What's Next for Gold? - Hindu Business Line Op-ed

By Adhvith Dhuddu
(Op-ed as appeared in the Business Line Hindu on Oct 21st)

Gold recently broke through the $1,000/ounce psychological barrier, generating interest among investors, traders and even the common man. Currently there are many factors abetting the price rise in gold. Although no concrete prediction can be made about the price, the outlook appears bullish. There are nine crucial factors that affect the price in the short and long term.

LONG-TERM DRIVERS

Forex reserve allocations: The Asian Financial Crisis in 1997-98 resulted in an accumulation of forex reserves over the last decade. After amassing forex reserves in US treasuries, many Asian economies and export-oriented countries have exhausted their appetite for US debt.

The slow divestment from US treasuries to gold and other precious metals will impact the price of gold. An increasing proportion of forex reserves is being held in gold as countries realise that this could also be a sensible hedge against a slumping US dollar.

Make use of forex reserves - Mint-WSJ Op-ed

By, Adhvith Dhuddu
(As appeared in Mint-WSJ on Sept 14th, 2009)

RBI’s primary use of forex reserves is twofold: As an emergency fund in case of a fiscal crisis or food crisis, and to help mitigate any significant volatility in the rupee

Recently, surpassing $2 trillion, China’s foreign exchange (forex) reserves make up close to one quarter of the total reserves in the global economy. Though a pittance compared with China’s reserves, India’s forex reserves have grown healthily over the last decade and a half and are in many ways a reflection of our success as an economy. With close to $260 billion—approximately 25% of our gross domestic product (GDP)—in forex reserves, our coffers are extremely well padded to tackle a crisis. But what’s disappointing is the Reserve Bank of India’s (RBI) reluctance to deploy these funds in creative and resourceful ways.

In his book, Making Globalization Work (2007), Nobel Prize winning economist Joseph Stiglitz dedicates a whole chapter to explaining how the global reserve system should be reformed for the greater good of the world economy. After analysing how Asian countries have accumulated significant reserves following the Asian financial crisis, Stiglitz says: “The money put into reserves is money that could be contributing to global aggregate demand; it could be used to stimulate the global economy. Instead of spending the money on consumption or investing the money, governments simply lock it up.”

TV9 COMMENTARY ON GOLD

Main points made:

1. The price of gold should continue to rise as there are many factors that are abetting the rise.

2. As inflation fears plague the US economy, and as the true reality of the economic recovery is known, a safe haven like gold should see higher demand.

3. Unprecedented debt issued by the US government will result in inflation now or later, and this will devalue the US dollar significantly. As gold is a dollar-denominated asset, even if supply demand numbers are stable, a weakening of the dollar will mean a rise in the price of gold.

4. The recent economic crisis have forced many export oriented countries, and countires with bulging forex reserves to divest the US-dollar holdings (at least partially) and funnel them into gold both as a hedge and as a safe haven.

5. The supply of gold will only rise constantly and steadily. But the demand for gold can suddenly shoot up in times of crisis as a safe haven.

6. General commodity cycles last about 20-25 years; this one began in early 2000 and could last another decade or more. Of course 10-12 more years of bullish sentiment in commodities will be associated with some bearish periods.

7. Temporary seasonal factors (like the festival season in India for the next 2-3 months) also mean the bullish sentiment in gold is validated.

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Fuss over private education

One of the main functions of the government should be to marry human capital with physical capital

By, D. Muralidhar

As appeared in Mint

Any developing country has a short supply of financial resources to provide even basic amenities. Though the current Indian government has been claiming to be a welfare one, the basic requirements of millions of people continue to be unmet.

Most of the developing countries are endowed with a large human capital, but any forward-looking government should leverage this capital in an efficient way. One of the main functions of the government should be to marry human capital with physical capital. This has to be done so that the country’s resources can be leveraged in the most optimal way. This transformation can occur only if human capital possesses sufficient education. The mercenary zeal of private enterprise can accelerate the process.

