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 18th 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.)

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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.





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A BUDGET FOR YOUNG INDIA

By Adhvith Dhuddu

(Op-ed as appeared in Business Line Hindu)

There is much talk and anticipation surrounding the rejuvenated UPA’s interim budget expected in early July. While everyone’s discussing tax slabs, agricultural subsidies and fiscal discipline, it’s equally important that our Finance Minister focuses on presenting a budget with Young India in mind.

The demographics of our country calls for such progressive policies and young Indians have high expectations from a UPA that is partially spearheaded by Mr Rahul Gandhi and his young brigade. After all, young voters were crucial to the UPA’s thumping victory.

The 5 Es affecting young India are Education, Employment, Entrepreneurship, Environment and Energy.

Employment: Given the gloomy state of employment, tackling the labour problem first could mitigate fears of a prolonged slowdown with high unemployment. Thousands of graduates are added to an already strong Indian workforce each year, and if hiring does not gain momentum soon, it could be a source of problem for the Government.

The Finance Minister should consider providing temporary tax incentive to certain labour-intensive sectors (such as retail and manufacturing) which can have an immediate impact and alleviate some pain. But decisive and far-reaching action is needed soon or we could see many unemployed and disgruntled young graduates.

Education: The HRD Ministry has been asleep at the wheel for the last five years, adopting regressive policies when it comes to education reform. Caste and class have taken centre-stage for too long, overshadowing merit. Aimlessly increasing allocations and earmarking crores for more institutes will not ensure quality unless the ineffective command-and-control structure is comprehensively revamped.

Colleges and universities are not being allowed to make swift changes to meet 21st century requirements, and adding salt to our wounded education sector are laws that prohibit foreign universities, which are lining up to invest in India.

Mahatma Gandhi once said, “The youth of the nation is the salt of the country.” Our HRD Ministry’s inability to act is driving away thousands of talented and passionate students to other countries for graduate and postgraduate studies. If the Congress-led UPA is smart, it will enact extensive education reforms to leverage the favourable demographics of this country.

Entrepreneurship: A lot is said about the transformational reforms in 1991 that vaulted India into the global arena. But what Mr Manmohan Singh and his team did then was very simple: they provided an extremely conducive environment for entrepreneurship, which led to expansion in industries, innovation, employment, an enriched population and an active electorate.

The time is ripe for another entrepreneurial revolution, and policies favouring it. Even today corruption is rampant, capital is expensive, contracts are arduous to enforce and it’s tough setting up an enterprise. India ranks a dismal 122 out of 181 in the ease of doing business report published by the World Bank. The reforms in 1991 have shown us the right way; right policies today can foster entrepreneurship in a young population that will be the employers and employees of the future.

Energy: Energy consumption by individuals and industries is set to soar to unprecedented levels in the coming decades. Whether it is petrol, diesel, LPG or kerosene, it is critical to secure our energy future. Protecting and strengthening energy infrastructure is primary but, simultaneously, energy generating capabilities must be expanded. The Government should create a positive environment with sops for renewable energy projects and companies. Instead of choosing wind energy over solar or hydroelectric power over ethanol, we should adopt an all-of-the-above approach and promote all renewable energy companies.

The West has realised this and is rigorously trying to expand renewable sources of energy. We should create an energy infrastructure that is home-grown and self-sustaining. This issue is at the heart of every young Indian’s priorities, as energy shortages and rising prices loom ahead in the absence of long-term energy policies.

Environment: Although it may appear inconsequential at present, we will only be cursing ourselves (and our previous governments) in 2030 and 2040 if we fail to formulate and enforce concrete environmental regulations. India has experienced rapid industrialisation in the last 15 years and the pace is expected to increase in the coming decades.

The least we can do is leave the coming generations a clean and green environment. As Thomas Friedman points out in his book Hot Flat and Crowded, the 21st century will belong to leaders in Energy Technology. Energy and environment are strongly correlated and can be addressed through an all-of-the-above approach to renewable non-polluting energy.

