Kharif MSPs: Subbarao ‘ka bad luck heech kuch kharab hai


Vivek Kaul

Many years before he became a social ambassador trying to highlight all that is wrong with India, actor Aamir Khan did this film called Rangeela. The movie had many firsts to its credit. The actress Urmila Matondkar, who had had a string of flops till then, wore a swimsuit on screen for the first time. It was AR Rahman’s first Hindi film, with all his releases before Rangeela being dubbed versions of his Tamil scores. The movie also had a lead character (played by Khan) speaking Mumbaiya Hindi, one of the earliest in the history of Hindi cinema, throughout the movie.
One of the lines that Khan spoke in the movie, and which has since become a part of popular culture, was “apun ka to bad luck heech kharab hai” (We all know what it means, so let me not waste time translating it). But before you start wondering why am I talking about Aamir Khan in a piece which is clearly not about him, let me explain.
Subbarao is in a huge Catch-22 situation. Even if he manages to lower long term interest rates the borrowing may not pick up.AFP
An individual mouthing the same lines like Aamir Khan in Rangeela 17 years back, right now, must be Duvvuri Subbarao, the governor of the Reserve Bank of India (RBI). The government of India seems to be in the mood to make his job tougher by the day.
The Cabinet Committee for Economic Affairs on Thursday (14 June 2012) approved sharp increases of 15-53 percent in the minimum support prices (MSP) of kharif crops, which are typically sown around this time of the year for harvesting after the rains (ie, September-October). “The government has accepted the suggestion made by the Commission for Agriculture Costs and Prices (CACP), which recommends MSPs after taking into account the cost of production,” said Home Minister P Chidambaram , after a meeting of the Cabinet Committee on Economic Affairs.
The MSP for paddy (rice) has been increased from Rs 1,080 per quintal to Rs 1,250 per quintal. For the ‘A’ grade variety the prices have been increased from Rs 1,110 per quintal to Rs 1,270 per quintal. Other major products like bajra, ragi, jowar, soybean, urad, cotton, etc, have seen similar increases.
This means UPA-2 has already put itself in election mode, and any interest rate cuts will mean helping a profligate government seek re-election with other people’s money. Should Subbarao be helping politicians by obliging?
The impact
Every year the Food Corporation of India (FCI), or a state agency acting on its behalf, purchases rice and wheat at MSPs set by the government. The “supposed” idea behind setting the MSP much in advance is to give the farmer some idea of how much he should expect to earn when he sells his produce a few months later. This price support is expected to encourage higher production of rice and wheat.
FCI typically purchases around 15-20 percent of India’s wheat output and 12-15 percent of its rice output. But what this price support often leads to is farmers producing a lot more than the required demand. With the FCI obligated to purchase what the farmers produce, its godowns overflow and at times the wheat and rice are dumped in the open, leading to rodents feasting on the crop. So if you see more such news items and photographs later this year showing this, don’t be surprised.
The significantly higher prices that the government is offering for the rice crop also mean an increased fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
For the current financial year 2012-2013 (i.e. the period between 1 April 2012 and 31 March 2013) the food subsidy has been budgeted at Rs 75,000 crore. Experts are of the opinion that this amount is underprovisioned and with the MSP of rice paddy going up, the food subsidy bill will shoot up significantly. “The underprovisioning of food subsidy in the current year is at Rs 31,750 crore. Now with increased MSP on paddy, the total food subsidy deficit at the end of the current year will be about Rs 40,000 crore, putting immense pressure on the food subsidy burden of the government,” a food ministry official told The Economic Times.
Given that the government is offering a significantly higher MSP for paddy in the kharif crop, a similar move can be expected for wheat, which is substantially part of the rabi crop, planted in the autumn season and harvested in winter. This means that food subsidies will go up even further, in turn pushing up the fiscal deficit.
Higher inflation
The MSP for urad has been increased by Rs 1,000 per quintal to Rs 4,300. The MSP of cotton has been raised from Rs 600 to Rs 800 per quintal. Jowar saw the biggest jump of 53 percent per quintal.
Other than rice and wheat, many of the crops with announced MSPs do not have a designated government agency that buys the crop at the prescribed price. Hence, when an increase in MSP is announced it doesn’t necessarily lead to an increase sowing of these crops. But what it does is push up prices. As Madan Sabnavis, chief economist, Care Ratings, told Business Standard: “I can’t understand the need to announce MSPs for crops other wheat and rice, given (that) there is no official procurement. It does nothing, except pushing up food inflation.”
Religare Commodities, in a research note, expressed a similar sentiment. It said though higher MSPs for agri-products were thought to increase the sown area for a crop, in the last few years that doesn’t seem to be happening for most crops, except paddy, cotton and soybean.
The difficulty of being Duvvuri Subbarao
This announcement makes life even more difficult for Duvvuri Subbarao. First and foremost, the government is most likely to overshoot its planned fiscal deficit of Rs 5,13,590 crore for the current financial year 2012-2013. The government will have to borrow more in order to finance the increased fiscal deficit. More borrowing means that the current higher interest rate scenario is likely to continue.
The RBI is meeting on 18 June 2012 to decide on what its interest rate policy is going to be. It is widely expected that the bank will cut the repo rate (the rate at which it lends to banks). This, after the GDP growth rate for the period of January to March 2012 fell to 5.3 percent. The idea is that once the RBI cuts interest rates, banks will cut interest rates as well. Then business will borrow and so will you and me.
But reality is always different from economic theory. The RBI might cut the repo rate, which is a short-term interest rate, but long term interest rates on home loans, car loans, loans to business, etc, may not fall. This is because the government of India will have to borrow more for the long term to finance its increased fiscal deficit. And since its borrowing needs will go up, it will have to offer a higher rate of interest to attract lenders.
When the government borrows more, it crowds out private borrowing, meaning, there is a lesser pool of “savings” for private borrowers to borrow from. Hence, banks and other financial institutions which needed to borrow in order to give out home loans have to offer an even higher rate of interest than the government to attract lenders.
Hence, even if the RBI cuts the repo rate, whether that will have an impact on long term interest rates in India is doubtful. Over and above that, an increase in the MSP of the kharif crop will most likely to lead to higher inflation. This inflation will be on two fronts. One, as explained above, will be in the form of food inflation. The second will be in the form of suddenly increased incomes in rural India. This will lead to a situation where more money will chase the same amount of goods, leading to higher prices and thus higher inflation.
