FDI in Retail - Why now?

Yesterday the Indian government surprised a lot of people by allowing a 51% FDI in retail. While Congress had wanted to do it for some time now, it had been stopped in the past by its now famous coalition dharma and general public fear of foreign competition. What prompted this policy move now?

Congress has distinctly been a party without an ideology. In Nehruvian times it was a left leaning Fabian socialist party. But there has been clear lack of ideology in last two decades. Since 1991 it has been credited with ushering in economic reforms, ending the licence raj and putting the country on the track of growth. Although it was an act of a desperation once there was no other choice left, congress did not shy in taking credit even for what was thorough capitulation. One would be tempted to think that after such a drastic move   Congress would have aligned itself away from what it stood for in pre-1991 era. But NREGA showed that they are not shy of populist policies. For congress winning the next election is the new ideology. But why then is the Indian junta now supposed to believe the Manmohan Singh rhetoric that "If we are going down, we will go down swinging". Where does this sudden surge in courage come from? Or more importantly what is the strategy behind this move and why is congress willing to risk its government for FDI in retail?

Skeptics might be motivated to find a corruption motive. I do not believe there is any truth in that. This is a no transaction policy decision which is political in nature. It will help congress fare better in the next election. Popular middle class opinion in the nation is emphatically against the congress, but middle class never determines the election in India. It is the poor masses that determine the winner. And for the masses - Inflation is the biggest issue. At the right moment congress can provide some freebies to the masses (like mobile phone or laptop) to sway the opinion or pull out another NREGA like scheme out of the hat. But that won't be sufficient if the inflation that is breaking the poor man's back does not come down. Since inflation in India is structural in nature, this step was required.

Yes, the FDI will bring efficiency in retail, weed out middle man and make thing cheaper for the consumer, but that will take years to happen. This effect will probably not be seen before the 2014 election. Doesn't that defeat the purpose?  How does it help congress in 2014 election then? To understand this you have to understand the root cause of inflation in India and the reason why rupee fell 25% in a short while.

After the NDA was pushed out of power, for a few years the country was on right track of growth and surplus due to a number of reasons. Effect of the infrastructure spending for prior years were showing and the global economy was doing very nicely. In the second term congress was not so lucky. The global economy had plunged into a recession, but effect on India was not so pronounced. The real shocker came later. Monetary policy was accommodating and  government had started the NREGA which was costing the government forty thousand crores every year and was directly released to the poor. Exports were down but domestic consumption was high fueled by the increased money supply through the system. Current account balance crashed, luckily the rupee was saved due to capital account surpluses. Capital account surplus was temporary in nature - Indian corporates were borrowing heavily in US markets in trying to take advantage of record low dollar rates. But the dollar had to be paid back. Current and capital account both turned red and second half of 2011 was mayhem for the rupee as it lost 25% of its value in short time. There is a significant possibility that this trend of high inflation and rupee depreciation would continue in the future.

Given the government deficits and global economic scenario, there were very few options left. Government tried to fix its deficit by raising fuel prices, it helped. But that did not help the Foreign exchange problem. If the economy remains structurally weak and exports fail to pick up, then somehow Dollars have to be arranged to stop the rupee decline. India has to see some foreign investment and corporates are not ready to borrow after being screwed badly. So in another act of desperation congress has decided to allow FDI in retail. The money that will come in will stay in India for long and stabilize the Rupee. It will be a boost to growth and productivity. It will be atleast a decade before Walmart etc. start repatriating anything back home. Then it will be somebody else's problem to plug that hole. For now, congress can again be a hero, but the truth is that if they did not do this now, there would have been nothing left to save. It is a calculated political risk, and a potential masterstroke.

History

Is History a science or an art? I would argue it is much more a science than we realize.

Science functions as follows- inquisitive folk observe a natural phenomena, which they do not initially understand. They set out on a quest to understand that and related phenomenon. To that end, the inquisitor creates plausible hypothesis. And then starts the collection of evidence to support the hypothesis. This is done through experimentation and keeping sense perception heightened to what they are looking for. If the evidence collected allows the inferring of correctness of the hypothesis, it becomes an accepted theory. One more brick in the wall of Science. Another milestone.

Through the history of mankind science and human knowledge has followed this path to growth. Be it Galileo, Copernicus, Edison , Darwin or innumerable others.

There are some experiments where carrying out of the experiment is hard part and inference is self evident. For example when Edison was inventing the bulb, he had to create different prototypes and then switch on the bulb. If the bulb lights up the experiment would be successful and hypothesis would be theorized. However there are some experiments where  inference is not as simple as toggling a switch and watching for light. For example the Large Hadron Collider experiment. Constructing the experiment and carrying it out was no easy task, but neither is the inference. After all you are trying to find the Higgs Boson, which can not be seen. So large amount of data is collected, which are electrical signals generated from collision of particles, and computer programs go through that data looking for a signature. If the data would pass statistical tests - hypothesis would become the theory. With time if more and more data confirms the hypothesis, scientist would be able to assert with more statistical significance, the correctness of their conjecture.

