We also travel on the Highways

People have a knack of improvisation when it comes to livelihoods, more so in a poor country like India.

The Picture below is from a National Highway in Andhra Pradesh. Dramatic climate change means that farmers dread unseasonal rains - like hail at the onset of summer! A village thought that the Highways can also be used to dry their grains before weighing and sold to the trader.

Struggle for Livelihood: Where are the benefits?

There are so many government welfare programmes for the Girl Child. Yet, in most rural areas the struggle for livelihoods means that families are dependent on the age-old traditional means (as in the photo below from a village in Mahabubnagar Village of Andhra Pradesh). 

One wonders if there are fundamental problems in the manner in which the welfare programmes are structured. Or, is simply a case of problems that arise when there is an attempt to push schemes with a 'one-size-fits-all' top-down approach? Everybody other than the beneficiaries seems to know what exactly should be given to them. In other words, does it simply indicate that we have lost our way due to excessive dictation from above. 

Over the past 10 years, continuously rising agricultural commodity prices and high internal migration and, with it rising agricultural wages has largely ironed the cracks in rural society. Imagine, the consequences once agricultural commodity prices start to decline. A falling agricultural commodity prices will invariably lead to a decline in rural wages. High levels of indebtedness means that it almost certain to create a disaster. 

One wonder what may trigger such changes? Or, is it better that there is no collapse in agricultural commodity prices?

Weekly Village Fairs - Fast Vanishing Breed

Pictures from a Village fair in Mahabubnagar District of Andhra Pradesh, India. This is one of the largest such village fair in South India and is held on Saturday. It has been held every week since 1983. 

Changing socio-economic nature of rural India and consumer behaviour seems to be indicate that such fairs are increasingly fading into the twilight.

There are three sections: Buffaloes and Oxen, Goats & Sheep and other items (including food grains, vegetables and household section).

The Section of the fair that enables exchange in household items and food grains.

Education and Indebtedness: The Case of Andhra Pradesh

India is an excellent example where past investments in education have yielded handsome tangible benefits. Resultantly, it is now considered as the single most important tool for social and economic advancement for almost all social groups. The problem of low skills acquired through education is well known. A more pertinent problem that is over looked is the unintended consequences of indebtedness that increased investment in education are creating amongst the poor. Unlike in the past few decades, the causes for indebtedness, especially among the poor, are markedly different. While the decades-old causes for indebtedness have remained (like repaying old loans, and daily needs), new causes that require ever larger amounts of credit (like education, health and housing) have been added.

Investments in education from individuals and the government have increased over the past few decades. Increased expenditure on education is indicated by growth in enrolment of students and the expansion of educational institutions in India. The number of schools (primary, upper primary, secondary/senior secondary level) increased from 230,700 in 1950-51 to 1.389 million in 2009-10. This growth was in all segments: the number of primary schools increased from 209,000 to 823,000 while upper primary schools increased from 13,600 to 367,700 and secondary/senior secondary schools increased from 7400 to 189,900 . Enrolment in school education increased from 2.38 million to 243.2 million. In the case Higher Education, the number of universities in India increased from 30 in 1950-51 to 634 in 2010-11 while the number of colleges increased from 695 in 1950-51 to 33,023 in 2010-11. The total enrolment of students increased from 397,000 in 1950-51 to 16.9 millions in 2010-11. UP, Maharashtra and Andhra Pradesh have the highest student enrolment.

The expansion of the government machinery till 1991 and the growth of the private sector after 1991 helped increase the employment opportunities. The high paying jobs in the information technology (IT) and Information Technology Enabled Services (ITES) sectors reinforced the belief that education facilitates economic and social growth and advancement. The consequence of this awareness is magnified in the rural areas since it helped the rise of new elite in a very short span of time: in the last few decades educated found employment, and used the surplus to buy land. As values of land rose and the rise of this elite, mostly from humble origins only helped expand the importance of education in popular perception. It was in this context that the impact of government policy of encouraging education and its consequences needs to be understood. The increase in number of educational institutions from 2000-2010 varies from 60 percent to more than 100 percent across the different segments and more pronounced in secondary, higher and professional education spheres. However, the above developments are not alarming by themselves.

Over the past decade, poor have been convinced due to a combination of factors that include changes mentioned above and rising wages (which leave larger amount of disposable incomes) that the best possible manner in which their children will have a better future is through education – even if it means assuming ever larger quantities of debt. The dysfunctional nature of government schools increases the attraction for the more expansive private schools. An example best illustrates this increased scale of attraction of the more expensive private education: the only private school in Palasamudram Mandal of Chittoor district (Andhra Pradesh) with a population of about 11,000 boasts of strength that exceeds 400. Professional higher education, always more expensive, is deemed imperative for an attractive job.

Since rising cost of private education has moved concurrent to increased expenditure on health and other living expenses, a large number of people end up borrowing money to meet the higher education needs of their children. Invariably, the inaccessibility of low cost institutional loans for large numbers of poor forces them to borrow at high interest rates driving them deeper into debt. A study (2011) on the MFI crisis in AP pointed out that 234 of the 1069 respondents had borrowed money for education from MFIs. These loans varied from Rs.25,000 to Rs.120,000 and were used for various purposes including education.

