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Talking about Economics, Science and Religion. And then adding humans to the equation.
So what do we know about science, economics and religion ? Well! for starters, science existed since the day Universe came into being, and therefore science has been around long before humans or human civilisation came into existence. Science is as old as the universe itself. There is science on Mars, but no economy. Also there is science all across the cosmos, but till date, the size of the space economy is limited to human activity closer to earth or our solar system, although this may change as humans venture into space on a larger scale. There are vast amount of natural resources spread across various parts of the Universe as well as continents like Antarctic here on Earth, which has resources worth tens of trillions of dollars. But it still has no economy or in other words GDP, and that is down to the fact that, there is no permanent human civilisation based there.
The idea of economics and economy started along side religion, nation state, and culture etc. And therefore, like other human ideas, it was conceived as a subject by humans. So humans will continue to influence it. Human behaviour, human perception and psychology, and their overall sentiment will continue to influence the subject of economics and the idea of economy. The data created by a human society, categorised as economic activity related data, tends to be the metrics widely used, to understand or gauge the overall wellbeing of an economy. And as the human society becomes more complex, so has the economy. It has no doubt continuously evolved and changed reflecting the changes in the human society. But like religion or culture, it has design flaws, and therefore fails to serve the entire human civilisation. The prime example is, the aftermath of the financial crisis. While we can measure the financial cost to an economy, what we cannot accurately measure is, the human costs that is directly and indirectly related to the financial crisis of 07/08. And the same does apply to religion. Although some of may of us continue to argue the case for religion, none of us have tried to accurately assess or measure the human costs of religion on humans, in terms of holding back human’s overall progress etc while the various religious franchise aka religions have gone richer and wealthier over time.
In the US alone, based on various estimates, the society known as the American society tends to give away around $ 82.5 billion a year to religion. And then, there are direct and indirect human costs. Having said that, wars have killed more humans than religion, and they also cost a lot more money than religion. But in historical context, some of the wars were religiously motivated, and humans still tend to fight over their religious and cultural ideology.
The question then is, do we need religion or economy for that matter ? And the answer isn’t that difficult. For many of us religion is still the answer to questions like, why do we exist and what’s our purpose ? And to a very large extent economics and economy has played a very vital role in the evolution of the human society as well as its overall progress. So to take away economics or religion from humans may not work out well. While science has always existed, sometimes, it is the economics that has justified scientific progress. And it is the economics of space that will most likely drive humans exploration of space.
According to space foundation, the space economy is already worth over $ 329 billion, and in the next 50 to 100 years, space industry will become the most dominant among all the sectors of the economy. It will not only create new jobs, but also help take humans as a civilisation to the next frontier. At least that’s what I feel. Imagine an economy that is not only going to measure the economic activities here on Earth, but also from across the Universe. But can it create enough wealth, to help fund the living of the entire human race ? Now this is a rather difficult question to answer, because unless and until, we keep finding ways to make the entire design of the economic system more efficient, it will continue to fall short.
My own assessment is that, economics and economy as an idea and subject is not a complete science, but unlike a religion, it isn’t stagnant, or requires the human society to completely surrender itself, and be at its mercy. It has flaws, but it also does have the capacity to continuously evolve, and so it should. Humans are the key input to the entire equation, and without adding humans, one could say, nothing is relevant. And the human element will continue to add a level of unpredictability and uncertainty to the field of economics and economy.
Understanding Emotional Capital
Most Humans are emotional animals, and not just humans, the statement is probably true for most living species on Earth. Unlike money, emotions are hard wired in the overall design of a human being, so separating emotions from a human being is, more or less equivalent to taking out the core of what is being a human.
The driving force behind a goal, ambition, or a dream of achieving something of significance, tends to be emotion. And emotions do play key role in how committed a human is. The idea of a human being, to be in relationship with another human being is also, mostly based on the underlying emotions that humans tend to have for each other. And once they have invested their emotions in a relationship, they tend to work extremely hard to make it work.
My own understanding of a human emotion or emotions in general is still evolving. I have always felt that, humans should not be emotionally attached to their business or profession, and my rational for holding that view has mostly been based on the assumption that, emotions will comprise the ability of a human being to make rational decisions. And the evidence tends to suggest that the view may have a strong merit. But over time, my own view on the subject matter has evolved, and in the process, it has changed somewhat.
