Bully for the Bull

Bully for the Bull

In the preceding trading week and the last hour of trade on Friday the 18th, we witnessed the destabilising spectacle of a bungee-jumping Sensex, Nifty, Midcap, Smallcap and indeed every single sector index on the Indian Stock Market.

Amongst the consternation this spectacle wrought, we could only console ourselves by remembering that plunges and recoveries of this sort have happened before. But, each time it happens, it is occasioned, to a lesser or greater extent, by the inept actions of an over cautious government quite clueless about the impact of their nostrums on market “sentiment”.

This time, it was to do with an unreasonably tight credit policy as the steerage class of futures and options punters cried out for more margin money from brokers who couldn’t pony up because they were in turn refused further limits by banks because of the RBI guidelines. So, some poor wretches “drowned” in their financial puddles, victims of the kind of “collateral damage” that former US Defence Secretary Rumsfeld was fond of citing.

That this government is uncomfortable with the pronounced risk-taking abilities of traders and investors who live and breathe “greed and fear”, is self-evident. But the basic thing that our politicians and bureaucrats do not properly understand, is that a stock market works as much on fundamentals, liquidity and logic as it does on sentiment, and let it be plainly said – rank speculation.

It is speculation that feeds most heartily on sentiment, and no bourse worth its salt can call itself alive and well without it. To try and stamp out speculation in the bourses is like trying to stamp out sex in the bedroom. And any action that works to wilt this ineffable sentimental aspect tends to produce very strong adverse reactions. And this means in everyone, from the Colonel’s Lady to Judy O’ Grady: all those institutional players, mutual funds, insurance companies, the foreign institutional investors, the hedge funds and futures and options traders, the newly arrived sovereign funds -all these research driven big-hitters. But even these blue-chip organisations share an inordinate attachment to “sentiment” with the superstitious learn-on-the-job punters, well-advised high-net-worth individuals and those discreet but powerful private equity players.

But whenever, in recent times, our bourses have taken a grievous tumble, we have seen Finance Minister Chidambaram come out to reassure us on market “fundamentals” and our high “GDP growth” rates, using a tone of voice one might best use when addressing the mentally challenged. But, Mr. Chidambaram and the entire posse of politicians, bureaucrats and sarkari economists, stoutly refuse to acknowledge, out of some robust if inexplicable arrogance, that “fundamentals” do not, by themselves, determine the performance of stock markets.

Meanwhile, back at the ranch, and in the cities and towns of America, we are witness to a tremendous manifestation of change. We see a black man battling for the Democratic Party presidential nomination with a woman. In watching these two archetypes duking it out, breaking taboos like a Greek might break dinner plates, we are treated to something never seen before. But America has always been good at handling change, despite its more recalcitrant and reactionary elements.

This same America wants to acknowledge that India has arrived and is willing to give us time to adjust to the implications of our new found prominence. Perhaps then, there is a parallel here, between how India should be handling its economic emergence and the way America is contemplating the election of its first black or woman president.

In the December 2007 issue of The Atlantic, the cover story is on Barack Hussein Obama’s candidacy. In it, Andrew Sullivan writes, “Sometimes when the world is changing rapidly, the greater risk is caution”.

Today, Tuesday the 29th, of the week after, we are no longer plumbing the depths of the financial market abyss. But, if we have anyone to thank for this state of relative stability it is Ben Bernancke, the US Federal Reserve Bank Chairman. Because, it is Mr.Ben who turned the tide on the global market crash by cutting US interest rates by an unprecedented 75 basis points, from 4.25% to 3.5%, in the middle of last week.

It is true that Bernancke, like our own RBI Governor Reddy, has erred too much on the side of controlling inflation, to the point when the US bourses went into a free fall. But, still, we must be grateful because it is Mr. Ben’s 75 bps cut that saved the bacon of the Indian markets plunging at nearly 10% a day!

But have we learned anything from the US example? Not if you go by Governor Reddy’s monetary policy announced today. In it, he uses the inflation word ad nauseam to justify his standing-still on the cash reserve ratio (CRR) limits, the repo rate which stands at 7.75% as well as the reverse repo rates.

But, in the end, especially if Bernancke feels compelled to cut the US interest rate by another 50 bps tomorrow night, we might see a flood of foreign investment coming into India to take advantage of our “conservative” fiscal management and the great arbitrage opportunity. We could also see a surge in the indices from the money that will come back into the markets from the excess captured by the Reliance Power IPO and the large collections made from a host of new mutual fund offerings.

Governor Reddy, Mr. Chidambaram and Mr. Damodaran might have to come up with some new ways to strangle growth before the ink is dry after all.

