus a small amount of capital appreciation- giving a good total return) and shift back to equities. The key is to buy reasonably liquid bonds of high quality. In buying listed bonds, one does not suffer deduction of tax at source (of course, the government can change it, but cannot do so retrospectively due to practical issues) giving one a longer use of cash.