Vivek Kaul
George Soros likes to believe that he has managed to make all the money that he has, by following what he calls the theory of reflexivity. Not everyone believes this though.
His son Robert, offers another explanation for his success in Michael Kaufman’s Soros: The Life and Times of a Messianic Billionaire. As Robert puts it “My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s his early warning sign.”
Soros himself has some doubts. As he writes in The New Paradigm for Financial Markets – The Credit Crisis of 2008 and What It Means “To what extent my financial success was due to my philosophy is a moot question because the salient feature of my theory is that it does not yield any firm predictions. Running a hedge fund involves the constant exercise of judgement in a risky environment, and that can be very stressful. I used to suffer from backaches and other psychosomatic ailments, and I received as many useful signals from my backaches as from my theory. Nevertheless, I attributed great importance to my philosophy and particularly my theory of reflexivity.”
So what is the theory of reflexivity? As Soros writes “The crux of the theory of reflexivity is not so obvious, it asserts that market prices can influence the fundamentals. The illusion that markets manage to be always right is caused by their ability to affect the fundamentals that they are supposed to reflect…Buy and sell decisions are based on expectation about future prices, and future prices, in turn, are contingent on present buy and sell decisions.”
Now what does that mean in simple English? Let’s understand this in the context of the rupee which has depreciated rapidly against the dollar in the last few months.
The rupee largely fell because of our high current account deficit. The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances. Simply put, our demand for dollars was more than their supply. The rupee was also adjusting for the high consumer price inflation that we have had for a long time now.
So the rupee falling against the dollar was a given. The fall in the value of the rupee was reflecting the economic fundamentals of India. Or as conventional economic theory goes, market prices reflect the fundamentals on most occasions.
The trouble is that rupee has had a free fall and this has led some economists to believe that it has fallen more than it should have to reflect India’s economic fundamentals. As Rohini Malkani, Prachi Mishra and Aman Mohunta write in The Economic Times “ However, with the rupee around 65-66 to a dollar, it has overshot its equilibrium value and is undervalued at current levels.”
Simply put, the value of the rupee against the dollar has fallen more than it should have to reflect India’s economic fundamentals. The trouble with this argument, like most arguments made by theoretical economists is that it tends towards ‘equilibrium’.
While the fall in the value of the rupee reflects India’s economic fundamentals, at the same time the fall in the value of the rupee also impacts India’s economic fundamentals. Malkani, Mishra and Mohuna do not take the second factor into account.
As the rupee falls, Indian oil companies need to pay more for the oil that they import. If the government chooses not to pass on the higher cost onto the end consumers ( as it has done in the past) this means that the oil companies need to be compensated for the “under-recoveries”.
This means a higher expenditure for the government. A higher expenditure in turn means a higher fiscal deficit. Fiscal deficit is defined as the difference between what a government earns and what it spends. This will lead to more borrowing by the government and will crowd out private sector borrowing (for banks as well as corporates) leading to higher interest rates. Higher interest rates will have slowdown economic growth further.
If the government chooses to pass on the increase in the cost of importing oil to the end consumer, it will lead to higher inflation. A higher inflation can’t be good for economic growth either. A weaker rupee will also make other important imports like fertilizer, coal, palm oil etc, costlier. This will have its own impact on economic growth as people will cut down on consumption to meet higher expenses.
India’s external debt as on March 31, 2013, stood at at $ 390 billion. Of this nearly 79% debt is non government debt. External commercial borrowings(ECBs) made by corporates form nearly 31% of the external debt. This is not surprising given that the Credit Suisse analysts point out that 40-70% of the loans of 10 big corporate groups that they studied for a recent research report, are foreign currency denominated.
With a weaker rupee, as these loans mature, corporates will need more rupees to buy dollars. And this will have a huge impact on their profit and loss accounts. Lower profits or losses are obviously not good news.
A weaker rupee also has an impact on Indian exports, given that India’s top exports like gems and jewellery, organic chemicals, vehicles, machinery and petroleum products, are all heavily import dependent. Hence, people in this business will have to pay more in rupee terms to import raw materials that they need to make their finished products. This will have an impact on the pricing of exports and explains to a large extent why a weaker rupee doesn’t necessarily always lead to higher exports.