The inability of the education system to sufficiently impart requisite skills including those like basic communication skills means that students are unable to find jobs that enable improvement in economic well-being or to provide sufficient surplus beyond immediate living expenses to service their debts. This aspect of indebtedness is often overlooked. Our studies indicate that on an average a family assumes new debt of Rs 5,000 to Rs.50,000 annually accrued due to investments on education. According to The National Employability Report – Engineering Graduates 2014 ranks AP among the bottom 25 percentile of States as far as employability of engineering students for IT jobs. Interestingly, the state ranks along with Tamil Nadu and Kerala.

This is part of a largely phenomena that is playing out on a larger scale in different parts of India.  A study found that nearly 47% of 2013 graduates were found unemployable in any sector. Only 2.59 per cent of them was found employable in functional roles such as accounting, while 15.88 per cent was suitable for employment in sales related roles and 21.37 per cent for roles in the business process outsourcing sector.

Thus, it is imperative to understand the precarious nature of the present investments in education that is driven by assuming high-cost debts. This leveraged investment in education should be seen in the context of another leveraged investment that is common among the poor – investment in housing. The gestation period for return on such investments is often decades into the future, while debts have to be serviced in the immediate present. As an owner of a private school chain in AP pointed out that education business has been aided by a change in the mind set of the people at all levels: a change from considering education as expenditure in their personal balance sheets to an investment in their balance sheet. It is also the only segment of the education value chain that is completely unregulated. Investment in education has the ability to improve the social and economic well-being of the poor provided it facilitates gainful employment. Far from creating an ‘aristocracy of culture’ (to borrow a term from Pierre Bourdieu), the incomes generated from such leveraged investments are insufficient to service the debts, thereby driving the poor deeper into the quagmire of debt from which they have little possibility of exiting in the foreseeable future. History shows us that the result of hundreds of thousands individuals borrowing short-term and investing long-term is a perfect recipe for disaster. The catch is that it takes decades for this to play out.

Nothing left to Cut?

A drive through certain parts of the rural areas clearly shows the extent that we have caused to the environment - like in the picture.

Too Little, Too Late?

Mechanisation of Agriculture: Photo Update

A trend to watch in 2014 is the rapid pace of farm mechansiation. However, there is little information about the consequences of this process on the local community and the labour markets. 

Harvesting in Progress: Photo from Kurnool District

Mechanisation of Agriculture: Insufficient understanding of its Impact?

An often but extremely interesting facet of rural socio-economic life (at least in AP) is the increased mechanisation of agriculture. A clearly discernible, albeit recent appearance in agricutlure is the mechanical harvesters. They increasingly dot the rural landscape. Since May 2012,when we first pointed out this trend, their use has increased exponentially. Each harvester costs Rs.1.4 million to Rs.1.6 million with a prospective owner investing about Rs.500,000 to Rs.600,000.

The rapid use mechanical harvesters has very interesting consequences, most of which do not seem to be well understood. Some of these issues are highlighted below:

Firstly, A number of these harvesters are operated in a manner similar to the lorry business. 

Secondly (most important but often overlooked), it reduces the time cycle for the farmer - they now facilitate completion of harvesting about one month earlier than in the past; 

Thirdly (at least in AP) there is an increased adoption of the harvesters in dry regions of the State rather than in the more irrigated (and more prosperous regions). In these dry regions, labour costs are lower but, there is greater investment in mechanised harvester - mostly to operate as a business rather than for own use. 

Fourthly, their use saves substantail amount of money to the land owner: they harvest about one acre in one hour and the cost varies from Rs.1200 to Rs.2500 (depending on the demand). 

And, Lastly, Needless to say, nobody seems to knows its impact on the rural labour markets, other than the conventional stereotype that mechnaisation leads to job losses. 

Time for a rethink?

Fighting Food Inflation in India: Attempting the Impossible?

Almost everybody claims that they are worried about inflation. It is likely to be a major issue in the forthcoming election in 2014. But, there are not many satisfactory explanation for where the demand is coming from, especially food inflation. 

1. There is an increase in money that people are earning and money that people are accessing by assuming new debts or through remittances. 

2. Wages are up, so is the Minimum Support Price (MSP) for various agricultural commodity prices is up so there is some increase in inflation that is bound to increase - everybody knows that. 

3. Oil prices are up - everybody knows that. 

4. High levels of consumer lending by the banks. 

5. What may be missed is that over the past few years there is a huge amount of money that is going directly into the hands of lower half of the population, if not lower quartile. Undoubtedly, one of the important items that the lower middle classes and the poor do is to spend a lion's share of their earning on daily household expenditure and items like housing, debt repayment and education. A large part of their daily household expenditure is going into food. Where are people getting so much money to spend ever increasing amounts on food:

(a) There is a large number of money flowing in through Remittances from other countries - nearly $60 billion (at present value: Rs.360,000 crores) flowing into India through formal channels. Assuming that at last another US$10 billion comes through hawala route (i think it could be double that). Hence, the total money flowing in through remittances could be in the region of Rs.500,000 crores annually. There is a major correlation between increasing remittances and rising food inflation since most of the money goes into funding expenditure related to daily needs, education or housing. There are whole villages where large sections live on remittances. 

