(1) COAL GATE - MAY THE DEBATE RETURN TO PARL - (2) IS GROWTH UNIMPORTANT? WHEN WILL INTRST RATES COME DOWN? (3) QUANTITATIVE INFO IN A/Rs A MUST

COAL GATE (CONTINUED)

+ IS GROWTH UNIMPORTANT?

+ QUANTITATIVE INFO IN A/Rs  A MUST

COALGATE is becoming curiouser and curiouser. What should be primarily discussed in Parliament has been dragged into the forum of Media by media -  which is their right – but, what is really curious is that the Media Discussion has been actively joined in by both the Opposition and  Ruling Coalitions.

If they can discuss it threadbare in media – the question arises – why can’t they discuss the same in Parliament – which is the proper and prescribed Forum for discussing the CAG Reports!

Let all Parliamentarians first discuss the CAG Report in Parliament and the Public Accounts Committee, threadbare, obtain all facts from all sources including CAG, and then see what went wrong and where. If nothing went wrong, wonderful; if something did, that can be got corrected. If somebody needs to resign on any grounds, they can then be made to resign. Is there a case for any RESIGNATIONS even before the CAG REPORT is discussed in Parliament?

I think, there is no case for it right now. We can’t certainly say with THIS EXACTLY IS THE WRONG – AND THIS ONE IS RESPONSIBLE FOR IT.

There are a number of layers in the process - like the state Governments, their Ministers and bureaucracy, the screening committee members, the persons who appeared before the committee, the various Central Ministries and Ministers who were part of the decision making – and then, at the final stage, comes the PM.

In between – somewhere - are the Companies who got the allotments in haste, but did not mine even half a tone of coal all these years. What did they do with their Higher Market Valuations in the Mean time is a curious Factor needing attention.

Leaving all this – demanding the PM’s resignation on mere moral grounds – in times which do not belong to the Nehrus and Sastris – is just not appropriate. Much water has flown down the Ganges – and no one has resigned after Sastriji on mere moral Grounds – unless you make a case against him personally.

It looks as if BJP IS INTENT on scoring a SELF GOAL on this issue - and surrender the ADVANTAGE to Congress, which may win on BJP's self goal.

 
In any Organization, things do go wrong. As Murphy’s Law proclaims – if something can go wrong, it will. Murphy’s Law may not be RIGHT all the time; Murphy’s  Law  too can go wrong  and it does. In other words – things do go wrong – not all the time, but, some times. An extension of the law says – things go wrong when least expected.

Probably, this extension has struck COLAGATE –when people least expected it.

The Ruling UPA need not have joined the Media Debate and could have insisted on Parliamentary Debate First – media Debate only later. They could have taken the stand - we are not going to go before media before Parliament discusses the CAG Report. This, they could have done. But, like in all other issues, they went ahead trying to score points, opening up New Fronts in the Media itself – chiefly against the State Governments, and then, QUITE UNNECESSARILY, against the CAG, who cannot join the Debate. 

Even the Prime Minister, who, normally does not get into such controversies joined issue against the CAG. But, nobody was willing to give the CAG the same facility – of rebutting the charges on the Media itself – or, even going further, discussing the whole Report in the Media itself – since the Debate forum has effectively shifted to Media.

This has necessarily rattled the CAG. It has rattled CAG and - also given him enough indications on what he should do when called upon to justify his report in PAC and before  Parliament.

While Government says, CAG’s figures are exaggerated and incorrect, CAG is finding all arguments to  prove, that their calculations were actually HIGHLY CONSERVATIVE – and the presumptive loss figures are actually much higher. This is what we see from latest News Reports.

Media is digging out many more angles in COALGATE. We will need to wait and see.

When Team Anna or Ram Devji agitates on Corruption – everyone talks of Supremacy of Parliament. But, now none talks of it.  Media Discussion seems to be of Paramount importance. The doubt now is - Will CAG’s Report on COALGATE at all be discussed in Parliament? If so, when?

Will Parliamentarians restore to Parliament its due rights to discuss and take action on CAG’s Reports?