With the right kind of policy focus, the Government can whet the youth’s appetite and simultaneously put the nation on the fast track to growth.

(The author is an asset manager and professional trader)

ONLINE LINK TO THIS ARTICLE: CLICK HERE

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NEWS-9 COMMENTRY ON BANGALORE'S INFRASTRUCTURE WOES

On news-9 (June 4th 2009) commenting on the Bangalore's infrastructure woes and why the BBMP is unprepared even after years of experience that monsoons and rains severely affect roads, drains and activity in Bangalore.


I AM URGING ALL BANGALOREANS TO GO ONLINE AND SIGN THIS PETITION TO BE SENT TO THE BBMP. GO ONLINE, READ THE PETITION AND SIGN IT: CLICK HERE


THE MORE PEOPLE THAT SIGN THE PETITION, THE MORE POWERFUL THE MESSAGE. LET IT BE DIFFERENT THIS TIME, AND LET US ALL TAKE A FEW MINUTES OUT OF OUR BUSY SCHEDULES AND FORWARD THIS PETITION LINK TO PEACE LOVING BANGALOREANS SO THAT OUR VOICE IS HERD LOUD AND CLEAR. SO PLEASE FORWARD THIS LINK TO MORE CONCERNED BANGALOREANS TO SEND A CLEAR MESSAGE TO THE BBMP. 

Dont forget to add your comments!

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COMMENTRY ON NEWS-9: THE DILAPIDATING STATE OF BANGALORE'S INFRUSTRUCTURE 

I was on News-9 today (June 2nd 2009) commenting on the dilapidating state of infrastructure in Bangalore. Recently rains captured the life of 6 year old Abhishek, which was extremely tragic and absolutely unacceptable. The BBMP, or the primary organization responsible for this lapse was caught napping at the wheel. Their top officials were not even ready to appear in front of the media to apologize. Here are some points that I made. 

1. LACK OF PLANNING: Unfortunately Bangalore (and many metros in India) do not even have updated underground maps of drains and sewage systems, which is very disappointing. It's the responsibility Bruhat Bengaluru Mahanagara Palike or BBMP to get on this job immediately so that search and rescue operations can go on smoothly in times of emergency. 

2. NO EXCLUSIVE SEARCH AND RESUCE TEAMS FOR EMERGENCIES: The BBMP has no team who is assigned solely to emergencies like this, which is again very sad. It's the duty of organizations like BBMP is to have top quality search and rescue teams with world class equipment, after all they are using our tax money!

3. BBMP recently took out half page and quarter page ads boasting how they had record tax collection --- WHERE'S ALL THAT MONEY GOING IF THEY CANNOT PROVIDE THE CITIZENS OF BANGALORE SOME BASIC AMENITIES!

I AM URGING ALL BANGALOREANS TO GO ONLINE AND SIGN THIS PETITION TO BE SENT TO THE BBMP. GO ONLINE, READ THE PETITION AND SIGN IT: CLICK HERE


THE MORE PEOPLE THAT SIGN THE PETITION, THE MORE POWERFUL THE MESSAGE. LET IT BE DIFFERENT THIS TIME, AND LET US ALL TAKE A FEW MINUTES OUT OF YOUR BUSY SCHEDULE AND FORWARD THIS PETITION LINK TO PEACE LOVING BANGALOREANS SO THAT THEIR VOICE IS HERD LOUD AND CLEAR. SO PLEASE FORWARD THIS LINK TO MORE CONCERNED BANGALOREANS TO SEND A CLEAR MESSAGE TO THE BBMP. 

Don't forget to add your comments!









Where is GOLD headed, and WHAT DETERMINES its direction?

