Wednesday, 11 November 2009

A Wonderful Idea

Economic Times threw up a wonderful idea in it's editorial on Nov 10, 2009.

They argue

The government must mandate the Employees’ Provident Fund Organisation, which is trying to computerise its operations, to not duplicate effort and waste resources, and, instead, adopt the Central Record-keeping Agency (CRA) of the National Securities Depository Ltd (NSDL) that services the New Pension System (NPS).

If this idea is implemented, it will go a long way to make the New Pension Scheme viable for the intermediaries and also drive down costs of the savers further.

The cost of maintaining an NPS account with the CRA is high for a voluntary contributor, because of the virtually fixed overhead costs are spread over a small number of subscribers. The annual service charge for maintaining an account would fall, says an estimate, from the current Rs 350 to Rs 250 when the number of accounts maintained by CRA rises to 30 lakh. Likewise, the transaction fee will decline to Rs 4 per account from Rs 10 at present.

But the article stops half way and does not go to the logical end of the issue. What is really needed is to give the employees, who contribute compulsorily to EPFO, the freedom to choose between EPFO and NPS. Only then the service we get from EPFO can improve meaningfully.

Friday, 6 November 2009

India: The Rolls Royce: Devina Mehra

I was spring cleaning my book case and found a few magazine clippings. They are columns from long ago that I liked. Tried googling for the stories but nothing turned up. So thought about sharing them one by one:

The first one is a column written by Devina Mehra, owner of First Global. This Column appeared in the Business World issue dated 1st November, 1999.

The western press, even the financial journals, love to disparage India and characterise it as the biggest failed experiment in the world. The Indian press, by and large, is only too willing to agree. Leaving the often partisan western view aside, let's compare how India compares with the rest of the emerging world as an investment destination. Every pundit on long term stock investing will tell you that the most fundamental rule for picking a stock is predictability.So, you have to check that, first, will the firm still be around after a few years and second, that earnings and cash flow can be forecast with some certainty.

Using the same analogy for countries, wouldn't predictability be equally desirable? Standards should arguably be tougher as liquidity may be relatively low and hence, the potential investment horizon would, of necessity, be longer. Investors would logically want some reassurance that the country's economic and political system would still be around in recognisable shape a few years hence. In this context, let us look at nations which are (or have been) hot investment magnets in the recent past. Take China - is anyone willing to bet what system will be operating in 10, 20, 50 years hence? While things are coasting along, it is easy to ignore that the law is not what it should be, that official statistics can be easily tampered with because penalties for dissent are so high, that the army is the biggest smuggler in the land... or for that matter, look at countries like Indonesia and Malaysia where there was always a hefty price to pay for criticism. A debate free country with clearly-identified despots is easy to deal with, till the whole edifice disintegrates.

Some investors will airily talk about a 'gradual move towards democracy and better human rights' in many of these economies. Or hold conferences how openness to the rest of the world and trade and capital flows will accelerate this move. Such talk ignores history. Major systemic changes usually involve discontinuities and dislocations. Worse still, the system that eventually emerges may not really change things for the better. Was Ayatollah Khomeini's Iran that much better than the Shah's? Or, when Gorbachev dismantled the Soviet system amid thunderous applause from the west, who would have thought that he'd be voted the most hated person (along with Yeltsin) in Russia one day? An entrenched system's exit usually causes major upheaval and also a vacuum - look at Russia, and to an extent, Indonesia. Think of the possibilities (if and) when China moves towards democracy, considering that the current system is already fraying at the edges.

India's democracy is often characterised as 'raucous and noisy', but how can it be otherwise in diverse, pluralistic society. Yet both Indian citizens and outside investors tend to miss out on what this means. Here, if Yaswant Sinha forecasts a 6.5% GDP growth, there are half a dozen independent agencies who can say 'We disagree' without fear pf being persecuted of being tax evasion (or sex offences, for that matter!). If the Chinese leadership continues to harp on the mantra of 8% GDP growth even if it flies in the face of it's own energy consumption statistics, who's to provide the voice of dissent? More important, who will give the bosses the bad news - that their village, city or province has not met its growth targets. To those who think this far-fetched we refer again to history.The massive Chinese famines of 1958-61 killed close to 30 million people. The famine lasted three years because the local party officials could not or did not give Peking (as it was then) the bad news. Of course, there are no pressure from the opposition parties or the free press because neither existed.

Financial market players may not be interested in famine prevention. But let's look at issues like privatisation. In Russia, in spite of a paper democracy, most state assets were sold off for a song after closed door negotiations. This was one of the main reasons for global dumping of commodities from aluminium to oil, bankruptcy of the treasury, fall in tax revenues etc. In India, this would be impossible due to checks and balances in the system. This is not to say that the Indian way is the best, or perfect, or even close. The point is we have too little appreciation of what we have: a vibrant democracy, a non-partisan judiciary, checks and balances of a free press, good accounting standards, reasonable banking regulation, quality technical/management education, excellent stock market trading systems... All these translate into lower risks for financial markets.How many emerging economies can boast of a half century track record where there has been no change in government without an election or due parliamentary process, no default on debts or breach of any international treaty.What this has meant in financial markets is that investors have not had to contend with the roller-coaster ride of most emerging markets. All that we need now is some more atma-viswas.

I liked this piece very much. While reading please remember this was written 10 years ago and hope you like it too.