(935 words)

By Gautam Mukherjee
Tuesday 29th January 2008

Also published in The Pioneer www.dailypioneer.com on the OP-ED Page on Wednesday 30th January, 2008

Merchants have no country

BOOK REVIEW

EXTREME TURBULENCE—India at the Crossroads
By Upendra Kachru
311 pages. Rs.395/-
Published by Harper Collins Publishers India in joint venture with The India Today Group

Merchants have no country

Upendra Kachru, author of this gentle management book, teaches strategy at a leading business school in India. He quotes Thomas Jefferson to assert that, “Merchants have no country”, in the context of globalisation, helpfully informing the reader that Jefferson was “one of the early US Presidents”.

The professor in Kachru is prominent in the book. It is rich in case-study like anecdotes from well known socio-political figures of the 19th and 20th centuries such as Malthus and Maslow and great Indian corporations including Wipro, TATA and ITC. Kachru uses anecdotes to illustrate his various points of emphasis, such as, the need for innovation, anticipation, vision and change. However, Kachru’s version of “extreme turbulence”, does not, on examination, frighten or alarm, as I was hoping it would, because he refuses to pick out any threats for special mention, and, his proposed remedies on how to better anticipate the future seem familiar, genteel and tame and reminiscent of blind man’s buff.

What is interesting is his narrative on how to manage uncertainty and complexity, particularly with regard to the future, and in the context of large, well-established corporations prone to complacency. But in exploring this, all Kachru is able to offer are anecdotes on the many ways to skin a cat but no longed for pattern, formula or panacea emerges. There are, it appears, many ways to manage the future but none that you can hang your hat on till after the fact. It is the sort of clinging to the known facts that one might have expected from a cost accountant.

So this is most certainly not a how-to-manual to brave the “turbulence” to come. But the book still makes for a reasonable catalogue of the doings of innovative, look-ahead folk who had what it takes to get it right. So perhaps, the subliminal suggestion here is to imitate these and other such masters of survival, and who knows, some of us might be able to add a point or two, or even a whole chapter, to future such catalogues on innovation, change management and so forth.

A lot of this book is comfortably paced and sometimes strongly historical, going back, without embarrassment, to the Stone Age, but it is always well-ordered and chronological in its approach to progress. This sequencing, however, seems to elude the accelerated nature of the challenges that confront the modern Indian business environment. After all, India’s one trillion dollar economy that took 30 years in the making, is set to double in the next five years, according to Economic Times 2007 Award winning brokers Motilal Oswal. So, by implication, probably anything that happened over five years ago, and certainly prior to 1991, is unlikely to shed any light on the road ahead. If Upendra Kachru had taken this somewhat pitiless premise on board, he might have produced a far more compelling book on the future of the Indian business landscape.

But perhaps, Professor Kachru does not quite see it this way. Nor does he feel like dwelling on the inequities of the Indian condition circa 2007, when this book was written. He glosses over its non-inclusive growth, its smugness, its too-little-too-late ways, the dangers and stress points occasioned by its lazy polity. Upendra Kachru does not quite see the Titanic metaphor as appropriate – India is not that ship heading for a nasty Arctic iceberg at full speed.

But even in this sometimes optimistic vein, some of Kachru’s extrapolations are a little blinkered. He quotes an unattributed publication called Beyond Economic Growth 2007 on page 59 of his book to rank sub-continental India at 25th in the global GDP growth sweepstakes and 43rd in terms of overall global competitiveness. What, you are tempted to exclaim, no BRIC ascendancy, no Emerging Market buzz? However, we are in good company in report anonymous, because, China, is ranked only at 12th on the GDP growth list and shares the honours with Taiwan at 13th on global competitiveness!

Evidently, such statistics can be misleading when taken out of context. Witness, also, that it is Azerbaijan and Mauritania that have secured the first and second positions in terms of GDP growth with 32.50% and 19.40% respectively. And it is Switzerland that tops the global competitiveness rankings with sparsely populated Welfare Valhalla Finland at number 2.

It makes you want to sink to the bottom of your 43rd ranked shoes, particularly when Kachru sees nothing bizarre in this, even calling economies such as those of Estonia, Latvia and Lithuania “tiger economies”, praising them, for their “macroeconomic stability, especially low inflation and low budget deficits”.

Fortunately, Kachru does not ignore the better known studies by entities such as the IMF, Goldman Sachs and GE wherein India can look forward to a bright future. This even as Kachru’s all-bets-are-off rendering on “long-term projections” don’t quite ring true. At the end of the book, and indeed in dribbles and drabbles throughout, Kachru gives the impression that he thinks the more pessimistic projections on India’s economic future are the ones that might turn out to be right.

(850 words)

By Gautam Mukherjee
Tuesday 8th January 2008

Also published in The Sunday Pioneer on January 20th, 2008 in the BOOKS section under the title "Blind man's bluff".