Bad money drives good money out

DALAL STREET is in a jubilant mood with the Sensex surging past the 10,000 mark. Yet, the volatility in the market continues unabated. The recent fluctuations mirror the whims and fancies of Foreign Institutional Investors (FIIs).

From the first week of November to the third week of December 2005 the Sensex gained more than 1,450 points. But within a week, by the end of December, the Sensex had crashed by about 300 points. Albeit their miniscule share in the total market capitalisation, the FIIs play an unduly critical role in the stock market. Consider:

The FIIs' gross purchase is 1.2 per cent and net investment about 0.13 per cent of the total market capitalisation that stands at around $513 billion and the correlation among the FIIs net investment and the Sensex exhibits as much as 0.63 over these years.

The recent surge is attributed mainly to FII hyper activity; there is nothing to indicate that they have subsided and the FIIs continue to be a force in the market.

To understand this hyper activity of the FIIs, the sources of the money have been put under the microscope and attempts made to understand why it is flowing so freely into India. But that is not an effective strategy to sanitise the hot money impact on the market. There is an efficient alternative of countering their hyperactivity with active participation of the domestic investors by increasing the depth of the market.

This lack of depth is a consequence of the perception that the stock market is a playground for speculators and small-term profit-seekers created by the two major scams that occurred within a decade, thereby scaring away potential long-term investors.

This made way for speculators to ride the changed pace of the Indian financial markets. Also, the face of Corporate India has changed significantly over the years. Also the consistent corporate results supported by a strong economy, signal the emergence of an energised stock market.

At this juncture two important questions arise. First, does the Sensex truly reflect the fundamentals? Second, is this bullish movement of stock market stable and sustainable?

A simple way to make the Sensex stable and sustainable is to replace the bad money — that moves in and out of the market — with the good money, that stays long in the market.

The real question, however, is, where is the good money? A glance at the household savings pattern will show that good money is aplenty, but barely shows up in the stock market.

Household saving pattern In India

The last decade saw a sizeable change in the savings pattern of households. Total domestic savings more than trebled but there has been a significant re-allocation between investments in shares and debentures, and small savings.

In 1993-94, the household investments in shares and debentures stood at 9.3 per cent of the total household saving, whereas the investment in small savings stood at 4.1 per cent. In 2003-04, this scene reversed as the investments in shares and debentures absorbed a mere 0.8 per cent compared to small savings' 8.5 per cent. This shows households' interest in long-term investments.

Had the 1993-94 pattern of investments in shares and debentures continued, the stock market would have had additional resources of around Rs 56,000 crore.

This would have been substantial enough to ensure the much required liquidity in the market to withstand the hyper activity of FIIs whose net investment in 2003-04 was Rs 44,000 crore. The bar graph depicts this pattern.

The Table gives detailed returns for an investment of Rs 1,000 with different alternatives.

The return on investment held at least for one year in the stock market is significantly higher than the five-year return from other investment options.

Yet, investors are parking their money elsewhere. This could mean that the perception of the stock market as not being safe has not changed.

To change this sceptical view, first, the Government has to resolve its cynicism about the stock market. The Government and the regulator have a strong case to act towards making the market a safer place, one that rides only on the fundamentals.

A better prescription

Recently the Government took a bold step towards resolving its cynicism about stock market investments. The New Pension Scheme, introduced in January 2004 under the Pension Fund Regulatory and Development Authority (PFRDA) Bill, moots investing in the equity market.

This will pump in resources into the stock market, which can, in turn, sterilise the effect of manic FII flows.

In most emerging economies, including China, pension funds are allowed to invest in the equity market. Increased tax benefits should bring in huge amounts to mutual funds.

A free hand to the banks in the equity market participation can bring further benefits. The Securities and Exchange Board of India (SEBI) has a bigger role in educating small investors to play safe in the market.

This is the right time for the Government, SEBI and the households to come together to take advantage of a strong economy and root the market in fundamentals.

(The authors are Associate Professor and Doctoral Student respectively at the Madras School of Economics, Chennai.)

Source:- Hindu Business Line

 

 

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- Prayagraj Patel

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Commanding, not demanding, respect

DECADES after their demise, Mahatma Gandhi, Jawaharlal Nehru, Sardar Patel, Kamaraj and Rajaji continue to inspire millions of Indians. And not without reason.

For, these leaders were the epitome of values, high ideals and absolute integrity. They worked, for the most part, in perfect harmony and were able to enter the minds of ordinary Indians — the collective consciousness of an entire nation.

