2 Good Interviews
The country urgently needs to shift focus from finance to commerce: Uday Kotak, Kotak Mahindra Bank
Sugata Ghosh, MC Govardhana Rangan & Anita Bhoir, ET Bureau Jul 10, 2013, 08.27AM IST
Is the India story fading?
As we were all growing up there used to be a very big mantra in India which was called ‘export or perish.’ There was a long period when we used to focus on import substitution. In the past eight years, these two phrases ‘export or perish’ and ‘import substitution’ are no longer a part of the Indian economic vocabulary. I was looking at all the equipment and facilities, furniture for our new office. I was shocked that so much of it is imported. Tables and chairs are coming from Malaysia and China. You ask yourself what is happening to our manufacturing. If we are going to start importing, then we have a big challenge on our hands.
Is the adverse trade balance the problem?
You have to look at the March 2013 numbers and the number that strikes me the most – $500 billion imports and $300 billion exports. We have a $90-odd billion gap in terms of current account. It is a problem of commerce which is becoming a problem of finance. We have to get competitive. Can we afford to import Chinese Ganeshas?
Are import curbs a solution?
Today it has become a problem of finance. How are we trying to solve this – by getting more money to fix this. What about reducing the trade gap? If one is a heart patient, he needs a long walk. It’s a long walk we must do.
Is the young population an obstacle, or a boon?
We have a billion mobile demand and 800 million users. Many are using more than one handset. Why are we not manufacturing it in the country? What is it that a Korea has that we don’t? That’s where the whole psychology and system in the last 10 years has moved away from competitiveness and we have not addressed the 500/ 300 problem.
When there is a finance problem staring at us, how do we attempt to fix broader issues?
We need to glorify people who solve the 500/ 300 problem. A weaker currency is a national tariff. After we get a weaker currency, we have to take advantage of that. Or else, we will waste it once more in inflation and in the inability to raise competitiveness.
So is a weak rupee a blessing?
If properly used and not frittered away. If a software professional’s salary is in rupees but earnings are in dollars, then you are competitive. But if it leads to a disproportionate increase in inflation, then we would have wasted the opportunity.
Isn’t inflation already a burning issue?
If I look at my branch one thing that shocks me is the rate at which ground floor real estate rentals have gone up and it is completely lazy money that a landlord gets. It reduces my competitiveness. We need a policy that is brutal about commerce. We have to think about this as not a problem of finance but a problem of commerce. Unfortunately, all our minds are focused on finance. But the issue is that a problem of commerce is being handled as a problem of finance.
Are financing problems addressed with higher debt limits for FIIs?
There is too much of pressure about cost of funds. In a country where your consumer price inflation is 8-9%, savers will not save money at less than 8%. Which depositor today will accept less than 8%? Then if you try and reduce interest rates your financial savings move to gold and real estate. We have to ensure that financial savings continue to be attractive. The move on FII debt was because borrowers are complaining. Most of the borrowers borrowed in dollars and did not hedge. So they thought they were borrowing at 2% while they were borrowing at 20%. The first principle of business is to borrow in the currency of your business, otherwise you are a forex speculator.
So there’s a financial sector challenge?
There are issues when you have such a high government ownership. If the asset side of the balance sheet has pressure, you need capital. The correct liberalisation of the financial sector would have been broadening the public ownership in public sector banks. Which means you would have all public sector banks as widely-held private sector banks. But we can’t take that decision for political reasons.
Is the financial system in trouble?
The banking system is going to be under greater pressure than what banks are willing to show. For both public and private sector banks, it is an issue of governance. It is about trusting the numbers. If you look at 2009, why did the recovery happen? Recovery happened because somebody in the world’s largest economy opened the tap, the US, followed by Europe and now Japan. US is now shutting the tap and it’s like all water levels coming down. Buffet’s statement comes to my mind – only when the tide turns you know who all have been swimming naked. Therefore, for a quick recovery you need steroids. I don’t see global steroids in a hurry. If steroids are being withdrawn, it is back to productivity, competitiveness, getting commerce right. It is about back to basics.
What needs to be done?
