Intersections

Three questions to RBI and the govt on today’s rate cut

Following the unexpected 50 basis point cut in the policy repo rate by Reserve Bank of India (RBI) today, India’s largest bank, State Bank of India (SBI) has announced a 40 basis point cut in its base rate to 9.3%. ICICI Bank CEO Chanda Kochhar said that a “large part of today’s cut will get transmitted”, but is quick to add that “it will happen with a lag”. Other banks are expected to follow this demonstration effect.

While the cut is ‘unexpected’, and the industry would be happy (the markets reversed the falling trend today, with the BSE Sensex ending 162 points higher) what seems to be missing in the banks’ reaction to the cut is good finance — and good politics. In this context, three sets of questions for the banking sector.

One, over the past one year, RBI has reduced policy rate by 125 basis points. So, why have commercial banks been dragging their feet to pass this benefit to households? Take any bank and map its base rate. You will find a huge lag. Could it be due to lack of competition? If so, what’s stopping RBI from allowing more banks in the system? Where is the benefit of lower interest rate going? Why is it not coming to consumers?

Two, as the banking regulator, what has RBI done to ensure the transmission of a fall in rates? In the go-go years, when interest rates were rising, the rate hikes for home loans happened within hours, if not days, of policy announcements. Could RBI educate us as to why the return trajectory is so slow, where lies the friction? On this front, it seems the pressure to cut rates is coming more from the government than from RBI.

And three, why has the principle of a transparent base rate as the default benchmark rate for home loans not been extended to Housing Finance Companies (HFC)? Why are commercial banks allowed to float HFC arms and sell loans from there at all? This little fine print is all it takes for the idea of ‘universal banking’ to continue to charge high rates on low costs, pocketing the profit. Both, the RBI and the government, have a role to play here — more the former — to ensure a consumer-first approach to banking.

Profit is good, profiteering on the back of consumers, who are bearing the brunt of inflation on one side and these manipulations of high interest rates on the other, is not — the sooner RBI ends this anti-consumer anomaly in the banking sector, the better. Good finance leads to good economics. But in this case, with a rising middle class, it could also mean good politics.

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Clash to clasp: an alternative discourse on civilizations

Whether civilisations today are ‘clashing’ or ‘clasping’ is more than a question of semantics. If the news environment and wars are seen, the clash is clearly visible. The attempt to force fundamentalist religious ideologies down the throats of nations, using violence as a tool, is gathering momentum. From Iraq to Syria and Libya to Nigeria, the violent face of Islam is wreaking havoc. Ironically, the first victims are Muslims themselves.

In that reality, you can’t argue with Samuel P. Huntington, whose brilliant 1996 book, The Clash of Civilizations and the Remaking of World Order, laid the foundations of examining religion as a conflict zone. In his 1993 essay for Foreign Affairs, he wrote:

Civilization identity will be increasingly important in the future, and the world will be shaped in large measure by the interactions among seven or eight major civilizations. These include Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, Latin American and possibly African civilization. The most important conflicts of the future will occur along the cultural fault lines separating these civilizations from one another.

It is easy to see Huntington’s work as the last word, when weighed on scales of current affairs that have been dominated by a religion that has been hijacked by its violent and fundamentalist leanings. A narrow view of Islam has captured our minds today and it is very easy to extrapolate and transplant that view onto all Muslims, even those suffering and the first victims of this onslaught — the Syrian refugee crisis is not going to be the last of this phenomenon. Clash, we believe, is the new civilizational intercourse, violence its market, death its currency.

