Month: March 2015 | Page 3

23 March, 2015

Beyond the pink press

If you are a regular reader of the business press in this country, you would know that there is a marked tendency to give a “positive spin” to most things. “All is well,” is a mantra often espoused.
But anyone who has some understanding of the Indian economy, knows where to look for data and can look beyond the spin, would know that beneath all the foundation and the lipstick, there are big cracks. And these cracks might soon start to hurt.
Mihir S. Sharma’s Restart—The Last Chance For the Indian Economy is one big rant on those big cracks (and I mean it in a good way. If the business press is not ranting, someone’s got to rant). Sample this—Every year up till 2030, 13 million Indians will enter the workforce. To give each one of them a job, jobs need to grow by 3% per year. Since 1991, they have been growing only at 1.6% per year. In fact, as last financial year’s Economic Survey points out, for the shorter period between 2004-2011, the job growth has been at a minuscule 0.5% per year.
So, the pink papers may be jumping up and down about the huge number of jobs being offered by companies at college campuses, the overall reality is different.
Then there is the case of Indian agriculture employing too many people. As Sharma writes: “According to the last Census, in 2011, 55 percent of India—over half worked in agriculture. The sector, however, provided less than 15% of India’s gross national product. So, in other words, farms employed most of India’s people, but produced very little.” This has led to a situation where only 17% of the people who worked on farms survived only on money they made from their farm. Everyone else did some extra work.
The solution is to move people away from agriculture and into factories. Sharma suggests that the farmers understand this. Nevertheless, India is not building as many factories as it should. In fact, the manufacturing revolution has given this country a complete skip. As Sharma puts it: “We even sell the absence of a manufacturing sector as a brilliant innovation.”
And there are multiple reasons for why India does not really have a manufacturing sector. The labour laws suck, ensuring firms start small and continue to stay small. The crony capitalists are not used to paying for factors of production. And Indian politicians have never bothered to explain the importance of economic reform to the citizens of this country.
If India’s demographic dividend has to remain a demographic dividend this needs to be set right. Sharma goes into some detail explaining what needs to be done.
To conclude, Restart is a good read for any one wanting to know the real state of the Indian economy. On the flip side, in order to make the book read like an economic thriller, Sharma let’s the journalist in him overide the economist in him and makes way too many generalizations. That could have been avoided. At the same time a book of this kind could have done with a little more data and number crunching.

The review originally appeared in the Business World April 6, 2015

(Vivek Kaul is the author of Easy Money trilogy. He can be reached at [email protected])

