Vivek Kaul

[email protected]

The Reserve Bank of India has cut the repo rate or the rate at which it lends to banks by 50 basis points, to 8% from the prevailing 8.5%. While theoretically this might mean lower interest rates charged by banks on loans, but practically that might not be the case.
So how will the interest rate cut announced by the Reserve Bank of India impact you and me? The answer is it won’t. Or to put it a little more positively, it will hardly make any difference. Even though the RBI has cut interest rates, the banks may not be able to do so. Even if they do, it will be by very small amounts. Also, it is highly unlikely that the RBI will be able to come up with any more rate cuts during the course of the year (the reasons are explained later).
So here is why the Reserve Bank of India cannot do much when it comes to lowering interest rates or in turn your equated monthly installments (EMIs) this year.
Banks are lending more than they are borrowing:  If one looks at the data over the six month period of September 30, 2011 to March 31,2012, banks have lent a total of Rs 4,87,659 crore but at the same time they have borrowed only Rs 4,04,786 crore. Hence the ratio of what banks have lent to what they have borrowed over the last six months, which is referred to as the incremental credit deposit ratio, comes to a whopping 120%. This is clearly not a good sign. What this means is that banks have been unable to raise enough deposits to match their loans over the last six months.
Typically of every Rs 100 a bank raises as deposits, Rs 24 has to be invested in government securities, basically bonds issued by the government of India or its affiliates. This ratio of 24% is referred to as the statutory liquidity ratio. Other than this of every Rs 100 raised a bank has to maintain a reserve of Rs 4.75 with the Reserve Bank of India. This ratio is referred to as the cash reserve ratio. If one were to add the statutory liquidity ratio and cash reserve ratio, a total of Rs 28.75 or 28.75% of the deposits raised by banks cannot be given out as loans. Hence that leaves Rs 71.25 out of every Rs 100 that can be given out as a loan.
So when the incremental credit deposit ratio of bank is at 120%, it is giving out Rs 120 of loans for every Rs 100 raised as deposits. How is that possible? The bank may be lending out deposits it had collected in the past and not given out as a loan or it may be tapping other sources of funding like certificate of deposits. But this is a situation which cannot keep running forever. The loans made by banks cannot keep exceeding the deposits they have collected.  What is interesting is that the incremental credit deposit ratio for the six month period ending December 30, 2011, had stood at only 68.5%.  Hence things have tightened up over the last few months.  
Given that banks are finding it difficult to raise deposits to match their loans means that they will have to continue offering high interest rates on their deposits. A high interest rate on deposits will lead to banks charging a high interest on loans as well, which of course means higher EMIs. There is not much RBI can do about it.
The finance minister has underestimated the level of subsidies : When the finance Pranab Mukherjee gave his budget speech in February last year, he had set the fiscal deficit target for the financial year 2011-2012, at 4.6% of GDP. Fiscal deficit is the difference between what a government earns and it spends and is expressed as a percentage of the gross domestic product.
He missed his target by a huge margin when the real number came in at 5.9% of GDP. The major reason for this was the fact that Mukherjee had underestimated the level of subsidies that the government would have to bear. He had estimated the subsidies at Rs 1,43,750 crore but they ended up costing the government 50.5% more at Rs 2,16,297 crore. The finance minister had underestimating the subsidy level of the three main categories of food, fertilizer as well as oil.  
This has been the case in the past as well. In 2010-2011 (i.e. the period between April 1, 2010 and March 31, 2011) he had estimated the oil subsidies to be at Rs 3108 crore. They finally came in 20 times higher at Rs 62,301 crore. Same was the case in the year 2009-2010 (i.e. the period between April 1, 2009 and March 31, 2010). The estimate was Rs 3109 crore. The real bill came in nearly eight times higher at Rs 25,257 crore (direct subsidies + oil bonds issued to the oil companies). 
Similar underestimates have been made for the financial year 2012-2013, to project a fiscal deficit of 5.1% of GDP. The total subsidies bill has been estimated to be at Rs 1,90,015 crore a good 12% lower than the subsidy bill for the year 2011-2012. The government has constantly underestimated the cost of subsidies and there is no reason to believe that it would not be the same for this year as well. Oil prices are unlikely to go down, and inflation is also not seen slowing down. Hence it is most likely that the government will miss its fiscal deficit target for this year as well.
This means that the government will have to borrow more than it had actually planned to finance the increased fiscal deficit. When the government is a big borrower in the market it has to compete for money with other players in the market and hence offer a high interest rate of interest on the bonds that it plans to issue to finance the fiscal deficit. Given this, the rate of interest charged by banks on all other forms of loans also remains high because all other forms of lending are more risky than lending to the government. Also, the government borrowing “crowds out” the private borrowers. And hence if the government is offering a rate of interest of 8% on its bonds, then the banks are likely to charge more on all other forms of loans that they make.