Gold has been inching up quietly in the last few weeks, and not many are taking notice because there haven't been any monster moves. But the way it's shaping up on the charts, we could see some huge movements coming in the next few weeks. Coincidently, gold has been in an uptrend ever since November of 2008 (click on the chart below for a bigger picture in a new window), when the financial crisis was unfolding at a rapid pace. It' has formed higher bottoms, has never reached the November 2008 lows and is approaching the previous tops made in Aug-08 and March-09, which are all pretty bullish signs. Here are some things to watch out for when trying to forecast gold's future movements. 

1. The continued weakness of the US dollar is contributing heavily to the rise in gold. If the dollar continues to depreciate against major currencies, the uptrend in gold might continue. 

2. Gold is comfortably above two critical moving averages (the 50 day and 200 day moving averages) which is a very bullish sign on for commodity traders. 

3. The technical formation on gold is very bullish as volume has also been picking up slightly in the last 2 weeks. 

4. Gold has massive resistance between $1000-$1020 which is a very critical band. If gold consolidates there and lacks strength as it reaches that price, it can correct back to the $900 levels. The other scenario which is more likely is that gold will shoot through this resistance with good volume and reach $1100-$1120 very soon. 

5. Fundamentally speaking, if the, "green shoots," sprouting in different economies turn out to be weeds, i.e. a false signs of recovery, then gold is the safe haven that everyone will rush to, which should send the price of the yellow metal up another 15-20 percent. 

6. Many countries are slowly and silently divesting tiny portions of their US treasury holdings in their foreign exchange reserves and funneling them towards gold. In fact, if the dollar crashes gold prices will SURGE so this acts as a small hedge in many cases. 

7. If the commodity bull market resumes and initiates its second leg, then gold might see historical levels very soon. 

NOTE THAT THE CHART BELOW IS FOR THE GOLD ETF GLD. THIS ETF APPROXIMATELY REFLECTS 1/10TH THE PRICE OF AN ACTUAL OUNCE OF GOLD. CLICK ON THE CHART BELOW FOR A CLEAR PICTURE. 



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As appeared in the Business Line Hindu. 

The US dollar is bearing the brunt of the blame as critics reemerge to vilify its position as the world’s reserve currency. Concerns about many aspects of the US economy have resurfaced following the unprecedented financial commitments made by the Obama Administration to pull the economy out of a deep recession. US debtholders are becoming increasingly apprehensive about this and the trillions of dollars in long-term liabilities that the US government is saddled with .

Although this is nothing new, the momentum to give the world an option of another global reserve currency is picking up as more economists and central bankers come to this consensus, as the Chinese realise the $2 trillion quandary they’re entangled in, and as the US continues to print its way out of this recession simultaneously devaluing the dollar.

STEEP STRENGTHENING

As the crisis was unfolding at lightning speed, the dollar did strengthen considerably. This was primarily due to two reasons: The lack of another option as a safe haven currency and the forced asset sales all over the world to meet rising capital requirements in the US. So the quick and steep strengthening of the dollar immediately after the crisis should not be mistaken as a sign of long-term resilience. There are several other issues that have plagued the currency which will contribute to its steady decline.

Short-term liabilities skyrocketed to inconceivable heights as the US government committed $3.5-4 trillion in bailouts, guarantees and assurances to various institutions since September last year. Although a lot of this was required to prevent financial Armageddon, the numbers are mind-boggling as you realise that the total amount committed was 30-35 per cent of its GDP.

What’s more alarming are the long-term liabilities that the government is burdened with in the next few decades. Tens of trillions of dollars in entitlement spending towards social security and medicare are not only unavoidable but are rising steadily as average life expectancy rises, healthcare costs surge and inefficiencies in the system persist. There are some signs of hope as this Administration strives to modernise healthcare, and tackle long-term entitlement spending.

But here’s how the situation stacks up currently: China holds close to $2 trillion in US debt and has expressed concerns about the US government putting the printing presses on overtime. In some way this subtly implies that China will not purchase US treasuries at a rapid pace. This is where the dilemma arises, as the US issues treasuries at an unprecedented rate to finance its ever-expanding liabilities. If China either sells current treasuries it holds, or slows the pace of gobbling up newly issued treasuries, interest rates in the US will rise significantly; only to prolong the recession.

