Journey of $ from Bretton Woods and Beyond

1930

till WWII - 'Begger thy neighbour' policies .Rampant devaluation of currencies to make exports cheaper .

1941 Atlanic Charter , precursor to the Bretton Woods

1945 End WWII and Brewtton Woods agreement signed

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments.

Throughout the war, the United States envisaged a postwar economic order in which the U.S. could penetrate markets that had been previously closed to other currency trading blocs, as well as to expand opportunities for foreign investments for U.S. corporations by removing restrictions on the international flow of capital. Without a strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war.

U.S. allies—economically exhausted by the war—accepted this leadership. They needed U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive.

Before the war, the French and the British were realizing that they could no longer compete with U.S. industry in an open marketplace. During the 1930s, the British had created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter's "free access" clause before agreeing to it.

A system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency was set up.The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.

After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 65%).The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks.

1946 - Marshall Plan

The Marshall Plan was the program of massive economic aid given by the United States to favored countries in Western Europe for the rebuilding of capitalism1947-58 Implememntation of Marshall planFrom 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. From 1948 to 1954 the United States gave 16 Western European countries $17 billion in grants.

1960- Tiffin's Dilemma

In 1960 Robert Triffin noticed that holding dollars was more valuable than gold was because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. In the 1960s and 70s, important structural changes eventually led to the breakdown of international monetary management. One change was the development of a high level of monetary interdependence. The stage was set for monetary interdependence by the return to convertibility of the Western European currencies at the end of 1958 and of the Japanese yen in 1964. Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the profligate fiscal spending of the Johnson administration had transformed the "dollar shortage" of the 1940s and 1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special Drawing Rights were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding Special Drawing Rights (SDRs) equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.

1971 - Collapse of Bretton Woods

The early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the "Nixon Shock".The shock of August 15 was followed by efforts under U.S. leadership to develop a new system of international monetary management. Throughout the fall of 1971, there was a series of multilateral and bilateral negotiations of the Group of Ten seeking to develop a new multilateral monetary system.On 17 and 18 December 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a "temporary" agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued.This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.

1973

The denomination of oil in dollars after the 1973 Middle East oil crisis.

1974

US manages to save $ as the only currency of trade for Oil.

1979

Second Oil Shock

1989

Emergence of deregulated global financial markets after the Cold War that made cross-border flow of funds routine.

A number of economists (e.g. Doole, Folkerts-Landau and Garber) have referred to the system of currency relations which evolved after 2001, in which currencies, particularly the Chinese renminbi (yuan), remained fixed to the US Dollar as Bretton Woods II. The argument is that a system of pegged currencies is both stable and desirable, a notion that causes considerable controversy.

"Bretton Woods II", unlike its predecessor, is not codified and does not represent any kind of a multilateral agreement. It contains the following key elements:

The United States imports considerable amounts of goods, particularly from East Asian export-oriented economies such as China, Japan and various other Southeast-Asian countries.

Since China and Japan don't have much demand for U.S.-produced goods, United States runs large trade deficits with both countries.

Under normal circumstances, trade deficits would correct themselves through depreciation of the dollar and appreciation of the yen and the renminbi. However, Chinese and Japanese governments are interested in keeping their currencies low with respect to the dollar to keep their products competitive. To achieve that, they are forced to buy large quantities of U.S. treasury securities with freshly-printed money.

Similar mechanisms work in the Eurozone with the euro and its satellite currency (Swiss franc). The Eurozone is somewhat less coupled to the U.S. economy, so the euro has been allowed to appreciate considerably with respect to the dollar.

2007

As of 2007, $ still has the largest share (65.7%) of foreign reserve holdings, with the euro some distance behind at 25.2%.However since 2000, the dollar share is falling and the euro share is rising, though the trend is very gentle.

Loosing streak for the Grand Old Party

So the loosing streak for the Congress continues………….. latest one is Karnataka which was once it’s stronghold.
It has been two years since they last won a state election!

I wonder what has happened since last two years .Of course congress has been doing all the right things at the centre .OBC reservation, NREGS, Farm loan waiver the list is quite impressive..Their governance has been top class at the centre. It is then puzzling as to why the elction gods have been at the other end for them.

I think there are no easy answers. Some of them are clear and some of them are not.

Let’s understand the Vote bank of congress
SC/ST and Muslims ...
SC/ST are moving away from the congress as they find attractive options like the BSP .BSP may not be successful outside UP , but what is pinching congress is that the votes are getting divided.
Ther muslims have not come back as they desired.