Why things won’t improve anytime soon:  The government of India is in a huge debt trap. The fiscal deficit of the government of India i.e. the difference between the amount it earns and the amount it spends has gone up by 312% over the last five years, For the financial year 2007-2008 (i.e. the period between April 1,2007 and March 31, 2008) the fiscal deficit stood at Rs 1,26,912 crore, against Rs 5,21,980 crore for the financial year 2011-2012. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. When expenditure is expanding nearly 9 times as fast as your income, it can’t be a good thing. What this means that the government has taken on more and more debt to finance the deficit. But more debt also means more interest that has to be paid on that debt.
The bigger question is where does the government get the money to pay interest as well as repay the earlier debt that it had taken on? If you and I take loans we have to pay interest and repay the principal from our income. A few smart ones think they can beat the system and take on new loans to pay off interest as well repay earlier loans. But this game also doesn’t last forever. Ultimately if you spend much more than you earn, the system does catch up with you.
But not for the government. Lets us try and understand how. The fiscal deficit target for the financial year 2012-2013 has been set at Rs 5,13,590 crore.  Of this amount the government will spend Rs 3,19,759 crore to pay interest on the debt that it already has. Rs 1,24,302 crore will be spent to payback the debt that was raised in the previous years and matures during the course of the year 2012-2013. Hence a total of Rs 4,44,061 crore or a whopping 86.5% of the fiscal deficit will be spent in paying interest on and paying off previously issued debt. What this means is that new debt is being issued to pay off old debt and pay interest on it. The government can keep doing this longer than you and I can because ultimately it has the right to print
money to repay the debt.
But that is not a healthy option to choose and there are other long term repercussions of that. Hence the government has to keep offering a high rate of interest on its bonds to keep raising the money necessary to pay interest as well as repay its earlier debt. And the interest offered by the government on its bonds becomes the benchmark for the interest rate charged on all other loans. Hence if the government interest rate is high, the rate of interest charged by banks cannot be low. So, for the time being its bye bye low EMIs.   

(The author is a writer and can be reached at [email protected]) 

Vivek Kaul
([email protected])
The heat had finally reached Mumbai. She was fidgeting and he was snoring. Finally she woke him up.
“Did you happen to read what Warren Buffett has written in his latest letter to his shareholders?” she asked.
“What? Warren Buffett?” he replied. “It’s four in the morning!”
“Hmmm. So?”
“Let me sleep.”
“Come on,” she said, trying to wake him up.
“I haven’t read it,” he replied, trying to go back to sleep.
“Don’t lie,” she said. “If you haven’t, what are these print outs doing next to your bed.”
“Yeah, printouts. I guess you won’t let me sleep.”
“No, I won’t” she said with a winner’s smile on her face.
“Well every year Warren Buffett writes a letter to the shareholders of Berkshire Hathaway, explaining the investment decisions he has made during the course of the last year and how he sees things panning out in the days to come.”
“Arre! Itna to I know!” she interrupted. “What are the main points he has made in this year’s letter?”
“This year he has talked about gold.”
“Gold?”
“Yeah gold. And why investing in stocks is going to be a much better bet than gold in the days to come.”
“And what’s the logic there?” she asked.
“As Buffett puts it “Gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.””
“Seems like a fair point. So why do people buy gold then?”
“In the words of Buffett “what motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm.””
“Hmmm. And what do you have to say regarding this?”
“Well, gold has very few industrial uses, given the fact that it is very expensive. And yes, people beyond a point buy it because everyone else is. But then that is true about any other investment as well. Let us take the case of America. In the late nineties everyone wanted to buy dotcom stocks. Once they were done buying dotcom stocks, all of them wanted to buy houses. This pushed up the price of first dotcom stocks and then houses. Of course beyond a point the bubble burst, investors lost money, and landed the whole world into a big financial mess,” he explained.
“So? One shouldn’t buy when everyone else is buying?” she interrupted.
“ I never said that. Some of the investors who got their timing right did make pot-loads of money as well. As George Soros, the biggest speculator of them all once wrote “Nothing is quite as profitable as investing in an early stage bubble.””
“As usual, there are two sides to everything,” she said, rather philosophically.
“ But let’s stay on track. We were talking about gold.”
“Yes gold.”
“I don’t agree with what Buffett has to say.”
“Why?”
“Because what he says goes against basic human nature over the years and I do feel that gold is going to give good returns in the days to come.”