CHINA'S DILEMMA 

In an efficient marketplace, all artificially priced assets eventually get valued at the appropriate levels. This is where China’s dilemma arises. The primary reason its currency is artificially undervalued is because of its unabated appetite for US treasuries. In a way, the Chinese don’t have a choice but to aggressively continue purchasing US treasuries if they want to keep their currency undervalued. So the consequences for the Chinese if they sell US treasuries or slow down their purchases will be paramount as their currency will surge to choke export growth.

The Chinese government and central bank face an uphill task as they confront this complex challenge. With the limited amount of funds they posses, they have to simultaneously perform three critical activities:

They need to keep their currency undervalued to support their massive export industry;

Continued support for their internal growth through their ambitious stimulus plan is critical in assuaging any social uprisings in the rural and semi-urban areas; and

They need to continue purchasing US treasuries to prevent any drastic fall in the dollar’s value.

Clearly, the Chinese are in a multi-trillion dollar quandary as they appear stuck with US treasuries which are depreciating steadily. The US was able to finance its liabilities for years, and successfully bought cheap goods from the Chinese with cheap credit via US treasuries (which it sold to the Chinese), and is now actively pursuing to devalue the dollar as the Federal Reserve and US Treasury realise that’s the only way out. It increasingly looks like the US might have its cake and eat it too.

IF NOT THE DOLLAR...

But a few larger questions arise here: How can the dollar be a universally accepted global reserve currency when two countries, the US and China could potentially derail the currency? If the US was analysed as US Inc., would any banker lend it money after glancing through its balance-sheet?

The counterargument for all these questions is often the same: If not the dollar, then what else? It’s not a legitimate question, because, true there is no other currency that is as powerful as the dollar, but if an alternative is presented to the world, if a choice is given to nations, then the true resilience of the dollar will be discovered, because then there will be a choice.

This might not be an appropriate time as nations recover from this historic meltdown, but a clear roadmap must be drawn out in the next one year so that countries can finally choose in which form they want to keep their reserve funds.

The Stone Age did not end due to a lack of stones, similarly the petroleum age will end long before the world runs out of oil and the dollar’s status as the world’s reserve currency will end not due to a lack of dollars but because individuals, central banks, governments and nations will realise the increasingly perilous state of the dollar as the country’s liabilities get compounded with the passage of time.

(The author is a professional trader and asset manager in the US and India.)


Online link to this article: Click here

TV 9 INTERVIEW: COMMENTING ON THE IT SECTOR SLOWDOWN IN INDIA

I was recently interviewed by TV9 news (a local news channel) and gave my opinion on the slowdown in the IT sector, and how it's interrelated with the slump in the US economy. The main points discussed are breifly given here. 

1. The main sectors affected in the US during this recession are: financial services, insurance, brokerage and banking. Companies in these sectors outsource a significant amount of activities to Indian and other IT companies. Therefore the slowdown has affected their IT spending numbers leading to depressed revenues and profits. 

2. IT budgets in many mutli-national companies like Citi, JP Morgan, etc. have been slashed leading to lower IT capital spending. This again affects Indian IT firms. In FY 2009, tech spend in the US declined by 9 percent and in FY 2010, the outlook is not very sanguine either, as tech spend might stay the same or decrease marginally. 

3. IT budgets in Indian companies too have taken a hit. They grew at a healthy pace by 13-14 percent in FY 2008, and might grow only at 4-5 percent in FY 2009. IT budgets in the coming financial year might either stay constant or just grow marginally. 

4. IT spending is usually divided into essentail and non-essential IT spending. Essential IT spend usually consists of 60-70 percent of the IT budget, which has been steady. It's the non-essential IT spend that had declined. 

5. As a result, many Indian IT firms are accepting contracts at a lesser price.Projects that were usually done at a certian price, are being accepted at 10-15 percent less. 



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