20 March, 2015

Janet Yellen’s excuses for not raising interest rates will keep coming

The Federal Open Market Committee(FOMC) of the Federal Reserve of the United States, which is mandated to decide on the federal funds rate, met on March 17-18, 2015.
The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.
In the meeting the FOMC decided to keep the federal funds rate in the range of 0-0.25%, as has been in the case in the aftermath of the financial crisis which broke out in September 2008. Janet Yellen, the chairperson of the Federal Reserve also clarified that “an increase in the target range for the federal funds rate remains unlikely at our next meeting in April.” The next meeting of the FOMC is scheduled on April 27-28, 2015.
The question is when will the Federal Reserve start raising the federal funds rate? As the FOMC statement released on March 18 points out: “In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
Other than a clear inflation target of 2%, this is as vague as it can get. The inflation number in January 2015 came in at 1.3%, well below the Fed’s 2% target. The Fed’s forecast for inflation for 2015 is between 0.6% to 0.8%. At such low inflation levels, the interest rates cannot be raised.
But the Federal Reserve wasn’t as vague in the past as it is now. In December 2012, the Federal Reserve decided to follow the Evans rule (named after Charles Evans, who is the President of the Federal Reserve Bank of Chicago and also a part of the FOMC). As per the Evans rule, the Federal Reserve would keep interest rates low till the rate of unemployment fell below 6.5 % or the rate of inflation went above 2.5 %.
As the FOMC statement released on December 12, 2012 said: “ the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 % and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.”
This is how things continued until March 2014, when the Federal Reserve dropped the Evans rule. In a statement released on March 19, 2014, one year back, the FOMC said: “In determining how long to maintain the current 0 to 1/4 % target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” In fact, this is exactly the wording the FOMC has used in the statement released on March 18, 2015.
What the FOMC meant in the March 2014 statement was that instead of just looking at the rate of unemployment and the rate of inflation, the Federal Reserve would also take into account other factors before deciding to raise the federal funds rate. So what made the Federal Reserve junk the Evans rule?
In February 2014, the rate of unemployment was at 6.7% and was closing in on the Evans rule target of 6.5%. In April 2014, the rate of unemployment had fallen to 6.2%.
If the Fed would have still been following the Evans rule, it would have to start raising the Federal Funds rate. This would have meant jeopardising the stock market rally which has been on in the United States. In the aftermath of the financial crisis, the Federal Reserve had cut the federal funds rate to 0-0.25%, in the hope of encouraging people to borrow and spend more, to get their moribund economies going again.
While people did borrow and spend to some extent, a lot of money was borrowed at low interest rates in the United States and other developed countries where central banks had cut rates, and it found its way into stock markets and other financial markets all over the world. This led to a massive rallies in prices of financial assets. In an era of close to zero interest rates the stock market in the United States has seen the longest bull market after the Second World War.
Any increase in the federal funds rate would jeopardise the stock market rally. And that is something that the American economy can ill-afford to. So, it is in the interest of the Federal Reserve to just let the stock market rally on.
Interestingly, the Federal Reserve has been changing the so-called “forward guidance” on raising the federal funds rate for a while now. In March 2009, it had said that short-term interest rates will stay low for an “extended period.” In August 2011, it said that short-term interest rates would stay low till “mid-2013.” In January 2012, the Fed said that short-term interest rates would remain low till “late 2014.” And by September 2012, this had gone up to “mid-2015.”
In March 2014, it junked the Evans rule. So, what this means is that the Federal Reserve will ensure that interest rates in the United States continue to stay low. Peter Schiff, the Chief Executive of Euro Pacific Capital, summarized the situation best when he said that the Federal Reserve would “keep manufacturing excuses as to why rates cannot be raised” and this was simply because it had “built an economy completely dependent on zero % interest rates.”
Given this, be prepared for Janet Yellen offering more excuses for not raising the federal funds rate in the days to come.