P.S: We now find that Mr.Deepak Parekh has raised his voice against CANCELLATION OF COAL BLOCK ALLOCATION - saying it will ruin the country. He very pertinently says - "Reversing every economic Policy is the beginning of the end of this country". I totally agree with him. But, whoever has not made any attempt to mine the COAL from the BLOCKS  allocated - Their ALLOCATION MUST BE CANCELLED, and their allocated blocks must be re-allocated to some one who will do the mining IMMEDIATELY. 

INDIA is in IMMEDIATE NEED OF POWER - and therefore, of COAL - So, some one who is in such dire need of coal must be allocated the Coal Blocks with strict stipulation that he must start mining, say, within 6 months of allocation and use it for specified purposes. 

There is another news that MANY Non-UPA, Non-NDA PARTIES have come together to voice their OPPOSITION to the DISRUPTION OF PARLIAMENT. As this Blog has said earlier - whatever one have to say - say it in PARLIAMENT. Let the country know all facts - from the most authorized source, namely, the Parliament - not from Media. PARLIAMENTARIANS of both UPA and NDA must both first discuss the CAG REPORT in Parliament - and thereafter only, in Media. It is definitely not healthy for MPs to discuss CAG Reports in Media first and in Parliament later. Also, demanding RESIGNATIONS even before start of discussions is meaningless. One Party's view need not be MAJORITY VIEW - and Majority view must prevail. The call of many parties for review of the coal block allocation by a SITTING SUPREME COURT JUDGE is perhaps the BEST SOLUTION. Both UPA and NDA must support this method of resolving the issue. But, even for that - Parliament must discuss the issue - at least for a day - without disruptive atmosphere. This precedent can become a permanent feature of Parliamentary functioning if not stopped now -  and will boomerang on BJP also - in states where it is in Power - and at centre, if and when it becomes the Ruling Coalition at Centre.

Leaving the COALGATE its present stage – let us see how GROWTH vs INFLATION debate continues.

INFLATION vs GROWTH

RBI refuses to bring down the INTEREST RATES until and unless INFLATION  comes down. But, Inflation seems more stubborn than RBI. It refuses to come down – probably – until and unless RBI reduces the INTEREST RATES, it has raised in monthly installments over a year or more.

This Blog has been pointing out this phenomenon for over an year. Now, many CEOs have started asking the same.

RBI says – INFLATION must come down to 5% or less. Yes. This is needed.

But, how and who will do it now - is the question. Is there a scope for raising Interest rates further? Even if RBI raises Interest Rates further – will it really reduce INFLATION? It has not happened at all in the last  one and a half years. Who can be sure of that to happen now?

RBI was always right in asking Government to use its fiscal and administrative powers to reduce Inflation. For some reason, Government is looking at the RAIN GOD, to help it bring down inflation. If RAIN GOD is the solution, where is the rationale for RBI to keep its INTEREST RATES so high?

While many Industry captains have been voicing concerns over the decelerating Growth, the latest to join the Bandwagon is Sri K.V.Kamath. He has said – for Growth’s sake cut Rates by 1%. He is right, but, I would say, partially. The Rates must come down to a level lower than that of the Chinese – so that our Industries become competitive.

In the last year and a half – Growth (GDP) has been nose-diving very consistently – and the performance of many Industries is suffering. Demand for Industrial Products has not been going up at all, and in some sectors, it is coming down drastically. The latest to be added to this list is – 2 wheelers. The Big companies are all reducing their Production, as per the latest report. Why the Demand recession? It is not in 2 wheelers alone. It is in many sectors. On one side, their manufacturing and all other costs have gone up by a significant amount because of the Hike in Rates. On the other hand, the buyers are not enthused by the High Rates to go for purchase at these levels of Interest.

We also know that huge Inventories are lying Idle in realty sector. There are no Buyers for them. One of the reasons for that also is the High Interest Rates – apart from the huge hike in realty prices by the builders.

No one says, Interest Rates is the only underlying factor for the decelerating Growth. There are others – to be tackled by the Government. But, Interest rate is also a significant factor. That is the point, the RBI cannot ignore. High Interest Rate in India makes Indian products uncompetitive compared to the products of other countries.