Simply said, they were able to command, and not demand, respect. They were able to mobilise the entire energy, time and resources at their command to develop a vision of modern India that would keep pace with scientific and technological progress throughout the world.

It is worthwhile remembering that several giant public sector projects — that actually laid the foundation of India's industrial revolution — were launched and successfully implemented due to the foresightedness and vision of these great leaders and those whom they inspired.

Compare the present situation, and one wonders what went wrong. There are compromises that one keeps on making to earn a living. Emergence of respectable leaders — whose ways of living and doing things can be emulated — is becoming so rare that one wonders whether it will ever happen, leading to a leadership crisis of gigantic proportions.

Do we still have hope? Do we still have some leaders whose personalities match, at least to some extent, the qualities of great leaders?

The answer is yes. Mr R. Sreedharan, the chief architect of Konkan Railways and the Delhi Metro, stands out as an outstanding leader who motivated hundreds of employees to execute huge and complex projects. Dr Kurien, of Amul fame, brought about a White Revolution, touching and changing the lives of millions of farmers for the better. Mr V. Krishnamurthy is respected for his contribution to Indian management, having turned around BHEL, SAIL and Maruti Udyog.

Mr Narayanamurthy of Infosys Technologies and Mr Azim Premji of Wipro stand out as leaders of impeachable integrity and of great vision.

Inasmuch as the boom in the IT and IT-enabled service sectors literally drives the economy, these leaders are respected and are looked upon as role models for thousands of youngsters.

The Tatas are considered a model to emulate for corporate governance. HR experts have documented the great emphasis that the Tata group gives to human resources development.

Their involvement in community service is often cited as an outstanding model of social responsibility. Simply doing the right thing is one way of building respect.

Having a "service-before-self" philosophy in real life, does help in sending the right message to subordinates.

A good leader also never lets down his subordinates, even if they commit big mistakes at work.

In fact, the best leaders take decisive action only when integrity is at stake. Leadership is a skill that can be developed.

However, for doing this, one has to necessarily stress on values. The trick is to create situations where commanding respect becomes possible.

This is a task for both managers and managements, but more for the latter.

Source: Business Line

By: A. B. Sivakumar

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VENI, VEDI, VICI
- Prayagraj Patel

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The need to look beyond GDP

The need to look beyond GDP

 

 

 

 

In Davos, the Finance Minister, Mr P. Chidambaram set out 8 per cent GDP growth rate as his goal. Then, one of the desired outcomes for the Finance Ministry could be 8 per cent GDP growth rate. The Minister even had a recipe ready: Mobilising resources, accelerating savings, and making India a manufacturing hub of the world. That recipe may be treated as first order solution. How to mobilise resources better, how to stimulate savings further and how to manufacture what the world wants, would constitute solutions of the second order.

Growth is quantitative, not qualitative. Once concern expands from quantity to quality, technology becomes crucial — only when we master technology will we have an assured platform for world-class manufacture, can we mobilise resources better and also put our savings to best use. For that reason, we may consider emulating, even surpassing, Western nations in technology as the solution of the third order.

Thomas Kuhn has explained in The Structure of Scientific Revolutions how the West has dominated the world in science and technology for the past four centuries. His analysis may be difficult to follow but his answers to the conundrum are simple: (a) Western scholars continuously questioned the received wisdom. (b) They experimented with new ideas, even hopeless looking ones. (c) When a new idea functioned better, they discarded the old; they changed tack. (d) Then, they started all over again, questioning the new wisdom itself.

This continuous churning of ideas did not mean any disrespect for the progenitors of the old. Western scientists replaced Newton's Laws with the Einstein equation without any reduction in the awe and respect they had for Newton.

We may grow at 8 per cent but we will not become economic giants until we start questioning received wisdom, raise questions, not as carping criticism of others, but as a means for self-improvement. (Remember, Reliance has the world's largest refinery but is dependent on others for technology.)

Next, we should have the courage to experiment with new ideas and to stop borrowing ideas from others. Further, to top it all, we should learn to accept, even encourage change. Are we ready? For a start, why should we not question the prevailing wisdom that places GDP growth rate as the ultimate in economic management? GDP growth misleads; it gives a false sense of success. It does not distinguish between the income generated by desirable activities and the income of those that are not: For instance, it treats income from the sale of cigarettes on par with the salary earned by a teacher. In other words, economic output includes both "goods" and "bads". The GDP measure cannot separate them.