And today, I am of the opinion that, emotions are natural enhancing tools, and maybe,I need to relearn the definition and the role that emotions can play in helping humans progress. A business or a profession, whatever it might be, may lose some of the essential intensity, if humans weren’t emotionally invested in it. And the loss of emotional attachment to a business, may not necessarily mean that, the decision making process will become more rationale based.
As humans grow, so does their emotional capital. And through a process of trial & error, also commonly known as living, most human beings tend to get a better handle of their own reservoir of emotional capital. It is by learning to better utilise and understand their emotional capital that, humans can define their own success, whatever that might be. Or in other words, learning to invest your emotional capital wisely by a way of trial & error, will define where you may end up in your human journey.
So therefore, building the right reservoir of emotional capital, by better understanding how emotions can help or enhance a human being positively, individuals as well as the society at large, can learn to make better decisions, whether business or otherwise. The idea that emotions show the weak side of a human being has no scientific merit. And emotional Capital is good for your overall well-being including the financial well-being.
Read Full Post | Make a Comment ( None so far )The BREXIT Road
For some people in Britain as well as parts of the European Union, the general feeling towards the EU project can be possibly be summed up, more or less as that, the EU leaders continue to remain disconnected with the reality, and fail to grasp the reality on the ground. Some do argue that, by coming across as being acting elitist, the policy makers are destroying competitiveness of European business. The evidence is that, across industries, the cost of compliance for European companies has increased significantly year-on-year. And instead of using BREXIT as an opportunity to fix a very inefficient system, the leaders keep talking in terms of rhetoric.
I firmly believe that, no one in London wants EU to fail, and it shouldn’t, because it has delivered peace across Europe. But European Union as an idea is full of flaws, and just ask those, who paid and continue to pay the human price for being a European. My own assessment is that, BREXIT isn’t good for UK or the EU, and that’s the reality, but it’s also an opportunity. European Union badly needs reform, and its not that Europeans have started falling in love with Brussels post BREXIT.
As I see it, Britain is getting out of European Union and not the continent of Europe. So lets have that perspective. I don’t see European Union working out in its current shape, and the four principles that EU leaders keep talking about, are completely unsustainable together, because they create serious misallocation of resources. There was no socioeconomic impact assessment done on expansion of European Union, we all know what happens to a Company that goes through a expansion drive, without a well thought out strategy. So why not fix the flaws, and then sell the product wisely to the public, and let’s see if the potential customers buy into it? No point lecturing people, if they reject your product or fail to understand what you are selling, and providing a good customer service is key to making a product work.
European Union as a product will need to evolve , and it will be good for European politicians to understand that, the language of business as well as science still remains English, and that’s not going to change in the foreseeable future. Also London will continue to remain an attractive jurisdiction, and the world of finance will continue to be dominated by English. The opportunities are still out there, and I sincerely hope that, politicians across Europe including the U.K. will come together, to make good of those opportunities, and maximise it for their shareholders, in other words, the common citizens.
Also to some extent, people in Britain fail to understand that, in continental Europe, there is a genuine love affair with the idea of European Union, and that is, for a number of reasons, which I won’t go into. So yes, like any love affair, the journey will be driven by emotion. And it’s not that, the average people don’t understand that, there are serious design flaws with the idea of European Union, but when you are in love, you are in love. And, I think, Britain will do well being mindful of this fact, while negotiating its exit from the EU. Also, on the British side, there are people who are extremely attached to the idea of Great Britain and its glory. So there are emotional attachments on both sides, and yes I fully appreciate that, the will of the people has to be enforced, and it should be, or what’s the point of a democratic system. But when we are talking about a permanent change, the prudent thing to do, will be to keep the emotions aside, and have a boringly dispassionate approach towards figuring out a way forward that works for all sides. No point being nasty, in the end, we will have to learn, to live with each other. Europe needs Britain and Britain needs Europe, it’s just a fact, and we shouldn’t be confused about it.