A close examination would reveal parallels between the act of inference in scientific inquiry and the quest to understand human society and its history. We have a huge number of people on this planet, existing co-dependently for very long, where individuals change through time and ideas that bind them also change through time. Society resembles a mutating organism in that way. It can also be seen as a diversified scientific experiment happening as we breathe. The tough part is Inference. Like a biologist a historian tries to understand the organism that is our society. If we can study our own behavior on a giant scale and through time, and take some knowledge from it, we will have much greater control over our destiny.

History, and the act of writing and re writing of it is not just a statement of facts, but our attempt at inference. History is an attempt not just to create a theory which is an end to itself, but an understanding of individual and collective human nature which itself would evolve over time. The distinction between art and science probably comes from the fact that there is no well defined objective in this exercise, but it resembles science in so many other ways.

Marketing@Olympics and other things

Yesterday while I was watching the 200m race, i saw Usain Bolt grab a camera from a Sports journalist and click away. Later it was all over the news. Many thought he was exploring the photo enthusiast part of his persona, but I wondered - How much would he have been paid for this? I mean top sportsmen who have worked hard to be where they are, don't even drink a cola for free on the street (they can actually be sued if they are photographed drinking a rival cola anywhere) why would he grab a new Nikon D4 introduced in January, on one of the biggest nights of his career and do the best kind of advertisement (one that looks natural) in one of the most watched moments around the world.

Marketing runs so deep in the system that you can never be sure if you really want some thing or you have been subconsciously suggested to want it. If you see the expression "The Beast" of Yohan Blake, that he does when he is being introduced at the start or during celebrations, he almost resembles the Puma which is his sponsor. Now that is some clever shit, and I wouldn't be surprised if that celebratory stance is actually paid for( how it works is it draws your attention to the logo he is also wearing on his jersey while he is on the screen and so registers it on your brain).

I see so many amateur photographers, who all incidentally have found out that photography is a good hobby to have and develops you artistically just when the digital camera technology was becoming economically feasible and companies needed a market now that they had the product. That maybe partly true, but I am sure a tabla or painting offers equally satisfying artistic experience, but they have no takers.  World is full of people who have little idea of what they want, they are just being manipulated everyday.

I am skeptical to an extreme (from experiences of course), to be aware of what i really want and what is being pushed by some party. I did not even read the Harry Potter series when it first came out and became a hit (well that was my loss), because even mainstream literature is usually shitty, like Chetan Bhagat or a Fifty shades of Grey. I let it grow stale and if it is any good it will stand the test of time. And then I will read/consume it when I am sure it is not me who is being monetized. Also the body of literature is so vast out there that if you are reading the best sellers, you are probably just lazy not to find out where all the good stuff is.

Monetizing everything runs very deep in capitalist culture. For example in many countries marijuana was not banned until few decades ago. It was a policy pushed by the US because as a vanguard of capitalism it is principally opposed to Marijuana as it is very hard to monetize. Of course Alcohol is much more harmful than marijuana, but that is legal. Because you can grow marijuana at your home and be satisfied, it is illegal. It is not good business and it is also not  good for business.

Cute Penguins?

Penguins are probably considered one of the cutest creatures around, with their shiny smooth skin and the way they waddle and slide on the ice. They have captured popular imagination in the movie Happy feet and also as a mascot of the Linux kernel. I recently read on a FB status how when a male penguin falls in love with a female penguin it searches the whole beach to find the perfect pebble to present to her. So cute and romantic right?


Let me tell you some things about Penguins that might change your opinion. 


Emperor Penguins are known to push each other in water to test if the water is safe and free of predators. When the penguins are hungry they gather around the shore and wait for somebody to go near the water. Eventually the hungriest one does and at this time they take the liberty to push him with a light nudge into the water. Then they watch his fate intently, and only when they are assured that the coast is clear they take the leap to find some food.


In the early twentieth century on an expedition to south pole, George Murray Levick studied the Adelie penguins, their habitat, reproduction etc. What he found about their sexual habits was so shocking that the information could not be published at that time and was under censorship for nearly a century. He reported acts of Homosexuality among the Penguins. And to that if you say - "Well, that is why homosexuality should not be illegal as it has been documented in around 1500 species, it is safe to say it is totally natural" what do you have to say about the acts of Pedophilia reported among the cute creatures down south?


