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 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)
After have read the interesting blog a couple of thoughts comes to my mind but before sharing them I have to emphasize that I’m neither an expert on the Titanic tragedy nor the Indian economy.
ReplyDeleteIt is of course challenging to compare a historical event where the outcome is familiar to everyone with something that might happen and the end is yet to be seen. Using the metaphor of the Titanic disaster and apply it on the Indian economy is thrilling and triggers the imagination.
The sticky oil prices and weakening local currency and other indications mentioned would in that case be symbolized by the Atlantic which can as any ocean be very volatile and turbulent. The Titanic tragedy came instantly and vigorously when colliding with the iceberg. So continuing with the metaphor-
What would be the “iceberg” which instantly will appears and unavoidable for India to collide into?
Can the “India collision” be prevented?
If the collision happen what kind of rescue operations will be required?
Or, will India be left to its fate far out in the ocean unreachable for rescue operations?
Nicely written. Agree with you whole heartedly. but you've stayed away from prediciting where INR would go to in 2012. I actually dont think India and INR are heading for disaster. As has been history, time and again, India has hit hurdles but has come out stronger and fitter. For investors, financial disasters create opportunities. It's the same this time around. Once the turbulence settles, that'll be the time to put money at work in India....Property, Equity, Bonds, you name it.
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ReplyDeleteI appreciate your foresight Avinash - on predicting a possible crisis which could be larger than 1991. The way you linked it the events of Titanic is ingenious.
ReplyDeleteThe government is still denying to call it a 'crisis' per se, but says we are in difficult times. I believe that this crisis is not as bigger or worrisome as in 1991 in terms of CAD and Fiscal Deficit as we have a Forex reserves of $280 Bn. But this crisis will impact a common man or public larger than what it did in 1991 due to rise in disposable income and more exposure of a common man on the economic policies of the GoI.
There are several reasons which are leading or dampening the current state of the economy. One small event is triggering a chain of bad events - forming a vicious circle which the government is facing immense challenges to solve.
The rise in CAD and Fiscal was creating a bubble, but it needed a pin to blow it. The Fed stimulus cut was the so called EVENT which triggered this whole fall of over 20% of INR/USD and all other major currencies.
GoI wants to clean its hands saying that all the emerging economies are facing this challenges. But the truth is INR is ALL TIME low compared to other emerging currencies which are 2, 3, 5, etc years low.
The interest rates are not supporting the situation is because India has huge inflows in Equity rather than in Debt. Any rise in the interest rates or measures to control liquidity is just annoying the foreign investors to dump their investments in Equity markets because this will cause inflation and slump the profits of the corporates.
The HERD mentality prevalent in the markets is causing a further fall in the already sick INR. The country which offsets its CAD with the Capital inflows is facing a trouble because of huge outflows triggered due to 'Fed stimulus cut'. Hence, it is wrong to say that there were huge inflows post 2008 because of the strong growth opportunities. All we can say is that we were a better choice compared to other emerging nations as all advanced nations were in crisis.
I think I am going on talking on this never ending problem in front of us. But I want to conclude by saying that it would have been good if the GoI delayed the FSB and LAB bills. This could have reduced over 1 -1.5% of fiscal deficit.
The key events ahead - Syrian war (Oil), General Elections, US Fed meet this Sept.
Hope the Ship never sinks :)
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Pranay Veer