By over playing their hands, both sides is taking the risk of doing permanent damage. Love affairs can get nasty, and quite frankly Britain’s relationship with the EU was never based on love. But British diplomats and the politicians do need to factor in the reality that, whether it’s Mr Juncker or Mr Tusk, there is a genuine love affair with the idea of European Union. And we need to learn to respect that love, instead of criticising others for being in love. What we are looking at today is, potentially a lose – lose outcome for all sides, and it’s hard to practically see otherwise. And that’s why it is important that leaders in European Union, instead of punishing Britain for not being in Love, try to understand that, sometimes relationships don’t work, and also sometimes people do patch things up. Also, why not make some changes, to accommodate each other, after all that’s what a good relationship is all about, or am I missing something ? There is an opportunity, so why not make the most of it ?
Government officials across European Union, are all making concerted effort in figuring out, what they can do to attract businesses, to move from london. And their pitch is not bad at all, but as a business, you have to ask yourself, do you buy into a series of promise or do you wait, to see how much of what is being promised will get delivered on the ground. I am afraid, the reality is, it will be a big struggle for a single European city to replace london. Because london built itself over hundreds of years, into what it has become today, and quite frankly, it’s a daunting task for one European city to replace London entirely. So yes, bits and pieces of what london is offering can be moved to other parts of the EU, but that won’t be enough for a business really. Also a major issue is language, contrary to what politicians in the EU might say, the language of business is English, and there is no way, you can force the world to change to French now. And I am beginning to also sense that, there is a genuine fear among some bureaucrats in Brussels that, if Britain makes a success of its exit from the EU then, others will most likely follow.
So with all that, here are some ideas worth looking into, while UK is on the BREXIT Road.
- lower the corporate tax rate to 18%
- provide 2- years tax exemptions on profit of startups with 5 employees
- lower the personal tax rate for people earning over £ 350,000 to 36%
- lower the personal tax rate for people earning between £ 50,000 to £ 150,000 to 30%
- keep the basic rate for people earning between £ 12,000 to £ 49,000 around 20%
- people earning £ 45,000 and over will pay £ 25 flat access fee for GP and A&E visits and £ 35 access fee could be charged to non residents.
- a stamp duty surcharge of 5.5% could be levied on non resident buyers of residential properties in the U.K. This surcharge could be used to partially pay for building more social housing.
- working with the depart of trade & industry create a business mentorship program, where business schools from across U.K. could partner with SMEs, to provide them free of charge essential advisory support on how to grow and better manage the business. Business schools with the support of department of trade & Industry could mentor existing SMEs, and help find ways to grow sustainably.
- set up a £ 5 billion business support fund, in partnership with private sector, to help fund start up investments requiring £ 30,000 to £ 750,000 in seed funding. The trust acting on behalf of the government could take 25 % of the exit value, in order to generate profit. This fund could be funded by a combination of surcharge of 1.5% on Tobacco and from the profit generated by exiting the investments in the startups as well as allowing councils across the UK to support and subsidise startups.
- expand the capacity at both London GatWick and Heathrow, to ease the congestion
- dial down on the cost of non critical regulatory compliance on businesses and the cost of compliance on businesses
- work out a deal with the EU to access the single market by paying an annual membership fee. UK runs a trade deficit with the EU, and it is in the interest of European Union, to not lose a market that imports around £ 290 billion in good and services from the EU annually. A short term disruption will result in very sizeable job losses and also closings of businesses across the EU. Many SMEs that are reliant on selling to their customers in the U.K. will have serious losses, so it’s in the interest of EU, to work out a deal on trade.
- reposition London as the offshore hub for YUAN, Indian Rupees and other important emerging currencies by supporting their capital market transactions through london, a common regulatory framework could be worked out in partnership with regulators from key emerging countries, to enable companies from these key emerging markets, to access capital as well as other vital resources through London.
- make it easier for people with high skills and high net worth to come and live in the UK
- develop key cities across U.K. for sectors that will play a dominant role in the future, for example, make parts of U.K. the hub for AI related technological developments as well as space among others
- pitch Oxford, Cambridge and Edinburgh as technology centres of the world
- enable partnership between schools and businesses, to help with skills development
- to help build the soft power of London, help create legislation that will enable non governmental organisations from across the world to house their outfits in london.
