New BPL Caller Tune

I thought it would be a good day when I woke up. The weather was pleasant, I nursed my morning tea, picked up the newspaper, kept the pillow on my sofa, and lay down on the soft cushion anticipating 30 minutes of peaceful reading. But what I saw in the paper almost made me spill my cup of tea over it. The Indian government, in its infinite wisdom, is apparently planning to announce a scheme on  independence day to provide free mobile phones to all below poverty line (BPL) families, in order to enhance producivity and usher in a new era of economic development.  Cost: Rs. 7,000 crores (approximately $1.27 billion)

The naysayers like me can spill tea or coffee over it, but the government of India (in its infinite wisdom) has put in a lot of thought into it.  They knew that critics would scoff at the idea, because BPL families may not have the money to recharge their phones. To silence them, the Government of India will provide free talk-time worth Rs. 200 every month for all BPL families. Ha!

That said, the bigger issue for the government may not be the phone recharge, but the basic charging of the phone itself - in a country where electricity is not available in a good chunk of rural households.

The plan of action also involves sending messages to these phones extolling UPA government virtues and aam aadmi programs (those damn critics say that this is a populist measure aimed at a third term for the current circus). The critics are crazy because the bulk of BPL families don't know how to read or write. For all you know, they might see BPL in those texts multiple times and confuse it with BJP. In all this my BP is shooting up - aakhir UPA ki baap ka paisa hai kya? As tax payers, we are entitled to some answers.

No wonder the planning commission had earlier this year set an income of Rs.26 a day as the poverty benchmark. After all, we want to limit the number of phones given away free, don't we?

Meanwhile, the government is also in talks with service providers to make sure that the caller tunes are provided at a subsidized rate to BPL families. Now that was something I cooked up, but didn't it seem plausible in all this madness?  Oh! Tughlaq was such an honorable man.

Tamasha - India's favorite genre

El Nino, Lost crops, La Nina, IMD,
We didn't start the fire  
No we didn't light it  
But didn't try to fight it

Now, I'm a big fan of the Billy Joel song, but I had to edit the last line (and the first one). India (and Indians, by default) could well be headed for it's worst  year in the last decade. No matter what our meteorological department says, we haven't seen rains this year, at least in the south. August rains are predicted to be pretty strong, but the precipitation lost in the last two months could be costly. Though it may have sounded like one, this is not a weather update, and this could have major implications on our lifestyles in the coming months.

Sugar hovers at around Rs. 33-35 a kilogram. How about sugar at Rs. 60 or 70? The whole of India (especially the North) would go into a tizzy. The present Sheila Dixit dispensation in Delhi got the first real taste of success after the onion price rise in the run up to the elections that brought down the incumbent BJP government. How about aaloo at Rs. 50 per kilo? And how about Rs. 60 for a kg of rice? If you thought the Food Corporation of India and their rotting warehouses would save us from a stratospheric price rise in food grains (like the Strategic Petroleum Reserve and their salt domes filled with oil in the US), you could be in for a rude shock.

Why is this important except from a pinch-on-my-wallet perspective? Well, the RBI has its first quarter review of the monetary policy on July 31. There are a bunch of analysts that are expecting surprises like interest rate cuts (India's Reserve Bank has surprised analysts more than any emerging market central bank in recent times). That my friends, is wishful thinking. I could be wrong, but at some level, I think the analysts could be in for a surprise. How about a hike in key rates? 

A possible drought and the consequent food grain price inflation will be textbook whipping boys for raising or retaining key benchmarks. Fair enough! But coupled with a lame government, this is a disaster that India is waiting for and walking into with a devil may care attitude. Reduced industrial activity, thanks to high borrowing costs and zero-luster reforms, will ensure that our RIP as an attractive investment destination is written in glowing letters.

Oh, and since we are on the topic of governance, the only policy action that got some sound bites recently is the Karnataka government's decision to spend 17 crores on poojas (prayer ceremonies) to appease the gods of rain. Seriously? I prefer the central government's inaction to this paleolithic state intervention!

In all of this, our currency will continue to fall. Unless crude falls substantially, I do not think there will be any real kicker for global growth. The only Au lining in this otherwise dark cloud is the deluge of superhero movies. I think they are some kind of a leading indicator of the markets bottoming out - too much pessimism- the paranoia being overdone. I would like to believe that, but if I had to put my money where my mouth is, I would short our currency, our government, and our central bank.

As for tomorrow, look at the way our benchmark indices moved today - big rallies with the Sensex rising about 300 points and the Nifty a 100 points, anticipating positive cues from the RBI. They're setting us up for something. Like I said before, I could be wrong, but (I'm gonna stick my neck out) the indices will see red tomorrow.