All said – I think, It is time that RBI reduced the INTEREST RATES significantly – even while putting pressure on Government to do what Government needs to do for containing Inflation.

QUANTITATIVE INFO IN ANNUAL REPORTS

So far, Indian Companies have been giving quantitative performance Information also – along with financial Information in their Annual Reports. But, now there is a move to do away with this requirement.

This move is quite retrograde and unnecessary. Companies are giving this Info – and investors and Analysts want this Info – to judge whether the Profits (or losses) have come on higher or lower production or on mere price manipulation. Likewise, whether higher or lower raw material consumption was there – is also material for Investors and Analysts. India need not abandon its HELATHY PRACTICES – especially when there is a good need for them.

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GDP GROWTH TO BE LESS THAN 7% = Measures Needed : 1. Reduce Interest Rates by 2-2.5% 2. Budgetary & legislative Measures by Govt

GDP GROWTH FOR FY12

ESTIMATED TO BE

LESS THAN 7%

Measures Needed :

1.        RBI needs to reduce Interest Rates by 2-2.5%

2.        Budgetary & legislative Measures by Govt

Now, it is official. Official estimates indicates that GDP Growth will be less than 7%.say, around 6.9% for current Year. If we factor in the Inflation estimates, where will the real GDP be for current Year?

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. The GDP adjusted for changes in money-value is Real GDP.

It is not clear whether the GDP Growth estimated – is adjusted for changes in money value  or not. In other words, is it GDP or real GDP?

In any case, Every country must necessarily ensure that Growth rate is always above Inflation Rate.

But, if we are constricting Growth – while trying to contain Inflation – then also, we need to ensure that Growth Rate is kept above Inflation Rate. This is an ESSENTIAL PRE-REQUISITE for any country’s Health. If this is not ensured, there will be an absolute fall in the standards of living.

In our country – we are battling with falling Growth Rates right now. There is no point in comparing Growth Rates with Developed countries like USA, where there is a saturation limit, beyond which growth will be at lower rates like 4 % or less.

But, then, inflation rates also will be around 2% - so that net or REAL GROWTH RATES  will still be reasonable in such countries.

CONTROL OF INFLATION :

If Growth Rate is 7% or less but inflation rate is also around that or above that, sterner measures than RBI monetary Policy measures are needed to contain such High Inflation rates. As Government periodically states, an Inflation level of around 4% is tolerable. But, lot of supply side measures are needed for keeping Inflation at or below 4%. By supply side, what is meant is – supply of products and services – which must be enhanced to keep pace with or exceed the Demand for products and services.

RBI can constrict supply of money – through its Bank interest Rate and CRR mechanism. It has nothing to do with supply of Products and services. This falls in the realm of various Central and state Ministries.

FISCAL & ADMINISTRATIVE MEASURES FOR INFLATION CONTROL :

Unfortunately, there has been less than adequate positive and quick action on the part of the Ministries at Centre and states -  to control Inflation by enhancing the supply side. RBI also has been pointing out this in their Monetary Policy Documents – directly and indirectly.

But, Inflation comes down in long term in countries like India – where there are no monopoly conditions. Inflation in vegetables, cereals etc can be seasonal. It comes down when harvesting season comes. This has happened. This will go up again when the season goes. Unless, some supply side measures are undertaken by the Government – like, ensuring water supply by digging canals, enhancing water storage facilities and so on. In Most places, we still see, tanks and canals dug hundred years back by some Kings etc – but not by Governments after Independence. In places where there are rivers, we find Dams being erected – to enhance supply to one region and deprive supply to another region. There is clearly no NATIONAL WATER POLICY at work. 

Water lies waste in Dam sites, when it can usefully be used to irrigate irrigable areas in lower regions.

This is just an example. There are so many such factors, which need to be examined and addressed, if we are to be always self sufficient in Food articles.

