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Colin Lea
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The author is Australian with a long term interest and personal stake in financial planning and management. He is a Registered Financial Adviser, is a member of the FPA Australia, and is a Certified Gold Seeking Alpha Contributor. Prior professional background of 20 years in military &... More
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  • Indians Answering The Call To Rebuild Their Economy 3 comments
    Oct 12, 2012 3:48 PM | about stocks: IFN, IGC

    The following article is shared from the Sydney Morning Herald:


    October 13, 2012 by William Pesek

    A surprise Finance Ministry appointment suggests India is serious about reform and investment.

    THE first time I met Raghuram Rajan, the Indian economist couldn't sit still.

    It was over coffee in Bangkok in November 2008, less than two months after Lehman Brothers imploded and almost took the global financial system down with it. Rajan had become a big draw by then, having warned as early as 2005 that a crash was coming. On that day in Thailand, he had a crisis on his hands: The hotel's WiFi was out.

    "I'll be back - I need to make a call and make sure the world economy is still there before I begin my speech," he deadpanned. "You never know."

    That last sentiment could also apply to an extraordinary bit of recruitment on the part of Indian Prime Minister Manmohan Singh. Rajan, 49, is one of his most pointed critics, never one to shy away from slamming India for trying the same failed policies over and again. Rather than castigate Rajan, Singh offered him a job: top adviser to the Finance Ministry.

    Rajan's arrival might shake up India at just the right moment and accelerate moves to open retailing, aviation and insurance to foreign investment. Palaniappan Chidambaram's return as finance minister in July might have seemed enough of a jolt. He wasted no time in announcing policies that amounted to shock therapy for an economy that has lost its way. If those were a sign India is again open to business, hiring Rajan suggests it won't stop there. There are three things about Rajan that are noteworthy:

    One, his focus. He's looking in the right places - modernising the financial sector, making it easier for companies and entrepreneurs to do business and tackling the labyrinthine distribution system in areas such as agriculture;

    Two, Rajan is a University of Chicago guy. To some extent he's about increasing economic efficiency as a means of raising living standards. Supply-side solutions can go too far, as we saw when the US went off the rails due to lax regulations and oversight. Yet if there is anything India needs, it is a burst of deregulation fever.

    Among the most common phrases you hear in India is "licence raj," shorthand for the baffling and elaborate system of issuing permits to do anything. This snarl of red tape throttles business and breeds corruption. It is the single biggest barrier standing between India's 5.5 per cent growth and shantytown dwellers in Mumbai or Kolkata. New strategies are desperately needed to remove it;

    Three, Rajan is an intellectual re-import. It is often said that India's best export is its chief executives - Indra Nooyi, of PepsiCo, Lakshmi Mittal, of ArcelorMittal, Anshu Jain, of Deutsche Bank, to name a few. Its academics, too, remind us that developed nations don't have a monopoly on economic wisdom.

    Rajan is part of a growing pattern of talent returning home. Take Rana Kapoor, who left Wall Street to start Mumbai-based Yes Bank. Or former Citigroup executive Jaithirth Rao who founded software maker MphasiS in the US before moving the group's headquarters to India, where he started an affordable-housing finance company. Rajan's experience as chief economist of the International Monetary Fund from 2003 to 2006 and as a celebrity academic is now to India's benefit.

    There's still plenty of flow in the opposite direction, including Kaushik Basu. He recently left India's Finance Ministry to become chief economist of the World Bank, which along with the International Monetary Fund is holding its annual meeting this week in Tokyo.

    Basu is the rare iconoclast in a position to make a difference. An adherent of his own brand of Freakonomics, his interest lies not with the politically correct or expedient but common-sense solutions to the biggest quandaries of our day. One is what to do about corruption. He argues that it be legalised, thereby adding transparency and having the effect of naming and shaming graft seekers.

    Like Basu, Rajan is an example of an Indian in the right job at the right time in ways that could benefit humanity. Jump-starting India's economy would offer the world another engine at the perfect moment. It would also arrest the policy decay in Asia's third-biggest economy.

    A day after Chidambaram met the US Treasury Secretary, Timothy Geithner, in New Delhi this week, Standard & Poor's reminded India it may become the first BRIC economy - Brazil, Russia, India and China - to lose its investment-grade rating. Junk status would be a terrible blow to a nation S&P predicts will see its budget shortfall widen to about 6 per cent of GDP in the year to March 2013. Borrowing costs would surge, investors would flee and reducing poverty would become harder.

    The good news is that Rajan is on the case to help Singh's team get back in touch with its reformist roots. You can bet he won't be sitting still on the job.

    Read more:

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: IFN, IGC
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Comments (3)
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  • Star1965
    , contributor
    Comments (33) | Send Message
    India. Reforms. Really?