The column originally appeared on The Daily Reckoning on Mar 20, 2015

20 March, 2015

Manmohan Singh—The dishonest politician

If Bollywood like Hollywood made political biopics, and if things hadn’t turned out the way they have, the story of the former Prime Minister Manmohan Singh would have made for a reasonably good movie.
Here was a man who rose through the ranks and got a doctorate in economics from the Oxford University. He became the Chief Economic Adviser in the seventies, governor of the Reserve Bank of India and the Deputy Chairman of the Planning Commission in the eighties, the finance minister of India in nineties and finally the Prime Minister of India in the noughties.
It was the classic story of an underdog who was sometimes “very lucky,” making it in life. This is a format that biopics thrive on. Nevertheless, in the autumn of his career, things aren’t going quite right for Singh. A happy ending is no longer on its way. His tenure as Prime Minister saw him overseeing probably the most corrupt and inefficient government that India has ever seen.
And now Singh, despite being not corrupt is paying for the same. A few days back, special CBI judge Bharat Parashar, summoned Singh as accused in what is now known as the Coalgate scam.
Parashar has summoned Singh for re-allocating a coal mine to Hindalco. As the judge said in his order: “There was a conscious effort on his part to somehow accommodate M/s Hindalco in Talabira-II coal block.” The screening committee had earlier allocated the block to the government owned Neyveli Lignite Corporation.
Singh could have easily saved himself from this embarrassment, if he had acted in a way he thought was the correct way to go about things. But before we get into that, a few other things need to be discussed.
On June 9, 1993, the the Coal Mines(Nationalisation) Act was amended to allow companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. This was done primarily because the government owned Coal India could not produce enough coal to meet demand.
Between 1993 and 2011, more than 200 hundred coal-blocks were given away free by various governments. Most of these blocks were allocated between 2004 and 2011 when the Congress led United Progressive Alliance was in power. A straight forward explanation for this lies in the fact that this was the period when coal prices had started to rally and hence, a free coal block had great value. Interestingly, Singh was coal minister for a significant period between 2004 and 2011.
The blocks were allocated by an inter-ministry screening committee which had the coal secretary as its Chairman. The committee was supposed to allot blocks after assessing applications by using parameters like techo-economic feasibility of the end-use project, the past record of the applicant in executing projects, the financial and technical capability and so on.
The trouble is that the process followed by the committee was not clear from its records. The former Comptroller and Auditor General Vinod Rai makes this point in his book Not Just An Accountant: “All that the records showed was that the committee met, deliberated and merely recorded the name of the block allotted to a company, and the state where the end-use plant existed. It is left to the reader to decide if transparency was a victim.”
Interestingly, from 2004 onwards the number of applicants for coal-blocks just went through the roof and it was not possible for the screening committee to be objective about the coal-block allocation. This is something that former coal secretary P C Parakh recounts in Crusader or Conspirator—Coalgate and Other Truths: “108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal-blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?”
In August 2004, Parakh proposed to Manmohan Singh(who had taken over as coal minister after Shibu Soren resigned) that the coal-blocks should be allocated through a process of competitive bidding. This would ensure transparency in allocation. It would keep also keep away non-serious players and help the government earn some revenue. On August 20, 2004, Singh approved allocation of coal-blocks through the competitive bidding route.
Immediately, letters written by various MPs opposing competitive bidding started to come in. As Parakh recounts in his book: “This included one from Mr Naveen Jindal who had considerable interest in coal mining.” What did not help was that Shibu Soren, who was a former coal minister by then, and would become coal minister again, opposed it. Dasari Narayana Rao, who was minister of state for coal, was also not in favour of the decision.
Politicians not wanting an auction was understandable because it would take away the influence that they had in allocating coal-blocks.
Singh gave into the pressure and on July 25, 2005, it was decided that the coal ministry would continue to allot coal-blocks through the screening committee route.
In a decision on September 24, 2014, the Supreme Court cancelled 204 out of the 218 coal-blocks allocated by the government since 1993. In fact in August 2014, the Court had stated that: “the entire exercise of allocation through Screening Committee route thus appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.”
Singh could have saved himself a lot of embarrassment if he had insisted on the competitive bidding route, which he had agreed to in August 2004. But he looked the other way, choosing to give in to the compulsions of coalitions politics and the fact that if he did things his way, he would not last as the Prime Minister.
That’s the thing about being in power. Once you have it, it is better to look the other way than stand up for what you believe in and risk the chance of being fired and leading a retired life of loneliness. Singh may not have been personally corrupt, but he was dishonest to himself. He ultimately did not stand up for things that he believed in, in order to ensure that he continued to be the prime minister. And that is indeed very tragic.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Daily News and Analysis on Mar 20, 2015