In respect of manufactured products, the biggest danger today – comes from Cheap imports – from countries like China, which are killing domestic manufacturing Industry. Government must undertake some protectionist measures quickly to promote domestic manufactured products against cheap imports. At the same time, domestic products’ quality must be vastly improved.

In the name of WTO, No Government of any country can afford to allow the swamping of its existing domestic manufacturing Industry by foreign products in the scale it is happening presently.

Well. These measures are for medium/long term and are continuing efforts needed in every country. At the minor level, logistical support like, transportation, storage etc – must be ensured for all products.

But, in the immediate future, how do we propel Growth to a trajectory much above the Inflation Rates?

The easiest measure, is of course, reducing Repo and reverse-repo rates to the level where they were prior to March 2010. At least 2 to 2.5% can be slashed away from these Rates, so that capital assets creators feel comfortable enough – to create productive assets. After all, their Return on capital must be sufficiently more than the Cost of Capital – to encourage them to undertake their ventures. Else, why will anyone create capital assets, whose return is less than the cost of capital? 

Second, Government must become a Big Facilitator for Industry. Supply of Coal, electricity, fuel, gas etc must be made available in plenty – to encourage capital to follow into production.

Today, Reliance Power says, its 2400 MW Power plant is ready – but where is the gas to run it? We do need the electricity. Therefore, we must arrange for the gas -  if necessary by quick imports, or by diversion, from non-essential consumption.

Coal, gas, electricity, fuel must all be reasonably priced – so that final products will be competitive in national and International markets.

The Budget is a Great instrument – to adjust taxes in such a way that Indian exports become attractive, imports of raw materials remain attractive, but imports of final products (which are also available in India) are not that attractive. 

These Policy imperatives are known to all. But, how it translates into Budget – we need to wait and see.

Land acquisition Bill is yet to be introduced and passed. This is essential for Industry to find an acceptable method of acquiring land for their purposes, and for landowners to get satisfying compensation for parting with their land.

I am not impressed with the FDI in Retail. It is not a panacea for any of our problems.  A Wal-Mart is not going to solve any of our problems – but is likely to create unemployment for already employed people and displace Indian products from the retail market with foreign products. Yes. Some people will benefit. But, many will lose. The Gainers are saying, Yes. Losers still don’t know the axe falling on them.

There are so many avenues for FDI – in Defence production, in science and technology, in Pharma, in higher technical education, in different areas of R&D and so on. We can even have FDI in road Building – provided, we pass our Land acquisition Bill first.

In summary – 2 immediate measures to improve our estimated GDP can be identified :

(1)        Reduce Interest Rates (by RBI) by 2 to 2.5%

(2)        Budgetary measures &  L.A.Bill (By Government).

We do hear right voices from Shri Pranab Mukherjee, from Montek Singh Ahluwalia, from Shri Rangarajan and other luminaries.

RBI can reduce Interest Rates – right away. After all – Growth NEED NOT WAIT – anymore.

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INFLATION vs GROWTH = WHO SHOULD MANAGE WHAT? = THE DEBATE CONTINUES = RBI CAN BAT FOR GROWTH

INFLATION vs GROWTH

Who must manage Inflation?

Who must Manage Growth?

The Debate continues

There is a wide spread debate in India on Inflation and Growth.  In Europe, the discussion is more on bringing up sinking economies. Not merely the Industry, but Sovereign Governments are in deep problems there. In US, it is more a question of sustaining employment and  demand – since supply side is adequate. The Government in USA is robust and strong – though there are some differences between Congress and President right now. China stands on a different footing from all the rest. They have built up capacities in different Industry segments – and are ready to dump their products at ANY PRICE (almost) to capture foreign markets – Indian, US, Europe and so on. The countries where China dumps their products – have huge worries in sustaining their own Industries, employment etc.

Problems are therefore different in different corners of the Globe.

In India – we are seriously discussing Inflation and Growth. The most disturbing aspect of all our discussion is – we are only discussing – but doing almost NOTHING ELSE. If anything, we may be doing the opposite of what we are aiming for.