The slew that failed

RBI came out with a slew of measures today to arrest the Rupee fall. The piddly nature of the slew meant that markets tanked, and the Rupee hit a fresh low. Actually the steps announced by Mr. Rangarajan (RBI top honcho) reminded me of the battle scenes from Ramayan telecast on DD in the 90s. The battle lines are drawn, and the crowd is expectant. Mr. Rangarajan lifts his bow and lets outa slew (the third slew in this para) of arrows. The arrows fly in tandem towards the market. (music dhanadang dhanadang dhanadang in the background) Before reaching the target, the arrows stop and fall in one shot. Camera zooms back to Mr. Rangarajan who bangs his chariot in disgust and disappointment.

C'mon, if these are the aces up your sleeve at least don't make any grand announcement that we are going to take some majjjor steps. Just announce in a business as usual manner. Without the pressure of expectation built in, markets might take to them in a kinder fasion.

That said, in the blue corner, headlines declare that analysts' consensus estimate is that the Rupee will fall to 60. (This time I'm tempted to join them. That would complete a bear picture.) But you know what the usually means, correct?

Depreciating Cs

Well, the two Cs are depreciating. In the middle of simmering fuel prices, Crude oil has depreciated by about 17% in the last one year. Indians should have rightfully expected some relief from higher fuel prices. But our Currency decided to play spoilsport. Indian Rupee fell by a staggering 27% during the same period, wiping away crude price gains and further burning holes in our pockets.

The RBI announcement last week to remain hawkish further spooked the markets sending the Rupee closer to the retirement age in government jobs. A few more jabs, and it will touch 58 to the US Dollar. RBIs hawkishness, twin deficits, high inflation, and a frozen government are all things that we are used to by now.

What surprised me though was what RBI deputy governor Mr. KC Chakraborty said when asked whether falling crude will help arrest inflation:  "The fall in crude prices has been partly offset by depreciation of Rupee. In rupee terms, oil prices have not gone down much". Thank you very much Mr. KC. There you go - a text book answer. He should have been in a classroom. And while he was at it, he could have sidestepped the question about how hawkishness in some way contributes to the falling currency.

He also went on to make a case for people who save - and how low interest rates in a high inflation environment could hurt those who save money. I'm not going to say anything about that, because I don't have anything left to save after paying my bills. All I can say is that we need more doves than hawks in RBI now. So sing with me, Kabootar ja ja ja ....

Bharat Bandh - An apt name for the state of affairs

It was the worst of times, it was the age of foolishness, it was the epoch of incredulity, it was the season of darkness, it was the winter of despair, we had nothing before us, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

Well, all it needed was a few deletions from the Dickensian book opener to describe the state of affairs of the Indian economy and politics in the present period. As I write this, there is a nationwide shutdown (Bharat Bandh): a textbook response to the highest increase in fuel prices in history. Fuel prices had to be increased because crude oil (which is mostly imported) prices have been going up, and the Rupee has been falling. This is a double whammy because the appreciating crude has to be paid for in dollars which have to be purchased using a depreciating Rupee.

Let's start with the question of why the Rupee is falling. The primary enemy of our currency woes is our government (Surprise!) - one that suffers from the worst form of policy paralysis. Decisions that could have helped invigorate the economy and stabilized our currency have been constantly put on hold. Opening up sectors like retail, education, and aviation could have made us the emerging market to go to, not the hot potato that we have become. Simply put, the FDI dollars just won't come the way they could have.

On the other hand, we have the issue of corruption, which the government is not interested in dealing with, except when it is conducive to do so to settle political scores or keep allies in line. The Swiss account details cannot be disclosed (wait a minute, did you say RTI?), but Raja, Jagan Mohan Reddy, and Kanimozhi can go to jail. The 2G spectrum scam is not just a tall tale of corruption, but a tale of how unattractive India has become as an investment destination. Norway would not forget the Telenor fiasco (their sovereign fund is invested heavily), nor would Dubai forgive Etisalat, nor would a lot of funds and governments watching the nasty show unfolding currently. Raja might have been the organizer, but the present dispensation presided over it.

Tax policies that have a retrospective effect (Vodafone) is not something any prospective investor would like. Businesses do factor in uncertainty about the future in their investment decisions, but it would too much to ask them to factor in uncertainty about the past. So shaky is the tax "reform" initiative that fund houses have shunned India and shifted to Singapore stock exchange (SGX) to take a bet on India through Nifty futures traded there. And guess, which side of the trade they would take?