Independent scholar Richard Alan Hartz, who has an enviable body of work behind him as part of the team that is preserving and putting together the works of Sri Aurobindo and his spiritual collaborator Mirra Alfasa (better known as The Mother), disagrees. In his new book, The Clasp of Civilizations: Globalization and Religion in a Multicultural World, he argues that the advantages of cultural diversity “may outweigh the challenges it poses” and harmonises — rather than contradicts — the outlook of the West with that of the East, using intuition as his dominating theme:

The antithesis between the rational, scientific West and the intuitive, mystical East is as much an oversimplification as the supposed opposition between Platonism and Aristotelianism in Western culture itself. It is true that the empirical, logical side of the Western pursuit of knowledge has at times overshadowed the more idealistic though no less rational impulse towards transcendence. Sometimes reduced to an undercurrent, it is this Platonic aspect of the Western mind that has the most affinity with corresponding elements in Eastern civilizations.

If material success, scientific breakthroughs and an overall sense of prosperity is a metric of civilizational dominance and aspiration, there is no doubt that the chasm between the ‘West and the rest’ is huge, even if much of that has been written with the blood of religious sanctification, ruthless colonial exploitation of economies and an appalling sense of human contempt through slavery. At such a point, it is very easy for ‘the rest’ to fall back on the only source of strength they have — religion’s most primitive expression — and use it as a tool of identity. In such a state, ‘clash’ can easily capture our minds. Hartz doesn’t try to reverse or change this. Instead, he argues for a higher synthesis:

For a relatively brief period in recent history, the West forged ahead in the quest for knowledge, as in other areas, while older civilizations retired from the limelight. Those civilizations are now returning to center stage and reinventing themselves under modern conditions. The synergy of intensively interacting cultures cannot fail to stimulate humanity’s continuing efforts to understand itself and the universe. Intuition has played an important, if not always acknowledged, role in the advancement of knowledge even in the West at the height of the age of scientific rationalism. All the more are our intuitive faculties likely to flower as Eastern civilizations, which have traditionally cultivated them, assimilate what they have learned from the West, rediscover their own genius and turn their reviving creative energies toward the future.

But can the unifying potential of religion prevail over its divisive tendencies? Hartz offers hope:

Its [religion’s] power to sanctify irrationality points in one direction, the spiritual urge towards self-discovery and transcendence in the other. Today both are accentuated. It is yet to be seen whether the aspirations towards peace, harmony and enlightenment found in all religions will outweigh their use as tools of identity politics. But their appeal to what is best in humanity may yet trump the sectarianism, bigotry and fanaticism decried by Vivekananda on that now half-forgotten September 11, in Chicago. If so, religions as vital manifestations of human diversity could impart their ardor to a vibrant unity in difference — not a clash, but a clasp of civilizations.

Looking at it from the point of view of trade and flow of products, services and ideas across nations, I find that the ‘clasp’ of civilizations is the dominating theme today, not ‘clash’. This is not merely because of our iPhones or cars, each of which carries multiple citizenship, but equally in the transport of ideas like democracy, science and governance institutions from the West and Yoga, spirituality and toleration from the East. Even the weapons the Islamic State uses to perpetuate violence have Western origins — something the world leaders need to put an end to. On the other side, the refugees escaping from them end up in Europe, not in other Islamic countries across the borders.

Perhaps, the ongoing ‘clash’ of civilizations will lead to a ‘clasp’, as a new equilibrium is established for humanity, as the West understands that the rational mind is not the pinnacle of man’s evolution and the East realises that finally religion and morality have to give way to a higher state of being. Sri Aurobindo articulated this in his 1918 book, The Ideal of Human Unity:

A spiritual religion of humanity is the hope of the future. By this is not meant what is ordinarily called a universal religion, a system, a thing of creed and intellectual belief and dogma and outward rite. Mankind has tried unity by that means; it has failed and deserved to fail, because there can be no universal religious system, one in mental creed and vital form. The inner spirit is indeed one, but more than any other the spiritual life insists on freedom and variation in its self-expression and means of development. A religion of humanity means the growing realisation that there is a secret Spirit, a divine Reality, in which we are all one, that humanity is its highest present vehicle on earth, that the human race and the human being are the means by which it will progressively reveal itself here. It implies a growing attempt to live out this knowledge and bring about a kingdom of this divine Spirit upon earth. By its growth within us oneness with our fellow-men will become the leading principle of all our life, not merely a principle of cooperation but a deeper brotherhood, a real and an inner sense of unity and equality and a common life.