Poll and campaign management

What is amazing is the fact that vote bank of congress is not translationg into seats , whereas it is for others.
The congress has this policy of not projecting a Prime Minster or Chief Ministerial candidate.This is a tradition that has been created to mainatain the hold of the so called “ High Command” so once they win they can impose any candidate that they like. This is now proving to be counterproductive.Imagine you do a project successfully in your organisation and the booty of the success goes to someone who has not done anything.You’ll simply quit .Now apply this formula to Congress . The state level poll managers neither seems have the right power nor the incentive to perform as they are not sure that they’ll get the benefit. This needs to change . Once the right people have the right incentives the results will follow.
The campaign management seems to focus on a few people like Sonia Gandhi and Rahul and not from the state leaders. This is also having a negative impact.Local issues it seems have been forgotten and big ticket issues are being addressed which do not have much of a mass appeal.
Basically it seems that opponents are having a stronger desire than congress in campaign management.

The Umbilical Cord

The Nehru/Gandhi cord is a as much a liability as an asset as there is noone who can speak freely and fairly against the miastakes of the leadership . Hence mistakes are being repeated .

There is something in Congress favour:

The congress is hopefully learing from each failure and they may not repeat the mistake in general elections.
Anti incumbancy in states where elections are going to be conducted is in congress's favour.
Vote back has not shrunk much . However it is not translating into seats as mentioned earlier . This translation can be done if good tactics are applied.
Momentum against congress may actually turn in their favour as negative votes are cast in their favour.

The PetroDollar Business

Last week I read the news of Iran moving it's crude oil trade completely to Euro and Yen and exited Dollar. This is indeed a predictable news and was coming for sometime now.

Lets understand why.

The dollar derives it's strength and demand from being the base currency for International Trade ( and sometimes national as well!) across the world and main contributor to this is crude oil trade. US itself runs huge trade deficits ( now at record Levels) which essentially means it buys more goods and services than it sells. Part of this deficit( and hence US consumption) is funded by the rest of the world itself in the form of purchase of US treasury bonds and capital and other investments.The rest of the world also maintains $ as Forex Reserves .The world $ Currency reserves are estimated at about 10,000 billion.

Hence an important fact: The rest of the world needs to sell goods and services to the US and it not necesasary for the US to reciprocate the same . It can simply do by printing Dollar . The rest of the World needs to maintain the vaule of $ as they have invested heavily in terms if $ bonds , reserves and other $ assets. This means US literally gets a lot of products and services for free . This is an amazing free Lunch that every Great Power aspires to have.
Of couse govermenets and monetory authorities across rest of the world know about this fact.

Now imagine rest of the world for some reason stops trading Crude Oil in Dollars. The demand for Dollar slumps so does the value of the dollar .As the Dollar value dips ,more countries move their curde oil trade on other currencies which effects further sharper slump in Dollar.

Such doomsday scenario thinking has prompted the hostile nations (to US) like Iran to move oil trade to Euro and Yen.( Many infact attribute this kind of fear led US to undertake it's Iraq adventure as late Saddam planned to move Iraq's oil trade to Euro before US invaded Iraq and there's a lot of credibility to such an argument.) This may prompt Saudi Arebia and Russia and many others to follow suit . The only issue here whether Euro/Yen or any other currency have the mattle to prove effective alternative to Dollar.I think Euro has a much better chance given the size and stability of the European Economy.

Most probaly if dollar slumps , it's be a gradual process over years and not a sudden phenomenon.

We in fact have the example of UK which lost it's superpower status in 20th century as it was unable to maintain the value of Pound sterling after second world war as the demand for Pound slumped after Bretton Woods Accord.

The Big Budget

I eagerly watched 08-09 budget this year and in some sense there was no surprise in it.
The farmer loan waiver was widely expected. What was really interesting was the fact that government wants to complete the waiver by June 08 .Considering the fact that elections are not possible during monsoon season , it seems that with all probability elections are due in September - October 08 . This will also be a period short enough to milk the loan waiver to farmers - the feel good factor. I also think that this move was planned much in advance with an eye on elections . The hard work was done in last few years .Of course ever government consciously works in first 3-4 years to give something substantial and visible in the late years of it's governance. This tactic is not new. I feel the execution has been done very well by this government . No doubt congress feels that they have given death blow to the opposition's electoral chances with the waiver.
I liked the approach of tackling ( the so called) slowdown by stimulating consumption through reduction in direct taxes and sales tax. The sixth pay commission bonanza will be an extra .This along will relief to farmers will also put more money in the hands of people what'll further give Phillip to consumption. However rapid interest rate cut will be difficult as a result.
The tax buoyancy in last three years has been remarkable - about 40% annually. The Tax-GDP ratio however is still very poor at about 13%. There are countries in the world where the ratio is as high as 50% .I however feel that the ratio should be in the range of 25-30% for India if taxes are paid properly. The only solution to this tax evasion is heavy dose of IT( information technology) for tax administration . The introduction of GST will also help simplify the system .But all these measures take time and the government is conscious of this fact.