- help UK based premier Universities and colleges to attract the brightest minds from across the world
Talking about globalisation, productivity and Universal Pay
For starters, what is globalisation ? And is there a metrics that can help us measure the level of globalisation ?
The standard acceptable definition of Globalisation is that, it is a process that has enabled interconnectivity, thereby increasing trade and exchange of ideas as well as cultural experience among other things. Globalisation, as a process spread over 100 plus years has made the world richer, in terms of GDP. The process has also enabled the local champions, to become international bigwigs. And these international bigwigs have then, gone on to influence the change, or in other words, the process that, we have learnt to call ” Globalisation “.
To understand the affect of globalisation, we could look at how our main cities and societies living within those cities, have today become truly global, and therefore globalised in their views. So starting with New York City, which has an estimated GDP of around US$ 1.5 trillion, followed by Tokyo with an overall GDP of approximately US$ 1.4 trillion, and then London with an estimated GDP of approximately US$ 700 billion, followed by Paris with an overall GDP of around US$ 625 billion. And the other emerging global cities including of Delhi, which has an estimated GDP of around US $ 368 billion, are all bigger than some countries, in terms of their economic size. These city economies have reaped the benefits of the relatively freer flow of people as well as ideas supported by flow of capital from around the world. And it is quite safe to assume that, majority of the people living in this global cities, will have a favourable view of globalisation and the interconnected world.
Capital and ideas do not have geographical boundaries. Any attempt to limit or restrict the flow of capital along with ideas will only stifle progress, and it also goes against the natural evolutionary process. Over a 100 year period, human productivity, which is generally measured as a ratio of total output versus total Input, has benefited tremendously from innovation. And we are slowly reaching a point, where in certain sectors of the economy especially manufacturing, humans productivity as well as efficiency is no longer able to compete with the automation process driven by robotisation. Also, there will be increasing pressure on human as a labour force, to continuously reskill themselves. We may work longer, but on a lesser pay ( in terms of overall living standard ) than the previous generation. Technology may have made our lives easier, but it hasn’t increased the overall disposable income of people in general. So, a sizeable percentage of the population within our society will continue to feel under constant pressure. And this pressure and feeling of being slowly eroded isn’t all due to globalisation. The answer and the underlying reasons are more complex than some of us would like to suggest or believe.
The society that, we live in and along with it, our economies changes over time. And that’s part of the natural evolutionary process. Our body changes as we age, that’s how the biological process is designed. We aren’t physically capable of doing things that, we could do as a 16 year old, at the age of 60. So, we learn to adapt accordingly. Humans and humanity’s ability to adapt to change has been at the forefront of our evolutionary advancement. And the next generation of humans will have to be much better equipped than us, to stay relevant. Genetically speaking, humans are 99.99% the same, but we are still different in many ways including in our overall level of individual productivity. Not all the work force doing the same job, will have the exact level of productivity.
A human life is, more of a marathon than a quick sprint, and in the end, how we run the race decides where we end up. And the idea that, governments and political leaders can somehow help us stay in the race by changing the rules of the race in our favour, isn’t a permanent solution. We may get tempted to vote for those who identify with our problems, but the solution to the problems won’t come from pushing back against the natural evolutionary process. To facilitate a change, we must be prepared to change. And to change, one has to be ready to adapt to the changes.
Universal pay guarantee for those living below a specified and tested poverty line, could serve as the spring board, to help support those who may start to fall behind in the race. The fact is, not all of us will win the race, but we could try to finish it, without worrying about our individual ranking. We join the race, the day we are born, so we don’t really get to choose. But we can learn, how to run the race better. This is where, the society and governments could help, and they should.
Read Full Post | Make a Comment ( None so far )Economic Data – The need for a system overhaul
How to best capture, assess or measure the overall economic activities of a modern nation state is an extremely challenging and complex task. The way, we assess and estimate economic data needs an update, as the existing tools aren’t able to capture the full picture,creating gaps. Also, what specific set of economic data is more relevant and serves as a better assessment tool to help assess the health of the overall economy needs to be looked at.
The policymakers as well as the governments need better quality and more relevant economic data that can be used as a reliable input to create specific policies, or evaluate a policy decision or reform. The existing leading economic data that are commonly used to make short term projections about the health of the economy, are quite volatile and also fails to accurately paint a high resolution picture of the overall economy,and is therefore subject to a wide range of different interpretations. And unlike a scientific data, economic data are created mostly as an estimation so it can not be relied upon as a fact.