Then, there's this wasteful expenditure under the guise of inclusive growth (NREGA), worth billions of Rupees, that institutionalize corruption and furthers the sole goal of remaining in power. Instead of investing in infrastructure that will result in future growth, we continue to pump more and more of the currency we have no right to print.

Faced with uncertainties and depressed earnings (and quality of earnings, in some cases), foreign institutional investors (FII)  have also been on their way out for quite some time. Putting all of this together, Rupee is likely to be under strain for quite some time. Now, that's a problem, because our crude oil import bill is huge, and oil has to be paid for in dollars.

And since we are talking crude, we should not forget a few things:
1. Why should the government benefit every time international crude prices rise? In case you did not know, taxes account for about 50% of your fuel bill. The official reason we get for every fuel price hike is the bleeding oil marketing companies (OMCs) that incur a loss on the sale of every litre of petrol or diesel. If that was the only reason, why did the government not freeze the tax amount (not the %) equal to what it was when fuel prices were allowed to float in 2010, and let the differential accrue to OMCs?

2. Why are we not sourcing cheaper oil? Iran is a case in point, as it offers oil at a much lower rate than the much-hyped $125 per barrel. What's more? Because of its compulsions, Iran is ok if India pays in Rupees, not dollars!!!!! More trade with Iran would not only mean cheaper oil, but also a healthier forex positioning by not spending greenbacks on at least on that portion of the import bill. But NO, our government would rather toe the US line, as is evidenced by the recent reduction in oil imports from Iran. Common man be damned.

3. Is anyone looking into the efficiency of OMCs? Rest assured, there will be a lot of holes in their books and processes, just like any other babu enterprise.

4. Every price rise has a built-in Mamata premium to it. The delta which will account for a possible hike reduction to assuage the shrill noises and uproar that follow a hike.

5. The Congress has been able to manipulate/cajole/threaten its ally base, and consequently the government is at its strongest when everything else is in tatters. This time around Mamata is relatively silent, because Mulayam is cozying up to the Congress, with possible offers for support. Her threats just won't work as it did in the past. The DMK, an ally, threatened to walk out, but then backtracked, apparently because the UPA government's fall would strengthen non-secular forces. Yay! I loved that one.

6. The pseudo-democratic picture is not complete without a few more strokes. In any democracy, the success (or failure) of a government can be judged by its opposition. In this case, the failure of UPA2 can be judged by the even more monumental failure of the opposition. The BJP looks like it still cannot come to terms with "Why-did-we-lose-despite-the-India-Shining-campaign?". The rest of the opposition is just waiting for a chance to sleep with the Congress. What options do we have to vote in 2014?

And then we take a look at the Rupee, and ask why it's falling? God, if I had the pockets of Soros, I would have shorted this damn currency myself. This falling currency incidentally gave the powers that be, the reason to hike petrol prices. In walks inflation and the RBI chief.

The RBI (Reserve Bank of India) chief seems to have taken the hawkish praises a little too much to his heart. Every time the key rates  are hiked, we're given the same villain as the reason - inflation. Every inflation-targeted interest rate hike has helped in depressing economic activity by increasing borrowing costs for the average consumer as well as the average business house.

Put all of this together, and your currency will continue to fall. Citing input cost pressure, OMCs will increase fuel prices thereby adding to the inflationary pressure. To target inflation, RBI will continue to be hawkish. The average Joe will be continue to get sodomized from all angles, while the government will sit idle making Nero look like a teenager.

The RBI does make noises when it comes to arresting the fall of the Rupee. But how much can it intervene, given the broad policy and structural concerns, and its small forex kitty that just has enough dollars to pay for 6 months' worth of imports? It actually brings back images of the early 1990s, when our liberalization process was rolled out, more out of necessity than vision. It is indeed ironic that the man heading our current dispensation is the one who helped us claw our way back and into relative prosperity back then. 

Well, there is one silver lining in all of this. Thanks to the steep fall of the Rupee, a good chunk of Indian equities (in dollar terms) is at appetizing levels for $FIIs - at levels that were not witnessed even during the great recession. Indian currency market (like the stock market) does not have that much depth, and FII inflows could make a whole lot of difference to the movement of the Rupee as well as stocks. That's a double bonanza for FIIs - they will have an appreciating Rupee as well as booming stock prices contributing to their ROI. Well, it's just a fool's thought, but bulls do have a habit of showing up when everyone turns Cassandra. It's either that or a wad of toilet paper in your wallet.

Or Manmohan Singh lives up to the first three letters in his name. But that would be so unrealistic and chauvinistic, wouldn't it?