If this tax buoyancy continues for the next two three years then I believe the government should be in a position to provide substantial form of social security like guaranteed annual income to the farmers , something like minimum salary of say 5000 per year to start with. This'll go a long way in preventing the human tragedy that has unfolded in the past few years in the rural hinterland of the country.

Aviation Boom in India

When I returned to India some two months back , I got the real experience of the boom . I had the first hand account two years ago when I left India and then did not have a chance to experience the same as I was abroad.

The very first to strike is the fact that the tier II and III cities are better connected by the budget airlines. The second is the fact that the profile of the air traveller has changed a lot in last one decade. I remember I used to travel frequently then and air travle was considered as quite a luxury .The profile of air traveler was wealthy businessmen, high ranking PSU Officials or Private sector executives or rich people. For average people air travel was out of reach and people would be very afraid about their etiquettes at airport and during travel.

Come 2008 and I can see common man traveling with his family by air not only within India but abroad as well , something unthinkable a decade ago. Air travel is much cheaper now as compared a decade ago.

This is due to the business model of low cost/ no frill airlines which rely on :

· Higher load factor a harvesting kind of strategy ( low airfares if you book early , goes higher as the travel date nears)

· No frills
· Chance factor ( read overbooking )
· Innovative marketing strategies ( advertising on planes and sell as much as possible )
· High charges for all add on services
· Increased capacity of planes by removing business class and reducing legroom
· Cut corners? ( lets not think of this factor)

Will this happy phase continue ?

Well all the so called no frill airlines in India are in deep red .One reason is the rapid growth of these companies other being high fuel costs, very high taxes ( they are almost always higher than the airline tickets) , high salaries for the employees owing to the skills shortage ( though this is an issue with almost every industry in India) . Such Low costs are clearly not sustainable. Consolidation in the industry is the beginning of the price hike. But I think we can still expect 25-30% growth in the foreseeable future.

Some Positives for the Industry are :

Rising income levels
Better connectivity
Improvement in Infrastructure
Greater acceptability of air trave

Customer service:

Don’t expect much from no frills . I feel there is a great divide in terms of customer service across firms. As per my experience:

Air Deccan – very average , even cutting corners.

Indigo/ SpiceJet – Good

The infrastructure required for such a boom is simply inadequate , though I know that government is working on the same quite seriously .

Some News

Proposed changes in India’s company law caught my attention. It is almost half the size of current law and works on the principle of lesser regulations and severe punishment.

Governments worldwide focus on principle of “ Not to fail “ which is not an efficient option. This just puts in layers of mindless rules and regulations. Even the government learnings focuses predominantly on what went wrong and not what went right..

A far better approach is lesser controls and a threat of heavy penalties. Why should a majority pay for acts which are likely to be committed by a minority?

Australia India Cricket

I’m impressed by the Australian Cricket team’s recent performance against India in one day internationals. The team is mentally tough and very good at playing psychological games .The on field abuses seem to be a part of a well though out strategy as well. I especially remember the closely fought nagpur game. Indians were close to victory .But Australians had many surprises in store which unsettled the Indian batsmen and kept them guessing all the time . Adam Gilchrist especially would do keeping near the stumps once and then from a distance. Today’s cricket is a mind game and India team need to learn a lot about it.

Rising Rs and strategies for IT companies

The rising rupee indeed reminds me of the rise of yen against dollar in the 80’s. Yen appreciated almost 80% against dollar during the period .But the Japanese continued to dominate the car market in US . But How did they do that ? Well that’s an interesting story .Japanese simply moved low margin car manufacture to US and Mexico and kept the high margin ones in Japan. The strategy was successful and companies like Toyota actually increased the market share in US.

In long term the rupee is also all set to appreciate significantly against the dollar.

The Indian IT industry should also draw inspiration from Japan.

Here are some strategies:

Financial Strategies:

Hedging :

Taking a long term say yearly outlook for the rupee and hegding accordingly

Hedging can however never be a long term strategy.

Marketing Lever

Diversifying the market : move over to Europe, APAC

The long term outlook for Euro is stable .Indian IT firms anyways do not have a significant business with Europe .The best bet then seems to be taking over Eurpean IT companies and offshoring their operations.

Diversifying the skewed US centric business to APAC and South America , China RussiaAustralia and India is also a good hedge. Indian and Chinese markets are going to be huge opportunity for the IT companies pretty soon. ,

Operational Lever

Near Shoring :

Say Mexico for North America , Eastern Europe for Europe ,China for Japan , Indonesia and Thailand for Australia . This is quite a workable strategy if trained resources are available in large quantities in the near shore locations or they are sufficiently skilled enough to be trained.