There is a marked shift in the demography of our country. The exponential growth of population in the band of 5-20-year-olds demands exponential investments in education. This has primarily not materialized due to the continuous demand on limited government resources for other purposes. In fact, government resources will never be enough. So there is an urgent need for the government to accept this reality and formulate policies for channelling private capital into this crucial sector.

It is relevant to draw a parallel with China here. The present Chinese population is what the Indian population will be in 2020-25. Apart from the various measures China adopted to augment continuous growth, education and skill development received a tremendous fillip. India must do the same.

The historical mindset of the Indian is to expect the government to undertake the responsibility of education. However, as incomes are inching up, paying for education is slowly gaining acceptance. The government must complement this change of mindset by freeing the education sector and allowing private capital. Private capital, by definition, smells profitable opportunities and gushes in; the pace of change is very brisk, thus gaining valuable time.

Having accepted the need for private capital in education, the next question posed by the naysayers is about cost, quality and control. We must start with a premise that some education is better than no education. As private capital flows in, many of these issues get sorted by simple market forces.

Education must be considered as any other amenity, without attaching any baggage. Factors such as reservations, source of capital, merit and beneficiaries should be kept out of the discussion in a country where millions have no access to basic education. We hear of many engineering colleges shutting down programmes in rural areas due to student shortages arising out of lack of infrastructure, teaching staff and other facilities.

So benchmarking must be done not against other countries, cultures, or systems, but against our own needs. This has to be the only yardstick to improve the availability of education.

Education being a part of the Concurrent List in the Constitution, Union and state governments must act as catalysts rather than controllers. The statements made by human resource development minister Kapil Sibal are indicative of the shift in the policy approach. But it’s not just the Centre: States that are progressive in their outlook on education will steal a march over others. Like private schools, states can also compete to get the best.

Having already lost decades, India has a long distance to cover. No further time should be lost; changes must be effected on a war footing. The only way out of this quandary is to use private resources with attractive policy incentives. The present inclination of the states to attract investment in industry should become a model to attract investments in education. Enlightened state governments can also leverage their demographic advantage.

D. Muralidhar is on the board of governors at the Indian Institute of Management, Bangalore, and member of the Planning Commission, government of Karnataka.

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India’s infrastructure woes

2009 AUGUST 6

As appeared in the Hamara Congrees site. Click here to visit Hamara Congress

- by guest contributor ADHVITH DHUDDU

The political and bureaucratic classes of India have finally manned up to accept the dilapidating state of our infrastructure. With all the right noises coming out of a rejuvenated Congress led UPA, the big question now is how words, plans and promises are translated to concrete action with long lasting impact. The Achilles Heel for policy decisions taken in India is the poor implementation of objectives, inefficient use of allocated resources and a lack of accountability. Whether its funds earmarked for rural food schemes or urban development of roads, capital often drips out unaccounted, from the leaky pipelines. What is originally envisioned by lawmakers and policy wonks seldom materializes on the ground.

Anyone would accept that a government cannot and should not function with profit as their motive; it’s just irresponsible and immoral. But an ironical observation here is the excellent accountability evident in every public-private partnership project with little or no leakage of funds. When private players are stakeholders with profit as their goal, accountability and responsibility reappears like magic. Government at all levels needs to take notice of this and try to replicate successful practices enforced in these partnerships. But delving into the critical infrastructure needs, one can easily identify many areas where long overdue development and improvement is needed.

Electricity (residential and industrial): India is replete with inefficient and outdated electric grids, a fatigued electricity transmission network and mediocre rural penetration. A lot of progress has been made in the power sector but its insufficient compared to what is required. Our archaic power transmission and dissemination methods contribute to huge losses in power, increased cost and needs desperate modernization. In many big metros, electricity is not a major concern as uninterrupted supply is somewhat reliable but rural areas continue to suffer as power generation and transmission still lags demand and power theft is rampant.