The Clasp of Civilizations  is an important book. It offers an alternative discourse from the one that’s plaguing us through actions of the few, the denial of the intelligentsia, the us-versus-them traps that the politically motivated are laying, and into which the rest of us keep falling.

9/11: let the light of Swami Vivekananda vanquish the darkness of Osama bin Laden

September 11 is a day when two symbols, both religious, meet one another from two opposing ends, both of which have changed the course of history forever. Unfortunately, the date is better known today for the terror strikes of 2001, when four aircraft physically transported terrorism to the US at an unprecedented scale for a nation that for decades had watched terror in India, Sri Lanka and West Asia from the sidelines. This date changed the texture of geopolitics and brought ‘home’ the Clash of Civilizations — eloquently articulated by political scientist Samuel P. Huntington, first in a 1993 article for Foreign Affairs and then in a 1996 book.

It is my hypothesis that the fundamental source of conflict in this new world will not be primarily ideological or primarily economic,” Huntington wrote. “The great divisions among humankind and the dominating source of conflict will be cultural. Nation states will remain the most powerful actors in world affairs, but the principal conflicts of global politics will occur between nations and groups of different civilizations. The clash of civilizations will dominate global politics. The fault lines between civilizations will be the battle lines of the future.

The book placed the expression ‘the West and the rest’ in popular usage.

The other, more important and more enduring event that took place on September 11 was a speech delivered by a monk at the Art Institute of Chicago in 1893. This speech has changed the way the world intersects with religion, faith and civilization, and whose impact will last far longer and reach far deeper than the brutal attack that took place 1,180 km away and 108 years later in the same country. If the 2001 destruction was triggered by proselytizing fundamentalists whose stamp has been hammered across the world since then, the 1893 speech to the West was an exposure to equally-revolutionary ideas from the East.

“Sisters and Brothers of America,” began Swami Vivekananda at the Parliament of the World’s Religions on September 11, 1893, only to be interrupted with a standing ovation that lasted three minutes.

It fills my heart with joy unspeakable to rise in response to the warm and cordial welcome which you have given us. I thank you in the name of the most ancient order of monks in the world; I thank you in the name of the mother of religions; and I thank you in the name of millions and millions of Hindu people of all classes and sects.

My thanks, also, to some of the speakers on this platform who, referring to the delegates from the Orient, have told you that these men from far-off nations may well claim the honour of bearing to different lands the idea of toleration.

I am proud to belong to a religion which has taught the world both tolerance and universal acceptance. We believe not only in universal toleration, but we accept all religions as true. I am proud to belong to a nation which has sheltered the persecuted and the refugees of all religions and all nations of the earth. I am proud to tell you that we have gathered in our bosom the purest remnant of the Israelites, who came to Southern India and took refuge with us in the very year in which their holy temple was shattered to pieces by Roman tyranny. I am proud to belong to the religion which has sheltered and is still fostering remnant Zoroastrian nation.

If Huntington’s idea of globalization meant a ‘clash’, Richard Hartz, an independent scholar living in Pondicherry, has raised it to a ‘clasp’. In his new book, The Clasp of Civilizations: Globalization and Religion in a Multicultural World, he argues that the capacity to embrace difference is needed as never before. “Globalization has led to a crisis in the world-system and humanity has to choose its destiny,” he writes. “There could be a disastrous clash of civilizations; but Huntington himself, the prophet of this worst-case scenario, gives sensible advice on how to avoid it. If civilizations could ‘clasp’ rather than clash, their diversity might become our most valuable resource.”

Hartz is an ashramite, who has been living in the Sri Aurobindo Ashram since 1980 and is part of the team that works to preserve and put together the works of Sri Aurobindo and his spiritual collaborator Mirra Alfasa, better known as the Mother. While his readings and references are vast, there is no doubt that his leanings veer towards the works of Sri Aurobindo, whose ideas on the remaking of world order he argues “are surprisingly similar to Huntington’s in some ways, but differ markedly in others.”