Further, to counter the "bads", we need "anti-bads" — more policemen, more cancer hospitals and the like. They are not a symptom of good health; yet they get included in the GDP. The measure we need is "goods" minus "bads" minus "anti-bads", not "goods" plus "bads" plus "anti-bads" which is what GDP is.

Rapid growth rate has yet another drawback: Unless difficult-to-implement precautions are taken, it increases rich-poor disparity. Increasing disparity is inevitable with rapid growth: Fast growth requires highly skilled but scarce labour. Hence, wages of skilled professionals rise rapidly. Simultaneously, with rapid growth rate the market for unskilled labour shrinks, and so do their wages. Thus, the rich become richer and the poor become poorer.

Further, GDP growth rate does not capture fully the reduction in the purchasing power of money. For instance, land prices in Delhi have shot up a thousand times in the past 40 years, some 20 times faster than the price of gold. At the same time, water has become more scarce; its quality is distinctly worse.

Electricity supply is fitful and much less reliable. Security has become far worse: Forty years ago, few houses had bars in their windows. Any thief could have entered simply by pushing the window open but few did. Now, not only windows, the neighbourhood itself has barred gates with watchmen prowling around — without much effect. Pollution has increased alarmingly. Yet, people accept without question the euphemism that "property values have gone up tremendously"! Professor Jeffry Sachs has an alternative to this preoccupation with GDP growth rate. He emphasises investment in social infrastructure over GDP growth rate. Growth rate in investment in social infrastructure corrects several of the flaws of GDP growth rate: It measures only the good; it enriches the poor. However, it will not fully capture reduction (or wastage) in purchasing power. For instance, a flyover in a city will be equated as hundred or even a thousand times more valuable than a rural road. It will not capture also rural-urban disparity.

The table indicates the vast gap between the targets of Bharat Nirman for rural upliftment with what the city of Chandigarh has. Hence, mere counting of social infrastructure investment is not enough.

We need something better than the growth rate in investment in social infrastructure as our indicator of a good outcome. That indicator should have also the advantages that GDP growth rate has — simplicity and measurability. The question is how to develop a simple, measurable indicator for the admittedly complex qualities of social and economic welfare.

There is a story of a good man who prayed to God so well that He was persuaded to grant the man a boon. On hearing about this offer, the good man got all greedy and started asking for all sorts of things. God replied that he was entitled to one and only one boon. The man thought over the problem and asked of God: The boon I want is sharing pizza with my grandson's grandson on the terrace of my mansion looking at my ten-acre flower garden.

One single boon and yet how much it encompassed! Progeny for four generations, longevity to see the fourth generation, health enough to climb a terrace, a hearty appetite and, wealth.That is what a growth indicator should do — encompass everything possible and also be simple to measure. Then, as a desired Outcome for the Finance Ministry why not choose growth rate of villagers with at least high school education? Here is a measure, simple, yet it encompasses a lot. Directly, it measures the growth of human capital in villages. Indirectly, it captures increase in employment, particularly educated employment in rural areas.

Thereby, it includes economic growth as well as reduction in rural-urban disparity.

The fact that educated people live in villages and not commute to work from cities (the way they do in satellite towns), indicates that quality of social infrastructure is high in villages, has become better than in satellite towns and has become competitive with that of cities.

Undoubtedly, growth rate of educated residents in villages will not have the weight of orthodoxy that GDP growth rate has; it cannot be compared with what happens in other countries, at least not yet. It is certainly not accepted wisdom.

The point here is not the replacement of GDP growth rate by the growth rate of educated rural population but to question age-old shibboleths, and look for alternatives. That kind of questioning, and the tolerance of such questioning, are the basic tools of progress, the tools that the West mastered four centuries ago.

Will the rules of the Finance Ministry encourage such questioning of hoary ideas? Will the new budget promote experimentation of such ideas? Will it see the bigger picture and not get stuck with the small one?

To emphasise the point, let me quote the UN Secretary General, Mr Kofi Annan, about an incident in his school days:

One day the professor put a large sheet of white paper on the wall. The paper had a little black dot on the right hand corner. When the professor asked, "Boys, what do you see?" we all shouted: "A black dot!"

The professor stepped back and said, "So, not a single one of you saw the white sheet of paper. You only saw the black dot. That is the awful thing about human nature. People never see the goodness of things and the broader picture.

(To be continued)

 

Source: Business Line

By: P. V. Indiresan

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