We live in a rapidly changing society and the economy is changing with the world ,and in the process becoming increasingly complex. So relying on the old tools to fully measure the overall economic activities, in order to assess the well-being of the economy, without having the capacity to rigorously interrogate the numbers, can only be described as an incomplete exercise with an incomplete process.
Getting a real time assessment of a nation’s economy is an extremely difficult challenge today, and the overhaul process could help us learn, how to get better at it. A road safety indicator could be derived from the numbers of accidents, both fatal and non fatals. So it’s not really a complicated exercise, but collecting a different set and range of data from various parts of the economy, and then processing it using a defined set of economic indicators as a tool to measure all the economic activities and the general well-being of an economy is quite a complicated process, and prone to errors. Input decides the output, and whatever be the input, we will have some output return loss.
So no system or engine created by human beings is 100% efficient, and therefore, even the best set of economic data will most likely fail to fully and comprehensively capture the true picture of an economy. And unlike a practising clinical physician, who is able to accurately assess the health of a patient real time by measuring the key life indicators created using highly advanced medical diagnostic tools, an economist has to rely on a set of estimated data that are extremely volatile and prone to errors as guidance, to navigate their way through, in order to get a pulse of the economy.
The technological advancement which has transformed the modern society is still somewhat absent in the field of economics, and this may be down to the fact that economy is not an exact hard science. Relevant government agencies responsible for collecting, creating and publishing statistical data will have to up their game by looking at overhauling their existing process and systems, in order to produce high quality and relevant data that reflects the changing modern economy. Also part of the field of economics and economic studies focused on creating standard models and methodologies to assess and measure the overall economic activities of an underlying economy needs an overhaul.
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The World Economy : So Where Are We Today ?
The QE along with the ultra low rates, as a loose monetary policy did what it had to do, during the crisis and also in the immediate aftermath, but the temporary measure also made the market somewhat irrational, and then came a time when markets got addicted to it, and kept on going higher regardless of the underlying fundamentals. And what we thought was a large Airbus 380 flying at 40,000 feet turned out to be an Airbus 318, so now, when our perception is changing, we find ourselves stuck, because, we know that an Airbus 318 is, simply not big enough to carry, and then keep the world economy flying at 40,000 feet, and also there is a realisation in some parts of the market that the Airbus 318 was never really flying at 40,000 feet. But the problem is, the central bankers, who kept the plane flying are now running out pages in the instruction manual.
So the central bankers in the developed world will need to find a way to get themselves unstuck. Low rates coupled with low inflation is not what most central banks in the developed world were expecting, and now they find themselves STUCK. In the QE era world, low interest rate environment isn’t necessarily all good and positive for the real economy, because the incentive to chase better returns leads to misallocation of capital. The asset price inflation that came about mainly from the misallocation of capital has more or less peaked, the fundamentals of the real economy were never that strong to drive the record level asset pricing. Easy money supply from QE was the main factor that created asset inflation.
Today, globally , the overall inflationary pressure in the real economy is somewhat subdued, and the central banks in the emerging economies are also lowering the rates. And this creates a very interesting problem for the central banks going forward especially in the UK and the US. The way, I see it is, the world economy is now starting to sail blind ( more or less ), and I must say, I’ve got my fingers crossed.
By waiting for an opportune time to raise rates, the central banks in the developed world have started the work of undoing all the previous good work that was done during the crisis, and in it’s immediate aftermath. Water in the ocean has to travel in a wave, and a still ocean is always a sign of something disruptive that’s probably on the way. So, we are getting stuck, by design, QE and the low rates as a part of the ultra loose monetary policy were supposed to be temporary measures, but for whatever reasons, it became the norm, and now, the markets have simply got addicted to the ” new temporary “.