(b) Internal Remittances - unknown amount but since that is a consequence of rising wages, we know it is already factored into present day thinking.  

(c) Borrowings by the lower middle classes and those below poverty line: There is a sharp jump in lending through SHGs and MFIs. Interestingly, both these have jumped over the past three years - years when inflation, especially food inflation has gone up. MFIs have ramped up lending over the past two years in other parts of India. Assuming that together (govt supported SHGs and MFIs) have lent Rs.50,000 crores it is quite high. Our studies indicate that most of these borrowings go into consumption loans. 

(d) Add to the above list loans by Gold Loan companies: wheret 30-40% of the gold loans may be to the poor earning less than Rs.100,000 (about US$1500) a year. Assuming that they have combined portfolio of Rs.100,000 crores and 40% is to the poor, then it would add another 40,000 crores. 

(e) Money from informal lenders - we have no idea about how much is going to the lower sections. So best leave it. 

(f) Add to this some welfare programmes like NREGA which is again directly flowing into the hands of the poor, who are most likely to be spending the monies within a week of receiving it. 

(g) Add to this other borrowings by the bottom 50% of the populace - a lot of which may be going back to purchase food and other daily needs. 

To these may be added other supply side factors and also the whole issue about land use and a new addition - export of food grains. 

In other words, there is about Rs.500,000 crores (more than US$79 billion) of "new" money that is chasing food items and most of this is invisible on the policy makers radar - at least till now. I think they are highly correlated to periods of rising food inflation. This is what i am assuming. Considering that i am usually very conservative when making an estimate (because i would like to err on the side of caution), it is bound to be far higher. Assuming that my estimate is correct it is still large. 

The point that we are trying to underscore is that people now have a lot more money in their hands, due to a variety of reasons. This is money that is going directly into the hands of those who are more likely to spend it immediately - and on food. In contrast, the remedial measures are geared at monetary policy, which take a long time to feed through to the system (say 6-9 months). Hence, the solution that is being tried out by the the Reserve Bank of India (monetary policy related) is not exactly very useful. Therefore, there is a need to reclabirate policy on the part of the Central Government and the RBI. Therefore, liquidity tightening may have only a limited role or even an adverse impact in controlling inflation because the underlying dynamics may not be working as well as they did in the past.  

Question worth Reflecting

Over the past few months there is a greater visibility of business establishments (picture below). This raises an important:

What is that people are more interested in - buy gold jewellery or borrow money?

In every city (the above picture is from Hyderabad), town or large villages shops selling jewellery and lending money against gold are increasingly visible. Five years back it was only registered pawnbrokers who offered such services. Now, we have banks, NBFCs, pawnbrokers, jewellery shops, and informal moneylenders offering gold loans. This leads to another question: Are people more desperate to borrow now than they were five years ago or is simply financialisation of commodities spreading to different parts and different segments of the economy?  

Boom, Bad Loans in Banking Sector and Valuation Model

At last, banking policy makers have realised the damage that bad debts have wrecked to the Public Sector Banks. Recently, a senior RBI official lamented that Corporate Debt Restructuring (CDR) for loans is 'going out of control' gone out of hand though they were under control till March 2011. The official pointed out that banks restructured accounts touched a massive Rs.3.25 lakh crores (approximately US$50 billion) - nearly Rs.2.7 lakh crores is through CDR. Belatedly, RBI has warned about the problem of over-indebtedness and directed the banks to make larger provisions. Other senior RBI officials have pointed out that more than 12% of the banking system's advances have turned bad, restructured twice or written off on technical definition. The official blamed this on poor credit appraisal systems. What was not mentioned is that the problem of bad loans is primarily grounded in cronyism - a phenomenon that grew exponentially over the past decade.  

Since at least January 2012, this blog has drawn attention to this problem with what was frowned by a few readers as boringly monotonous. We drew attention to the problems in different segments of the economy, especially the government and the corporate sector. Another facet of the economy that we drew attention to is the eerie similarities to 1996-98 period: the only difference is that the present size of the economy is much larger and by corollary, so are the problems. An overview of the causes for the growth may serve as a good entry point. We argue that the boom was caused largely by government spending, assuming debts and remittances. Each of these triggered a jump in land values, which only fueled the boom. 

Thought debatable, we may assume that the foundations for the boom were in the changes that took place between 2002-05. The good monsoons in 2004 and increased spending by the government triggered the boom. The total bank credit (on 19 March 2004) was Rs.7,64,383 crores. By 1 November 2013, total non food credit grew to about Rs.55,588,600 crores. In 2004 worker remittances from overseas into India were estimated at US$23 billion. By 2012, this had risen to about US$69 billion. The impact of such large money flows into the country can easily understood. Most of it went into chasing few assets including those in the stock markets. 

As more money flooded into the stock market and other commodity markets, a process that was underway in other parts of the globe, there was increased importance to a 'valuation model' - where capital appreciation was more important than incomes that could be earned through investment in the companies. Valuations improved with the perceived ability to collect rents through squatting. Squatting on resources meant higher valuations, which in turn could lead to companies being sold without investing any capital (other than for grabbing the resource). The only places where such money could be raised was by raiding the banks through crony connections)  that would enable an improvement in the valuations - a cause for many scams. The hurry to corner resources spread to the 'older' parts of the economy (coal, power, hydro, roads, etc) and to the 'newer' parts (telecom spectrum, digital gateways in the banking system, payment systems, etc). The ability to collect rents and easy money led to a rush to garner resources, thereby increasing the need to deploy larger sums of money to corner the resource. 