“The question remains whether the unifying potential of religion can prevail over its divisive tendencies,” Hartz writes.

Its power to sanctify irrationality points in one direction, the spiritual urge towards self-discovery and transcendence in the other. Today both are accentuated. It is yet to be seen whether the aspirations towards peace, harmony and enlightenment found in all religions will outweigh their use as tools of identity politics. But their appeal to what is best in humanity may yet trump the sectarianism, bigotry and fanaticism decried by Vivekananda on that now half-forgotten September 11, in Chicago. If so, religions as vital manifestations of human diversity could impart their ardor to a vibrant unity in difference — not a clash, but a clasp of civilizations.

Today, when we remember 9/11 and shun from the darkness of recent history, let us also expand into the light that Vivekananda spread on the same day.

Want to end mis-selling? Read this evolutionary report

Released yesterday, the Sumit Bose Committee report to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products puts, for the first time, the consumer at the centre of all regulations and recommendations. Drawing philosophical inspiration from the Indian Financial Code drafted by the Srikrishna Financial Sector Legislative Reforms Commission (FSLRC), it harmonises the clunky, wasteful, piecemeal and sometimes contradictory regulations across regulators and gives them a cohesive, strategic and clear direction.
If you want one word to capture this report it is: Evolutionary.
The 103-page tome takes the regulatory structure in hand that industry has been abusing to mis-sell financial products to households, often in the garb of two apparently noble ideas — deploying household savings in financial assets and serving the government’s funding needs — and irons out the deficiencies. Taking a historical view of things, with great storytelling thrown in to make it readable to consumers rather than merely gather dust, the report itself is as structured as its own recommendations — a perspective on the current state of affairs, product-wise breakdown and the recommendations spread out over product structure, costs and commissions, and disclosures.
“The Committee believes that consumer interests will be served by more transparent disclosures that enable consumers to understand products, compare them, and consequently choose those that serve their interests,” the report states.
And as a result, the broad principles follow. From ensuring that all financial products must have product structures that a consumer can understand to insisting that all products be easily comparable, the mind of the committee is clearly aligned with consumers. This is probably the first time that the consumer interest has been so directly served in any committee examining financial products — most committees so far have been interested in insuring growth of the industry, abstract terms like ‘penetration’, and of course, creating regulatory turfs for post-retirement sinecures for the bureaucrats writing the reports. “It should be remembered that this Committee is thinking first of the consumer and her welfare,” the report says.
The industry, particularly insurance, is going to be very unhappy. That is natural for a group of companies that have perfected mis-selling into an art form, through an institutionalised non-disclosures of costs, returns and benefits. Between the industry and the household lies an entity that loves this product — the distributors, who, with commissions as high as 35% have incentives to sell wrong products, the results of which will come up only 20 years later. This is done through bad product structure as well as below-board selling practices. Within insurance too, the big culprits are traditional plans, on which “the Committee spent most of its time trying to find a way to suggest disclosure and cost changes.”
The 25 recommendations for traditional plans expose the industry for what it is. “Lapsation profits, if any, should not accrue or be booked by the insurance companies,” it says. Which means, when consumers let go of a policy, the insurance companies make a profit, so there is an incentive in the system to induce consumers into letting policies lapse. Or: “There should be a clear split of the premium, at least for the investor, into mortality and investment.” This tells us that the industry has been mixing mortality and investment, leaving consumers confused.
Further, “the costs of surrender should be reasonable” and should belong to exiting investors. And all charges should “collapse into one single charge called the expense charge”. The report is unrelenting: “Returns should be disclosed keeping basic tenants of finance in mind. This means that all returns should be disclosed as a percentage of the investment made by the customer and not as a function of a third number, such as a sum assured or the maturity benefit.” One wonders what successive regulators have been doing about an industry running amuck and abusing households.
Reforms happened in ULIPs (unit linked insurance plans) when the then capital markets regulator CB Bhave said the structure of ULIPs brought it under the ambit of Securities and Exchange Board of India. In a hastily-devised compromise, a June 2010 Ordinance handed ULIPs to Insurance Regulatory and Development Authority of India (IRDAI), which thankfully turned the product transparent and consumer-friendly. But it was too late: an April 2013 paper, ‘Estimating losses to customers on account of mis-selling life insurance policies in India’, captured the losses to consumers of Rs 1.5 trillion.
Beyond households, but firmly in their interests, the biggest idea this report unleashes is clarity and efficiency of regulatory oversight. “Going forward, in order to bring uniformity and proper oversight, the function should decide the regulatory framework,” it states. “This means that, IRDAI and PFRDA should harmonise their investment regulatory function with that of the lead investment regulator SEBI. IRDAI should take the lead on insurance and annuity function. With a base uniformity founded on function, IRDAI and PFRDA should have additional regulations related to the function only to the extent they are necessary for the specific needs of products regulated by them. For instance, in case of IRDAI and PFRDA, these could be on account of products being closed-end and of longer tenure.”
This is a disruptive idea whose time has come. With financial markets becoming intensely complex, regulators need to work with deep knowledge and sharp focus. Otherwise, industry is very happy shopping for the weakest regulator, in this case IRDAI. By saying that functions should decide the regulator, the report understands that expertise is required to manage large groups of financial services providers, informally known as universal banks. This recommendation in particular and the report in general is in tune with the Indian Financial Code as drafted by Justice Srikrishna’s FSLRC report — the future of Indian financial sector (you can read the report here).
It is time regulators realised who they are working for — households, not mis-selling entities. And this report takes the next evolutionary step in that direction. The government must accept these recommendations. One caution: being selective about recommendations will not help the cause of consumers; this is an integrated approach to end mis-selling in the financial sector by tilting the regulatory architecture in favour of 1.25 billion consumers rather than a handful of fat cats and their emissaries. The comments on this report will be largely from angry agents, whose vested interests will end. It is up to the government to not get its vision clouded by them, the industry or regulatory turfs.