Increasing on shore content and providing technology and methodology onsite:

This is quite an efficient option without much risk .The methodologies, processes, Technologies developed offshore can be brought onshore to achieve productivity gains and increasing margins.

Demand Supply Levers:

Cutting costs by:

Hiring science and commerce graduates.

Moving to tier 2 and 3 cities .

I do not think that there is much quality difference in metros and Tier 1-V cities . Apart from cost advantages I believe lower tier cities will witness lower attrition.

These moves will however necessitate more front end training.

Some Innovative ways:

Making client work at offshore: Reverse Onshoring

If a project requires continuous presence of client resources then rather than working onsite these resources can work offshore .This will be a win- win situation for the client was well as the IT vendor .All resources of the IT company will work from offshore and

client also need not created space for the IT company’s resources , co-location will also increase team cooperation and success of the projects.

Service Outsourcing- be a quality vendor

All project based organizations will inevitably have benched resources and this is not the most efficient way to provide services .At any time an Indian IT company will have 15 -20% benched resources on an average. There are well established industries that have taken care of this problem.

For example , auto industry sources most of the components from different vendors .A similar vendor structure can emerge in the IT world as well where there are coding companies, testing companies etc.

The IT service provider will merely be a system integrator who ensures that project and services are delivered as per client specifications .This kind of ecosystem will minimize benched resources.

How to operationalise these strategies ? Which strategy will be a good fit for a particular company? Well, keep million dollars ready for hiring my services…..

Quad vs. SCO

The battle lines seem to have been drawn in East Asia for hegemony as the military exercise last week in the Bay of Bengal suggest. On one side we have what is called as Quad or Democratic axis –India, US, Japan and Australia also Singapore and the other being Shanghai Cooperation Organisation ( SCO) which includes China, Russia and Central Asian republics.

This is just a reflection of the new strategic alignment in Asia which in turn reflect the realities after the end of cold war and the emergence of China as a economic power.

There is no better news for India than this . India should derive economic and military benefit of the new alliance . I would look at Indo –US nuclear deal and recent economic cooperation with Japan as steps in this direction.

Will the power game in Asia lead to a Europe style grouping of NATO vs. Warsaw pact countries and cold war or something similar only time will tell. However what differentiates the present situation is the economic dependence of the two groups on one another. All the counties of the two groupings would like to maintain economic cooperation on one hand and political posturing like the recent exercise on the other hand.

At present the Quad seem to have an upper hand given the fact that SCO countries and mainly China have an export led economies which is a huge risk .

All Eggs in one Basket

The recent appreciation of rupee has thrown some interesting facts about the Indian economy. For one rising rupee is a good news for the Indian consumers and the other that there is a whole industry(ies?) in India that is created on the basis of rupee – dollar purchase value differential – mainly IT and BPO services .

I just think for a moment if India’s whole IT industry stops growing then what?

Well there is an army of people that is employed in the sector - the best and the brightest. India now produces about half a million engineers per year and most of them are absorbed by the IT industry. Now there is a severe shortage of right trained manpower that has caused ballooning salaries that is eroding the profit margins of the IT companies which they try to compensate by productivity gains every year.

Now look at the collateral effect of the Industry on the Indian economy.

IT industry contributes significantly to the Forex earnings of the country .But this is not the end of the story. NRI’s who are deputed on projects by the Industry also remit forex inthan $ 20 billion last year.

Since IT professional have large surplus owing to their high salaries , they invest most of this surplus in stock markets an real estate.

Now think of the effects of the slump in IT industry. A meltdown in stock prices of IT stocks and the money invested in the market, slump in real estate market ( which is in some sense related to stock market) apart from a hit in country’s forex earnings and a slowdown in the job market.

Hmm…..

The slump in the job market will reduce salaries that’ll help the IT industry to become more competitive – a kind of corrective feedback loop.

I personally think that low cost is an advantage that somebody else can always emulate and that anything and everything can be emulated given sufficient time .What matters is the difficulty and time to emulate . You can then use the time and energy to move far ahead of competitors.

So what can be the eternal plus point for Indian IT indstry ?

Quality at the right price , Brand Image , Innovation and availability of skilled manpower in large numbers .I think these factors can keep Indian IT industry kicking for time to come .

What can immediately be done to mitigate the risk of a slowdown in IT industry worldwide?