    As predicted, the Indian government has started its divestment drive. The govt. is behaving like the corrupt and bankrupt zamindar in a Tagore novel, who has to go to the old r a n d i (prostitute) to satisfy his private needs because the younger fresher one is too expensive. As outlined earlier, this is part of its plan. It is talking up the markets, announcing reforms that can never be developed on, and then selling its paper. It will recover Rs 40000 cr. from divestment and Rs. 30000 cr. from spectrum auctions. They say, the money will be applied towards the deficit. In reality it will be used to fund further sops and giveaways in the next budget. The deficit will be kept at 6 % of GDP and they will take their chances with the rating agencies like S and P later. (SELL ALL STOCK).


    Much has been made of the “burst of reforms” unleashed by Finance Minister Chidambaram in recent weeks. The stock market has rallied and animal spirits it seems are back. Everybody’s babbling about how the UPA, after eight years in power, has found religion ie “reforms”in the last eight weeks.


    The market is now at 21 times price to earnings (trailing twelve month free float adjusted as per the National Stock Exchange). Once more the mood swings violently. More interestingly the India VIX , the fear index is at 3 year lows of 15. This is usually an indicator of complacency, and historically such lows have signified a massive sell off. The combination of the stretched price to earnings and the VIX means the market is ripe for a big sell off. My two bit as an Ivy educated fund manager in Bombay who has worked internationally on some of the world’s major structural adjustment and economic reform programs.


    In reality, the reforms amount to bureaucratic tinkerings with percentages – of a sort that only tax mavens and accountants can comprehend. Witholding taxes go down by a percentage point or two. FII margin percentages change. Service tax percentages for insurance companies change. Now an attempt's been made to increase the percentages foreigners can hold in insurance and pensions. (This last will never pass through Parliament given the unanimous opposition to it). Blah Blah Blah.


    The Indian economy, in fact, requires Parashurama’s ax and not the surgeon’s scalpel. The reference is to the mythical woodcutter of Indian mythology who wields a massive axe when needed. Wholesale violence will have to be committed on large areas of India’s economy with Parashurama’s axe, if we are to resume a decent growth rate.


    The government had no choice but to unleash this wave of tinkering and call it “reform”. It is trying to keep the capital markets buoyant because it needs to sell or “chipkao” (i.e. stick, as we say in the business) close to Rs 40,000 crores worth of equity. This with spectrum auctions, hopefully plug the budget deficit a little by March. More crucially, it will also free up resources for massive election giveaways in next March’s budget. This is especially needed if the Food Security Bill –Madame Sonia’s chosen strategy for reelection – is to be passed.


    Real reforms for India will not happen for a long time. These include financial sector reform, and an end to the financial repression signified by the statutory liquidity ratio. Privatization of the banking system that’s put an end to the ridiculous spectacle of 75 % of the banking system being owned by the government in a market economy. Bankruptcy and exit laws will have to be introduced. Labour market liberalization and the freedom to hire and fire labour will have to be allowed.


    The collapsed state of Indian cities will have to be addressed by building 30 to 40 cities to accommodate massive rural urban migration. Land acquisition which is impossible now will have to be addressed. This list does not even include the sector changes required in real estate and infrastructure and sugar, and so on and so on. None of this is happening ever, it seems.


    Everybody’s babbling in the media about how crucial the February budget is going to be for the UPA because it will be packed with big ticket sops like the Food Security Bill. Remember game theory however. It is crucial to take your opponent’s reaction into account. The Opposition also knows that the budget will be crucial to the UPA’s reelection chances ! Why then will they allow the UPA to present the budget at all. Especially when they have the numbers and the government is already on life support and in a minority. !!!


    The government therefore, will, in all likelihood, fall in November-December, during the winter session of Parliament. Elections will take place in March-April as India needs the school system for a general election. This will allow the Opposition the chance to deny the government’s attempt to pass a budget full of sops and giveaways. The February budget will consequently be a vote on account. This scenario will suit all parties except the Congress and hence it will happen.


    Is the market discounting the possibility that in a few weeks, all these guys PC, Montek, etc. will be gone ? Is it discounting the possibility that this reform drive is a sham, that will be exposed in a few weeks when the government falls ? Looking at the way its going up, I think not.


    The logical conclusion also is that this is the high point of the markets move this year. India has gone from having the most incompetent FM (Pranab) to the most cunning FM (Chidambaram). The later is deliberately doing all he can to talk up markets to implement his plan. There is little need to oblige him and his plans of using the stock market as a financing vehicle, by buying high and losing one’s hard earned capital.
    18 Oct 2012, 04:01 AM Reply Like
  • Colin Lea
    , contributor
    Comments (606) | Send Message
    Author’s reply » I posted this article because I don't think we hear enough about India as an emerging market as we do about China (for comparison). Information direct from the coal face always offers a different perspective to what the mainstream media serves up, so I would like to say thank you for taking the time to write such a detailed response 'Star1965'. I think it would be interesting to see some articles from you on Seeking Alpha focusing on India, which you can do as an anonymous author and maintain your arms length given your institutional constraints.
    Regards, Col
    18 Oct 2012, 10:38 AM Reply Like
  • Star1965
    , contributor
    Comments (33) | Send Message
    sure thing col..
    25 Oct 2012, 12:07 AM Reply Like
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