I was completely dreamy eyed in early 90s with Manmohan Singh as Finance Minister, Oh India is changing. Twenty two years later, cash in the economy, as a percentage, is more than what it was then. Control cash. The Gangotri of all problems is cash. Stop that. Find ways and means of encouraging non-cash payments or discouraging cash payments. We need to encourage exports, encourage manufacturing. We will make our laws simpler in every aspect so that people think it is worthwhile to set up businesses and factories. Most Indian enterprises are become arbitragers. Free coal… free land… free things and arbitrage profits. We need to move to an era where value-add is given a premium over arbitrage. Most of us have been brought up in the 90s and 80s on the core middle class values where something is right something is wrong. And then if you mix it in 2000, it got mixed with drugs and everything got blurred.
What you are saying is more scary than the Harshad Mehta scams because investors are doubting the integrity of companies.
There is a significant need to put building blocks. Go back to the 1980 and 90s. Why did the equity markets turn around? Because you had created a convertible instrument called UTI where downside was protected. Now there is no such product. That’s gone. So the downside is fully to the investor. So if the upside and downside are fully to the investor and the poor guy for the first time came to the market in 2007-2008 and many of his ilk have been ravaged. For the longer term, you have to build trust.
Is there hope?
If you want growth in the next 10 years, it has to come from people-intensive and skill-intensive business. The single biggest resource India has is people and skill. The power of capital dominated over the last 10 years over everything else. If we threw money at a problem, you will fix it. Therefore, if we can get people, skills and knowledge as basis of our future, we will create jobs and we will create a future.
If you had to start your career all over again what would you do?
It would be in the real economy with digital. How can we not waste the opportunity created by a depreciating rupee? A simple example is that we had a 20% depreciation in a year. Our annual inflation rate is 10%, We have to make sure real wages don’t go much more than inflation. Then your entire depreciation is bonus. It increases your competitiveness by 20%. We must focus on using this currency devaluation as a tool for economic turnaround. Environment is yet another big issue for me. Are we going to stay with blackouts for the next 50 years? It is not an easy one because there is huge destruction but how do we get the balance?
Jim Rogers: Why I’m shorting India
The hedge fund manager on the financial crisis, his bets for the future and his decision to be extremely negative about India in his just-released book
First Published: Tue, Aug 13 2013. 06 26 PM IST
What lessons have you learnt from the financial crisis that started five years ago and how has your investment mantra changed since then? Can you tell us how your portfolio has changed over the course of this crisis?
Governments and central banks have reacted to the crisis in what they view is the correct manner, but, in my view, it is an artificial manner, and they are only making the crisis worse. The reason it is stretching out as a problem is that they never let the problem cure itself.
For instance, in 2001 and 2002, there were economic problems in the world and they hurt, but they were not that bad. The next one came in 2007-08 and it was much worse because the debt had risen by then. Central banks, especially the American central bank, started printing money and everything felt better for a while. Then the problem came again and central banks led by the Americans, and governments led by the Americans, again ran up even more debt and continue to do so. Many of us feel better, especially the ones getting the money, but, overall, it is worse now and the situation continues to deteriorate because the debt is so much higher now. The next time we have a slowdown, it is going to be a lot worse. In America, the debt quadrupled and a lot of it is garbage—we are floating on an artificial sea of liquidity, and it is wonderful if you are in the right boat.
Problems always come no matter what governments say and we have always had slowdowns in America after every six or seven years even in good times. Be very worried because the next time around, things are going to be much worse, especially in countries where the debt is much higher. In the 1920s and 1930s, the centre of the world moved from the UK to the US, primarily due to financial problems and mistakes made by the politicians. The same thing is happening now, and the centre of the world is moving from the US to Asia, exasperated due to the financial crisis and mistakes made by politicians. In the 1930s, US was a creditor nation, but it suffered badly, but not as badly as some of the European nations. Asia will suffer the next time around, but the West will suffer even more. I would rather be with the creditors than with the countries (that) have huge debts.
Any new reasons why you are shorting India? Have you ever invested in India?
I used to own tourist companies in India at a time. India should have had the greatest tourist companies in the world. If you can only visit one country in your life, my goodness, it should be India—it is an astonishingly spectacular place to visit. There is no place that has the depth of culture that India has. Yes, I have new reasons to short India—just read its newspapers everyday and you will see why.