The FED as well as the BOE will rightly say that there is no change in circumstances that demands a rate hike, in fact, the slowing world demands that the rates remains low for an extended period. And the markets are now starting to position themselves accordingly. But there is no guarantee that a low interest rate environment globally, will do the world any good, even when the developing world is also seeing a subdued inflationary environment. In my own view, the central banks can and should try to influence the flow of capital. It is what is required, and there is almost no real harm to the global economy if the FED was to raise rates by 25 bps, and by not doing that we run the risk of making what was supposed to be a temporary status quo, the ” new permanent “. If we continue with the existing ” status quo ” then there is a serious risk that markets will remain irrational and therefore volatile, and both will have damaging implications on the real economy. Take for example, the recent upswing in commodity prices , the price movement is not based on the assumptions that the fundamentals of the global economy is improving, or going to improve dramatically. In fact, it isn’t, and if we look at the recent growth projection of IMF, and also the overall inflation environment around the world, then it will be quite difficult to find a sound economic argument for the price movement upwards, but in my own view, I believe, the commodity market is moving up because of the realisation that rates will remain low. So the misallocation of capital as well as the distortion of market reality will therefore continue.
The benefits of QE as well as low rates was somewhat limited to the real economy, as a large part of the capital didn’t really flow into the real economy. And most data suggests that financial investors were in fact the main beneficiaries. The financial investors saw no real benefit, in terms of overall return of investing in the real economy , so a large part of the capital went into inflating the pricing of the financial assets for obvious reasons. Real economy isn’t designed to create high double digit returns in a very short period of time. So financial investors chasing quick and substantial return saw no incentive of committing capital to the large part of the real economy. But the hope was, especially from the central banks that at some point, the money will flow into the real economy. Having said that, QE and the low rates more or less served a their good purpose, but the central banks to a large extent failed in their attempt to channel the flow of capital where it could have been utilised to create growth in the real economy.
And if we are to rely on historical evidence, most available data suggests that when the financial markets starts growing bigger and faster, it is generally at the expense of hurting the real economy, and more often than not, it leads to a crisis.
The FED as well as BOE will need to change the ” status quo ” or in other words tweak the current market dynamics, a bit. You need a positive and a negative polarity to create the flow of current. The wind flows, when you have a high and a low pressure environment. And to keep a plane flying, you need to have a strong flow of air across both the wings. An economy like most planes requires two pilots, and so far, the central bankers have taken the lead in flying the plane, and they have done a good job especially in the absence of a strong leadership from various governments, but now, it’s time for the governments to play their role. So far the governments have failed to deliver on the important reforms that was badly needed. We have had sound bites coming out from various pockets of the governments as well as the political class in general, but the real lasting reforms aren’t quite visible yet. Blaming the financial markets and making the banks, a villain, is now an old story. The fact is, without the central banks taking the lead, the governments won’t really have an economy to talk about today. But there is a limit to what can be achieved through monetary policy alone, and I have always suspected that at some point, the central bankers will run out of tricks, and the limits of monetary policy tools will be tested and exposed. And it looks like that’s where we are today.
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When talking about the Indian economy, are we missing the big picture ?
Posted on September 24, 2017. Filed under: Uncategorized | Tags: Bad loans, Comments, economic policies, GDP, Growth, India, Indian economy, Indian politics, Infrastructure, opinion, society, Technology |
So the new government got into the office on the back of a pitch that was based on a lot of hope and promises, and while I have been personally quite supportive of the need for change. I have never been in any doubt that, the changes will require time and government will have to let down people. In a country like or anywhere else for that matter, a government gets elected mostly on perception built around the hype. Average people are simply unable to breakthrough each policies and make sense of it. A country like India needs a complete overhaul of its existing economic and financial infrastructure , and that requires a lot of re-wiring and also redesigning of the entire system. Any good reforms takes time, and a prudent policy is always, to not overload the system with Big Bang reforms, one after the other, the changes have to be incremental, but constant. A system overhaul takes time, and you can’t expect the system to start firing on all cylinders right away especially when you are creating more capacity in the old system.