Readings on Monday’s market crash

The day after a major market event throws up interesting reports and analyses. Here’s a list following yesterday’s Manic Monday — an overused expression, I know, but that’s what we have.

The Times of India has an interesting interview with Jayant Sinha, Minister of State for Finance. “Indians should not worry about this fall at all,” he says. “The structural reforms that we have undertaken are very substantial. Whether it is banking sector, whether it is the coal auction, whether it is NPAs or bankruptcy code, the manner in which we have tried to boost the entrepreneurial economy in India — these are all major structural reforms that are underway right now. But, structural reforms by definition do not deliver results overnight, they take time.”

It also has an interesting story that tracks a correlation: 7 of 10 biggest Sensex falls happened on a Monday.

Among advisories, we have the usual ‘he said, she added’ reports that echo one another.

But Lisa Pallavi Barboa’s report in Mint stands out and is closest to what I believe: stay invested. “While the opportunity is there, no need to jump in and buy for the sake of it. Invest in equity only if you have spare cash; stagger the buying. Don’t upset long-term asset allocation. Experts agree large caps are better valued than mid and small caps at present. For long-term investors, 3-5-year outlook remains positive. So, continue existing investments with that perspective. Many overseas brokerages remain overweight on India and identify it as the most promising emerging market. So, remain invested; don’t rush into buying and surely don’t sell in a panic.”

Almost all newspapers have edits on the fall.

The Financial Express captures the India opportunities and pushes for reforms to take advantage.

The Times of India sees the fall as an opportunity to improve India’s standing as an investment destination.

DNA hangs the demand of double-digit growth on the fall.

