Risk and reward

Opinion

Risk and reward

It was impressive to read about the 89 year old American billionaire Kirk Kerkorian offering to buy an ailing Chrysler Corporation for 4.5 billion dollars on April 5th, 2007. Kerkorian, the Brioni-suit-wearing Beverly-Hills-living investor has a present net worth of around US $ 15 billion. But just months away from his 90th birthday, he is unfazed about risking a neat 30 per cent of his fortune on yet another new venture. If he succeeds in buying Chrysler, Kerkorian will have to turn around the ailing marque in a highly competitive global automobile market. It will take even more of his money, a good deal of his genius and not a little of his time to pull off the feat. But then, this is the action of a habitual risk taker, an immigrant son from Armenia who thought it fit to drop out of the eighth standard to become an amateur boxer under the moniker “Rifle Right Kerkorian”.

Contrast the kind of brass and “Rifle Rightism” that led Kerkorian on to make a success of Las Vegas property development, stewardship of Metro Goldwyn Mayer (MGM), significant holdings in General Motors (GM) and so on with the traditionally risk averse ways of the Indian middle class. But lately, at least on one side of the fence, when it comes to taking on debt, as in home, car, personal loans and credit card spending, many in the urban Indian middle class may have already changed beyond recognition. Gone are the “neither a borrower nor a lender be” prescriptions of the past.

While this is a bold departure for the fastest growing section of India’s population, the tricky part might lie in how to fund all this easy credit. The middle class, hard-wired for generations to favour caution and prudence in matters financial may have at last splashed out on a consumer spending spree but still has little or nothing to hold off the consequent financial pressures except the income from their salaries. It is true that salaries have risen considerably and so have the total quantum of household savings - but most of the surplus still nestles in low yield bank deposits that have little hope of funding the sharp expansion in aspirations and lifestyles. But even in the face of countless rags-to-riches stories and rich-get-richer truisms all around, the middle class remains fixated on limiting risk even as it has succumbed to the blandishments of an upwardly mobile lifestyle. The result is a feeling of increased financial pressure that only seems to grow day by day.

The government, on its part, has anticipated this phenomenon by default, interested as it is to attract the funds to propel the robust growth of India’s economy. It realises the benefits of substantial household savings pouring into the stock market to participate in and partly fuel the expansions of business and industry on a risk-taking basis. Over the years, successive governments from both sides of the parliamentary aisle have gradually introduced a very attractive tax regime to encourage this process. For those resident individuals who are prepared to take a calculated risk by investing in listed equity, the income tax rate on any short term capital gains (meaning up to one year from date of investment), they make, is a flat 10 per cent. Otherwise, the same people are well used to paying up to and over 30 percent against their salaries and other income. Further, there is no ceiling on the amount of profit they are able to earn from stock market traded equity under these self-same terms. This then, is the sweetest spot in the provisions applicable to personal income tax at present. It gets even better. Beyond the first year of holding a listed equity investment, profits made against the holding are completely tax free.

The catch, of course, is the risk involved, but it must be said the choices otherwise are both low yielding and limited. Indeed the “fixed interest” investment universe has changed drastically. Even as the government is fighting inflation via higher interest rates at present, persistently high GDP growth and low inflation remains the economic forecast for the medium to long term. So, the middle class, so quickly habituated to the palatable phenomenon of low cost home, car and personal loans in a modest inflation environment- must now accept the flipside of this scenario too. Gone, most likely for good, are the“safe” but high yield bank fixed deposits and all similar instruments ranging from public provident funds to national savings certificates to tax free bonds and even the riskier company and non-banking finance company (NBFC) fixed deposits. Not only will the returns from these options rarely see double digits again, but inflation indexed, even at less than 5 per cent, they barely break even. And this is before income from such investments is subjected to the full whack tax treatment in line with one’s tax slab. Even higher threshold slabs for income tax applicable to senior citizens and women and an extra percentage point or so on senior citizen fixed deposits hardly make any difference.

Contrast this bleak scenario with average stock market equity returns in the 40 per cent plus region over the last few years and a consistent long term average of some 15 per cent and the way ahead seems crystal clear. Kerkorians one and all we may never become, whether at nine or ninety, but at a minimum, a shift in gear at the income end of things is definitely called for. Going back to neither-a-borrower-nor-a-lender-be times may not be a viable option anymore.