And it does not stop there. Mountaineers who are reported missing in expeditions are sometimes found buried in ice 50 years later and identified by their photos. This is possible because ice preserves the flesh. The same happens in Antarctica and you can find bodies of penguins dead over a hundred years ago if you dig beneath the new layers of ice. It is not hard to find a perfectly preserved Penguin corpse in the Antarctic and it is also not hard to find a living Penguin over it. Those cuddly penguins have been reported to carry out the most depraved act of all - Necrophilia.


So much for cuteness! And I am sorry if I ruined that penguin stuffed toy you like so much for you.

The Politics of IITs

It first came to my notice in early 2003. I was a first year student at IIT Kanpur then. On winter mornings sipping tea at MT and going through local hindi news papers like Aaj and Dainik Jagran, I would find small articles about IITK somewhere on sixth or seventh page. Usually they would be about cultural or technical festivals (Antaragini and Techkriti) or sports festivals. Or about some project that was completed or announced by a lab in collaboration with some corporation or government body.  This sort of news was not present in Lucknow newspapers. But over the course of time I could see more news about IITs in Lucknow news papers as well.

Then they during the placement season they started publishing the details of job offers students were bagging with top offers being emphasized. Over the years these top job offers news started making to front page in Kanpur and started being reported in Lucknow newspapers as well. The feel good nature of these kind of news stories was identified and exploited by mainstream media outlets nationwide. The emotions it generated in the public were similar to the likes of "Mukesh Ambani 3rd on the Forbes List of 100 richest people". Somehow media fools you into being proud of what shouldn't concern you at all and probably isn't even news worthy. IIT stories are also popular because it represents class mobility. Most lower middle class Indians consider IIT a door to upper middle class and they like to be reminded that despite their current predicament, there is a way out.

Being continuously fed stories about IITs for years, general public feels involved with them. A bit like people generally having views about the saas-bahu soaps they follow. Public is enamored with good news and disturbed by what they perceive to be bad news much more then they should be if their involvement was only at a rationally justified level. And whenever public feels strongly about something, politicians emerge on the scene to exploit those feelings.

Since becoming the Education minister Mr. Sibal took upon himself the crusade for making the IITs socially inclusive.  The entrance test was to be changed to a format which would eliminate or significantly reduce the relevance of coaching classes. Because coaching classes are an unfair advantage to a certain strata of the society and also the formal education system gets sidelined. Marks obtained in class 12th board examinations were to carry 40% weight.
 
Thankfully Mr. Sibal was not very successful in his bid and the final arrangement looks nothing like his original plans. Only top 20 percentile of each board will be able to appear for the JEE, which is a reasonable rule although if it were up to me, i would rather not have that as well. If you believe otherwise,  a few stories of injustices dealt by UP and Bihar boards can easily convert you.

What was amazing though was the magnitude of the effort Mr. Sibal put in his endeavors. With a population of 1.2 Billion, of which majority of households do not have access to decent primary education and the university education is in ruins, he is most worried about reforming a system which takes in less than ten thousand students an year and is probably the best performing institution in the country.

When will we see similar zeal from the minister to reform the primary education system? If he really wants to make higher education socially inclusive, shouldn't the school system be reformed first so that the quality of students increases. Instead his preferred solution is to twist the rules of the game. The JEE is in my opinion is one of the fairest systems in India (barring the externals ) and it is best if it remains fair.

But tinkering with the IITs offers Mr. Sibal much more political mileage than reforming the school system. First reason is that reforming school system could be a costly affair for the government which is already missing its fiscal targets under the weight of its welfare programs. The second and the more important in my opinion is that a shrewd politician like Mr. Sibal has recognized the irrational fancy the Indian population has taken to the IITs over the years. Populist moves regarding the IITs give him most "bang for the buck".  He is implicitly promising a bigger share of the pie to his vote bank.

I can only wish luck to the IIT system which is now on the radars of  politicians playing class and caste politics, partly due to its own success.

The Unabomber Manifesto

Recently I stumbled upon a brilliant essay from Ted Kaczynski, better known as the 'Unabomber' - A name that doesn't do justice to what he stood for. If it were up to me, I would call him the Waldo  of our times although that parallel stops where the bombings begin.

From Wikipedia -

"Kaczynski was born in Chicago, Illinois, where, as an intellectual child prodigy, he excelled academically from an early age. Kaczynski was accepted into Harvard University at the age of 16, where he earned an undergraduate degree, and later earned a PhD in mathematics from the University of Michigan. He became an assistant professor at the University of California, Berkeley at age 25, but resigned two years later.