This brings to forefront the road ahead for the regulators. Identifying and accepting the nature of the problem is the easy part. Dealing with it is more difficult simply because they will have to overcome vested interests. Unless, these vested interests, most of which are intertwined with the rulers, are overcome policy tweaking may be too little, too late. 

If history, a guide, expect a big bail out for the indebted crony elite, which passes off as genuine businesses. 

Technology and Rural Banking: Pictorial Explanation

"Banking" on Liquor?

Sign of Change or changing nature of socio-economic dynamics? There seems to be no turning back on the importance of liquor in everyday life.

The photo is from Anantapur District of Andhra Pradesh

Innovative Country Cousin of KFC?

There is never a shortage of innovation in Small Towns, especially when it comes to names. ATM can mean a lot of things to different people in various sectors. The banks would like to believe it is "Automatic Teller Machines" while customer would like to believe it is "Any Time Money". In some small towns (like Vijayawada and Kalwakurthy) ATM can also mean "Any Time Milk".

This interesting fast food restaurant in Vijayawada calls itself "Most Favourite Chicken". Probably would like to comfort its customers that it is as good (exterior looks and interior ambiance) as the better known multinational company. The multinational itself can do nothing to complain. 

Gold, Government Policy: Need for a reality check

In recent weeks, India has witnessed an interesting debate and policy interventions aimed at reducing the import of gold bullion in different forms. These measures are a continuation of the attempt to increase tax on gold inaugurated in the Budget of 2012. In the past few weeks, there have been a series of measures aimed at restricting the banks from lending for such purchases, restricting imports from people returning/visiting India and tweaking of other policies. Innumerable statements that seek to encourage gold owners to embrace electronic and other gold instruments are the order of the day. Invariably, these measures triggered a debate in the press about the reasons and efficacy of such measures.

The estimates about the quantum of the gold available within the country varies from 18000 tonnes to 20,000 tonnes, excluding the amount of gold held by temples. It is almost impossible to accurately estimate the quantum of gold available within the country. Imports are reported to have doubled since 2011. The rise in prices have only added to the attraction of gold. A clearly discernbile trend in India is the fact that millions of people are buying very small quantities, often no more than 1 to 10 grams at a time.

At the outset, it is imperative to underscore that a large part of these measures, however justified are hasty. These measures are hasty keeping the peculiarities of the socio-economic structure of India - even ignoring the cultural significance attached to owning gold in India. A number of articles have drawn attention to the need for a more efficient use of the huge amounts of gold already available in the country. Owning gold has not only cultural significance but also practical uses - probably far beyond what the government would like to accept. 

The response of the government has been remarkable insensitive to the needs of the people. Government seems to think that increasing import duties will help temper the demand for gold and give a fillip to the use of  existing gold hoard since most of the gold is anyway stashed away or in the form of jewellery. Unfortunately, this wishful thinking is unlikely to help either the government or the consumers. The only group that gains are the smugglers because any differential in the price of gold in the international and national markets will only lead to the opening of yet another profitable business. 

Electronic gold and related instruments have only a limited appeal. They require people to actively trade/invest on the stock exchanges. India has relatively few investors as a percentage of its population. Opening and Operating Demat accounts continues to be cumbersome as well as expensive, especially when holdings are of low value and volume. A more pertinent reason why gold and related electronic instruments are unlikely to succeed are due to reasons related to trust and problems in the dispute resolution mechanism. It is less risk to actually physically hold gold rather than place it with a formal institution or depend on brokerage houses and attempt redressal for fraud or litigation that springs up due to other reasons. 

Policy makers have to realise that in India gold is not only credit but as good as cash in hand in for the millions of people. Though, people like Warren Buffett may not have any use for gold; but, throughout India one can raise cash literally in the middle of the night by pledging gold. (Buffett is reported to have stated: "Gold get dug out of the ground in Africa, or someplace, then we melt it down, dig another hold, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head"). Apparently from Omaha the view from Mars is quite twisted. In the poorer parts of the developing world, gold is probably one of the most liquid assets and a more transparent asset class to own: even the poorest can compute their rise or fall in value everyday. They are more liquid than stocks even in the remote regions and more transparent opaque real estate market. Moreover there are very few markets accessible where people can invest relatively small amounts. Little wonder that all parts of the gold business - physical sales to lending against gold are booming business segments that has drawn even the largest players. Gold loan business is estimated to be worth Rs.300,000 crores per annum with about 2/3rd being informal in nature. 

The rise in gold price and thanks to the increased investments have single-handedly helped the poor improve their 'creditability' among the banks and pawnbrokers far beyond what government policy has achieved over the past decade. In such a scenario there is a need for the government to reconsider its suspicion (or even hostility) to purchase of gold.

Time for the finance minster to take a visit beyond the metros?

The picture below of a Pawn Broker from a village in Chitoor District

Perfect Storm Ahead?