Besides, the foreigners and the rich have gone forward an additional step and shown a marked preference for private equity. Investing, as they often do, in well chosen private unlisted companies, they confidently look forward to profits running into hundreds of percentage points when the companies finally go public. We can, as a mass, take our cues from this pointer as well - if we have the requisite risk appetite. But, at a minimum, the days of rewards without appreciable risk may be truly over and the sooner the middle class accepts this, the better.

( 1,033 words)

Tuesday 17th April, 2007
By Gautam Mukherjee

Also published in The Pioneer on Thursday 26th April 2007, Edit page.

Pinkie's day out!

Essay- Missing hand shrinking flower

Pinkie’s day out!

Democracy is all about universal suffrage, not as the wags have it, universal suffering. It is that one-adult citizen-one-vote principle with no discrimination based on gender, caste or creed. Ironically, not all of mankind has it and most of those who do tend to take it for granted. It involves, at a fundamental level, a pointing finger, that dexterous, even overworked digit, in the service of critics everywhere, aka Pinkie.

But really, the pinkie may be the second smallest finger on one’s hand but is not to be scoffed at any more than if it were actually called a forefinger. It can, for example, applied to the right button at the right time, elicit quite a convincing beep. A pinkie induced beep which stands in, electronically speaking, for speaking very softly while carrying a big stick. Especially if your community dada can organise a long queue wanting to beep the beep snaking off in the distance behind you.

India is known to be miles ahead in this pinkie-beeping game. Ahead, of “chads” pregnant or otherwise for instance, that former US vice president Albert Gore is unlikely to ever forget. And downright incomparable with places that depend on abrupt proclamations to learn about who is ruling them!

Still, we were not always pinkie-using-beepers and must spare a moment for nostalgia every now and then. Who can forget those bed sheet sized ballot papers? You needed both hands to fold them. Pretty things really, decorated as they were with charming motifs ranging from kerosene burning lanterns and pickaxes to personal marks that stood in for gentlemen who were formerly known as princes.

I am not trying to appeal to the memory synapses of our friendly neighbourhood sab jaanta hai armchair administrators of course. Because, don’t I know that the sab jaanta hai never vote? Therefore they have no recollection of bed sheet sized ballot papers, how can they? But voters, smeared by that indelible ink mark on their pinkie so that they don’t come around for seconds, will remember aforementioned ballot papers and those quaint polling booths too. They’ll recall those bamboo and coir rope created in-and-out lanes- very country décor in town and townie style laning in country. In fact, the voter lanes are still like this today. The ballot boxes are gone and the only thing that can still remind you of them are those canteen feeder biscuit tins. No biscuit tins in polling booths though- just electronic voting machines.

Some old timers, from our more politically aware states, will remember invitations to outsource the entire activity to very cooperative young men. There they were, sitting on divans made of similar ballot papers, the top few ready stamped in anticipation, located none too far from the policemen manning the booth entrances. Such eager public service oriented young men they were- smiling faces, large puffs, healthy biceps; so willing to save you the bother and give you a nice bottle of something pleasant to drink as well. Those were the old days. Now you have your pinkie and the beep that means you’ve voted successfully and that it has been simultaneously counted in favour of your chosen candidate and Party. No romance, no suspense, sigh!

The Americans keep coming here to see and ask about how we do it so well. We show and tell - it’s so nice to be asked. We tell them the whole election process works so well because it elicits participation from only one type of Indian. Most of our educated people don’t like to vote at all even though we have at least 400 million of them. The educated live mainly in our cities and like the voting holidays just fine but to relax in. However, they tend to cooperate and don’t interfere with their domestic help going off to vote. They do complain about how long their help take and call election days an excuse to go gallivanting and who can say that they are wrong? But the domestic help does vote before going off to gallivant because they actually like to exercise their pinkies and because it makes them feel powerful for a moment in their powerless worlds.

So you see, Mr. American, almost all Indian voters are poor and uneducated. Fortunately, for our prosperous politicians, India has more than 700 million poor people, more than enough to keep them in business without receiving even one vote from the rich, the middle class or the educated. That is why the politicians don’t worry too much about what the people in the cities have to say. There is no pleasing them anyway and besides they just won’t come out on Election Day will they?