The after-effects of Monday’s carnage continue. As of 12:51 IST, China (down 7.6%) and Japan (down 3.9%) are reeling, Hong Kong (down 0.3%) and India (down 0.1%) are recovering and Europe and the Americas are yet to open. The day promises excitement on both sides of the globe.

How to love market crashes: 7 lessons for investors

With the 1,625-point, 5.9-% fall in the BSE Sensex today, it is time to revisit the timeless lessons of investing. True, the fall is a big event. But for investors, it is nothing beyond a blip. This is not the first time that markets have crashed and it won’t be the last. The only constant in an otherwise volatile world of markets is how we react to such exigencies. The following seven lessons, gleaned out from experts the world over, for investors across geographies, stand firm today as they did yesterday and as they will tomorrow.

Lesson 1: Invest, don’t speculate.

Speculators perform an invaluable function — they provide liquidity. Their second-to-second trading tactics on a stock exchange converts those transactions into a price that more or less pretends to carry all the information about the underlying company in it. It is only because of such trades that investors can buy in or cash out.

Unlike speculators, investors have regular day jobs — they are executives, government servants, army personnel, entrepreneurs, builders, doctors, lawyers, teachers. They are jacks, if not kings, of their trades. For them to ‘play the market’ is like a stock broker wanting to deliver a knee replacement. Surely, he is not equipped to do it.

So, use the liquidity that speculators bring to do what you want — grow your wealth by buying when you want and selling when your financial objectives are met.

Lesson 2: Invest for the long-term.

Headlines driving the news pages are focussed on the intra-day fall of 1,741 points, that it is the third-highest fall, that more than 200 stocks have hit their 52-week lows and so on. Some will take a few extra steps and place the India-specific information in a wider context — that the fall in the Sensex puts India at the No 3 slot among major stock exchanges. That’s why we have journalists and reporters in the first place.

But when you invest, you need to look beyond the day’s headline. True, the Sensex, like most indices across the world, has taken a beating today. It has wiped out all gains over the past month, three months, six months, even a year. But look beyond the immediate. Over five years, its compounded annual growth rate stands at 7%; over 10 years, the number is 13%. Get into managed funds and many of the performances are unbelievably higher. In the long life of ups and downs, a small blip is nothing.

You didn’t get an equity exposure because you wanted your money to double overnight. Likewise, you’re not going to sell if the value of your portfolio falls by 5%. You invested in equities because you wanted your money to grow and finance a life’s goal, such as your daughter’s education four years on, your retirement two decades away and so on. None of those have changed. And since you’re not going to sell all your holdings because the market has jumped 5%, why should you bother if it’s the other way around?

Focus on your financial goals and allow your wealth to grow.

Lesson 3: Invest regularly.

As an average household, there is an income that comes in every month. You spend part of it and invest the balance. Now, there are two things you can do while investing. First, you could put aside the investing money first and spend the balance. And second, you need an instrument to put your investments regularly. These could be the traditional low-risk products like government post office schemes and fixed deposits. Or these could be medium-risk instruments like equities.

Speak to your financial planner and see if you have an appetite for equities and a little risk in your portfolio. If you do, choose a portfolio of mutual funds and get into systematic investment plans — Rs 2,000 per month in this fund, Rs 3,000 per month in that.

Because you don’t know (nobody does) when the markets will rise or fall, keep investing regularly. Equities work because the products of underlying companies are largely inflation-proof. The resultant growth that comes to companies gets factored into their stock prices, which a good fund manager harvests for households.

Lesson 4: Use experts.

When you get malaria, you go to a doctor. When there’s a leak in the kitchen, you call a plumber. When you want to learn Sanskrit, you go to a Sanskrit teacher. So, why should you not go to a fund manager when you want your money managed?

For every story you hear in the park about how your neighbour made a killing on a particular stock, there are umpteen stories of loss that you don’t hear of. Irrespective of how much you love real estate and gold, equities give the best long-term returns, period. But you won’t get those returns by investing in individual stocks and tracking 500 companies — you could if that’s all you did. You will get those returns by investing in mutual funds that have armies of fund managers and analysts who do the work for you and get your money to work.