“What makes you say that so confidently?”
“Let me get into some history before I get back to gold.”
“History?”
“Yes history. Sir Thomas Gresham was a financial advisor to Queen Elizabeth I, in the sixteenth century. Gresham helped Elizabeth clean up the monetary mess created by her father Henry VIII and her brother Edward VI, who ruled before her. Those days the primary form of money was gold or silver coins. And the quality of a coin was known by the amount of gold or silver it contained. But Henry VIII and Edward VI had managed to completely debase the pound by ensuring that it had very little silver left in it.”
“But what was debasement?” she asked.
“Kings and governments throughout history have been debasing coins. Nero, who watched while Rome was burning, was one of the first kings to debase money. Debasement was a practice where the ruler lowered the precious metal content of the coin while keeping its value unchanged. So let us say one coin weighed five grams. The king decides that from now on the coin will weigh only four grams. Earlier 20 coins could be made out of 100 grams of metal. Now 25 coins can be made from the same amount of metal.”
“Oh!”
“There is another other way to explain this. Let us say a particular coin has a face value of 100 cents (or paisa or pence for that matter). The face value of a coin is also referred to as its tale. Initially the metal content in the coin is also worth 100 cents. The value of metal content in the coin is referred to as specie. In this example, the tale value of the coin is equal to the specie value. Now the ruler decides to debase the coin and reduce its metal content by 10%. So the specie value of the coin will now be 90 cents even though the face value of the coin continues to be 100 cents. As explained above by doing this the ruler could mint more coins out of the same amount of metal,” he explained.
“Very interesting,” she commented.
“And that is how things were in Britain at that point of time. The economy was full of debased coins launched by the earlier rulers. Elizabeth wanted to launch new coins where the face value of the coin was equal to the amount of metal in it i.e. tale was equal to the specie.”
“Yes that made sense, given that the coins hardly had any silver left in them.”
“But there was a slight problem.”
“Problem? What problem?” she asked, getting into the discussion totally.
“In such a situation Gresham felt that bad money will drive out the good money. This meant that the citizens of the country will hoard onto the new coins whereas they would continue using the existing debased coins in the market for making payments. The new coins because they had a greater amount of silver in it would be melted and sold for their precious metal content. Hence the bad money would drive out the good. This in later years came to be known as the Gresham’s Law.”
“Yeah. That would be the logical way to react. Melt the coins and sell them for their silver value and get more money in the process,” she said. “So what did they do to get rid of this problem?”
“To get rid of this problem Gresham decided that all the old coins would be exchanged for new coins. So there were no old coins in the market, and the market moved onto using the new coins as the currency.”
“Hmmm. But what has all this got to do with gold?”
“I was just coming to that. This phenomenon of bad money driving out good has been observed time and again through the centuries, even before Gresham’s name became attached to it. As John Mauldin, a hedge fund manager explains it “‘Under the Greeks and Romans, when gold coins were debased, few people were dumb enough to want to exchange their old coins that had high gold content for newer ones that had low gold content, so older good coins disappeared as people hid them.””
“Hmmm. But how is it relevant today?”
“Bad money is driving out good money even today, though in a slightly different form. Governments across the world have been printing more and more paper money to tide over the various financial crises that they are facing. When a government resorts to printing more of its currency, it leads to a situation where there is much more currency in the market than before and hence like the coins which lost their precious metal content, paper money is also getting debased,” he explained.
“Hmmm. Sounds convincing.”
“To protect themselves from this debasement people buy another asset i.e. gold in this case, something which cannot be debased. During earlier days paper money was backed by gold or silver and it could be exchanged for gold or silver as and when needed. When governments printed more paper money than they had precious metal backing it, people simply turned up with their paper at the central bank or the government mint and demanded it be converted into gold or silver. This option hasn’t been available to people since the first world war started in 1914. Now whenever people see more and more of paper money, the smarter ones simply go out there and buy that gold.”
“So?”
“So gold keeps disappearing from the market and hence its price keeps going up. And as was the case earlier bad money i.e. paper money, drives out the good money i.e. gold, away from the market.”
“Ah, what a comparison!”
“And that is why Warren Buffett will be wrong when it comes to gold. As long as governments around the world keep printing money to fight the financial crisis, gold as an investment class will keep doing well.”
“But why is Buffett anti gold then?”
“A major reason for it is the fact that Buffett is a follower of the school of value investing established by Benjamin Graham. For most of the period that Graham was an active investor, private ownership of gold in the United States remained banned. Franklin D Roosevelt outlawed it in 1933 and it remained so till 1974. Graham passed away in 1976. Hence during the price years of his life as an investor, gold was never an investment class. To him investments were limited to stocks or bonds. Hence the theory of value investing never got around to talking about gold.”