In 1971, he moved to a remote cabin without electricity or running water, in Lincoln, Montana, where he lived as a recluse while learning survival skills in an attempt to become self-sufficient. He decided to start a bombing campaign after watching the wilderness around his home being destroyed by development.From 1978 to 1995, Kaczynski sent 16 bombs to targets including universities and airlines, killing 3 people and injuring 23. Kaczynski sent a letter to The New York Times on April 24, 1995 and promised "to desist from terrorism" if the Times or The Washington Post published his manifesto, Industrial Society and Its Future (also called the "Unabomber Manifesto"), in which he argued that his bombings were extreme but necessary to attract attention to the erosion of human freedom necessitated by modern technologies requiring large-scale organization."

His manifesto can be found here . It is a pretty long read for a manifesto but thoroughly enjoyable for most parts. His world view is completely objective analysis of the consequences of being part of a industrialist society. I do not agree though with his view that we need a revolution and complete dismantling of the system.

The most interesting part for me was his psychoanalysis of the Leftist mind. Examining the case of Indian Naxal movement- It is my opinion that people who are oppressed and part of any Leftist movement are actually yearning for Freedom and their plight is hijacked by the leftist activist coming from middle class backgrounds. The oppressed want to revolt because their freedom are being compromised but if they were aware of the fact that any leftist movement turns into a totalitarian regime which actually causes more suffering and oppression, they would hardly opt for the path they have chosen. The poor and the illiterate whose sufferings are showcased by the activist types, are in it because of the political ignorance. Part of the blame lies in lack of pro Freedom Humanitarian organizations in India as well.

And the Activists are mostly people of a certain kind. 'The two psychological tendencies that underlie modern leftism we call "feelings of inferiority" and "oversocialization." Feelings of inferiority are characteristic of modern leftism as a whole, while oversocialization is characteristic only of a certain segment of modern leftism; but this segment is highly influential.'

I found that what Ted wrote in 90s perfectly describes what personalities like Arundhati Roy have been doing since then. My understanding of the Leftist brain is considerably enriched after reading the manifesto.

Euro crisis

Euro crisis was misjudged by most market participants and even the authorities as a fiscal crisis. It was the prevalent opinion in 2010 and 2011. The dominant theme emerging now is that it has more characteristics of a balance of payment crisis rather than a fiscal one.

After the advent of the common currency, Germany became highly competitive compared to the peripheral nations. Germany was the major exporter of goods to rest of the Europe and it enjoyed a period of low unemployment and high growth coupled with low and stable inflation. Trade surpluses surged and prosperity increased. Policymakers couldn't have hoped for better outcome.

Peripheral countries had a period of high deficits financed by external debt. Loose monetary policy created a credit fueled real asset bubbles most notably housing in Spain. Wages increased while competitiveness declined compared to core Europe.  When the credit crisis hit, value of the collateral on bank balance sheets collapsed. Both banks and governments were in a precarious situation at the same time nursing an over leveraged balance sheet. Bank needed to bailed out causing accelerated increase in debt to GDP ratios. With sovereigns being unable to print their own currency, much needed liquidation of debt through monetization and inflation could not happen.

 The current situation in Europe is certainly not a stable state. The Fiscal and structural imbalances need to be fixed. It is very difficult to predict the dynamics of the situation, because that depends on how the politicians act. Politicians try to move in the direction of the consensus to limit collateral damage. There is tremendous activity in European countries towards manufacturing of consent on some articles while politicians are busy preparing there own road maps, which in itself is not a simple exercise.

But somethings can be deduced regarding the final outcome of the situation with more clarity than the dynamics. At this time, there seem to be two possibilities.

 First is the path of political disintegration which leads to breakup of the Euro. Peripheral countries have a reason to resent German stubbornness with austerity. But first major step in this direction will probably come from Germany because of its creditor status. Just like in the Soviet disintegration where the process of disintegration was started by the disenchanted beneficiary, Russia. This will lead to separate currency blocs or a situation similar to pre Euro era, but with heightened acrimony between nations. Trade will not be as free as it is today. Target 2 imbalances would have to be restructured to be settled in a future date. Peripheral countries will have capital controls before the breakup to prevent the flight of capital. The new Lira, Peseta and Franc would devalue after the issue while the Deutschmark and Guilder will appreciate in value. Germany will lose its competitiveness and suffer a recession while peripheral countries will re surge.

The second solution is the path that leads to political integration in Europe. Some sort of compromise is reached regarding the structural reforms and the fiscal compact. If the problem has to be addressed at its root  it should lead to a competitive periphery compared to Germany.  In a common currency framework this can happen through relative inflation in Germany compared to the periphery. Since peripheral deflation is not an option, we can only expect stable prices in the periphery and 4 to 5% inflation in Germany(despite the Bundesbank mandate). Wage inflation in turn will lead to real asset inflation.

Consequently, I am pretty bullish on German real assets- real estate, commercial property, inflation linkers etc for the next decade. In both the cases above- the asset classes stand to gain - either through re denomination or inflation. The risk to the view is how well the imminent German recession is managed.