Inflation Management has become like RAIN MANAGEMENT. Do you manage RAINS? No. we take an umbrella, when rains come. We wait for rains. If they come, we do agriculture. We do water management. If rains are more, we suffer floods. If rains are less or Nil, we suffer draught. But, we do nothing for bringing in rains or stopping the rains, when we had enough of them. That is the RAIN MANAGEMENT we do. Which means, we don’t do RAIN MANAGEMENT. We do self management when rains come – a fight or flight response – not a management response.

It is more or less the same thing – with Inflation Management. Planning Commission, Finance Ministry and all other experts are telling us – that Food Inflation may come down in Dec, January etc, but may go up again from February or March and so on. But, nobody tells us – what they plan to do – to reduce the inflationary trends in food articles.

Manufactured Goods Index, the IIP, may have wild swings from Minus to Plus,  depending upon  CSO’s compiling ability, mostly, and to some extent, the statistics furnished to CSO by those in charge of that.

Everybody has started looking at IIP statistics with some amount of suspicion. Everybody- probably includes CSO as well. No one denies the difficulties in such compilation of statistics from across the whole of the country. But, when are we seriously planning to revamp our statistical methods? When is that going to happen – so that we can take the statistics more seriously – for planning and action purposes?

Not that we are not taking the IIP stats seriously.  For whatever they were worth, we went into deep gloom, when the IIP was Minus, and we have managed to come out of our gloom when the IIP stats turned PLUS. With all suspicions in our minds – we still use it at least for our mood swings.

We have Great software creators like TCS, Infosys etc – who are used increasingly by all other countries for improving their efficiencies – but, our governments are yet to take any such major decisions to improve their efficiencies. The one big decision taken – like Nandan Nilekani’s Adhaar – is now condemned and praised – alternatively, on each day.

But, IIP stats  are useful pointers, anyway. Capital Asset formation indicators are Negative for quite some time. This should be taken seriously. Future production depends on current capital asset formation.

If Capital Asset formation is not managed now – future production and Growth will suffer in a big way.

Why is capital asset formation not happening? There could be several reasons. At least one reason is – that the returns on capital are not commensurate with the Cost of capital – in India today. The Interest Rates in India are TOO HIGH, for encouraging capital formation.

Why are the Interest Rates High?

RBI wants to control the Inflation. Its Intention is laudable. But, it is like the old fable of the Donkey trying to bray and alert its master to the coming of the thief while the Dog is sour with the master and is unwilling to Bark.

The Dog that must tackle the Inflation thief in India at least – is the Government (State and Central) and not the RBI. And, the Governments are doing their best to stoke Inflation, by increasing the prices of all raw materials, oil, Gas etc – and infusing huge money into unproductive purposes. There is almost no Inflation management – planned by any Government.

Are we really looking at those products which are Inflation prone – and trying to manage their supply side? Are we moving against Hoarding? Are we creating capacities for  storage, transportation etc? Are we creating efficient marketing systems? Strangely, we are waiting for Walmart – to take care of these mundane aspects! We are talking - as if, Indians cannot do it and only Walmart can do it! Governments have to do INFLATION MANAGEMENT – especially in countries like India. There is no other way.

RBI can, in my humble opinion, encourage or discourage Growth – but cannot manage Inflation. Why so? There is a huge parallel economy running on corruption and Black money in India, which far exceeds any Bank funds. There is also the problem of counterfeit currency supply, possibly from our great neighbours, as periodically reported in media. There is also the Indian habit of keeping huge currency (and other liquid forms of wealth) outside Banks. Do we not know, for instance, that every land / real estate transaction has two aspects – a registration value, which is much, much lower than the market value at which the transaction takes place? Where does the difference between the two come from? It comes from this parallel economy.

General Inflation is a function of all these funds – but, in the market place, the real inflation happens mainly on account of two factors – demand for Product and supply of product. In real estate, movie Industry and a few others, black money plays a huge part. But, in market place, for onions, tomatoes, soaps, blankets etc – Black money is not in picture. What is in picture is demand for the product and supply of the same.

