Monday, February 18, 2013

Loan Theory to Control Inflation
~~ Suman Mukherjee
Yes, I have given this Crazy Theory of Monetary Tightening as "Loan Theory" to control inflation. In many countries it is used as the last option but in India, this is a common case, especially in times when we have an almost non--functional bureaucracy and an equally dubious government. We Indians become too crazy when the topic zeros in on controlling inflation and "Poor Management". 
Yes poor people will suffer if the price rises but what will happen if there is no one to employ them? What will happen if the price of crops of a farmer comes down and down and the inflation becomes deflation? What will happen, if the poor have no money to buy, even at low price? In a growing economy there would be some inflation and I feel 7% should be normal, because we do not have a reserve currency like the US have. We are also not a developed country, and hence there will be some infrastructure bottlenecks, leading to inflation. Also, we have a huge population to feed and we have still not adopted modern farming method in full steam, so there is bound to be crop failures and lower yields, leading to the rise in the price of food items. These are some of the stark realities of India. Hence sitting in India, we should stop thinking of 2-3 % inflation as is found in the US or in some developed economies.
If the Industry and businesses collapses, and India resorts to mammoth imports then what will happen to this inflation? Will the CAD increase or decrease? Yes, some might argue that debt market will bring in foreign funds if the rate of interest is high. Okay fine, but then how long will Foreign Institutions buy Indian "Junk" Papers, if the economy collapses? Is there any value of Greek Papers today?  

Insane "Bookish" Economists, I pity for you all.
The moot point is that India Inc is collapsing, due to bad loans or due to non payment of high cost loans, as their business are becoming uncompetitive as compared to the international players. So, it is high time that cost of money comes down, so that the economy picks up steam. We can think about inflation later....!!At the moment let us fix our attention on growth and let the government come out with plans  for fiscal consolidation.
Also, it is seen many companies took loans for organic and inorganic growth, but other extraneous factors, robbed them off the necessary cushion to pay-up the EMIs. Look at the case of Suzlon Enegy Ltd: it bought REpower Ltd at high value and then suddenly the whole wind energy business collapsed in entire Europe. Misfortunes never came alone, then the US, became an open case of sub--prime disease and then the ultimate, the sovereign debt crisis in the Europe, put the final nail in the coffin.

What the government did? Gave economic stimulus. Fine, but it did not take the stimulus back fast and started giving inflation projections, which is a sort of dangerous. Should I have explain this too..........? 
In the US the government helped the corporations to tide over the crisis for the moment by buying out the toxic assets, and the result is that the US economy is now booming. But this government could not hold on to a wonderfully gifted economy from the NDA government and messed up everything. 

Another thing which is worth noting here is that: whenever, the Indian Markets started performing well, the government came out with some sort  of activities, which are harmful for the markets, either it is in the form of STT or increase in Capital Gains Tax or Promissory Notes or GAAR or something or the other. In the last 7-8 years we have been bombarded with all these weapons of  "Mass Capital Destruction". The government always had one example to give--the overseas market is not doing fine. But now when the US market is booming our government has no answer as why our markets are in a pathetic state?

Besides, every attempt had been made to milk the poor investors, starting from the FMO to Brokers to Stock Exchanges. There are hardly any steps taken to improve the investor interest in the market, in the form of giving some incentives. The result is that we have a 5-year BEAR MARKET in the small and mid cap space, which is deceiving too, when compared to the large caps. When the Sensex is near its all time high, many small caps are near their all time lows. Why is unusual thing happening? Who is responsible for this mess in Small and Mid Cap space? This is the space where the retail plays the most, and if this space is not performing,  how can one expect the retail to be back again? The stock exchanges instead of encouraging this space, went on putting all sorts of restrictions. The scrips are still put for months in T-group, then circuits are reduced to as low as, 1.8% and all sorts of torture. 
India Inc is now virtually on a ventilator but still the RBI, and some of our friends, think it is too loose to go for rate cuts---lest inflation increases. Okay fine. But who will feed you if the whole India Inc collapses?
I just shudder to think how professionally managed Companies like Tulip Telecom Ltd or Suzlon Enegy Ltd, go for CDRs? These are world class companies, but are now gasping for breath and is running heaven and earth for some concession on the loan amount. Though the present FM, has asked the banks to be liberal, but then the Great Indian Media seems to say, why so much time has been given that loans become bad?
I understand when an odd journalist from a 3 rd grade publication asks, this kind of stupid question, but I get puzzled when a seasoned journalist like Lata Venkatesh, of CNBC TV18 asks the same to former CMD of SBI. And I am happy the way the gentlemen answered her, with a bit of scorn.
The question is how will you fight with an American Company (US) who takes loan at 3-4% against an Indian Company who take at 12--13% (min). How can you think the price of apartments going down, when the interest cost takes up 15% of the total cost of the building? How long can you make your business competitive by cutting labour and electricity and other cost, unless the cost of money comes down. Or else India Inc has to go for zero debt companies, which is very difficult.
The loan theory to control inflation absolutely looks rubbish to me for a long term solution. Yes it can be used for the short term, but then this RBI Governor and bunch of economists spoiled everything by its over use for so many months. The wounds have become gangrene now, and it is high time that we bring in new specialists, rather those inflation--fighting fire-men. If there will be no one to make forest to supply wood, then who will employ these firemen........?
But the hopes are still on the current Finance Minister, to bale out of this crisis. He was successful during the Asian Crisis (1990s) and also during the US sub-prime crisis, and I am sure this time also he would be  able to tide over the situation. Only problem with him is that once, the market starts to boom, he either comes up with some additional taxes or some welfare schemes. He should not suddenly break the rhythm of the market.