In a scenario where inflation is expected to go up, should the RBI be cutting interest rates or should it be raising them? Subbarao is in a huge Catch-22 situation. Even if he manages to lower long term interest rates the borrowing may not pick up. As John Kenneth Galbraith points out in The Economics of Innocent Fraud:
If, in recession the interest rate is lowered by the central bank, the member banks are counted on to pass the lower rate along to their customers, thus encouraging them to borrow. Producers will thus produce goods and services, buy the plant and machinery they can afford now and from which they can make money, and consumption paid for by cheaper loans will expand..The difficulty is that this highly plausible, wholly agreeable process exists only in well-established economic belief and not in real life… Business firms borrow when they can make money and not because interest rates are low.”
And the current economic scenario in India does not look good enough for the businesses to borrow.
To conclude
What the huge raise in MSPs tells us is that the Congress-led United Progressive Alliance is also getting into an early election mode. And the easiest way to get votes is to bribe voters at the taxpayers’ cost. Before the last Lok Sabha elections, the UPA waived off Rs 71,000 crore of farm loans. This move of substantially increasing MSPs of crops is in line with that move, though it’s not as big as that. However, the UPA raised MSPs by huge amounts even in 2008 — a year before the elections.
It’s likely that this might be a first in a series of moves which might lead to the UPA bringing the elections forward from 2014. Having the elections before 2014 clearly makes sense for the Congress, given that the state of the economy is only going to get worse in the days to come. Hence we might be entering a scenario where the UPA will come up with more boondoggles to woo voters.
This will make things even more difficult for Duvvuri Subbarao, who might well be telling himself “apun ka to bad luck heech kharab hai” more often in the days to come.
(The article originally appeared on www.firstpost.com on June 15,2012. http://www.firstpost.com/politics/kharif-msps-subbarao-ka-bad-luck-heech-kuch-kharab-hai-344697.html/1)
Vivek Kaul is a writer and can be reached at [email protected]

Pranab Mukherjee does a Paulo Coelho


Vivek Kaul

The rating agency Standard and Poor’s(S&P) has warned that India could lose its investment grade credit rating. In a report titled Will India Be the First BRIC Fallen Angel?, the rating agency said “Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating.”
The agency revised its outlook on India’s ‘BBB-‘ long-term sovereign credit rating to negative from stable. What this means is that India runs the risk of losing its investment grade credit rating and being rated as speculative or junk.
Let us try and understand what this really means for India.
What is investment grade?
In 1970, the Penn Railroad, the largest railroad in the United States, went bankrupt. This was something that the rating agencies did not foresee. One of the repercussions of this bankruptcy was that the Securities and Exchange Commission (SEC, the American equivalent of the Indian Sebi) decided to penalize brokers who held bonds of companies that were less than investment grade. But who would decide what was investment grade?
As Roger Lowenstein writes in an article titled Triple-A Failure “This prompted a question: investment grade according to whom? The SEC opted to create a new category of officially designated rating agencies, and grandfathered the big three – S&P, Moody’s and Fitch…Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed…Many classes of investors were now forbidden to buy non investment-grade bonds at all”.
Every rating agency follows different ratings. The rating agency Moody’s has 21 different type of ratings of which the top 10 are deemed to be investment grade. The remaining 11 are deemed to be speculative by the rating agency and “junk” by the market.
S&P has 12 different level of ratings of which the top 5 are deemed to be investment grade. India’s rating is BBB-, which is the last rating in the ratings which are deemed to be investment grade. If India’s rating is downgraded, then the next rating is BB+. S&P defines it as a rating which is “considered highest speculative grade by market participants”. Hence BB+ is the first rating at the junk level. The ratings are essentially meant to be an estimate of probabilities. Hence, the bonds of a country which has a BB+ rating are expected to default more than the bonds of a country which has a BBB-rating, thus making them more risky.
What will be the impact if India gets downgraded?
One clear impact will be foreign investors who are not allowed to invest in non-investment grade securities staying away from India. This would mean that pension funds and other long term funds will stay away from India. It could also mean that for foreign investors who have investments in India exiting their positions and the stock market might go down in the days to come. This after the brief rally it has seen recently in expectation of an interest rate cut by the Reserve Bank of India.
The way foreign investors think about India is very important in deciding how well the Indian stock market performs. Since the beginning of the year foreign institutional investors have been net buyers (the difference between what they have bought and what they have sold) of stocks to the extent of Rs 34,551.33 crore. During the same period the domestic institutional investors have been net sellers of stocks to the extent of Rs 18,666.06 crore.
This buying by the foreign investors is the major reason behind the BSE Sensex, India’s premier stock market index, giving a return of 7.85% since the beginning of the year. The threat of downgrade to junk status obviously does not put India in a good light in the eyes of the foreign investors. Given this, the stock market is likely to go down, and bring down the overall economic confidence in the country as well. It would also mean that Indian corporates looking to raise money from abroad would have to pay a higher rate of interest.
The bond market in India will largely remain unaffected because it doesn’t have much foreign presence.
The Azhar Syndrome
But the threat of a downgrade by S&P according to me is a smaller worry than the Azhar syndrome. So what is the Azhar syndrome? The term was first used in a report of the name brought out by First Global more than three years back in March 2009. As the report pointed out: “The Azhar Syndrome is all about Azhar… the kid from the slums in Slumdog Millionaire. He flew to LA for the Oscars, slept on clean sheets in an air-conditioned hotel room, for the first time (and possibly the last time)…came to his Bombay slum home…and moaned to the press “It is so hot here, and the mosquitoes…I can’t sleep”. He is finished. A few nights in a clean hotel room, and the guy can’t adjust back to the reality of his slum existence.”
Like Azhar assumed that the “five-day” party that he had in Los Angeles would continue forever, so has the Congress Party led United Progressive Alliance (UPA assumed that all is well and the economic growth that India saw for the last few years will continue forever on its own. India enjoyed a GDP growth averaging 8.7% during 2004-2008 and 7.8% during 2009-2011.