19 March, 2015

Janet Yellen is not going to takeaway the punchbowl any time soon

Central banks are primarily in the business of sending out messages to the financial markets. In a statement released on January 28, 2015, the Federal Reserve of the United States had said: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
In simple English what this means is that the Fed would be patient when it comes to increasing the federal funds rate, which in the aftermath of the financial crisis which started in September 2008, has been in the range of 0-0.25%. The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans. This is the longest period for which the rate has remained at such low levels, in over fifty years.
In the aftermath of the financial crisis, the Federal Reserve and other central banks around the world had cut interest rates to very low levels in the hope of encouraging people to borrow and spend more, to get their moribund economies going again.
While people did borrow and spend to some extent, a lot of money was borrowed at low interest rates in the United States and other developed countries where central banks had cut rates, and it found its way into stock markets and other financial markets all over the world. This led to a massive rallies in prices of financial assets. In an era of close to zero interest rates the stock market in the United States has seen the longest bull market after the Second World War.
Given this, the stock markets in the United States and in other parts of the world have been doing well primarily because of this low interest rate scenario that prevails. With the return available from fixed income investments(like bonds and bank deposits) down to very low levels, money has found its way into the stock market.
The January 28 statement was released after a meeting of the Federal Open Market Committee(FOMC) which is mandated to decide on the federal funds rate. These meetings of the FOMC are followed very closely all over the world simply because if the Federal Reserve does decide to start raising the federal funds rate or even give a hint of it, stock markets all over the world will fall.
After the January meeting, the FOMC met again on March 17-18, 2015. In a statement that the Federal Reserve released yesterday (i.e. March 18) after the FOMC meeting, it had dropped the word “patient”. So does this mean that the Federal Reserve will start to be “impatient” when it comes to the federal funds rate?
The Federal Reserve chairperson Janet Yellen held a press conference yesterday after the two day meeting of the FOMC, in which she clarified that: “Modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase. In other words, just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient.”
So what Yellen was essentially saying is that even though the Fed had removed the word “patient” from its statement released yesterday, it was not going to be “impatient,” when it comes to increasing the federal funds rate in particular and interest rates in general. Welcome to the world of central bank speak.
In fact, Yellen also clarified that the FOMC won’t increase the federal funds rate when it meets next towards the end of April, next month. At the same time she said there was a chance that the FOMC might raise the federal funds rate in the meetings after April.
This statement of Yellen has led to the conclusion in certain sections of the media that the Federal Reserve will start raising interest rates June onwards, when it meets next after the April meeting. Only if things were as simple as that. Chances of the FOMC raising interest rates this year are remote. There are multiple reasons for the same.
First and foremost is the fact that inflation in the United States is well below the Federal Reserve’s preferred target of 2%. In fact, for the month of January 2015, this number was at 1.3% much below the Fed’s target of 2%. The Fed’s forecast for inflation for 2015 is between 0.6% to 0.8%. At such low inflation levels, the interest rates cannot be raised.
Inflation is down primarily because of low oil prices as well as the fact that the dollar has rallied (i.e. appreciated) against other major currencies of the world, in the process making imports cheaper for the people of United States. Lower import prices have a significant impact on inflation. The dollar has gone up in value against the yen and the euro primarily because of the money being printed by the Bank of Japan and the European Central bank. This money printing is not going to stop any time soon. As more money is printed and pumped into the financial system, interest rates are likely to remain low. At low interest rates the hope is that people will borrow and spend more and this will benefit businesses and the overall economy.
Getting back to the dollar, an appreciating currency has the same impact on the economy as higher interest rates. Higher interest rates are supposed to slowdown demand and in the process economic growth. Along similar lines when a currency appreciates, the exports of the country become expensive and this leads to a fall in exports. This slows down economic growth. Hence, in a way an appreciating dollar has already done a part of what the Fed would have done by raising interest rates.
With a lot of money printing happening in other parts of the world, chances are the dollar will continue to appreciate. Also, oil prices are likely to remain low during the course of this year, meaning low inflation in the US.
Further in December 2014, the Fed had forecast that economic growth in the US in 2015 will range between 2.6% to 3%. This has been slashed to 2.3% to 2.7%. In this scenario , it doesn’t seem likely that the Federal Reserve will raise the federal funds rate any time soon (may be not during the course of 2015).
William McChesney Martin, the longest serving Federal Reserve Chairman, once said that the job of the Fed is “to take away the punch bowl just as the party gets going.” Yellen as of now doesn’t want to spoil the party. What this means is that the stock market rallies in large parts of the world are likely to continue in the days to come.
The only thing one can say at this point of time is—Stay tuned!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on www.firstpost.com on Mar 19,2015

