" Only
mothers can think of the future - because they give birth to it in their
children."
—Maxim Gorky (Russian,
1868-1936)
Word for the day
Pseud (n)
A person of fatuously
(foolishly) earnest intellectual, artistic, or social pretensions.
Malice towards none
Mirza Ghalib famously wrote:
Bosa dete nahin aur dil pe hai har lehzaa nigaah
Jee
mein kehte hain ki muft haath aaye to maal achcha hai
(O My love you do not allow
me to kiss, but desire my love. Thinking, "the stuff is good if only I
could get it for free!")
First random thought this morning
The overwhelming presence of social media in life is sickening. A
large majority of people appear possessed by the desire to somehow impress
others.
While it may have motivated a few to acquire new skills and
capabilities in order make a mark, most have developed parasitical tendencies
to garner some glory. Frivolity of thought, dissipation of energies &
resources, and pretense of emotions (like, dislike, love, hatred, anger and
appreciation et. al.) is order of the day.
My gut feel tells me that this trend is not sustainable and it may
be the youngest revolution (for lack of better word) to die.
Household savings - changing paradigm
I wonder whether it is appropriate for finance minister, RBI
governor, and other policy makers to think like an individual household in
formulation of broader policy framework!
We all know that buying of a financial instrument from market
merely signifies a transfer of money (a promissory note) in lieu of a bond,
deposit receipt or stock. It changes the description in the balance sheet of an
individual. But it changes nothing in the aggregate balance sheet of the
country. Then why the government or policy makers should be bothered about it?
The question should therefore be whether the savers of money are
being adequately compensated for the consumption they are sacrificing today?
Essentially, the government and policy makers should analyze
whether:
(a) The entities to whom
household savers would assign their saved money, could produce more real output
then the savers investing that money in assets himself could do?
(b) Is there sufficient
empirical evidence to suggest that household financial savings have earned more
risk adjusted returns than the physical savings of households?
We may also need someone to explain how disinvestment of 5% shares
in a government owned enterprise (GOE) to household investors or LIC or
domestic mutual funds changes the balance sheet of the economy? As I understand
it, the effect of disinvestment is as follows:
(i) The total stock in GOE
is owned collectively by all the citizens of the country. A sale by the
government directly to household savers just transfers the ownership from
collective to individual. A sale by the government to domestic financial institutions
transfers the ownership collectively to a smaller group. No change occurs at
aggregate level.
(ii) The government may
retire some debt from the money it receives through transfer of shares in GOE.
It would save some interest at the cost of dividend and prospective rise in the
value of the stock so disinvested.
(iii) The buyer will forgo
interest and will be entitled to gain from dividend and prospective rise in the
value of the stock so purchased.
Similarly, I fail to understand what economic change will occur if
a household saver buys mutual fund units and the MF invests that money in
buying stocks from the equity market.
If a household saver deposits his savings in his bank account, the
bank could utilize that money in any of four ways, viz. ., (a) buy government
securities (b) deposit with RBI which in turn will buy government securities or
Fx (c) lend to a borrower and (d) do nothing.
We all know that the government borrows not for earning but for
spending. The money spend on building infrastructure does help everyone and the
economy.
But it is worth examining how much of money borrowed by the
government in past decade from domestic savers has been actually invested in
building infrastructure.
Similarly, it needs to be evaluated how much of savers' money lend
by the banks to various borrowers in past decade has actually produced more
return than the household could have earned by investing himself in physical
assets like gold, house, motor vehicle or intangible asset like education and
skill building.
All physical savings of households is not unproductive
Since 1995, India’s economy has grown at an average rate of 6.9%.
However, the total employment in economy during this period has grown at just
0.3% CAGR.
In this period the number of self entrepreneurs has certainly
increased in the country. This has coincided with the sharp fall in public
sector employment. The aggregate private sector employment level has not been
able to compensate for fewer opportunities available in public and unincorporated
private sector. Consequently, the total number of employees on live payrolls
has fallen sharply since early 2000’s.
The combination of two – lower employment opportunities and
liberal business rules – has perhaps forced people towards entrepreneurship
that keeps them underemployed for most of the time.
Millions of these enterprises are run by the owner himself,
without any hired worker. Many of these are run from the residence of the
owner. These enterprises employ almost thrice the number of people on the live
payroll in organized sectors. These self owned enterprises generate almost the
same amount of profit as gross profit of all listed companies in India.
(Important to note that 1/3rd of the profit earned by all
listed companies is earned by top 36 PSUs and top 100 listed companies
accounted for over 75% of this value addition.
Equity trade has not been equitable
It is important to highlight that the debate on role of household
investors in the publicly traded equity market is not only inadequate but
perhaps misdirected also.
Though the regulator and the government authorities have taken
cognizance of the actual state of affairs in recent past, and we have certainly
seen a few steps being taken. But we are still some distance from finding a
sustainable cure for the malice.
(a) A deeper study is
needed to discover how much of the rise in market capitalization during past
25years is due to (a) rise in quantum of publicly traded equity; (b) PE
re-rating and (c) earnings growth.
(b) The mutual fund and insurance
industry has grossly and consistently failed the investors in these 25yrs
decades. Except for 2-3 fund houses, most fund managers have performed briefly
and only during the bubble like conditions.
(c) Regulatory framework
has evolved over past couple of decades and is robust enough to prevent any
systemic collapse in the trade settlement. However, it has still not been able
to effectively break the malevolent promoter-operator nexus, causing frequent
cases of price manipulation.
India traditionally has a strong equity culture
India, unlike many western countries and China is a country of
entrepreneurs. We might have more self-employed people than G-3 taken together.
A large part of India’s households’ net worth is invested in equity – equity of
their own businesses not in listed equity – but nonetheless equity.
Empirically, gold has never been a disproportionately large part of household
wealth. Moreover, Indians have traditionally favored physical assets over paper
assets. Every Indians aspires to have their own house. So the home equity in
India is close to 100% in most cases, unlike in many developed countries.
The point to ponder here is that given the strong equity culture
amongst Indian households, fewer employment opportunities, better business
opportunities and poor social security infrastructure - whether the households
should be incentivized to invest more in their own enterprises, home equity,
skill building, and mobility etc. or should they be motivated to invest in
financial instruments.
I know that it may not be a black and white proposition and a
plain "yes" or "no" answer should not be expected.
However, I would like the finance minister to consider schemes
like following, rather than ruing about low financial saving rate and providing
incentives like 80C, 80CC, 80CCD etc.
(a) Issue tradable tax
credit certificates for investments made in training and skill building for
self enterprise.
(b) Subsidy on two wheelers
and delivery vans used by self entrepreneurs operating their businesses from
home.
(c) An action plan to make
managements of publically traded companies accountable to public. For example,
managements of public listed companies who have failed to deliver at least 6%
CAGR in shareholder's value (dividend plus rise in share price) over past two
decades may be ousted and replaced it with professional management with clear
mandate....to continue next week.