Pranab Mukherjee, the finance minister, rejected the threat of the S&P downgrade. In a press release said that the Government is fully seized of the current situation and he is confident that there will be a turnaround in our growth prospects in the coming months. Mukherjee expects the Indian economy to grow by 7% in this financial year. “A reversal of interest rate cycle, weak crude prices and a normal monsoon were likely to improve the economic conditions and the slowdown would not be as sharp as widely feared, and that the economy would grow closer to 7 percent this fiscal,” Mukherjee told a conference of chief commissioners and directors general of Income Tax on June 11,2012.
The things that Mukjerhee expects will help India grow at 7% are things he has no control over. This is the Azhar syndrome, which has plagued the Congress party led UPA for a while now, at work. The confidence that come what may, economic growth will happen continue on its own. Mukherjee and the UPA seem to be big believers in what Paulo Cohelo wrote in the bestselling The Alchemist – A Fable About Following Your Dream “Here is one great truth on this planet: whoever you are, or whatever it is that you do, when you really want something, it’s because that desire originated in the soul of the universe. It’s your mission on earth… And, when you want something, all the universe conspires in helping you to achieve it.”
The world might conspire to give India its economic growth. Interest rates might fall. Oil prices might fall. And the country might have a normal monsoon. But this is no way of running a country.
And the assumption that economic growth will happen because Mukherjee and his ilk say that it will happen, is clearly worrying. As Ruchir Sharma writes in his recent boo k Breakout Nations – In Pursuit of the Next Economic Miracles: “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
To conclude
Hardly any constructive steps have been taken to revive economic growth which is falling. Just talking about growth does not create economic growth. The solutions to the economic problems currently facing India are simple and largely agreed upon by everyone who has an informed opinion on the issue. As the Economist put it in a recent article titled Farewell to Incredible India “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government, are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But there isn’t much hope going around. As the S&P report explains: “The crux of the current political problem for economic liberalization is, in our view, the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition. The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalization of the economy. Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own.”
(The article originally appeared at www.firstpost.com on June 6,2012. http://www.firstpost.com/economy/sp-downgrade-and-indias-return-to-slumdog-status-340605.html)
(Vivek Kaul is a writer and can be reached at [email protected])

'The best thing that can happen to Google is that all its new products fail early'


Michael Brandtner is one of the leading branding and focusing consultants in Europe. and Associate of Ries & Ries. Beside his consulting work he is a frequent speaker on the topics of branding and positioning. “All my presentations start with “Brandtner on Branding”. But “focusing” is still the most important job to do in branding. A brand without a focus has no power at all in the long term. Take Sony! What does Sony stand for? Fifteen years ago Sony was a brand superstar. Today it is a burned out brand,” he points out. In this interview he speaks to Vivek Kaul.
You are a focusing consultant. What does a focusing consultant do?
I help companies to find the right focus for their brands. Most brands today are unfocused. That means that they try to stand for many different attributes at the same time. In a typical brand statement you will find phrases like this: Our brand stands for high quality, great service and innovation. Maybe this makes sense in a brand or positioning statement. But it sure makes no sense in the mind of the customer. Today, if you want to be successful, you need a powerful focus like “driving” for BMW, “breathes” for Geox or “search” for Google. The most powerful brands today are built around a single idea or even better a single word. That is the focus of a brand. And in my consulting work I help companies to find this one word.
What does it take for a company to be focused?
It takes strategic long-term thinking. You really must decide what your brand should stand for. Here in Europe Ryanair is focused on “low fare” airline. Today Ryanair is the most successful airline in Europe. Most other airlines are unfocused. They try to appeal to everybody. Of course most other airlines are in trouble today. Or take the Automobile industry. The brands in the so-called mushy middle are in trouble. The real successful brands are at the high end like Porsche, BMW. Mercedes-Benz, Audi or Lexus or at the low end like Hyundai or Kia. The brands in the mushy middle are unfocused. The brands at the high end or at the low end are focused. So I predict that Hyundai will become the largest Automobile brand in the world.
How does it help if a company is focused?
For most managers it seems not logical to focus. They still believe that the more you have to sell the more you will sell. It sounds so logical. But it isn’t. Marketing is not a battle of products. It is a battle of ideas. So if you want to win the marketing war, you have to focus on the right idea. Here is an example from Germany: In 1988 Dr. Best was just another toothbrush with a market share of about five percent. Then the brand becomes the first “flexible” toothbrush. This idea is the focus of the brand. They only make flexible toothbrushes. The advertising is focused on the flexible idea. They developed a powerful key visual or better called visual hammer with a tomato to dramatize the benefits of a flexible toothbrush. Dr. Best is flexible, flexible and flexible. Today the market share is over 40 percent. This is the power of a clear defined focus. A focus is more than an idea, it also a long term direction for the brand. It is the single idea that helps a brand to dominate a category.
Any other examples?
Take Opel. Opel is a European car manufacturer that makes a lot of different car models. But Opel has no focus. Why should anyone buy an Opel? I don’t know. Most people don’t know. In the mind of the prospect Opel is just another manufacturer of different car models.
What does it take a company to be all over the place?
Not much! A brand becomes successful with a single idea even a single product like Red Bull as the first energy drink. Then the management starts to add a “sugarfree” Red Bull and even a Red Bull Simply Cola. In most companies this is a natural way to grow a brand. And it is the perfect way to lose focus. This does not happen overnight because it is not easy to change the mind of the prospects. And that is the big problem with the issue of brand- and line-extensions. You can expand a brand over a long period of time and you are still clearly positioned. Then one morning you wake up and you have to realize that your brand does not stand for anything anymore. It takes time to build a brand and it takes time to destroy a brand. Take Sony! What does Sony stand for? Fifteen years ago Sony was a brand superstar. Today it is a burned out brand.
How does it hurt if a company is not focused?
If a brand has no focus, it will end up standing for nothing. That is the problem of Sony today. And maybe it will be the problem of Samsung tomorrow. Samsung is also unfocused. But today Samsung has the Galaxy. The success of the Galaxy is the main reason why most people think that Samsung is a hot company and brand. But Samsung as a brand does not stand for anything specific. Do you know what Samsung stands for? I do not. Fifteen years ago many people thought that Sony was a hot brand because of the success of products like HandyCam, CamCorder and Trinitron. These products faded away and Sony was left as an unfocused brand that stands for nothing specific. Now Sony is in deep trouble. It is like in the political world: If a political candidate tries to appeal to everybody, he will appeal to nobody. Take Barack Obama in 2008! He really did a brilliant move by focusing his entire campaign on one word, on “change”. “Change we can believe in” became his battle cry. That is the power of a focus.