Industries bear the brunt of this problem as their costs surge and margins become slender. Manufacturing is a critical sector in any economy and its success depends heavily on how well the state abets them with uninterrupted and affordable electricity. Unfortunately many industrialists have shifted expansion plans abroad, and foreign players have scratched India off the list citing unreliable and expensive power as the deterrent.

Our government needs to recognize the tremendous benefits of having cheap, uninterrupted and reliable electricity. If the Congress led UPA can achieve this, it can usher in a new era of manufacturing in India as international players will relocate their bases to leverage inexpensive power with all the other advantages we already posses, i.e. affordable labor, language, technical skills, a growing market, etc.

Roads and highways: It’s a pity that the previous government’s brainchild and the NDA initiated Golden Quadrilateral (GQ) project was not pursued with rigor since 2004. This is why it’s important to leave political affiliations at the door when important national infrastructure issues are deliberated. The sluggish progress was evident after the NDA was voted out of power, which is disappointing.

Although the project is nearing its completion, tremendous amount of investment is required to maintain and expand the GQ and our complete highway network. Close scrutiny is required for all highway and road projects as contractors often try to make a quick buck by using cheap and low quality materials. Roads and highway networks need to be built for the future, keeping in mind the ever rising vehicular population and increasing dependence on highways for transporting goods.

Internet and broadband: Internet connectivity, broadband penetration and IT saturation is pivotal to the success of any nation in the 21st century. If India’s vision is to be a superpower in the coming decades, we need to equip our rural and urban population with the ability to leverage the internet in the most optimal way. Trying to win in this century without the internet is like trying to win a 21st century war with pitchforks and knives.

The internet is a productivity multiplier and the sooner it’s embraced by the population the better for the country. With this in mind, it’s disappointing to note that the rural penetration of computers and internet is poor and internet infrastructure in the urban areas requires extensive upgrading. Besides providing top quality IT infrastructure, tremendous investment is also required in training our rural masses.

City planning: There’s little talk about this in the mainstream media, but urban infrastructure planning is pivotal to the success of any large city. Many of our metros don’t even have up to date maps of sewage, drainage and sanitation lines, and rely on outdated maps for water and electricity lines. This often results in little or no coordination between different departments when roads are dug up for various reasons. Planning when it comes to the rural areas is downright appalling, as millions in villages still struggle to get basic sanitation facilities, good drinking water and electricity.

Infrastructure now: And for those still unconvinced about investing in infrastructure, here’s what a new, improved and modern India will look like: we can boast of efficient resource consumption, better capital utilization, soaring productivity which will lead to a higher GDP and incomes, accelerated growth, smart and agile supply chains for industries, faster movement of goods and equipment across the country, elimination of slack in the system, affordable travel for all, a highly educated population, an efficient marketplace, soaring foreign investments, and a country where superior infrastructure becomes so commonplace that citizens will finally focus on their jobs and stop complaining about the massive lags presently inherent in the system.

Our guest blogger Adhvith Dhuddu writes regularly for various publications in India and US about the economy and politics. He blogs regularly at www.AdhvithDhuddu.com and can be contacted at adhvithd@gmail.com.

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UPA 1.0 Vs. UPA 2.0: LEFT REALLY LEFT OUT?

By Adhvith Dhuddu

You don’t need a rocket scientist to decipher the capital markets’ vicious reaction to our FM’s highly anticipated budget. With expectations sky high, which were reflected in the May 18^th jumbo rallies, our FM under delivered on numerous aspects disappointing many stakeholders. Whether its investors, industrialists or the aam admi, but for the scattered green shoots, the broad strokes painted in the budget lacked the transformational and reformist tone that was required of Mr. Mukherjee. After the Left was left out, and the UPA launched its revamped 2.0 version; the towering expectations of a reformist UPA have been put to rest, at least temporarily.

