But this ship cannot sink!

An ill-conceived moniker 

The legend of the ill-fated ship now, quite literally, has another dimension to it . Its been a month since Titanic in 3D’s release and its evident that this disaster, in its centenary year now, still remains the planet’s favorite shipwreck story. I haven’t yet seen the 3D version of the movie but recall seeing the 1997 release and being awestruck by the dramatic reconstruction of a tragedy that never should have been.  When you look at a faithful re-enactment of some of the planet’s greatest catastrophes on celluloid, you actively seek the key events that had the largest impact on the outcome. As a finance professional, insights from the ship’s misadventure often forms the basis of my investment related discussions with members of my fraternity. Its my firm belief that the Titanic’s unfortunate end was inevitable. It lay in its monstrously flawed origin. Why was it ever called ‘The Unsinkable Ship?’

The Incorrigible Twins

Over the last couple of years, I have seen denial at close quarters. It creeps in like an unwanted visitor when the talk inevitably veers towards India. The Indian Rupee has been spectacularly routed. It is periliously close to breaching the 54 per dollar mark again - a level it last saw in December 2011. The hapless Deficit Twins, Current Account and Fiscal, are experiencing growth spurts like never before. Estimated at 3.8 per cent of GDP for the fiscal year 2011—12, India’s Current Account Deficit is far worse than what it was in the crisis of 1991. India’s Fiscal Deficit jumped to 5.9% of GDP for FY 2011-12 compared to the earlier target of 4.6% and the Government has set the FY2012-13 fiscal deficit target at 5.1% of GDP which is very high. Now you may think an Indian Ultra High Networth Individual would treat a fact like this with a lot more respect. Not really! Any mention of the yawning Deficit’s only elicits a yawn in return. I am coldly asked to cut out the sarcasm when I say that I hope to see the twins walk down the aisle someday and take on the more coveted name – Surplus!

A home bias that is hard to ignore

There is a conviction bias that is hard to ignore.  Is there a misplaced sense of belief that the country will side step a looming crisis, of a magnitude perhaps greater than the one it faced in 1991? And what could be the basis for this belief? Can strong popular opinion be enough to sustain the India growth story? A year ago, India was boasting 8.4% GDP growth, with experts predicting it would overtake China on the growth charts. Today, growth has slumped to 6.9%! The knives are out for the India story with skeptics going to the extent of saying that the ‘I’ in BRIC was never a reference to India but to Indonesia!

Belated Measures

The government has been struggling to woo foreign investors back with belated measures like the two way fungibility in Indian Depository Receipt’s (IDRs). The implementation  impacts only one company at the moment but may perhaps, in the long run, prompt other companies to float from IDRs, leading to a deepening of the capital markets. Freeing up interest rates on the fully repatriable Non Resident Indian accounts to encourage remittance inflows may not provide immediate solutions. Compared to FDI and FII, remittances are indeed a more stable and sustainable source of foreign currency inflows to the current account but it may be a long time before India (with inward remittances forming only 3% of its GDP) steals a march on countries like Phillipines, where remittances have consistently contributed to more than 10% of its GDP.

Last week, The RBI relaxed the interest rate ceiling on FCNR deposits of banks with maturities of 1 year to less than 3 years to 200 basis points above the LIBOR or swap rate, from 125 basis points now. On 3 to 5-year maturity FCNR deposits, the rate ceiling was relaxed to 300 basis points above LIBOR. Also, banks are now allowed to freely determine the interest rates on export credit in foreign currency. None of these measures seem to have succeeded in bolstering the rupee though.   

A combination of high, sticky oil prices and a fast weakening local currency have made things worse for a country that meets 80% of its energy needs through imports. Fears are rife that government induced fuel price hikes may lead to a massive uptick in the prices of essentials.

Like a punch-drunk boxer, the economy reels and just about manages to stay on its feet.

State of Denial

Not surprisingly, the denial, in its strongest from comes from the government of India. After S & P cut India’s credit outlook to negative late last month, on the back of fast deteriorating fundamentals, and warned of a one-in-three chance of a downgrade to junk status in the next 2 years, all that the finance minister of India, Pranab Mukherjee, had to say was ‘there is no need to panic’.

For me, the most defining moment of James Cameron’s Titanic is a scene from its climax involving two of its fringe characters.Its when Bruce Ismay, the snooty first class passenger confronts Thomas Andrews, the ships designer and incredulously tells him, ‘But this ship cannot sink!’. Thomas Andrews says in response,’She's made of iron, sir! I assure you, she can... and she will. It is a mathematical certainty’

Isn’t that always the key? To differentiate a fact from an opinion!

(The views expressed here are my own and do not necessarily represent the Government of India’s positions, policies or opinions – Avinash Menon)