Since everybody is talking about Facebook these days, how focused is a company like Facebook?
Today Facebook is a focused brand and company. Facebook stands for “social network”. It is the leading social network in the mind.
What about Google?
Google as a company is in the process of becoming unfocused. Google as a brand is still focused, because it still stands for “search” in the mind of the customers. It is still the ultimate search engine. But if Google is successful in expanding the company, it will destroy the focus of the brand. The best thing that can happen to Google is that all the new products under the Google brand will fail early.
How do you view the potential of Facebook when it comes to brands advertising themselves?
Facebook is not an advertising medium. It is much more an information medium. To but it even better: It is an interactive information medium. On Facebook people are interested in information, in conversation, in gossip, in buzz. But they are not really interested in advertising. On Facebook marketers have to think more like editors than like classical advertising people.
How does a marketer market in the world of Facebook, Twitter, blogs, and what not? How do you see social media changing marketing?
Social media today is totally overhyped. For many people it is a medium that will change the world of marketing as we know it. Here is my point of view: Social media is an important medium, but it is still only a medium. How important is television as a marketing channel for a company or a brand? It depends on the company, on the brand, on its strategy, on its messages and so on. How important are Facebook or Twitter or blogs as marketing channels for a company or a brand? It depends on the company, on the brand, on its strategy, on its messages and so on. For some companies and brands social media will become very important, for other companies and brands social media will only be another information medium like the web-site. For a car brand like BMW or Audi Facebook may be a great medium, because both brands have a lot of fans and a lot of relevant news for these fans. For a tissue brand Facebook is more like an additional web-site to give some basic information about the brand. Every company has to find out for itself how important Facebook, Twitter or blogs are in the media mix.
What’s the biggest branding mistake that a company can make?
(1) Believing that brand- or line-extension is the ultimate strategy to grow a brand.
(2) Believing that the better product will win
(3) Believing that it is easy to change the perception of customers with advertising.
Especially companies in trouble are doing these three things at the same time. Typical example here in Europe is Opel! Opel is in trouble. The typical reaction: We have to launch new models under our brand name to win market share. We have to build better products than the competition, because customers prefer better products. We have to change our logo and we have to launch a new advertising campaign to change the perception of our brand. Will it work? Of course not. Opel needs a new focus. Take Apple! About 15 years ago Apple was in trouble. What did Steve Jobs? He launched the iPod in 2001. He focused his efforts on a new brand to rebuild Apple. The success of the iPod did more for Apple than all other marketing efforts combined. It was also the base for the iPhone and the iPad. Steve Jobs knew about the power of a clear defined focus. He built three leading focused brands in only one decade, the iPod, the iPhone and the iPad. By doing this he made Apple the most admired company and brand in the world.
What are the areas of marketing according to you which marketers have the most trouble with? How can they address it effectively?
Still many management and also marketing people confuse reality with perception. That`s why they believe that the better product will win. Not true. The better brand will win. New Coke was the better product. Coke Classic is the better brand. Who wins? Coke Classic. Marketing is not a battle of products. Marketing is a battle of perceptions.
Could you elaborate on this point a little more?
Most companies are still building or investing in better products. But they should invest in better brands. Take Nokia! Nokia is the dominant brand for mobile phones. But Nokia is a weak brand in smart phones. Nokia stands for mobile phone, not for smart phone in the mind of the customer. So what is Nokia doing? They try to build better smart phones like the Nokia Lumia. Maybe the Lumia is a great smart phone in the factory. But in the perceptions of the customer it is just another smart phone on the market. Nokia should stop building better smart phones and start building a better smart phone brand. To achieve this they have to do two steps: Step one: Nokia has to create a new category of smart phones with a new powerful app. Step 2: Nokia has to give this smart phone a completely new brand name.
Why are big companies unable to launch successful new brands? They usually end up buying other brands. Like Google bought Orkut or Facebook bought Instagram recently.
The reason behind this is the so called corporate ego. If a company has a powerful brand name, it will tend to use this “powerful” name for all products. That is good thinking inside the company, but it is bad thinking outside the company. For the Kodak management is was logical to use the Kodak name also for the digital products. But this does not make any sense outside the company. Why should anyone buy a digital camera from a photo film company or brand? Kodak is not perceived as an expert for digital cameras. That`s the point. So it is not a bad strategy for big companies to buy new brands. If Google had launched a web-site for video search on its own, they would have probably called it Google Video. Instead they bought YouTube. Google now owns two strong brands and also market leaders in the search engine business. Google is the ultimate search engine. YouTube is the ultimate “video” search engine. Additionally Google has also Android. That is a great multi brand strategy. Google+ on the other hand is only a me-too social network. That’s a bad brand strategy.
So what does that mean?
That means: Companies have to overcome their corporate ego to launch second brands. But there is one very important point. It is not enough to launch a second brand first of all you need a new category. Take Microsoft in the search engine business! It is regardless whether the call the search engine MSN Search or Bing, because the strategy “launching a me-too search engine” is wrong. That means: If you launch a second brand, you first will need a new category. Without a new category you should not launch a second brand at all.
(Interviewer Kaul is a writer and can be reached at [email protected])

(The interview was originally published in the Daily News and Analysis(DNA) on June 11,2012. http://www.dnaindia.com/money/interview_the-best-thing-that-can-happen-to-google-is-all-its-new-products-fail-early_1700670)

What the BJP can learn from Coca Cola?


Vivek Kaul

It was October 1990. I was thirteen. In a pre cable TV, multiplexes and mall era, just about the only thing that got a teenager in a small town excited, was the twice a week Chitrahar on Wednesdays and Fridays, broadcast by Delhi Doordarshan.
Unless of course there was a cricket match on! But cricket was not played as often as it is today. And not everything was broadcast on the state owned Doordarshan.
Hence it was very exciting when Lal Krishna Advani arrived late one night to stay “overnight” in the guest house in the colony I lived in. Advani, during those days, was going around the country as a part of what he and the Bhartiya Janata Party (BJP) called the rath yatra.