“Very interesting,” she said.
“So can I sleep now?” he asked.
“Na,” she replied.
“Why?”
“Its six thirty now. Time to get ready for office!”
(The author can be reached at [email protected]. The piece was originally published at http://www.rediff.com/business/slide-show/slide-show-1-column-why-warren-buffett-is-wrong-about-gold/20120405.htm)

Vivek Kaul

([email protected])

A few years back I asked Scott Adams, the creator of the Dilbert comic strip, how does it feel to be “even” referred to as a management guru these days: “ironic”, was his one word answer! Cartoonists and comic strip writers are usually men of few words. So I guess Adams was just being modest, for I have learnt more about how organisations “really” work, by reading the Dilbert comic strip, than all the tomes that made me fall asleep at the business school.
One of the things that Adams keeps harping on is that employee morale is a risky thing. In The Dilbert Principle he writes: “Happy employees will work harder without asking for extra pay. But if they get too happy, endorphins kick in, egos expand, and everybody starts whining about the fact that with their current pay they’ll have to live in a dumpster after retirement.”
So what is the way out? “The best balance of morale for employee productivity can be described this way: happy but with low self-esteem,” explains Adams.
People who understand this best are managers (the real ones, not just the ones who just come with the designation), who are in positions of authority, and they try and make the best use of it.
As Satyajit Das explains in Extreme Money: Masters of the Universe and the Cult of Risk “If a manager has ten people in their department, then reducing each person’s bonus by $100,000 increases the manager’s own share by $1million,” he writes.
And how does this help? It helps precisely in the way that Adams explained it earlier. “Happy employees man that you have paid them too much. Disgusted employees mean that you have paid them so little that they will leave. The optimal point is between satisfied and dissatisfied – enough to keep you but not enough to make you complacent or diminish the manager’s own bonus,” explains Das.
A simple way of keeping employees happy but with low self esteem is to create some self doubt in their minds. So if your boss often asks questions like, are you sure this is the way we should proceed, or keeps your KRAs a little vague, or doesn’t bother to find out your entire skill-set, or keeps reminding you of how hard he had to fight to get you that bonus you got, or there is no opportunity for any new thinking and it is either his way (the boss’ way) or the highway, you know what he is up to.
There is also an old fashioned way of creating self doubt. As Adams explains “One of the most effective ways…used by managers is to practice ignoring an underling…this sends a message that the employee has no human presence.” All this ensures that enough self doubt is created in the mind of the employee. And he doesn’t look for a very high raise, and at the same time starts to think that “Thank god, I at least have this job!”
Also, it helps managers hide their incompetence. Laurence J Peter came up with The Peter Principle which states that in a hierarchy every person rises to his or her level of incompetence. So all good salesperson do not make for good managers. All good teachers don’t make for good principals. All good derivative traders don’t make for good CEOs. In my profession, all good reporters do not make for good editors primarily because the skill set required for both the jobs are “very” different. So if a boss or a manager has reached his level of incompetence then by creating self doubt in the minds of his underlings and reportees he can continue shielding his incompetence.
These days one grows higher in the hierarchy there is an inherent need to understand more and more things. The specialisation that is encouraged at lower levels thus becomes a handicap. As Das writes in Extreme Money“ few senior bankers understood transactions outside their expertise. Even then, their knowledge was frequently dated. Today, a 55-year-old rarely understands a 25-year-old. In banking, the rapid rate of innovation and change meant that a 35-year-old did not understand a 30-year old.” Hence the rate at which an individual rises to his level of incompetence has become faster now. So there is a greater need to create a level of self-doubt among his reportees.
What works for bosses and managers also works for companies because the days when Henry Ford doubled pay overnight are long gone. “Facing low worker morale and high turnover on the production line in January 1914 Henry Ford raised wages to five dollars a day, doubling at a stroke most workers’ pay,” writes Eduardo Porter in The Price of Everything. “It worked…after the pay hike Ford was churning out 15% more cars per day with 14% fewer workers.”
But Ford could double salary overnight primarily because the company enjoyed a near monopoly with very little competition. “Ford…enjoyed fat profits unheard of it in the cutthroat competitive environment of today. Today, multinational companies scour the globe of seeking cheap labour and low taxes, abundant raw materials, and proximity to consumers. And competition is ruthless,” writes Porter.
The days of monopoly profits are long gone. So in this day and age companies cannot afford to have employees with high morale who would want to be paid very well. Costs have to be kept under control. And extremely happy employees with high morale are not the best way to go about doing it.