In the era of high voltage media blitz, it always pays to take information in the public domain with a dose of salt, if not chilli powder. Over the past two months, the favourite of the media was trying to predict the monsoon with the occasional sprinkling of selective coverage of the scams. Interestingly, the Sahara scam barely found a mention except on the day of the Supreme Court verdict. In the past, we avoided attempting to predict a drought and have consistently held that it is too early to call a drought (at least in AP) for the simple reason that historically, there were a number of occasions when there were floods in September - October. This does not mean that merely because AP has received its fair share of rains, the problems are over. The State benefits substantially only with abundant rains in Maharashtra and Karnataka.

Therefore, in times such as these, it is best to attempt to gain insights through more objective indicators (i.e.relatively speaking) and arrive at our own conclusions. Personal experience indicates that a detailed look at the chart patterns is useful. This short-post attempts to outline a few chart patterns that will have a bearing on the future.

A look at the US indices is instructive for a number of reasons. US is the largest economy, despite all the rhetoric about the demise of the dollar, that is easier said than done. A more important reason is that in the era of reverse globalisation, the major beneficiaries are like to be USA and Europe (after the present crisis drives down wages over the next few years). We say next few years as the charts seem to indicate that the markets may be heading into a perfect storm. Complacency is at historically high levels. Despite all the rhetoric of the free markets, hoping that the US Federal Reserve expands the supply of money is the hope on which the markets survive on a daily basis. The results of mining companies clearly indicates that the world economy may have topped. China seems to be hurtling downwards while India has no clue about what is happening. Brazil lies between the two, while Russia is not likely to well, especially when industrial metals and oil decline while food grains rise.

The chart below of the S&P 500 index in US indicates that the markets may be on a verge of a major down move. A look at the bottom part of the chart below indicates that while the S&P index has maintained a semblance of increase, the decline in the internal strength (in this case indicated by Relative Strength indicator) matches that of the decline between 2006-2007 that preceded the crisis of 2008

Think that is a statement that is sensationalism or filled with hyperbole? The chart below compares the volumes of the S&P 500 with price movement. Volumes have steadily declined, especially when the market have rallied, indicative of the lack of conviction among buyers? Or does it portend something even more ominous? Like the death of the 'equity cult' that was peddled to the middle classes as the road to riches? The short answer is that nobody knows. Little wonder that Keynes observed that 'the markets can remain irrational for longer than you can remain solvent' (sic).

 Over a longer horizon, the chart below of the Dow Jones Transportation Average (monthly) from 1990 the present should be a cause for greater concern. It indicates that the rally is not only running out of steam but is also likely to decline substantially (if the charts are any guide). Since the chart is monthly, the results are likely to play out over a period of months rather than a few weeks. If our fears turn out to be correct, the consequences for the global economy will be disastrous and will be felt for the next few years.

Therefore, it pays to be cautious.

India: Till Debt Do Us Apart

A common mistake that almost all of us make is, we mistake a bull market for our own brilliance. India's decade old boom is one such typical story. Over the past two years, we had deluded ourselves to think that we have made a dramatic and radical departure from the past. We even for a term for the low growth period: Hindu rate of growth. It is difficult to understand the term. We have convinced ourselves that we are in a completely different boat from more indebted countries and consumers in USA and Europe. Indeed, we are in a completely different from our US and European counterparts. Our boat leaks more than the others. 

India is probably as highly indebted as any of the other countries that are presently in deep trouble. It is just that we selectively disclose our debts. We are pure lucky that the world is more concerned with the US and European Debt crisis for the simple reason that they are more important to the world economy than India. The chart below - Debt to GDP ratio of different indebted countries (courtesy: tradingeconomics.com) indicates that it is time that we grow more concerned about our own debt. One crucial difference between all the countries mentioned in the list have a current account surplus and also have large foreign exchange reserves that are their own. Unlike the case of India, they may not melt at the sign of slightest trouble.

Figure: Debt to GDP Ratio of major indebted Economies

One should not be positively inclined or complacent on viewing the above chart. While the debt is likely to remain constant or even increase and rarely decrease, GDP is bound to vary substantially and will depend on economic conditions within India and Outside. A decline in GDP, as we can expect in the next few years, will make the chart worse.

We often believe that the rise in GDP is due the India's ability to decipher to secrets for economic growth all at once. Unfortunately that is not the case. The reasons for the rise in GDP are due to (a) Global boom, (b) Massive increase in debt induced growth along with other factors such as large increase in prices, asset inflation, etc. The jump in salaries due to the Central Pay commission induced increase in salaries should not be forgotten. The jump in commodities substantially benefited India. Nearly 35 percent of Indian companies that form part of the BSE Sensex are commodity companies, rising prices invariably helps them. Add to this their ability to fix prices and we easily understand the dynamics of rising prices.

An important reason for the illusion of the boom and delusions of India's economic might arise due to the exponentially large borrowings by our companies and individuals. It needed a drought to forcefully attention to that. As a nation, we seem to have convinced ourselves that we can borrow our way to prosperity. 

An interesting chart clearly highlights the borrowing binge that the largest groups have indulged over a short span of five years. It would be interesting to see the pile up in debt by all the listed companies. Since that is difficult,we draw attention to one of our previous post in which we had mentioned about the increase in bank credit.