Early next morning, before he was supposed to leave, a small crowd which included me had gathered in front of the guest house. He came out and was requested to speak a few words. I don’t remember anything of what he said except the last line, which was “saugandh Ram ki khaate hain, mandir wohin banayenge”.
He was out of the place in five minutes. But the crowd that had gathered continued to mingle around. Some were happy at having seen him. Some were amazed to know that his rath wasn’t actually one. Some women spoke about the glow Advani ji had on his face. And some others were worried. “Mandir banega ki nahi?” they asked.
I pretty much had the same feeling as everyone else, but what I was most happy about was the fact that I would be a minor celebrity in the school next day, having seen Advani when none of my classmates had.
Advani was arrested a few days later before the rath yatra could enter Uttar Pradesh. As he writes in his autobiography My Country My Life “My yatra was scheduled to enter Deoria in Uttar Pradesh on 24 October. However, as I had anticipated, it was stopped at Samastipur in Bihar on 23 October and I was arrested by the Janata Dal government in the state then headed by Laloo Prasad Yadav (sic). I was taken to an inspection bungalow of the irrigation department at a place called Massanjore near Dumka on the Bihar-Bengal border (Dumka now comes under the state of Jharkhand).”
We all know what happened in the aftermath of the rath yatra. But as I grew older, I kept asking myself, why did Advani say what he did? Why was it so important to build a temple there? Didn’t the country have bigger issues which needed to be sorted out first? And so on.
Political party as a brand
All my questions were answered the day I realised that every political party is a brand and a brand needs to stand for something. It needs a story that can be told to people, so that people can go buy the brand by supporting it and by voting for it.
In the aftermath of Indira Gandhi’s assassination in 1984, the Congress Party had swept the Lok Sabha elections, with the BJP winning only two seats. Given the sorry performance the party needed to stand for something in the minds of the Indian voter.
Brand BJP was built on the war cry of “saugandh Ram ki khaate hain mandir wohin banayenge”. This ensured that the party was able to increase the number of seats in the Lok Sabha from 2 in 1984, to 88 in 1989 and 118 in 1991.
The party espoused for causes like making temples in Ayodhya, Kashi and Mathura. It talked about banning cow slaughter, having a uniform civil code, and doing away with the Article 370, that gives special status to the state of Jammu and Kashmir. All this was music to the ears of voters across Northern and Western India and the party catapulted from being a political front of the Rashtriya Swayamsevak Sangh (RSS) to having an identity of its own.
BJP’s story was that it stood for the cause of Hindus and Hindutva. And it was not the only political party that came with a story attached to it. Almost every political party that has risen in India in the last three to four decades has had a story attached to it.
The Kanshi Ram story
Kanshi Ram launched the Dalit Soshit Samaj Sangharsh Samiti or DS4 as it was more popularly called, with the war cry “Thakur, Brahmin, Bania Chhod, Baki Sab Hain DS4.” This left no doubt in anybody’s mind that Kanshi Ram and DS4 stood for everyone who wasn’t an upper caste.
Kanshi Ram probably realised the power of the slogan he had hit upon. He came up with another slogan along similar lines when he launched the Bahujan Samaj Party(BSP). “Tilak Tarazu aur Talwaar, inko maaro joote chaar” was the rallying cry of the BSP (with Tilak, Tarazu and Talwar being the representation of the Brahman, Bania and Thakur castes, the upper castes).
Or let’s take the case of Left Front in West Bengal. The front which comprised of various communist parties stood for what the Sonia Gandhi led UPA calls the aam aadmi. It positioned itself as being pro-poor and anti big business. When the Left Front first came to power, share croppers where handed over land after taking it over from wealthy landlords. Teak trees were planted in front of homes by Left Front members where a girl child was born, so that the tree could be cut when she was of marriageable age and money for the wedding expenses could be raised.
In the late seventies and early eighties the Left brand also stood for “trade unions” which bargained hard in the interest of the workers. This over the years ensured that most industrialists shut shop and left for other parts of the country. But this didn’t really have any impact on the voter base of the Left Front which remained committed because what the Front was doing was in line with the story it had sold to the voters.
Why the story is important
The story that a political party sells to its voters is very important and it should hold for a very long period of time. Take the case of Janata Dal which was formed by the merger of the various factions of the erstwhile Janata Party, which were the Lok Dal, Congress (S) and the VP Singh led Jan Morcha.
The story that the party successfully sold to the voters was that it would introduced 27.5% reservation for other backward classes (OBCs) in government jobs, as had been proposed by the Mandal Commission.
The story was lapped by the votes and the party won 142 seats in the 1989 Lok Sabha elections.
Despite student protests erupting all across the country, starting with Rajiv Goswami burning himself in front of Deshbandu College in New Delhi, reservations were introduced. No political party could be seen going against this legislation.
The trouble was once Mandal Commission became a reality what did the Janata Dal stand for in the mind of the voter? Nothing. This soon led to the regional satraps forming their own parties like the Mulayam Singh Yadav led Samajwadi Party in Uttar Pradesh, Lalu Prasad Yadav led Rashtriya Janata Dal in Bihar and the Nitish Kumar-George Fernandes led Samta Party also in Bihar.
The end of Janata Dal led to the coining of one of the most memorable though underrated slogans in Indian politics: “Thakur buddhi, Yadav bal, jhandu ho gaya Janta Dal.” (where thakur was in reference to VP Singh who was a rajput).
Hence a political party needs to stand for something in the mind of the voter. If it doesn’t it meets the fate of a party like Janata Dal.
If it ain’t broke don’t fix it
Buddhadeb Bhattacharya became the Chief Minister of West Bengal in 2000, taking over after Jyoti Basu had been the Chief Minister for 23years. Bhattacharya tried to get big business to come back to Kolkata, so that jobs could be created.
But the trouble was Bengal was not a state used to the ways of professional business. If BPOs had to set shop then they had to work every day their foreign clients were working. So was the case with IT companies. But in a state where bandhs were way of life, how would that be possible?
Buddha Babu asked his party carder not to disturb BPO employees on their way to work on “bandh” days. This was the first dint to the Left brand. Then the heavy industry companies wanted to set shop, given that labour in Bengal was cheaper than other parts of the country and the government was ready to welcome them.