A number of classical risk mitigation strategies:

• Increasing business in Europe , East Asia and India ( which is a second class citizen for IT companies) .High valuation of IT companies can be leveraged for takeover of large IT companies in Europe.
• Need to Build a strong Brand Image
• Hiring in the said markets. Local resources are highly essential for a client facing role
• Offshoring in other countries like China, Eastern Europe , South America
• Building Product portfolio
• Create Intellectual property rights which can be leveraged over a period of time

Ending the Never Ending Corruption in India

There has been a slow deterioration of processes and administration after the Britishers left India.

Now I do not want to harp on the 40 year old song sung by the Indian politicians. Every politician promises that and almost all fail to deliver. What is the issue? What can be done?

Given my experience in the industry ,I think corruption can be dealt with if some systemic measures are taken.

Here’s what I think can be done effectively to decisively curb corruption in India.

Citizen Identification Number :

India does not have any citizen identification system like US . This is a big problem as there is no way a person can be uniquely identified. This needs to be done , although government is making serious efforts in this direction . The gains are huge from such an exercise . Imagine every financial transaction that a person does can then be tracked so can be all the history of the person from certificates to criminal and land records. There is simply no way to escape!

Quality and standardization:

There is an urgent need to define the quality parameters and standardize all government related services like turn around time etc .This’ll reduce the scope for corruption.

One of the easiest way to achieve both the above objective is to have good IT systems in place.

Quality will also ensure that government focuses on exceptions rather than general day to day activities.

Training :

There is a huge need to train the staff at government and PSU's. A well trained staff is the only way to achieve sustainable processes.

Pragmatic Leadership :

Finally all the above just cannot be achieved without good leadership

Religious fanaticism and India

Some recent events in India made me think about this subject .

I do not want to brand the views of a few people as the view of a nation or a religion, but the fact remains that the perception about a group of people is created by a few egregious representatives of that group be it religion , company or even a school or a college . This may not be fair but never the less a reality.

Although there are many religions that co exist in India for centuries and there is no evidence to suggest that a religion was abolished by force. However there are abundant cases of forced conversions in too distant a past . The reality of modern India is that there are virtually no significant cases of conversions without a free will. Even if such cases are taken into account there has not been any change in the religious mix of the country.

Given these facts I do not think there is any room for religious intolerance and fanaticism by general populace. I therefore think such incidences can safely be ignored.

Depth of the Indian Markets

So as predicted in my previous article reality check did begin for the Indian market . It has somewhat recovered though and I expect further recovery. I am keenly watching the recovery. FII’s pulled out about INR 3500 Cr . once RBI raised interest rates .What is interesting is the total downfall tereafter.So if FII’s pull out less than a $ billion out of Indian markets , they fall by more than 10- 15% . This is bad performance as compared to other BRIC and developing markets .This certainly indicates one important factor which cannot be overlooked i.e. the depth of the Indian markets. Such a shallow depth will cause sharp ups and downs , some of which we have already seen.

Now how to deepen Indian market ?

This will eventually happen when lot of long term money flows in like life Insurance premium and Pensions money. This money typically stays in the market for good 15-20 years and provides stability to the market. Second is the participation by the Indian public in the market . In most developed countries investments in mutual funds roughly equal to bank deposits. In India we do have along way to go to achieve this although we are rapidly moving in that direction. Third and less significant is the participation by smaller but well informed investors. We either have traders type retail investors or a completely naïve kind .

I’m quite confident of long term prospects ( 5-10 years) of the Indian market.

Parkinson's Law

I'm always fascinated by this law.An amazing piece of work by Dr. Parkinson's almost half a century ago will remain relevent for good. Here's an abstract :

WORK EXPANDS SO AS TO FILL THE TIME AVAILABLE FOR ITS COMPLETION’

General recognition of this fact is shown in the proverbial phrase 'It is the busiest man who has time to spare.' Thus, an elderly lady of leisure can spend the entire day in writing and dispatching a postcard to her niece at Bognor Regis. An hour will be spent finding the postcard, another in hunting for spectacles, half an hour in a search for the address, an hour and a quarter in composition, and twenty minutes in deciding whether or not to take an umbrella when going to the pillar box in the next street. The total effort that would occupy a busy man for three minutes all told may in this fashion leave another person prostrate after a day of doubt, anxiety, and toil.