The budget’s indifferent tone coupled with an unenthusiastic reception leaves one wondering if the Left was just a scapegoat in UPA 1.0 from ‘04 to ‘09. It’s imperative that the electorate ask this question because change has not come when the people demanded it. Voters couldn’t have sent a stronger message than by voting out the left parties who were vociferously obstructionist in nature, gleefully blocking every reform oriented policy initiative.

The primary culprit of this budget was the lack of details which the markets debunked almost immediately, sending the major indexes into deep red. So how can one accurately answer that question? Very simple, let’s explore if any major policy measure that the left would have blocked has been implemented.

FDI in banking, retail and insurance: Something that the Left parties vehemently opposed, fearing that outside competition would be detrimental to local industries. With the Left gone, there were high expectations that deregulation in these sectors would be initiated. But no concrete details were given in this segment.

PSU disinvestment: Another area that the Left strongly opposed believing the classic communist view that government is the best institution to run an industry. The prospect of moving forward here was very high as many analysts expected cash flows from PSU disinvestments to help pad the fiscal deficit. But again, besides a brief mention, little details were imparted in the FM’s speech.

Fuel Policy: Everyone’s aware of how the Left consistently voiced their irrational criticisms when fuel prices were hiked even a rupee or two. This budget was a golden opportunity for our FM to introduce sweeping policies to incentivize efficient use fuel, to encourage alternate energy companies, or to tax high polluters, all of which would’ve drawn the Left’s criticism. He could have leveraged this tremendous opportunity to provide an energy vision for India but failed to deliver from the pulpit.

Although these are just a few areas where UPA 2.0 could have initiated reforms, it clearly reflects the lack of political will to make bold moves in this opportune environment. While it’s true that the stock market is not the ideal barometer to measure the budget’s outcome, one has to pay attention to the markets as it was biggest post-budget drop in Indian history. Not only is it disappointing to realize that the Left was a scapegoat in UPA 1.0, but it’s also unfortunate to watch the Congress continue along the lines of UPA 1.0, lacking the ability to make bold moves, devoid of the required political will.

Also, few have dared to ask one tough question: What if we do stimulate, sending the fiscal deficit to 6.8 percent or higher (adding off-balance sheet items amplifies the deficit), and growth is still at moderate levels between 6-7 percent? That situation could be severely precarious for the Indian economy as the FM will then have to tackle a rising fiscal deficit, moderate growth, diminished receipts and India could fall prey to credit downgrades by international rating agencies. This outcome, which could be extremely detrimental to the economy, is very likely as the FM’s plan is a conditional one. A condition that growth will creep back into the Indian economy and the world economy will slowly pick up momentum.

I ask this question because although bold moves are required in this environment, it cannot be at the cost of fiscal prudence. Claiming that more money in the hands of the consumer will lead to higher spending is valid if you are in the United States, but the mindset of the Indian is to save more and spend only moderately. Given the gloomy environment, more individuals will be looking to pad their own bank accounts not someone else’s.

Overall this Budget is a relative disappointment because the FM has failed to capitalize on newfound popularity of the Congress party. A bird’s eye view of the budget lacked the needed lucidity in many reform areas, skipped the concerns about delivery mechanisms, has been blithe about FRBM targets, and was devoid of any visionary message or statement for the next five years of UPA 2.0

(The author is an asset manager and professional trader.)

UNION BUDGET 2009: July 6th 2009.

Commenting on the Union Budget just before D-day on 5th July, 2009.

Some points made:

1. Given the gloomy state of the global economy, the Union Budget should be presented with growth as the primary aim.

2. Although our fiscal deficit is expected to rise as rural schemes and various subsidies weigh on India Inc's balance sheet, the growth imperative must not be sacrificed just to keep the deficit numbers in check. Of course, if the fiscal deficit gets out of hand, India could face a credit downgrade, but that is not very likely in the near future.

3. IT has been a source of growth for the last decade, and this would not be the best time to eliminate tax incentives in place as the US and UK (big markets for IT) are in a recessionary environment. Uncertainty on the 10A extension must be cleared out and IT companies must be given 1-2 more years of tax exemption.