This was where all the trouble started. Almost all land in Bengal is agriculture land. And every time an industrialist wants to set shop it leads to some farmers being put out of job. Things escalated when the party carder in Nandigram resorted to violence against farmers who were protesting. The same was the case with Singur, where the Tata Nano plant was supposed to come up.
When a communist party (or rather parties) start beating up farmers, it need not be said that it does do any good to the identity and brand and the story they have carefully cultivated over the years.
This in no way means that industrialization is not important or should not have been pursued by the Left Front government, but it was definitely not done in the way it was. This of course went totally against the anti industry image that the Left Front carried in the minds of people. The same Left Front whose trade unions went cholbe na cholbe na against industries and industrialists was now catering to their demands, felt people of the state. Communists had become capitalists. The practitioners of all that Karl Marx had espoused for were now vouching for the principles of Adam Smith.
There was clearly a branding problem. The gap was filled by Mamata Banerjee who now stands for everything that the Left Front had stood for, warts and all.
India shining
The year was 2004 and I was travelling in a local bus in Hyderabad, excited about the new mobile phone I had bought. The phone suddenly buzzed and it was a Delhi number, the first call on my new mobile. I picked up the call and heard the voice on the other end say “main Atal Bihari Vajpayee bol raha hoon”.
It took me a few seconds to realize that it was an automated call in the voice of the Prime Minister of the country asking the voters to vote for the BJP led National Democratic Alliance (NDA) in the upcoming Lok Sabha elections.
The party had decided to abandon its soft-Hindutva branding and decided to go in for what it thought was a more mass market campaign of “India shining”.
The party lost the elections and has been in opposition ever since.
What BJP can learn from Coca Cola
Donald R Keough, a former president of the Coca-Cola Company, in his book The Ten Commandments for Business Failure elaborates on what happens when the story associated with a brand is changed.
A slew of research and consultants told the top brass at Coca-Cola that people were looking for more sweetness in the product. This led to the launch the ‘New Coke’.
What followed was a disaster that went totally against what the consultants had predicted. People did not like the tinkering. And some of them started to hoard old coke, before the stocks ran out..
One day an old woman called a Coke call centre. Here is how Keough recounts this touching story.
. “It was an eighty-five year woman who convinced me we had to do something more than stay course. She had called the company in tears from a retirement home in Covina, California. I happened to be visiting the call centre and took the call. “You’ve taken away my Coke,” she sobbed. “When was the last time you had Coke?” I asked. “Oh, I don’t know. About twenty, twenty-five years ago.” “Then why are you so upset?” I asked. “Young man, you are playing around with my youth and you should stop it right now. Don’t you have any idea what Coke means to me?”
This made the top brass at Coke realise that they are not dealing with a taste or a marketing issue, but the idea or the story behind Coca-Cola. It was the “real-thing” and the consumers did not want any fiddling around with it. Immediately a decision was made to bring back the old Coke as “Coca-Cola Classic”.
To conclude
As marketing guru Seth Godin writes in All Marketers are Liars “Great stories happen fast. They engage the consumer the moment the story clicks into place. First impressions are more powerful than we give them credit for.”
Given this getting rid of first impressions in the minds of the voter is very difficult. This does not apply for the Congress Party, which has been around for so long that it doesn’t really stand for anything and hence can change forms like a chameleon.
So if the BJP has to pose any sort of challenge to the Congress led United Progressive Alliance (UPA) in the next Lok Sabha elections it needs to go back to what it has always stood for in the mind of the voter: Hindutva. Like Coca Cola, it has to go back to stand for what it used to in the mind of the voter.
What it needs to decide on is the degree of Hindutva? Does it want to follow the hard line approach that it did in the late 1980s and the early 1990s with slogans like “ye to kewal jhaanki hai, kaashi mathura baaki hai” or does it want to follow the soft Hindutva strategy that it did when Atal Bihari Vajpayee was at his peak.
Given this, there is no one better than leader than Narendra Modi who can project the attributes of the pro Hindutva line. The trouble of course with Modi is that he comes across as a hardliner. Hence it’s important for Modi and the BJP that the spin-doctors of the party get to work immediately trying to soften up his image, so that his acceptability goes up across sections he is not currently popular with.
(The article originally appeared at www.firstpost.com on June 6,2012. http://www.firstpost.com/politics/political-brands-what-the-bjp-can-learn-from-coca-cola-333964.html)
(Vivek Kaul is a writer and can be reached at [email protected])

People should listen to market experts for entertainment, not elucidation.


Michael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management in the United States. He is also the author of bestselling books on investing like Think Twice: Harnessing the Power of Counterintuition and More Than You Know: Finding Financial Wisdom in Unconventional Places. His latest book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing is due later this year. In this interview he speaks to Vivek Kaul on the various aspects of luck, skill and randomness and the impact they have on business, life and investing.
Excerpts:

How do you define luck?
The way I think about it, luck has three features. It happens to a person or organization; can be good or bad; and it is reasonable to believe that another outcome was possible. By this definition, if you win the lottery you are lucky, but if you are born to a wealthy family you are not lucky—because it is not reasonable to believe that any other outcome was possible—but rather fortunate.
How is randomness different from luck?
I like to distinguish, too, between randomness and luck. I like to think of randomness as something that works at a system level and luck on a lower level. So, for example, if you gather a large group of people and ask them to guess the results of five coin tosses, randomness tells you that some in the group will get them all correct. But if you get them all correct, you are lucky.
And what is skill?
For skill, the dictionary says the “ability to use one’s knowledge effectively and readily in execution or performance.” I think that’s a good definition. The key is that when there is little luck involved, skill can be honed through deliberate practice. When there’s an element of luck, skill is best considered as a process.
You have often spoken about the paradox of skill. What is that?
The paradox of skill says that as competitors in a field become more skillful, luck becomes more important in determining results. The key to this idea is what happens when skill improves in a field. There are two effects. First, the absolute level of ability rises. And second, the variance of ability declines.
Could you give us an example?