Figure 2: Rise in debt of 10 heavily indebted business groups

Interestingly, the above statistics seem to indicate that the law of diminishing returns may be catching up. If diminishing returns are not having their effect then it is likely that money is being carted out of the country on a very large scale. 

The consequences of this borrowing binge seems to be playing out in the present. A large component of this money seems to have flown into speculation in land, followed by construction - again with a speculative underpinning rather than anything else. The best evidence can be garnered from the 'new' almost ghost townships that have come up in many cities - Kolkata's almost empty new city is evidence of the consequences of speculating on somebody's speculative tendencies. And, we never fail to poke fun at the Chinese who have 20 times more number of ghost towns.

As a nation we seem to have gained cutting-edge knowledge about the mechanics of recycling debt without actually infuriating the global bond markets. We will never infuriate the local bond markets because the largest player in Indian economy is the government. Historically, it does not pay to anger the biggest gorilla in the market. Moreover, the most profitable business are those that have mastered transfer of public resources. Incidentally, they are also the most indebted business. Ever wondered why our companies prefer to over-leverage themselves? The answer to that question is that banks are mostly publicly owned. CRISIL, the not so accurate rating agency (just like its owner, S&P) estimates that bad debts will reach about Rs.2,00,000 crores by the end of this financial year (ending March 2013) . However, if the banks were less economic with the truth, that figure could easily be 2-4 times higher. This excludes the thousands of crores that have already been restructured. 

This is not to claim that our banks will collapse. They will be bailed out by the government. But, we have to thank the RBI for that as their experience from 1947 to 1969 taught that. Unfortunately, in the post-liberalisation era, RBI cannot force the banks to reduce lending. So in order to hide their non-performing assets, the banks are increasing up lending. In the process they have end up increasing systemic risks as they 13% of their loans are to the largest 10 industrial groups. The banks seem to forget that their ability to raise money was their ability to attract money from overseas bond markets. That may be coming to an end as the bull market in US Treasuries means that the largest banks will find it more profitable to invest their money in US government bonds and ride the rising in prices than take risks. This is already happening.

Ironically, our consumers from top to bottom, are no different from our over-leveraged corporate entities. For decades, the richest have been able to borrow. Since, 2005 we have added the poorest as the new consumers of ever larger quantum of debt. At last they have deciphered the key to recycling ever larger quantities of debt. SKS Micro proudly claims that they lent more than Rs.5000 crores of debt to the poor in AP (before the government cracked the whip on their 'lend-beat-or-kill-and-collect-insurance business model collapsed'). Add the lending by rest of the MFIs and we have the larger picture.

Indian Business Culture: Profitability through Transfer of Public Resources

Over the past two years, this blog has been critical of the Indian business culture. At times, our views were construed as being against the very principle on which the markets survive. But the events of the past few weeks have proved and reinforced the arguments that have elucidated over the past few years. If markets are to survive and prosper they need to function properly in a manner that they gain the confidence and trust of all the stakeholders not just the shareholders. If they are to survive without shocks, it is imperative that they benefit the a predominant part of the population rather than a few. Unfortunately, the model of economic growth that India has encouraged actively creates oligopolies and rent-seeking. Government policies in various sphere encourage such rent seeking behaviour. Add to this, the model based on a valuation metric (capital appreciation) that has been stressed in the capital markets to build 'wealth' and we have a recipe for disaster. It is imperative to note that our recipe for disaster should not be construed as a collapse of the markets (or a revolution). On the contrary, increased dysfunctionality of the markets have the potential to cause large scale dislocation and social crisis in a country like India. The sheer size of the country is sufficient reason why we should be wary of such dysfunctionality in our economic life. 

The below image is a newspaper clipping from The Times of India, Hyderabad Edition, 18 August 2012 (p.10) about two such cases of looting of private resources. 

The nature of siphoning off public resources is such that the profitability of a vast majority of the listed companies, though not all, is dependent on government doles of different kinds. Little wonder that foreign investors prefer companies that have the potential to build oligopolies or rent-seeking businesses. We would argue that if the government subsidies of various kinds (sales tax, excise benefits, etc) were removed a large number of listed companies would either run into losses or would make nominal profits with margins of less than 3%. Add to this form of direct and indirect doles by the government induced bank lending, either those due to pressure from the government or due to extra-economic considerations and we have a classic case of companies that will invariably end up winding up. 

Historically, one of the problem that we have faced in India is that companies, governments, investors and borrowers believe that debt is no different from profits and hence the proclivity to borrow beyond our means. Glibert Slater words in 1929 seem prophetic: 'India has a scarcity of people willing to practice the unattractive virtues of thrift and forethought’(In to L.C.Jain, Indigenous Banking In India, Macmillan, London, 1929, p. xiii).

And, we complain of fiscal deficit, subsidies and lack of interest among investors in long-term investing!!! 

India @ 65: Rumours and Rent-seeking complete the cycle

Never in the recent years has the week before and immediately after an independence day been as insightful and never has it drawn such forceful attention to the socio-economic contradictions of the times we live in - provided we wanted to heed those warnings. In normal circumstances, it should have drawn attention to the delusions that we have allowed ourselves to be carried away. Unfortunately, the nation does not even seems to have realised these are problems. If only, as a nation we have a slightly more respectful view of history, we would have realised that we have reach an inflection point in our history.  There is never a dearth of people who claim that India is at the cusp of recognition as a 'Great Power'. As a figure of speech, a great power could also be understood to mean a 'great power' just like the Hapsburg empire at the turn of last century.