But economic policies alone can’t re-wire the system, it also requires better execution. And if we are talking about creating growth then, there should be a realisation that, without the ability of funding, government policies on their own aren’t the magic fix. So I don’t care what economic policies the government can come up with, driving growth in a country like India , where almost 80- 90% financing is sourced from banks simply isn’t going to work, unless and until the banks are back in shape. The fact is, the bad loans problem hasn’t been fixed, and the lenders have been too slow to offload the garbage sitting in their living room, yes there are legislative policy changes and reforms to help the banks, but banks haven’t been proactive enough. And a lot has to do with the existing training as well as mindset of the executives within the current banking system. For example, based on my own experience, I have realised that a sizeable percentage of the senior bank executives in India aren’t willing to make tough decisions, because for them, as I understood it, it’s all about a peaceful retirement and self preservation. And the investigative agencies haven’t helped decision making process either. Also some of the rule changes don’t really help the banks clean up their balance sheet. The asset reconstruction companies or ARC as they are known in India are, like a time bomb waiting to explode . On practicality basis, there is almost zero value in the ARC structure.
Without recycling the rubbish, you can’t get rid of the stinky garbage, and monetise it. Many quality ideas are simply not getting funded in India, and young entrepreneurs who could drive growth are more or less shut out from funding. And the other real issue is that, like European banks, the Indian banks are also now scared to lend. The ex RBI governor did good talking and provided public opinion on almost everything, but failed to provide real solutions, and now he is busy promoting a book.
I would prefer a wholesale reform of the financial infrastructure of the Indian economy, where capital market becomes the largest source of capital and not the banks. The regulators also need to support the government by unburdening the system from socialistic era policies. Also the government needs to do more work and talk less, there is too much distraction. A lot of announcement, but not much is getting done. Media channels have an endless lineup of experts, who probably wake up everyday, ready to provide new round of expert opinion. And the quality of journalism is rubbish, where is a decent discussion on, what reforms need to be brought in, to help the nation grow? The issue is everyone is drinking from the same source, whether you are the federal or state government, central or state government owned companies, or the private sector. And unless there is new liquidity going into the banks, it’s going to be tough to fund growth.
Various state governments across India are struggling with a very bloated fiscal situation, and they also own companies that have not made money for a long period of time, so it doesn’t make any good business sense for these states, to continue to own unprofitable companies. And in most cases, these companies are competing with other unprofitable or distressed state owned companies across India. These companies were set up in various states across the country, to provide services to the citizens, and by design they were probably never pushed to make a profit. But the time has come for states across the country to find an exit, by either privatising the companies or merging them together with similar companies in other states, and then exiting it. This will also reduce the debt burden on the states.
Also to fund growth, I will encourage the government of India to put in $ 3 billion in equity and then raise additional $ 7 billion from local banks as well as international investors/ banks, to create a growth and investment fund. This fund could also be made tax exempt from withholding taxes for foreign investors, and let this fund buy new loans from the banks, the fund could then repackage the loans in an asset backed security ( ABS) as a way to refinance itself. The fund could also provide working capital loan indirectly to the SMEs through the banks, and let the originator banks hold just 10% of the new loan on their books. RBI could also buy some of these securities from the secondary market to improve the liquidity and pricing. Also Emerging market focused fixed income investors could buy into these securities, and will be exempt from any withholding taxes. I am not a great fan of using pure debt to finance infrastructure, I would rather first raise equity to fund the infrastructure, and then give equity investors an exit by issuing the debt. If you look at it from pure risk perspective, the equity investors are in fact protected from the completion of the underlying asset, and that’s why you need a strong construction company to provide completion and construction risk coverage. So once the asset is built, equity investors will have their value protected, and the return will come from issuing the debt at a premium. There is a natural cycle, and any insurance cover to protect your investment in infrastructure asset will not work, if you simply buy a credit protection. I prefer a equity – debt- equity – exit cycle , which is based on water cycle of cloud – liquid water- ice – water – cloud. That’s the best value preservation model.
The idea that you can protect your asset for its entire life cycle carrying just debt is completely absurd, and it simply doesn’t work, any debt, if not managed well tends to have the natural tendency to end up spiralling into an unsustainable burden. And, if there was no refinancing then, most debt will not be repaid. You can repay debt from cash flow, but refinancing still remains the most frequently used tool. So we need to link the cycle especially for infrastructure assets. The issue with an infrastructure asset also is the permanent loss of value, and this is when the asset becomes redundant for a number of reasons, but if as an investor, you haven’t recovered money during the cash flow generation lifespan or lifecycle of the asset then, you are looking at a permanent loss of capital.
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