One famous example of this is batting average in the sport of baseball. Batting average is the ratio of hits to at-bats. It’s somewhat related to the same term in cricket. In 1941, a player named Ted Williams hit .406 for a season, a feat that no other player has been able to match in 70 years. The reason, it turns out, is not that no players today are as good as Williams was in his day—they are undoubtedly much better. The reason is that the variance in skill has gone down. Because the league draws from a deeper pool of talent, including great players from around the world, and because training techniques are vastly improved and more uniform, the difference between the best players and the average players within the pro ranks has narrowed. Even if you assume that luck hasn’t changed, the variance in batting averages should have come down. And that’s exactly what we see. The paradox of skill makes a very specific prediction. In realms where there is no luck, you should see absolute performance improve and relative performance shrink. That’s exactly what we see.
Any other example?
Take Olympic marathon times as an example. Men today run the race about 26 minutes faster than they did 80 years ago. But in 1932, the time difference between the man who won and the man who came in 20th was close to 40 minutes. Today that difference is well under 10 minutes.
What is the application to investing?
The application to investing is straightforward. As the market is filled with participants who are smart and have access to information and computing power, the variance of skill will decline. That means that stock price changes will be random—a random walk down Wall Street, as Burton Malkiel wrote—and those investors who beat the market can chalk up their success to luck. And the evidence shows that the variance in mutual fund returns has shrunk over the past 60 years, just as the paradox of skill would suggest. I want to be clear that I believe that differential skill in investing remains, and that I don’t believe that all results are from randomness. But there’s little doubt that markets are highly competitive and that the basic sketch of the paradox of skill applies.
How do you determine in the success of something be it a song, book or a business for that matter, how much of it is luck, how much of it is skill?
This is a fascinating question. In some fields, including sports and facets of business, we can answer that question reasonably well when the results are independent of one another. When the results depend on what happened before, the answer is much more complex because it’s very difficult to predict how events will unfold.
Could you explain through an example?
Let me try to give a concrete example with the popularity of music. A number of years ago, there was a wonderful experiment called MusicLab. The subjects thought the experiment was about musical taste, but it was really about understanding how hits happen. The subjects who came into the site saw 48 songs by unknown bands. They could listen to any song, rate it, and download it if they wanted to. Unbeknownst to the subjects, they were funneled into one of two conditions. Twenty percent went to the control condition, where they could listen, rate, and download but had no access to what anyone else did. This provided an objective measure of the quality of songs as social interaction was absent.
What about the other 80%?
The other 80 percent went into one of 8 social worlds. Initially, the conditions were the same as the control group, but in these cases the subjects could see what others before them had done. So social interaction was present, and by having eight social worlds the experiment effectively set up alternate universes. The results showed that social interaction had a huge influence on the outcomes. One song, for instance, was in the middle of the pack in the control condition, the #1 hit on one of the social worlds, and #40 in another social world. The researchers found that poorly rated songs in the control group rarely did well in the social worlds—failure was not hard to predict—but songs that were average or good had a wide range of outcomes. There was an inherent lack of predictability. I think I can make the statement ever more general: whenever you can assess a product or service across multiple dimensions, there is no objective way to say which is “best.”
What is the takeaway for investors?
The leap to investing is a small one. Investing, too, is an inherently social exercise. From time to time, investors get uniformly optimistic or pessimistic, pushing prices to extremes.
Was a book like Harry Potter inevitable as has often been suggested after the success of the book?
This is very related to our discussion before about hit songs. When what happens next depends on what happened before, which is often the case when social interaction is involved, predicting outcomes is inherently difficult. The MusicLab experiment, and even simpler simulations, indicate that Harry Potter’s success was not inevitable. This is very difficult to accept because now that we know that Harry Potter is wildly popular, we can conjure up many explanations for that success. But if you re-played the tape of the world, we would see a very different list of best sellers. The success of Harry Potter, or Star Wars, or the Mona Lisa, can best be explained as the result of a social process similar to any fad or fashion. In fact, one way to think about it is the process of disease spreading. Most diseases don’t spread widely because of a lack of interaction or virulence. But if the network is right and the interaction and virulence are sufficient, disease will propagate. The same is true for a product that is deemed successful through a social process.
And this applies to investing as well?
This applies to investing, too. Instead of considering how the popularity of Harry Potter, or an illness, spreads across a network you can think of investment ideas. Tops in markets are put in place when most investors are infected with bullishness, and bottoms are created by uniform bearishness. The common theme is the role of social process.
What about someone like Warren Buffett or for that matter Bill Miller were they just lucky, or was there a lot of skill as well?
Extreme success is, almost by definition, the combination of good skill and good luck. I think that applies to Buffett and Miller, and I think each man would concede as much. The important point is that neither skill nor luck, alone, is sufficient to launch anyone to the very top if it’s a field where luck helps shape outcomes. The problem is that our minds equate success with skill so we underestimate the role of randomness. This was one of Nassim Taleb’s points in Fooled by Randomness. All of that said, it is important to recognize that results in the short-term reflect a lot of randomness. Even skillful managers will slump, and unskillful managers will shine. But over the long haul, good process wins.
How do you explain the success of Facebook in lieu of the other social media sites like Orkut, Myspace, which did not survive?
Brian Arthur, an economist long affiliated with the Santa Fe Institute, likes to say, “of networks there shall be few.” His point is that there are battles for networks and standards, and predicting the winners from those battles is notoriously difficult. We saw a heated battle for search engines, including AltaVista, Yahoo, and Google. But the market tends to settle on one network, and the others drop to a very distant second. I’d say Facebook’s success is a combination of good skill, good timing, and good luck. I’d say the same for almost every successful company. The question is if we played the world over and over, would Facebook always be the obvious winner. I doubt that.
Would you say that when a CEO’s face is all over the newspapers and magazines like is the case with the CEO of Facebook , he has enjoyed good luck?
One of the most important business books ever written is The Halo Effect by Phil Rosenzweig. The idea is that when things are going well, we attribute that success to skill—there’s a halo effect. Conversely, when things are going poorly we attribute it to poor skill. This is often true for the same management of the same company over time. Rosenzweig offers Cisco as a specific example. So the answer is that great success, the kind that lands you on the covers of business magazines, almost always includes a very large dose of luck. And we’re not very good at parsing the sources of success.
You have also suggested that trying to understand the stock market by tuning into so called market experts is not the best way of understanding it. Why do you say that?