The week was insightful from a social and economic angle. In the realm of economy, a number of companies declared their results. The results drew attention (at least mine) to their debts. There are very clear indications that growth is rapidly declining. At last we have policy makers being less economic with the truth in this respect. Socially, it drew attention to the problem that we have faced for at least 100  years in different forms: ethnic tensions. Economic-geography wise (which may have been missed), it drew attention to the precarious nature of our cities - or those that aspire to become 'Global cities'.

When was the last time in India we had riots, rumour induced panics, high levels of inflation, high indebtedness, banks in cover-up mode because of bad debts and, people feeling brilliant because of a bull market? The short-answer is not far back in time in the period from 1989-1998! The bull market part was only till early 1995. How did we reach this point? Quite simple - actually. We deluded ourselves that we about to embark on a 'great transformation' of the country from a poverty stricken, third-world country to a 'developed' super-power in the making in the not too distant future. Historically, this is always the turning point when the bubbles and euphoria's are pricked but, we do not realise that for a long time after that. We forgot that, it never is dramatically different. The point of departure for the 1989-1998 period to the present is that riots then were a consequence of tepid and stagnant economic conditions that had accumulated over the decades. Now, ironically, they are a consequence of the economic growth.

It is pertinent to recollect that the boom of the last decade was built on debt (and I suspect the return of money that was carted away in the past and hidden in the once tax havens through foreign institutional investor route). The boom was also aided by the massive increase in money supply (not only in India but also elsewhere in different parts of world) as well as the rise in asset values (real estate, stocks and commodities). Price rigging of equity values contributed their part magnanimously. The house that debt built in India is extremely large - probably as large as the debt stricken countries of the word. Debt per capita seems small due to our teeming population. Private sector debt is especially interesting: despite various creative accounting strategies, recycling and ever-greening of debt. The banks in turn postpone the problem through debt restructuring or (CDR in banking parlance). Interestingly, one wonders why the regulator allows such ever-greening when there seems to be sufficient evidence that indicates this restructured debt is likely to lead to a default in the near future. It has been pointed out that since the process of CDR was inaugurated in 2001, only 57 cases worth Rs.43,000 crores have repaid the loans - a large component was due to the global economic boom. I always thought that the first lesson of prudential financial planning and investing was to place a stop loss. Indian banks obviously think differently. The following table provides an overview of the total debt of the more indebted of a few listed companies. Some of these companies were also mentioned in a previous post, but  thought it would be interesting to understand how the indebted companies were behaving and therefore the updation in the original list.

Name of Company	Total Estimated Net Debt	Accounting Period
Reliance Communications	Rs.35,650 Crores	June 2012
Lanco Group	Rs.31,968 Crores	June 2012
GMR	Rs.33,600 Crores	June 2012
DLF	Rs.22,600 Crores	June 2012
Suzlon Limited	Rs.13,800 Crores	June 2012
Essar Oil	Rs.9,500 Crores  (after CDR +6000 crores sales tax dues)	June 2012
Kingfisher Airlines	Rs.7,500 Crores	June 2012
Bharti Shipyard	Rs.5,800 Crores (after CDR)	June 2012
Deccan Chronicle	Rs.3,500 Crores	June 2012
Bharti Airtel (consolidated - including Subsidiaries)	Rs.68,000 Crores	June 2012
Tata Steel (consolidated - including Subsidiaries)	Rs.54,020 Crores	June 2012
Tata Motors	Rs.47,149 Crores	June 2012
Hindalco (consolidated including Foreign Subsidiaries)	US$8.9 Billion	June 2012

Interestingly, debts seem to have increased for a few of the companies that were mentioned in the previous post. We never seem to remember that we cannot borrow our way to prosperity. The above list, compiled from different newspaper reports and the recently announced quarterly results, excludes most of the companies listed on the stock exchanges. It also excludes the debts of government owned utilities and the power sector. The debts of the power sector are reported to be about Rs.300 billion. The list is not representative of the larger problem because it contains only that information which could be found easily.

According to RBI report, the total borrowings from banks in India (at the end of 10August 2012) are more than Rs. 27.6 lakh crores (Rs.276 Billion). Total bank credit is more than Rs.470 lakh crores (Rs.47,000 Billion). Hence, the list provided above is a tiny part of the total borrowings. In September 1998 it was Rs.7,549 crores. (Disclosure: I am not sure if I have tabulated the zeroes correctly, and on the lighter side, I blame any discrepancy to increase in money supply and the way RBI states it: in 1998 it was announced in thousands of crores and now it is announced as rupees billions). The list is clearly indicative of the exponential increase in debts.

Will these debts ever be repaid and are these highly indebted companies intrinsically valuable? A more difficult question to answer is will they survive the present problems, which are likely to last a long time? The easy part of the question is the first part. A lot of companies in India are unlikely to ever repay their debts. The period from 1991 to 1995 was not very different (as we have pointed out in the past). Companies raised debt and equity in large quantities from overseas lenders and investors to expand capacities, which never proved profitable till at least another decade after their completion. A number of companies never completed their expansion because they did not survive. This time is not likely to be different.