We must admit, that we must not stifle demand for these essential products. Already, as the prime minister himself has said, people are going hungry in large numbers – and the present demand for these products is actually LOW by decent human standards. We must encourage demand. Therefore, we must manage SUPPLY of these products much better. Supply of products starts from seed supply and fertilizer supply right up to marketing and placing of the products in the hands of ultimate consumers.

This, the Governments, both central and state, must be doing routinely. If they do these, they can manage Inflation, Health, productivity and other national wealth parameters. There will be no need for one third of people to go to Beds hungry.

These are not in the realm or jurisdiction of the RBI. But, classical Keynesian economics dictates that Inflation can be managed by constricting funds supply through Banks! This has many assumptions, many of which are not satisfied in India. This is the problem. RBI has raised Interest Rates, for controlling Inflation, 13 times in a span of one year. While RBI’s analysis is always admirable, the prescription for the malady is NOT. If Inflation went up, it was not DUE TO RBI. If it goes DOWN, it is also not DUE TO RBI. In Indian conditions, RBI cannot be blamed either for Inflation or for Inflation Management.

But, RBI can infuse a lot  into Growth. It can be a Great catalyst for Growth in Indian conditions.

Today, Return on Capital in most manufacturing Industries is not sufficient to go for Bank credit for expansion purposes because, credit from Indian Banks is available at very high Rate above the ROC. For working capital, there is no alternative. But for capital asset creation, many big companies are approaching Chinese banks, US Banks and even European Banks – where credit is available at much cheaper Rate.

Indian Banks cannot lend at those rates because our repo and reverse repo rates are themselves at a high level. Only Mid-sized and small sized Banks will have to approach Indian Banks for funds for capital creation. This again makes their products uncompetitive vis a vis the Chinese products etc. When we look at the Income statements of companies as they are trickling in, we find, the Interest expense has gone up hugely, and in some cases, it is responsible for turning the company’s profits into negligible or even negative numbers. The reduced profits result in reduced tax payments by them – and reduced revenues for the Government.

This in turn will result in deficit financing by Government – and stoke Inflation directly! Come March, we will know the extent of reduction in revenue numbers and the consequent Deficit financing. So, is RBI bringing down inflation or pushing up Inflation?

The Auto and Real estate sectors suffer a double whammy – the buyers have to pay huge Interest rates and so, some at least avoid buying homes / autos. Since the manufacturers and builders have to pay huge interest rates, they reduce manufacturing / building activity – and since they do take loans and manufacture / build, they do charge huge amounts for their final products, because of higher Cost of Capital. Auto companies and Real estate companies are both raising prices of their products right now. So, Inflation does not come down. But demand and production both do come down.

Government and Planning Commission are surprised that PSUs with huge cash balances are not investing in expansion. In their case also, only if the return on capital is more than the interest on their liquid funds parked with Banks, it makes sense for them to invest in expansion. If the rate of return on capital is less – where is the incentive for them to invest in expansion?

Compared to China, our rate of Industrial Growth is nothing to be pleased about. Not that funds are not available. Even the CRR of Banks, which is idle funds, is too high. A little reduction in that will release huge funds, which can expressly be channeled to fund ONLY GROWTH – and not consumption.

For funding expansion by private companies and PSUs, the primary condition that needs to be fulfilled is – we must ensure that rate of Return on capital is higher than Cost of Capital (or Interest rates charged by banks).While ROC is not in RBI’s hands, Cost of Capital is in its Hands. If RBI reduces Interest rates to the levels they were one year ago – RBI will be directly fuelling Growth. If CRR also is reduced with the express condition that the additional funds should go ONLY into production / Growth – and not for consumption, RBI will be aiding Growth in a much bigger way.

Industry and Government must seriously look at these aspects and impress on RBI to BAT FOR GROWTH – leaving Inflation to the Governments to manage.

It is not that Governments have no Role in Growth – their Role in Growth is primary. A huge amount of supportive legislation is overdue. Their taxation Policies can expressly fuel growth. But, in the immediate future, RBI can aid in the Growth process, by reducing Interest rates, by reducing CRR and by releasing additional funds only for Growth.

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