The government goes from one mistake to another—no matter what the controls are, no matter how much the debt keeps rising, Indian politicians are only looking for scapegoats. Look at the latest thing with gold—Indian politicians want to blame the problems of their economy on someone else, and now it is gold. Gold is not causing India problems, but it is quite the contrary. Exchange controls in India are absurd, the regulations that India puts in place result in foreigners going through 70 loops before they can invest in India. Foreigners cannot invest in commodities in India.
India should have been among the world’s greatest agriculture nations—you have the soil, the people, the weather, but it is astonishing that you have not become one—it is because Indian politicians, in their wisdom, have made it illegal for farmers to own more than five hectares of land. What the hell—can a farmer with just five hectares compete with someone in Australia or Canada? Even if you put together the land in all your family, it is still not possible to compete. Much as I love India, I am not a fan of its government. Every one year, they (Indian government) come up with more reasons for me to be less optimistic about that country.
Do you think India’s democracy is a problem to its success?
I can only make some observations. Japan, Korea, Singapore, China were all one-party states and, in some cases, were very vicious one-party states, but, as they became more prosperous, their people wanted more, demanded more and got more democratic, and they say this is the Asian way.
Greek philosopher Plato in The Republic, says that societies develop from dictatorship to oligarchy to democracy to chaos and then back to dictatorship. Chaos develops out of democracy. This seems to be what is happening in some of the Asian countries.
In the Soviet Union, they did the opposite—they said we will open up and let all people complain and they did. The people there were poor and they complained about being poor and hated the government. When South Korea opened up, the people were rich and they decided to get rid of the government without ruining the place. Taiwan did the same. Democracy being a problem may have credence in some Asian countries. But, I am not sure if India has been really a democracy in the true terms—from 1947 onwards, the opposition has had just one full term at the centre. The first five decades of its democracy, the centre has only seen a government led by a single party.
Power corrupts. Singapore was lucky. There has been plenty of criticism of Singapore’s (founding father) Lee Kuan Yew, and some of them are probably valid, but look at the results. Congo had a dictatorship for a long time, but has nothing to show for it. Singapore had a strong central government and look around you—I did not move to Congo, but I moved to Singapore. So it can go both ways.
In 1947, India was one of the most successful countries in the world relative to others. Even as recently as 1980, India was more successful than China, but then you know how that story turned. It was more successful than South Korea, more successful than most places in Asia—but, for me, it is unfortunate that you have failed to take advantage of some of your most valuable assets. India has some of the smartest people in the world, but it does not have an education system to support it. Infrastructure is equally poor. So, I don’t know if India would have been better without a democracy, and some of the greatest periods in history have been without democracy. But these are just my observations, and it is the Indians who must decide what they want.
What do you think should change in India for it to attract investments? There are several multinationals that have been successful in India despite all its policy and regulatory uncertainties. They have adapted and changed their business practices to suit India.
Yes, but on the other hand, there are not many successful Indian companies, outside those that are associated with the government. Look around in Singapore and you don’t see many Indian products, except for some restaurants. There are very few Indian brands that you would recognize outside India.
In India, many of its companies are successful because of their links with the government. Apart from a couple of software companies, I literally cannot think of Indian firms who have made it big in the international scene. But there are many Japanese, Korean, Chinese, Taiwanese companies that are very big globally. All Indian companies that are successful there are because of their relationship to the government.
If I were an Indian politician, I would make the country’s currency convertible tomorrow and stop deficit spending this afternoon. I would take a chainsaw to government spending as you continue to run up debts, I would free up the economy, especially agriculture, to make India the greatest competitor in this sector. You know, to open a retail outlet in India, even for Indians it is so tough—but for foreigners, it will take years in the current system. You keep companies out of India citing national security—just go to China and there are foreign companies everywhere.
There are millions of entrepreneurial, driven and smart Indians, but most of them want to be abroad because they know that unless they are involved with the right people in India, they are not going to be successful. Fewer than 50% of Indians stay in school till their 12th grade. How many universities are there in India—nothing when compared to the population! There are very good Indian universities, but they are nothing compared to the qualified Indians who need good education. One reason you see so many Indians going abroad is to compete or to get education. It would be such an exciting country to do business, if it were opened up. Historically, it has been an economic power and I would try and restore it to that position. Oxford and Cambridge can fill up all their seats with Indians who would pay their own way.