What you needs is an ‘equity exposure’, not equities. Meaning, you need to have a chunk of your portfolio invested in instruments that invest in equities. Track your funds on Morningstar, Value Research or Mint 50. Better still, work with a financial planner.

Lesson 5: Ignore the noise.

A statistic like the Sensex creates a lot of noise. Earlier, the noise would be of the participants — brokers, fund managers, companies and so on — who would be disheartened by the fall and would seek incentives to ensure the market goes only up. While everyone wants that to happen, and over the long term it does, you must remember that the market is filled with people seeking instant nirvana and the resultant noise.

Over the past few years, a new animal has started screaming — the political activist, with very low knowledge of finance, for whom any fall in the market is a reason to attack the government. It was there when UPA was running the country, it’s there when NDA is at the helm of affairs.

As a result, there are two kinds of noise you will hear. The first will be around economics: ‘The India story is over’; ‘The market has sent its signal’; ‘The fall is a precursor to bigger problems ahead’ and so on. The second is around politics: ‘Modi has failed’; ‘This government can’t manage the economy’ and so on.

Ignore both — the Indian economy is on an irreversible upswing and whatever your politics, be sure to know that politicians are on your side: they want growth, they want a perception of growth.

Lesson 6: Globalisation is here to stay.

In other words, you can’t be selective about economic events across the globe. Earlier, the markets hinged on the US — when the US did an ‘aaah’, global markets reacted with a ‘choo’. The cold relationships exist today in an accentuated form. With the balance of economic power shifting towards the East, there will be a democratisation of shocks and sensitivities. So, if China devalues its currency, the world will be affected and through it its companies, all of which will scratch the stockmarkets.

On India’s part, it is increasingly getting integrated with globalisation — barring convertibility on the capital account, India is as much a global player as say Japan or Germany: foreign capital comes and goes through foreign institutional investors, foreign direct investment is seeking avenues to build and sell to Indians, Indian goods are being exported to the world, the price of oil is easing the pressure on India’s fiscal deficit and so on.

As consumers, we drive cars from Japan, Germany and the US; we use phones made in Finland, China and Taiwan; we send our children to universities in US, UK, Australia and Singapore; the laundry list of India’s globalisation is long. To presume, it will not impact our investments and the Sensex is being naive.

Nothing illustrates this better than today’s crash. While the Sensex has fallen by 5.1%, China is down 8.5%, Taiwan 4.8%, Japan 4.6%, UK 4.4% and so on. At the time of uploading this post, the US markets and the Americas haven’t opened but it is unlikely that they will rise today.

Lesson 7: Embrace crises.

From the Asian crisis of the late 1990s to the economic crisis of 2008, from the US to Greece, from terror to oil, our placid lakes of serenity are now filled with black swans — events that we didn’t think would happen and for which we are not prepared.

But all through, companies keep producing and making profits, their stocks keep rising. Those that don’t make the grade get ejected from a brutal system and a new company joins an index. Look at the Sensex itself — its composition keeps changing every few months such that the best companies remain.

Through all crises, speculators through their trades and price discovery keep the market afloat. Millions of such transactions every day ensure that patient investors keep creating wealth. So, learn to take crises in stride, even embrace them. Every time a crisis breaks out and the markets fall, it is an opportunity for your systematic investment plan to get something at a discount.

For investors, market crashes are opportunities, we need to learn to love them.

Who’s driving India’s capital spending? Government and Reliance Industries

Reading S&P report, ‘India’s Private Sector Companies Adopt Wait-And-See Approach to Capital Spending’ raises concerns for Make In India, a few shreds of hope notwithstanding.