Granted that work (and especially paperwork) is thus elastic in its demands on time, it is manifest that there need be little or no relationship between the work to be done and the size of the staff to which it may be assigned. A lack of real activity does not, of necessity, result in leisure. A lack of occupation is not necessarily revealed by a manifest idleness. The thing to be done swells in importance and complexity in a direct ratio with the time to be spent. This fact is widely recognized, but less attention has been paid to its wider implications, more especially in the field of public administration. Politicians and taxpayers have assumed (with occasional phases of doubt) that a rising total in the number of civil servants must reflect a growing volume of work to be done. Cynics, in questioning this belief, have imagined that the multiplication of officials must have left some of them idle or all of them able to work for shorter hours. But this is a matter in which faith and doubt seem equally misplaced. The fact is that the number of the officials and the quantity of the work are not related to each other at all. The rise in the total of those employed is governed by Parkinson's Law and would be much the same whether the volume of the work were to increase, diminish, or even disappear. The importance of Parkinson's Law lies in the fact that it is a law of growth based upon an analysis of the factors by which that growth is controlled.

The validity of this recently discovered law must rest mainly on statistical proofs, which will follow. Of more interest to the general reader is the explanation of the factors underlying the general tendency to which this law gives definition. Omitting technicalities (which are numerous) we may distinguish at the outset two motive forces. They can be represented for the present purpose by two almost axiomatic statements, thus: (1) 'An official wants to multiply subordinates, not rivals' and (2) 'Officials make work for each other.'

To comprehend Factor One, we must picture a civil servant, called A, who finds himself overworked. Whether this overwork is real or imaginary is immaterial, but we should observe, in passing, that A's sensation (or illusion) might easily result from his own decreasing energy: a normal symptom of middle age. For this real or imagined overwork there are, broadly speaking, three possible remedies. He may resign; he may ask to halve the work with a colleague called B; he may demand the assistance of two subordinates, to be called C and D. There is probably no instance, however, in history of A choosing any but the third alternative. By resignation he would lose his pension rights. By having B appointed, on his own level in the hierarchy, he would merely bring in a rival for promotion to W's vacancy when W (at long last) retires. So A would rather have C and D, junior men, below him. They will add to his consequence and, by dividing the work into two categories, as between C and D, he will have the merit of being the only man who comprehends them both. It is essential to realize at this point that C and D are, as it were, inseparable. To appoint C alone would have been impossible. Why? Because C, if by himself, would divide the work with A and so assume almost the equal status that has been refused in the first instance to B; a status the more emphasized if C is A's only possible successor. Subordinates must thus number two or more, each being thus kept in order by fear of the other's promotion. When C complains in turn of being overworked (as he certainly will) A will, with the concurrence of C, advise the appointment of two assistants to help C. But he can then avert internal friction only by advising the appointment of two more assistants to help D, whose position is much the same. With this recruitment of E, F, G and H the promotion of A is now practically certain.

Seven officials are now doing what one did before. This is where Factor Two comes into operation. For these seven make so much work for each other that all are fully occupied and A is actually working harder than ever. An incoming document may well come before each of them in turn. Official E decides that it falls within the province of F, who places a draft reply before C, who amends it drastically before consulting D, who asks G to deal with it. But G goes on leave at this point, handing the file over to H, who drafts a minute that is signed by D and returned to C, who revises his draft accordingly and lays the new version before A.

What does A do? He would have every excuse for signing the thing unread, for he has many other matters on his mind. Knowing now that he is to succeed W next year, he has to decide whether C or D should succeed to his own office. He had to agree to G's going on leave even if not yet strictly entitled to it. He is worried whether H should not have gone instead, for reasons of health. He has looked pale recently – partly but not solely because of his domestic troubles. Then there is the business of F's special increment of salary for the period of the conference and E's application for transfer to the Ministry of Pensions. A has heard that D is in love with a married typist and that G and F are no longer on speaking terms – no-one seems to know why. So A might be tempted to sign C's draft and have done with it. But A is a conscientious man. Beset as he is with problems created by his colleagues for themselves and for him – created by the mere fact of these officials' existence – he is not the man to shirk his duty. He reads through the draft with care, deletes the fussy paragraphs added by C and H, and restores the thing to the form preferred in the first instance by the able (if quarrelsome) F. He corrects the English – none of these young men can write grammatically – and finally produces the same reply he would have written if officials C to H had never been born. Far more people have taken far longer to produce the same result. No-one has been idle. All have done their best. And it is late in the evening before A finally quits his office and begins the return journey to Ealing. The last of the office lights are being turned off in the gathering dusk that marks the end of another day's administrative toil. Among the last to leave, A reflects with bowed shoulders and a wry smile that late hours, like grey hairs, are among the penalties of success.

C. Northcote Parkinson, Parkinson's Law: The Pursuit of Progress, London, John Murray (1958)

Reality Check after Party Time

For last few years India has seen a rapid rise in real estate and stock prices .The prime driver of this rise has been soft interest regime. Lending by Banks for property purchases has been up by almost 50% year on year for last two years which fuelled property prices and let to property boom. The lower interest rate regime also ensured that liquidity was channeled into stock market .This along with FII inflow ensured a rising stock market with almost a secular rally. GDP growth has touched 9.2% highest in last two decades.