In your latest book, you have been critical of the numbers put out by the Indian government. I’ll quote from your book: “All growth rate figures are unreliable. It is stupefying to me that India could claim to have a clue to what is going on even in India, much less in China or in the US” or “When it comes to growth rate, Indians base their numbers on what China is reporting, making sure that theirs are better than, or at least in line with, China’s”. But, institutions in India are pretty strong and the numbers, be it GDP or any other put out by the Indian government, are considered to be largely reliable.
All government numbers are suspect. Last week, the US government revised its economic statistics and added a whole economy bigger than the Swedish economy—so America just went up a level in a week because they revised the numbers. I don’t trust what any government says. The Soviet Union used to have great numbers, but they were all made up in offices in Moscow.
I was not just picking on India, but using it as an indicator. If you go back over the last few years, you will see the Indian economy, as per the numbers its government has put out—some of the numbers its government has projected—are comparable with those of China. Then you go see both countries and you’ll realize something is wrong. If India’s growth over the last couple of years was comparable to that of China, where are the schools, the highways, the infrastructure, the housing, where has it all gone?
I was using this to state that we should be very careful about what governments tell us. In one of my books, I’ve come down hard on Germany—the Germans who were supposed to be hardworking and disciplined were also found to be making up some of the numbers they had been reporting related to job creation.
Where is gold headed? When is the good time to buy it? Of late, India has taken a slew of measures to curb its import. Many say that if India were to steeply reduce its import of gold, it will be able to alleviate its current account deficit, which, in turn, would help its economy get back on track?
It is a great question because I too am fascinated with gold and I do own gold. Gold went up 12 years in a row, which is extremely unusual, and there has been no asset in history that has seen something like this. The anomaly in the gold market is how strong it has been—it has never happened ever—technically, gold was overdue for a big correction. But the correction should be different from most corrections because the rise was so different from most rises. I was expecting it to decline and it has.
In my view, the main reason for the correction, other than the fact that it needed it, was on account of Indian politicians who suddenly blamed their problems on gold. The three largest imports to India are crude oil, gold and cooking oil. Since they can’t do anything about crude and vegetable oil, the politicians said India’s problems were because of gold, which, in my view, is totally outrageous.
But like all politicians across the world, the Indians too needed a scapegoat. Is this the reason why gold started correcting? I don’t know. But, India is the largest importer of gold, and whenever the largest buyer cuts back, there will be a correction, whatever is the commodity. The correction may continue for several more weeks, months or even a year or two. A 50% correction is common for commodities, but if gold were to correct 50% before it made its final bottom, that would be between $900-1,000.
In my view, gold is in the process of making a complicated bottom that will last a while. I hope that I am smart enough to buy more near the bottom because gold will go much higher over the next decade, because as I had said earlier, governments across the globe are making mistakes of printing money. When gold went to $1,200, I did buy more. But don’t sell your gold. I am not selling my gold.
If India curbs its gold imports, will its economy be back on track? There is no question that if you have money, it is better to invest it than put it into a stagnant asset—according to this argument, women should not buy dresses or shoes, or we should not be buying houses…the one billion Indians are smarter than the market and also the government. If they see that they are better off putting their money in gold, that is what they will do—the solution is not a ban on gold (import), but to make the economy exciting enough to make people want to put their money into other things. That will be better for the economy, but this is putting the chicken before the egg or the cart before the horse.
In the BRICS (Brazil, Russia, India, China, South Africa) countries, the rising middle class appears to be angry with their respective governments and have been demanding changes, reforms and better living standards. Governments of most BRICS countries—including India and Brazil—are confronted with the youth taking to the streets in protests. Do you think this can derail the emerging markets story?
It could derail, or it could open-up these countries further. If the billion plus people in India demand more and say the current system that is going on since 1947 is absurd, then it might make India a whole lot better. Compared to many of the countries globally, India was on top in 1947, but relatively India has only declined since then. Remember that you move from dictatorship to oligarchy to democracy to chaos—may be they will throw out these absurd oligarchs who rule India and then it may have a vibrant democracy and regain its proper place, its historic place in the globe.
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