What this means is that a fall in the value of the rupee will soon start impacting India’s economic fundamentals or perhaps it already has. And this in turn will mean a further fall in the value of the rupee. Swaminathan Aiyar explained it best in a recent column in The Economic Times “Many experts say the rupee has overshot and will come back. Really? Remember the same thing was said about the Indonesian rupiah when it depreciated from 2,500 to 3,000 to the dollar in 1997, but it eventually went all the way to 18,000. Estimates based on fundamentals quickly become meaningless because a crisis changes fundamentals hugely. The crashing rupee has already changed the economy’s fundamentals.”
Disclosure: The idea for this article came from Swaminathan Aiyar’s column Get ready for another Asian Financial Crisis in The Economic Times
The article originally appeared on www.firstpost.com on August 30, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Swaminathan Aiyar
Why Rahul Gandhi doesn't really mean what he says
Vivek Kaul
In an interview to the Tehekla magazine in September 2005, Rahul Gandhi, now the Vice President of the Congress party, is said to have remarked that “I could have been prime minister at the age of twenty-five if I wanted to.”
The statement created an uproar. The Congress party immediately jumped to the defence of its princling. Abhishek Manu Singhvi, the then Congress spokesperson, specifically mentioned that Rahul had not said ‘I could have been prime minister at the age of twenty-five if I wanted to’.
Tehakla initially stood by its story but backed down later. “This seems to be a clear case of misunderstanding. Mr Gandhi thought he was having a casual chat whereas our reporter took it to be a proper interview,” the weekly said in a statement.(The ‘edited’ casual chat can still be read on Tehelka’s website).
On another occasion Gandhi remarked “Please do not take it as any kind of arrogance, but having seen enough prime ministers in the family…it is not such a big deal. In fact, I often wonder why should you need a post to serve the nation.” (Source: Decoding Rahul Gandhi, Aarthi Ramachandran).
Gandhi’s obsession on clarifying that he is not in the race, seems to have continued. “Asking me whether you want to be prime minister is a wrong question,” he recently told journalists. In fact he even went onto add that he did not want to get married because marriage leads to children and a lust for power. “I feel we should all be detached from power. Only then we can contribute to the society better. You people ask me about my marriage plans. Sometimes, I think, if I marry and have children, I would want my children to take my position,” he said.
The spin doctors of the Congress party have been working overtime to portray this statement of their princling as a great sacrifice. But being married has got no link with running political fiefdoms and lusting for power. As Swaminathan Anklesaria Aiyar writes in a recent column in The Times of India “Mayawati and Jayalalithaa are both unmarried and without kids, and they run fiefdoms no less feudal than the Congress. Absence of children has never meant decentralisation.” This argument also works for Mamata Banerjee in West Bengal, Naveen Patnaik in Orissa and Narendra Modi in Gujarat, who also run political fiefdoms despite having no children. So the lust for power or politicians running political fiefdoms, has got nothing to do with being married or not.
Also the question is that what can Rahul Gandhi get done as a Prime Minister that he cannot get done being outside the government (assuming that the Congress led UPA continues to be in power)? As Tavleen Singh writes in a recent column in The Indian Express “Rahul already has more power than almost any politician in India other than his mother. So why should he want something he already has?”
Other than wanting to be detached from power, Rahul Gandhi also wants to empower middle-level leaders. “Today, I see how MPs feel without power and it is the same story in all the parties, be it the Congress or the BJP. I want to empower the 720-odd MPs in Parliament. I want to give voice to the middle tier, empower the middle-level leaders,” he said.
While he can’t do anything about the BJP, what is he doing about the Congress? Not much seems to be the answer. The upper ranks of the Congress party seem to be filled with sons/daughters of Congress leaders. In fact, Rahul’s boys, a term I use for the relatively younger leaders in the Congress party supposed to be close to the princling, are all sons of Congress leaders. As Aiyar writes “After talking for years about promoting youth in politics, you have indeed promoted many newcomers to important ministerial positions. They are young by Indian standards, but many have greying hair. The list in New Delhi includes Jyotiraditya Scindia, Sachin Pilot, Milind Deora and Jitin Prasad.”