But now look at the other side. Inflation has touched almost a decade high of 6.8% . Such high inflation rate is sure to unsettle any government.Current account balance has turned negative and is widening indicating a demand pull .

RBI has done it’s bit by raising the interest rates and CRR .These measures will ensure that the system has right liquidity and the economy does not overheat.

The measures will soon have an impact . Property prices should now stabilize and reduce. The relentless lending by banks should now hopefully be reduced .

Stock markets have seen highs all over the world , not just in India. The fundamental drivers for rise in the stock market in India is the FII and domestic inflows . If one watches the stockmarket movement it is evident that excess liquidity has played a very crucial role in the rise .Now with the measures taken by RBI hopefully the stock market will see some stability with a downward bias .In fact the sentiments in the stock market have been quite negative ever since CRR rate hike was announced .I expect this to continue.

Property prices work the same way as stock prices .What has happened in last few years is the buildup in property prices due to anticipation of a further price rise and a huge demand. Many people have bought houses just for investments sake. This may not materialize now due to higher interest rate and reduction in lending by banks for property.

Orkutting , Blogging and New Technology

I created my profile on Orkut some 3-4 months ago and I have not looked back since then. I met many of my friends which I would not have met otherwise School friends , college friends, companions and collogues of ex- company. It really is a great tool to be in touch. It is rather an obsession and addiction.

This is something familiar to me ….

This reminds me of a similar situation some half a decade ago. Then chatting was in vogue and I had a lot of spare time after my MBA entrance exams. It quickly became a fad. I would chat from morning through to afternoon .So would many of my friends. There seemed to be no other better way of doing timepass and networking. Many people would just create some anonymous id’s and chat with their own friends just for fun.

All that soon reduced considerably once chat rooms services were stopped by yahoo. Now chatting is used more for business and keeping in touch.

This is in fact true for all new technologies. It is first misused as people grapple with it and then as it’s implication is fully known it is used for what it was meant for and for serious business !


Now coming back to Orkut.

One of my good friend told me that he looks at the number of profile visits and if they are less or none then he feels bad about it. For him morning first thing in the morning is logging to Orkut and evening first thing back home is also Orkut !!! Ha Ha !!!!!!!!!

Addictions are always bad ….

I have realized in this short period of time that keeping in touch with all possible friends is good , but an amazing amount of time is required for it. Secondly I feel that one must also forget something over a period of time. One cannot be in touch with all his friends all the time.

I guess Orkut will soon be used for scanning CV’s , authenticating profiles ,matchmaking and identification apart from just socializing .

On my part I am reducing time spend on orkutting substantially and increasing on blogging!!!!

The Perception, Reality and The Truth

Early 90’s was an exiting period for the state of Maharashtra. The state was called the most developed , forward looking , prosperous and richest in the country .The state also seemed to have a ‘very good and efficient administration’ and a ‘ visionary leadership’. Nothing it seems can go wrong for the state.

Come 2006 . The state and Vidarbha region is witnessing unprecedented number of suicides by farmers .Regional imbalances are raising tension and threaten to tore the state apart .The state is in a vicious debt trap . Naxal violence and terrorism are the latest new problems. The state administration seems to be complete slumber and people seem to be content and complacent.

Just what happened in a decade?

I come from Vidarbha region. A decade ago when Maharashtra was called a developed state I could not really relate the prosperity of the state .It was a kind of double whammy. You come from one of the poorest regions in the country and yet are looked upon as one from the most developed region! It was difficult to explain the issue to others. Not any longer though!

This is what happed with Maharastra in last decade .

The resources were spent on unproductive purposes like bailing out sugar mills and giving sops to sugar belt farmers.

The investments that were made by taking expensive debt then did not yield desired returns a prime example is Mumbai – Pune express highway or developing the sugar belt.

There was virtually no investment in power and Infrastructure where it was needed like Mumbai . Mumbai now has a marginal growth rate as a result.

No effort was made to remove backlog of various backward region . In fact the backlog only increased fuelling regional tension.

The state failed to come up with a theme for development like Bangalore for IT and Gujarat for Petroleum

The state now finds itself where it has too high a debt coupled with an increasing expenditure and an compelling need to make huge investements in underdeveloped regions.

This is what happens really with governments worldwide. Somebody makes mistakes and others have to bear the brunt. Likewise somebody makes a sincere effort and others reap the benefit.

The leadership that took Maharashtra to such a nadir level is now nowhere to be blamed and in fact still revered. The state seems fit case where people live in past glory rather than thinking about getting over present ruins.