The poor, god bless their souls, are humble too. Of course, they have much to be humble about and can’t, because of their lack of education, aspire to sab jaanta hai status. They are orderly and amenable to being neatly organised into trucks and tempos and buses by “dadas,” (an Indian word for benevolent elder brothers), and herded in to vote for the candidate and Party that employs the big brothers.

Dadas are never employed to herd in the educated. Because the educated can, obviously, think for themselves. Besides, they know so much that they automatically become better citizens than the uneducated could ever be. It is just that, as a matter of fact, even principle sometimes, they rarely vote. You may well ask why they don’t vote when they know so much about everything including how to change and improve things Mr. American, but this is one question I don’t know the answer to.

(942 words)

Thursday 5th April 2007
By Ghatotkach


This and all original essays on GHATOTKACHSERIES are copyright 2005-2007 by Gautam Mukherjee. All Rights Reserved.

Growth versus inflation or is it Friedman versus Keynes

Opinion


The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

John Maynard Keynes

Most economic fallacies derive - from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.

Milton Friedman


Growth versus inflation or is it Friedman versus Keynes?

The real reason that India is back to its interventionist ways is electoral politics-forthcoming elections in the big state of Uttar Pradesh and then looming general elections in which the destiny of the ruling alliance will be determined. So the mantra being force-chanted is - control prices at all costs (even if it entails retarding the rate of GDP growth inclusive of business, industry, exports and foreign investment).

We, the public, can all see this, even the callous and arrogant notion that business, industry, foreign investors, home and car buyer et al can stand to make sacrifices and still end up not too much the worse for wear. It is unjust punishment for good performance and confidence, high-handed and disruptive intervention that is distinctly out-of-date. We need to reclassify our self image and see an emerging nation on its way to developed nation status-a country on the move, albeit at the ponderous gait of the elephant. We have a long list of things to do after over forty years of inadequate growth till 1991. Amongst many other things like health and education facilities, we need to reform and update our regulatory and policy making institutions; learn how to use our burgeoning resources better; ingest technology and online real-time systems; bring help and succour to a weak agricultural base and get on with infrastructure development. To do this in the least possible time, we need to give rein to free market forces much as it goes against our formerly statist grain.

If however, we continue to see ourselves as a little-hoper third world country with an erstwhile 2% GDP rate, current economic policy, with its Keynesian overtones, would perhaps make better sense. But we should remember Keynes’ economics was spawned in the years spanning WWI and on through the 1920s, ‘30s and ‘40s. Even then, its basic interventionist tactic of throttling growth to control inflation never really delivered the intended results. It is, of course, anathema to the thinking of the contemporary icon of the free market Milton Friedman, who died only in 2006, and whose ideas we are meant to be leaning towards since 1991.

To be fair, on a good day, the government sees itself as a facilitator of growth and prosperity. All the more why it is sad to see it forced back into knee jerk intervention. But, since the endeavour is presumably aimed at winning elections, is this intended slowing of growth good electoral politics in 2007? Will the old style snake oil deliver winning results in today’s polity?

It is true that the “India shining” campaign did not work for the NDA alliance in the last general elections and the UPA is consequently desperate to reiterate the aam aadmi credentials that handed it its unexpected victory in 2004. But is the correct response to prompting from grassroots political organisers an all out attempt to control inflation? And is the best way a Keynesian attempt to curb money supply and make what remains more expensive to access? Will the strategy of applying so many leeches to the body economic not put it in danger of being sucked dry? The all important voting peasant may be poor but wouldn’t he rather the government helped to increase his income instead of only bringing down prices?

Nobody can fail to be concerned that agriculture is growing at around 2% and industry, services, exports, in effect everything else, is growing at robust double digits. But is the answer in price manipulation at the supply end of things or radical and massive agricultural policy reform aimed at enriching the rural poor? Massive intervention to stimulate agricultural modernisation and growth is called for and not the extremely modest and tentative initiatives taken in the recent annual budget. After all, we need agriculture to also show double digit growth levels if there is to be prosperity amongst 60% of our people. How do we bring this about? Until we figure this one out, one lot of politicians running around looking for votes looks just like the rival lot running around seeking the self same votes.

(767 words)

Tuesday, 3rd April, 2007

By Gautam Mukherjee

Also published in The Pioneer on Wednesday 4th April, 2007 on the OP-ED pagewww.dailypioneer.com