Nothing seems to have been done about the Congress tradition of the so called “high command” appointing the Chief Minister, in case the party happens to win a state election or even otherwise. This trend was most recently visible in Uttarakhand where the majority of the MLAs wanted Harish Rawat as the Chief Minister, but had to make do with the high command’s choice of Vijay Bahaguna ( who interestingly is the son of the late H N Bahuguna, who was with the Congress party for most of his life). The high command also appointed Prithiviraj Chavan (whose father and mother were both Congress MPs), a political lightweight who was not a member of the state assembly, as the Chief Minister of Maharashtra when they wanted to replace the scam tainted Ashok Chavan (son of SB Chavan, another Congress leader).
The points made above are not exactly rocket science. And I am sure Rahul Gandhi understands them as well as the others. As Tavleen Singh writes in The Indian Express “Rahul Gandhi knows this as well as anyone else in politics, and if he wants to change things, then this is terrific. But why does he not get on with it? Why does he not begin by ensuring that next time the Congress party wins elections in some state, the high command is not given the task of choosing the chief minister? Why does he not ensure that next time a parliamentary constituency reports a vacancy, it does not get handed down to an heir?”
Singh in her column writes that as a responsible political pundit she has been mulling over what Rahul Gandhi said, and she remains “puzzled” and “mystified” by it.
This writer believes that there is an answer to what Singh refers to as a mystery and a puzzle. Allow me to explain. The writer Ramachandra Guha told me in an interview late last year that “I think this dynasty (Gandhi) is now on its last legs. Its charisma is fading with every generation.”
This is something that Shekhar Gupta also pointed out in The Indian Express “Ask any Congress leader who contests elections (unlike its star cast of chronic Rajya Sabhaists) and they will admit to you, albeit in whispers and fearfully glancing left and right, that the days when the Gandhi family could win them their seats are over. In the elections, now, it is every man for himself.”
This has been proven in Uttar Pradesh elections and the Bihar elections before that where the Congress party was routed. Rahul Gandhi was closely involved with both the elections. Given this the ability of Rahul Gandhi or for that matter his mother Sonia, to get in the votes for the party, is very limited. They are not in the same league as Jawahar Lal Nehru, Indira Gandhi or even Rajiv Gandhi, before them. Gupta explains it best when he writes “their ability to win seats beyond the Amethi-Rae Bareli enclave has diminished to insignificance.”
It would be foolish to believe that Rahul or Sonia do not understand this. Hence, they need the Scindias and the Deoras and the Pilots and the Prasads, of the world to continue winning elections. The smaller princlings within the party who can continue bringing in the votes from all across the country. The Congress party may be a shadow of what it was in the past, but it continues to remain India’s largest party. And for it to hold onto what it has, it needs to continue with the feudal structure that totally encapsulates it, with the Gandhis at the top.
In fact when the party has tried to get rid of its feudal structure it has had disastrous results. Take the case of Andhra Pradesh. After the death of Y S Rajasekhara Reddy, his son Jagan Mohan, wanted to become the Chief Minister. And that was not allowed. Jagan Mohan left to form his own party and is expected to widely damage the electoral prospects of the Congress party in a state which sends 42 members to the Lok Sabha.
On the flip side, even though the Gandhis are no longer the vote winners they once were, they are still very important to the idea of Congress. As Gupta put it in his column “I asked a senior (and always elected) Congress leader, then why was the Gandhi family still so important and had total sway over the party. He said, surely they cannot help anybody win elections, but they keep the party together. Their word is law and the party needs that discipline. Illustration: the moment Sonia or Rahul says something, everybody nods and falls in line. If Narasimha Rao or Sitaram Kesri said something, everybody broke out in rebellion and rashes.” So even though the Gandhis may not bring in the votes, they do help keep the Congress flock together.
Given this is in nobody’s interest, neither the Congress party, nor Rahul Gandhi (or for that matter his mother Sonia) to disturb the status quo. The Congress needs the Gandhis to survive as a party, and the Gandhis need the seats in the Parliament and the state assemblies to continue to be relevant.
In October 2008, while addressing girl students at a resort near Jim Corbett National Park, Rahul Gandhi referred to “politics” as a closed system in India. “If I had not come from my family, I wouldn’t be here. You can enter the system either through family or friends or money. Without family, friends or money, you cannot enter the system. My father was in politics. My grandmother and great grandfather were in politics. So, it was easy for me to enter politics. This is a problem. I am a symptom of this problem. I want to change it.”
More such statements will be made in the days to come. Meanwhile, the symptom and the problem will continue to co-exist.
The article originally appeared on www.firstpost.com on March 12, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)