19 March, 2015

Technology doesn’t tell us how to make best of use of technology

There is a personal reason behind writing this column. Over the last few weeks I have opted out of all the large WhatsApp groups that I was a part of.
This was a conscious decision in order to concentrate on the work that I do. The phone constantly kept buzzing with forwards, pictures and videos being sent all the time on weekedays. Over the weekends, the men got into arguments primarily centred around Narendra Modi.
This was a constant distraction. Briefly I tried turning the notifications off. But there was always the tendency to keep checking WhatsApp. Given this, I finally opted out of these groups.
We live in a day and age where there is an information overload. Hence, more than the ability to gather information per se, the ability to sift through it has become more important. As Pico Iyer writes in The Art of Stillness: “The amount of data humanity will collect while you’re reading this book is five times greater than the amount that exists in the entire Library of Congress. Anyone reading this book will take in as much information today as Shakespeare took in over a lifetime.”
Also, a lot of information that we are exposed to (like constantly receiving messages on WhatsApp or emails or calls for that matter) essentially ends up disturbing us, sometimes in ways that we perhaps don’t even understand.
As Iyer writes: “Researchers in the new field of interruption science have found that it takes an average of twenty-five minutes to recover from a phone call. Yet such interruptions come every eleven minutes—which means we’re never caught up with our lives.”
In fact, researchers have been trying to figure out the impact that technology has on our working lives. And the results merely state the obvious—that we can’t multi-task.
As Bob Sullivan and Hugh Thompson write in a column in The New York Times: “There’s a lot of debate among brain researchers about the impact of gadgets on our brains. Most discussion has focused on the deleterious effect of multitasking. Early results show what most of us know implicitly: if you do two things at once, both efforts suffer.”
Hence, trying to do two things at the same time is not the best way to operate. “In most situations, the person juggling e-mail, text messaging, Facebook and a meeting is really doing something called “rapid toggling between tasks,” and is engaged in constant context switching,” write Sullivan and Thompson. And this is exactly how most of us who spend their working days in front of a computer tend to operate. But any kind of switching comes with its share of costs.
In fact, researchers Christopher Charbis and Daniel Simons carried out a very interesting piece of research to show how difficult it is to even spot something else when one is engaged in doing a certain task.
As they write in their book The Invisible Gorilla – And Other Ways Our Intuition Deceives Us:“When people are focussing attention (visual and auditory) on (a) task…they are unlikely to notice something unexpected.”
Chabris and Simons made a small film which basically had students of Harvard University playing basketball. One team was wearing white and another team was wearing black.
After they had made the film, they ran a small experiment, where they asked participants to watch the film and count the number of passes made by the team wearing white, ignoring the passes made by the team wearing black.
The participants were asked after around a minute, if they had seen something else as well. And nearly 50% of them they hadn’t. As Daniel Kahneman writes in Thinking, Fast and Slow: “The viewers of the film are instructed to count the number of passes made by the white team, ignoring the black players. This task is difficult and completely absorbing. Halfway through the video, a woman wearing a gorilla suit appears, crosses the court, thumps her chest, and moves on. The gorilla is in view for 9 seconds. Many thousands of people have seen the video, and about half of them do not notice anything unusual.”
As Margaret Heffernan writes in Wilful Blindness – Why We Ignore the Obvious At Our Peril: “The experiment has been shown repeatedly, around the world, in front of diverse audiences. I first saw it in Dublin, in an audience full of executives. Like them, I was so focussed on counting the passes I never saw the gorilla.”
Chabiris and Simons did not believe the results initially. “Simons was so stunned by the results that he says that for several years afterwards, he still kept expecting people to spot the gorilla,” writes Heffernan.
The point being that it is difficult to do two things at the same time. And that is precisely what technology makes us do. We walk on the road while messaging others. And at times we are so focussed that we aren’t aware of the traffic around us. People drive while talking on their mobile phones.
There is another interesting example that I have recently come across. When a car stops at a red light, chances are the driver will take out his smart phone and start fiddling with it. More often than not he misses noticing that the light has changed from red to green and its time to move on. And it is only when other cars behind him start honking he wakes up.
Iyer sums it best when he says: “The one thing that technology doesn’t provide us with is a sense of how to make the best use of technology.” It is time we realized that.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on www.firstpost.com on Mar 18, 2015