The problem for some of the companies is that just as beauty is always in the eyes of the beholder, these companies were thought to be valuable because of the larger 'India growth story'. It was because of the perception at that point of time, that they could raise such large debts in the first place. That sort of 'symbolic capital' (in Pierre Bourdieu's terminology) is a rarity in the present circumstances. But, some of the companies hoped to able to establish themselves are gatekeepers to rent-extraction (like the roads business) and consequently, confused bull market related buoyancy with the inherent strength of the Indian economy. An example best illustrates this: the calculation for a number infrastructure projects, for which billions of rupees and dollar loans were accessed are based on impractical revenue streams. The reality is that instead of a booming economy we are likely to have a low-growth, high inflation economy - just like the 1970s to 1990s period. Most of these companies were thought to be 'valuable' based on those impractical revenue streams. It is pertinent to note that 'value' is always relative and based on perceptions of fickle minded investing hordes. In other words, they were all bull market stories or those in which a bull market was confused for brilliance. But, some of the businesses will invariably survive. The roads and port businesses will do well but they will be like the railway boom of the 1850s. The business itself will do well, but those who reap the benefits will be substantially different. Remember Keynes' observation: markets may remain irrational for longer than you can remain solvent!

A major structural deficiency of the Indian companies is that our companies are essentially rent seeking in nature. Innovation remains elusive for most of the companies, even those which like to think they are innovative. One need to look no further than the manner in which they bid for contracts. There are innumerable instances in the past decade where companies have bid for less than 1% margin to undertake some government contracts. One wonder how public, listed companies can survive on such low margins. On close scrutiny, it emerges that there is a clear patten: the reason is that their wrong reading of history is responsible for such fallacies and the desperation to place themselves are gatekeepers to the possibility of perceived outsized future profits. They often look at the history of the railways and believe that infrastructure makes great sense. Otherwise what explains a telecom company running up billions in debt, when they should have understood that voice would have to remain an important stream for their revenues considering the profile of India - most of those who own mobiles have insufficient literacy or own very basic models which means their ability to consume data related services is severely curtailed. We often forget that the markets have been around for a couple of centuries in different forms and are likely to be around for a couple of centuries more. The question that companies do not ask is if they will be around if they follow such unstable business models?

The foreign companies (and investors) have been extremely savvy and have realised early on that the only opportunities in India are in rent-seeking behaviour. Therefore, they have invested, essentially in companies that have the potential to maximise this rent seeking behaviour or in segments where oligopolies can be easily created - cement, moneylending, mining to cite a few. Thus, even the most innovative companies at the cutting edge of capitalism in the western world have invested in moneylending companies - see the list of successful technology companies from USA and Europe that have invested in micro-finance companies in India. Investors are keen in investing in warehousing which will be extremely profitable in a country like India, where information asymmetry and institutional protection is very weak. Imagine the kind of information that a large investor in warehouses will have about the inventory - especially food grains? This would contrast with that of the government, which either does not have information or even if it exists a large number of custodians of the information can be easily bought - if the price is right. It is pertinent to note that, the willingness to behave in a rent-seeking manner is all pervading. Harvester owners in a Mahabubnagar district were keen on fixing prices so that they could make outsized profits. Rice mill owners routinely fix prices for various by-products that they produce (like barn oil cake used as cattle feed). Cement and Steel cartel is probably as old as liberalization - irrespective of the category of owners.

The more we gloat about our great power status, the more quixotic that its proponents become with each passing month. We have never ceased to convinced ourselves that the whole world is lining up to invest in India. This has resulted in wages spiraling upwards, and productivity spiraling downwards - exactly at a time when the reverse is happening in the major consuming nations. This inversion removes the single most important factor that underscored the whole process of globalisation. Some of the western companies became truly transnational corporations producing and consuming on a global scale and serving markets in a very regional manner. A large part of the logic - if not all of it may be coming to an end.

Each passing issue highlights the problematic manner and the shaky foundations on which we have built our economic superstructures. Recent events in Bangalore and Hyderabad have underscored the frailty of India's economic foundations. The aftershocks of riots in distant Assam are felt more than 1000 miles away: Bangalore and Hyderabad. Thousands have fled in the after of rumours - not even actual incidents. The cost of nearly 15,000 fleeing Bangalore will only add to the economic woes. The costs have of such immediate removal of labour from the market is difficult to quantify immediately. End of the day, nothing has changed from the 1990s era. Ironically, both of these cities were ceaselessly marketing their "Global City" status and, along with Mumbai and Chennai are always competing for recognition at the high table along with New York, London, Hong Kong and Tokyo.

The answer to those riots: top government officials' response is on the lines of "situation is tense, but under control". Generally, speaking that is the standard government response which essentially means 'that the we are groping the dark and you should fend for yourselves till we know what is happening'. Remember the Punjab problem in the 1980s and early 1990s - even 200 deaths a days was followed by the same response.

Hopefully, at after an insightful fortnight, we will prepare ourselves for the future. The sooner we wake up to the problems at our hand, the better.