* We expect capital spending in India will continue to fall in fiscal 2016 despite its economy being one of the few bright spots in Asia-Pacific

* Corporates in capital-intensive sectors are mostly focusing on improving profitability and lowering leverage than looking at new projects

* We expect government-owned companies and Reliance Industries to lead capital spending before a broader-based pickup occurs

* Capital spending will start to recover in fiscal 2017 after companies benefit from improvements in the economy and government reforms

* The pace of recovery in performance and capital spending will determine future credit trends in Indian corporates

While investments are a necessary, but not sufficient, condition for economic growth, the report states that India’s private companies are looking at the idea the other way round:

We believe the private sector’s capital spending will eventually make a comeback in fiscal 2017 after overall improvements in the operating environment, such as higher economic growth, lower cost of borrowing, and ease of implementing new projects.

Worse follows:

We believe capital spending by the top Indian corporates will further decline by 10%-15% in fiscal 2016 from its peak in fiscal 2014. This is because the companies have yet to materially benefit from the government reforms or from an improvement in the Indian economy. Interest rates were high until last year and the global economic environment is also not rosy.

So, what happens to growth and employment drivers in the interim? It leans on the government, through its public sector entities:

…the country’s public sector has continued with its heightened pace of capital expenditure. Many of these government-owned companies have a well-protected competitive position, either due to regulatory or legacy reasons, and good financial position with better access to banks and financial markets to fund their investments. This is evident from the spending by companies such as ONGC, NTPC Ltd., and Power Grid Corp. of India Ltd., which together account for two-thirds of public sector spending among top 100 corporates. In certain cases, the heightened pace of capital spending by the public sector also reflects the lengthy decision-making process and gradual capital spending, which does not change quickly to suit market conditions.

Is it all dark on the Indian private sector front? Broadly, yes. But two exceptions prove the rule, one of them partly:

Some of the spending by the private sector and, to a much lesser extent, the public sector is outside India. For example, we expect Tata Motors to increase its capital spending. But it is mostly because of the planned spending by its Jaguar Land Rover business, which accounts for over 90% of the consolidated capital expenditure.

Which leaves just one major private company that’s carrying on with investments in India: Reliance Industries Ltd.

The decline in India’s private sector spending would have started in fiscal 2014 if it were not for Reliance Industries. The company doubled its capital spending in fiscal 2014 to Rs 600 billion and accounted for about 25% of the private sector’s capital spending. It is also the reason why, despite our expectation of a fall, we believe private sector capital spending will remain materially higher than public sector spending among the top Indian corporates. Reliance Industries has embarked on a large capital spending program of about $30 billion over three years, mainly on refining, petrochemical, and the telecom sector.

In the telecom sector alone, Reliance Industries plans to create 140,000 jobs on investments of Rs 70,000 crore. As the company’s chairman and managing director Mukesh Ambani said in his June 18, 2014 speech:

The year 2015 will see the phased launch of Reliance Jio across India.

The fruits of the tremendous value created by this Rs 70,000 crore initiative would start to flow.

Engaged in this massive endeavour are over 10,000 full time Jio employees working alongside nearly 30,000 professionals from our partners and vendors from all parts of the world.

In addition, there are over 100,000 people working across the country in creating the digital infrastructure backbone for this network.

Beyond Reliance Industries, however, the private sector, despite being optimistic about the new government and its open, transparent policies — the spectrum and mining auctions, for instance — is in a cautious mode.

Indian companies will be watching closely the government’s progress on addressing the issues faced by capital-intensive sectors, such as utilities, infrastructure, and metals and mining, in implementing new projects. Companies will need to be confident that their projects are not going to suffer because of the same issues. They have already burnt their fingers once.

In terms of relative capital spending, however, S&P says India is in a better position than China and ASEAN companies. “We believe capital spending growth may ease somewhat among top Chinese and ASEAN corporates for the next one to two years but we do not expect overall capital spending to decline like in India.”

Clearly, for growth, return on investment and jobs, India will need to lean on the public sector till 2017 — if the Indian private sector is in a wait and see mode, to expect private foreign capital to come in and invest is crossing the limits of optimism.

Disclosure: The author is New Media Director of Reliance Industries Ltd

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