The significance of a Diverse Workforce

I was going through an article about affirmative action policies adopted in US about half a century ago. One of the basic premise and foundation about the policy was the feedback from the US Industry that a diverse workforce tends to be more professional, effective and a better decision maker.

I think this is absolutely true .

I have worked through teams on both ends of the spectrum. With a diverse background comes richness of Ideas , culture , perspectives , behaviors which tends to foster a professional , tolerant culture which is open to fresh thinking and calculated risk taking .I have always loved to work in such an environment so will most ….

I am a firm believer in the policy of diversity and would go at length to maintain it. To put it simply , I would prefer a diverse and above average team to a homogeneous and most competent one.

Now consider the opposite side of the spectrum.

People from same background and culture will generally have same line of thinking and risk taking ability . The work culture is more of a family , a bit like mom and pop office with little room for accountability and professionalism. Only certain type of ideas will generally accepted and resistance to change will be a big hurdle.

Just look at Indian cities . Mumbai is a very cosmopolitan place with people from all possible diversity . On the other spectrum lie places like Delhi , Kolkata and Chennai in lower diversity order. Can you make the difference in the work culture ? I do…

India has so much diversity be it language , regional , racial , caste ( genetic diversity basically) and religion . I think sharpest cultural diversity in India is regional and then language , caste , racial and religion in downward order though language and region are very related in India and diversity based on religion is I think a debatable subject.

HR in most Indian companies have realized the importance of a diverse workforace and are working towards making diversity an important component of their HR policy .But with the experience that I have about Indian industry lot needs to be done to really foster and internalize diversity. I can see a typical problem here . People at the top know the importance and want to implement it and person(s) doing actual implementation has either no clue about it or simply unwilling to do it because it benefits him/her to keep it that way.

Humko to bhai Bus khana khana hai

I have observed this tendency of Indian society for ages but never seriously thought about it .Success of every social function be it marriage , party , get to gather , event depends on how tasty the food was. That is quite understandable given the importence that food has in every culture.

Hmm….

I recently went to a party organized to celebrate Silver Jubilee of my company .It was really a grand event with professional singers and employee performances organized.
The food to be served was starters and then dinner after an hour. So midway through the function it was announced that starters are being served , I predicted that soon the entire hall will get empty . And guess what it really did :) :) in 10 minutes flat!
Now everybody was interested to be in the long que for food than have a look at the performances .I could not really stop laughing and let me tell you it is not a rare scene at all. What was interesting was the fact that all the employees are very well paid and will count among the higher end of upper middle class in India. Phew!

I also remember a similar event. There is a branch of an MNC in India with strength of 1500. Stationary is distributed freely and guess what the monthly consumption of pens there is? 5000 +.

I worked for a private sector bank in India a few years ago .A grand sale was announced once by a city based retailer with almost 50% discount. There was almost a stampede at the event . What surprised me was the fact that a senior manager was purchasing all types for clothes and packing them in boxes. I soon realized that he wanted to purchase all that he can and sell these clothes outside!

I think we still live in that old mindset that everything including food is scarce and that you need to fight for it at every possible opportunity. Not surprising given the history of famines in our country just some half a century ago and a social culture built around that belief.

TATA CSN Corus

I’ve been curiously watching the developments on the proposed takeover of CORUS for quite sometime now. TATA and CSN now seem to have been locked in a lose- lose bidding war game of one upmanship for getting CORUS.

What are the options before TATAS apart from a outright acquisition?

I think it’s merger with Corus. So rather than spending resources for acquisition of CORUS just merge TATA Steel and Corus and avoid the debt burden.The proposed entity will then have the war chest to make another ( or more – the most obvious being CSN) mega acquisition.

On the flop TATA’s own share in the merged entity will be barely in double digits.This’ll make the new entity very vulnerable to takeover .Here I think TATA’s should enfuse capital of $5-6 Billion to up their stake to more than 50%.TATA sons has the wherewithal to raise so much capital. The financial muscle can then be used to acquire another 'major steelmaker'.

But CSN here also will try to justify it’s own case of merger. Then what?

I think TATA’s should just purchase 20-25% of CSN from open market. This’ll silence CSN. The merged entity can then comfortably takeover CSN if it wants.

What CSN is really afraid of is a takeover Bid from TATA’s.

There is another win –win option .A Triple merger of CSN , CORUS and TATA Steel.
But I think CSN and TATA are poles apart in terms of culture and this option although most feasible theoretically, it is most difficult operationally and hence highly unlikely.

An Afterthought :

What could have been done to smoothly purchase CORUS ?

I think TATA’s should have bought around 20% of Corus from open market before making the bid .This would have fend off any potential bidder.