The best way to answer this is to argue that the stock market is a great example of a complex adaptive system. These systems have three features. First, they are made up of heterogeneous agents. In the stock market, these are investors with different information, analytical approaches, time horizons, etc. And these agents learn, which is why we call them adaptive. Second, the agents interact with one another, leading to a process called emergence. The interaction in the stock market is typically through an exchange. And, finally, we get a global system—the market itself.
So what’s the point you are trying to make?
Here’s a key point: There is no additivity in these systems. You can’t understand the whole simply by looking at the behaviors of the parts. Now this is in sharp contrast to other systems, where reductionism works. For example, an artisan could take apart my mechanical wristwatch and understand how each part contributes to the working of the watch. The same approach doesn’t work in complex adaptive systems.
Could you explain through an example?
Let me give you one of my favorite examples, that of an ant colony. If you study ants on the colony level, you’ll see that it’s robust, adaptive, follows a life cycle, etc. It’s arguably an organism on the colony level. But if you ask any individual ant what’s going on with the colony, they will have no clue. They operate solely with local information and local interaction. The behavior of the colony emerges from the interaction between the ants. Now it’s not hard to see that the stock market is similar. No individual has much of a clue of what’s going on at the market level. But this lack of understanding smacks right against our desire to have experts tell us what’s going on. The record of market forecasters has been studied, and the jury is in: they are very bad at it. So I recommend people listen to market experts for entertainment, not for elucidation.
How does the media influence investment decisions?
The media has a natural, and understandable, desire to find people who have views that are toward the extremes. Having someone on television explaining that this could happen, but then again it may be that, does not make for exciting viewing. Better is a market boomster, who says the market will skyrocket, or a market doomster, who sees the market plummeting.
Any example?
Phil Tetlock, a professor of psychology at the University of Pennsylvania, has done the best work I know of on expert prediction. He has found that experts are poor predictors in the realms of economic and political outcomes. But he makes two additional points worth mentioning. The first is that he found that hedgehogs, those people who tend to know one big thing, are worse predictors than foxes, those who know a little about a lot of things. So, strongly held views that are unyielding tend not to make for quality predictions in complex realms. Second, he found that the more media mentions a pundit had, the worse his or her predictions. This makes sense in the context of what the media are trying to achieve—interesting viewing. So the people you hear and see the most in the media are among the worst predictors.
Why do most people make poor investment decisions? I say that because most investors aren’t able to earn even the market rate of return?
People make poor investment decisions because they are human. We all come with mental software that tends to encourage us to buy after results have been good and to sell after results have been poor. So we are wired to buy high and sell low instead of buy low and sell high. We see this starkly in the analysis of time-weighted versus dollar-weighted returns for funds. The time-weighted return, which is what is typically reported, is simply the return for the fund over time. The dollar-weighted return calculates the return on each of the dollars invested. These two calculations can yield very different results for the same fund.
Could you explain that in some detail?
Say, for example, a fund starts with $100 and goes up 20% in year 1. The next year, it loses 10%. So the $100 invested at the beginning is worth $108 after two years and the time-weighted return is 3.9%. Now let’s say we start with the same $100 and first year results of 20%. Investors see this very good result, and pour an additional $200 into the fund. Now it is running $320—the original $120 plus the $200 invested. The fund then goes down 10%, causing $32 of losses. So the fund will still have the same time-weighted return, 3.9%. But now the fund will be worth $288, which means that in the aggregate investors put in $300—the original $100 plus $200 after year one—and lost $12. So the fund has positive time-weighted returns but negative dollar-weighted returns. The proclivity to buy high and sell low means that investors earn, on average, a dollar-weighted return that is only about 60% of the market’s return. Bad timing is very costly.
What is reversion to the mean?
Reversion to the mean occurs when an extreme outcome is followed by an outcome that has an expected value closer to the average. Let’s say you are a student whose true skill suggests you should score 80% on a test. If you are particularly lucky one day, you might score 90%. How are you expected to do for your next test? Closer to 80%. You are expected to revert to your mean, which means that your good luck is not expected to persist. This is a huge topic in investing, for precisely the reason we just discussed. Investors, rather than constantly considering reversion to the mean, tend to extrapolate. Good results are expected to lead to more good results. This is at the core of the dichotomy between time-weighted and dollar-weighted returns. I should add quickly that this phenomenon is not unique to individual investors. Institutional investors, people who are trained to think of such things, fall into the same trap.
In one of your papers you talk about a guy who manages his and his wife’s money. With his wife’s money he is very cautious and listens to what the experts have to say. With his own money his puts it in some investments and forgets about it. As you put it, threw it in the coffee can. And forgot about it. It so turned out that the coffee can approach did better. Can you take us through that example?
This was a case, told by Robert Kirby at Capital Guardian, from the 1950s. The husband managed his wife’s fund and followed closely the advice from the investment firm. The firm had a research department and did their best to preserve, and build, capital. It turns out that unbeknownst to anyone, the man used $5,000 of his own money to invest in the firm’s buy recommendations. He never sold anything and never traded, he just plopped the securities into a proverbial coffee can(those were the days of paper). The husband died suddenly and the wife then came back to the investment firm to combine their accounts. Everyone was surprised to see that the husband’s account was a good deal larger than his wife’s. The neglected portfolio fared much better than the tended one. It turns out that a large part of the portfolio’s success was attributable to an investment in Xerox.
So what was the lesson drawn?
Kirby drew a more basic lesson from the experience. Sometimes doing nothing is better than doing something. In most businesses, there is some relationship between activity and results. The more active you are, the better your results. Investing is one field where this isn’t true. Sometimes, doing nothing is the best thing. As Warren Buffett has said, “Inactivity strikes us as intelligent behavior.” As I mentioned before, there is lots of evidence that the decisions to buy and sell by individuals and institutions does as much, if not more, harm than good. I’m not saying you should buy and hold forever, but I am saying that buying cheap and holding for a long time tends to do better than guessing what asset class or manager is hot.
(The interview was originally published in the Daily News and Analysis(DNA) on June 4,2012. http://www.dnaindia.com/money/interview_people-should-listen-to-market-experts-for-entertainment-not-elucidation_1697709)
(Interviewer Kaul is a writer and can be reached at [email protected])