(The writer can be reached at [email protected]. The article was originally published on Rediff http://www.rediff.com/business/slide-show/slide-show-1-column-why-bosses-like-unhappy-employees/20120402.htm)

Sri Sri Ravi Shankar has lately been a branding disaster. He seems to be going the Baba Ramdev way after making all the right noises all these years.
Every brand has a story associated with it. Ramdev’s story was “practicing yoga can cure any disease”. Those who have seen his yoga DVDs will recall the line “karte raho, cancer ka rog bhi theek hoga”.
This story helped him build a huge yoga empire whose turnover ran into over Rs 1000 crore. The story was working well, until Ramdev decided to diversify, like all big brands do.
He wanted to start a political party and launched a campaign to bring all of India’s black money lying in foreign banks back to India. His story changed from being a yoga guru to an aspiring politician who is also a yoga guru. And that clearly did not work.
Or let’s take the case of Sai Baba of Puttaparthi, the biggest guru of them all. His story was he could do miracles, basically small tricks like creating ash, necklaces, rings etc from thin air. This was perceived as a sign of divinity in India and he soon developed a mass following across various sections of the society.
He never changed his story, stuck to it and his followers took pains to keep talking about his miracles, thus ensuring sustained followership.
Sri Sri Ravi Shankar’s story is that of spreading happiness and is targeted at the upper middle class segment of the society. Sri Sri is not a mass market guru like Sai Baba of Puttparthi was. In an interview he was asked why doesn’t he go on fast like Baba Ramdev had? He replied “I have so many followers outside the country. If I go on a fast, it will become an international issue. This is our problem and it should remain in India.”
Some mumbo jumbo has always been a part of his forte and it seems to impress the upper middle class that is prime target. Like the only time I have seen him from close quarters he said something like “jeevan ka matlab jisne batlaya usne samjha nahi, jisne samjha usne batlaya nahi“. Now go figure what that meant.
So even though Sri Sri thinly associated himself with Ramdev’s campaign against corruption, he didn’t go all the way with it. Clearly, associating himself with a mass market guru on a market issue would have spoilt his story of being an international guru promoting peace and happiness to the upper middle class. But now by making this comment on government colleges producing naxals he looks to be going the Ramdev way, trying to get into an area which is clearly not his comfort zone. (You can read the story here)
Great brands come to be associated with stories that get built around them. When these brands try to change this story, chances are the new story just doesn’t work, like has been the case with Baba Ramdev. The latest comment by Sri Sri also looks like that he now wants to be more than just a lifestyle guru who has a cult like following.But that might not just work. Big brands like Sri Sri come with stories attached with them and after a point it becomes difficult to change that story.
Take the case of the Bhartiya Janta Party(BJP). After years of projecting the soft Hindutva story, brand BJP tried to move to the “India shining” story before the 2004 Lok Sabha elections.
A huge telemarketing and internet marketing campaign was unleashed in line with the changed “story”. I still remember that while travelling in a bus in Hyderabad I got a call from an unknown number and on picking up was told “main Atal Bihari Vajpayee bol raha hoon”. For a moment I did not know what had hit me. The recorded voice of Vajpayee went onto elucidate how India had been shining under his five year rule.
Of course this new story did not work. And the party had to go back to its soft Hindutva line.
Another good political example is of the Left Front in West Bengal (or Pachimbanga as its now called). The front under the leadership of the then Chief Minsiter Buddhadeb Bhattacharya abandoned the tried and tested principles of Karl Marx in favour of the “invisible hand” and Adam Smith. They probably thought if China can do it, why can’t we? The voters clearly did not like this new story being projected by the Left, and threw it out after 34 years in power.
Fair and Lovely, the fairness cream from Hindustan Unilver Ltd has been sold on the “kale ko gora bana de” story for years now. Faced with constant criticism on the racial tones of the story, the company tried to change the story. It tried to associate the “achievement” story with the brand. The new advertisement showed a girl achieving her dreams of becoming a cricket commentator and finally meeting Krishnamachari Srikanth, a former India cricketer. The “achievement” story probably did not work and the company went back to its old story.
Donald R Keough, a former president of the Coca-Cola Company, has an excellent example in his book The Ten Commandments for Business Failure 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 made it 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. The consultants maintained their stance that people would eventually come around to drinking New Coke.
Keough relates an example of an old woman who called the company call centre and that was what made them drop New Coke and relaunch Coke as it was. “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.”
Sri Sri needs to take this lesson from Coca Cola and go back to his old story of being a yoga guru and give up any plans of being a politician. 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.”