Railways: India's story till now & the Budget

The Indian Railways sums up the current state of the Indian government’s PSU machinery and the bureaucratic setup of the country. It is a business entity controlling an important component of the economy, yet not realising its full potential. An organisation still split up by its social obligations, bogged down by red- tapism and inefficient public sector wages paid to its employees, who most probably joined because of the employment benefits and pension, than by the task at hand. Just like other PSUs it had seen a successful start, which fizzled soon after.

It is said that responsibility and accountability start from the top. For the Railways, corruption and jugaad originate from the top. There is always a big political hullabaloo before the cabinet is sworn in, and speculation on which political ally will be given the Union railways ministry always abounds. The ‘honourable’ minister is requested for favours for constructing stations or making trains pass through fellow parliamentarians’ constituencies. Adding to that, the preceding minister’s serendipity that it was a cash mine with profits of Rs. 9000 crores(in 2005) after years of successive losses.

The Railways after independence already had a network of around 53,600 route kms. Today, it stands at 65,000 route kms. An increase of just roughly 12,000 route kms of network in 60 years!

Well, the Railways has always been more or less a socio-political entity. But it wasn’t like this always. It was once the symbol of India’s economic pride and by numbers it still is. It has the largest railway network in the world under single management. The Indian Railways carries the most passengers (4 billion) in the world. It is also one of the largest employers (15.8 lakh employees) in the world.

However, it has also been under-performing and has shown relatively little and almost stagnant growth in terms of laying more lines, better freight handling, infrastructure facilities and train wagons. The Railways after independence already had a network of around 53,600 route kms. Today, it stands at 65,000 route kms. An increase of just roughly 12,000 route kms of network in 60 years! It is indeed very shocking that the Railways not taken up any major expansion initiatives. This lack of initiative cuts across many government agencies.

Another major negative has been the cross-subsidisation fare policy of the Railways. Under this policy, the revenue collected from freight charges is used to cross subsidize the losses from the passenger fares collection. Passenger fares have always been kept low as a populist measure, but the ever-rising oil (fuel) prices have been causing massive losses to the Railways. The PM’s Office has even suggested that this system be abandoned in favour of something more relevant and effective. It had suggested passenger fares be indexed to oil prices. But, even this was not accepted in this year’s budget. And so by keeping fares low this year as well, we can again expect it to incur huge losses.

It seems the Railways, like few of its fellow PSU brethren is on a journey with no destination.

Also, a problem characteristic to all PSU is evident here as well. There is no clear roadmap for public-private partnerships. In natural monopolies like the railways it is essential to bring external technology and competition into the system, so as to give consumers a better return for their money. Private players will bring with them funds and expertise, which is vital to revamp the existing Indian Railways.

Like a sail..keep drifting

The railways has to bring its act together, and the process should start from the top. In the current budget, announcements of setting up medical colleges and sports academies are unnecessary money laundering excuses. There was no mention of the ‘world class’ stations, a promise made last year. No mention about modernisation of the machinery and facilities. No more faster trains. No vision, no serious number crunching. It seems the Railways, like few of its fellow PSU brethren is on a journey with no destination.

RBI policy review and my views

There is excess liquidity for sure both in the Indian and Global financial markets today. Thanks to the near zero interest rates in the developed world; it is felt that the developing world is sitting on asset pricing bubbles. So it is more interesting to notice how these bubbles can be spotted today. The 20% food price inflation is not just a problem in India, but the rest of the developing world as well. Also the stock market was defying all logic 3 months ago, but recent quarter results have quelled some fears of over valuations. Moreover even commodities including oil have staged an upward trend in prices, even though the developed world is still healing its wounds. Thus it is a very difficult situation for the RBI to be in today, especially to be overseeing the global economic rebalancing also taking place in Asia’s favour.

Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles.

The inflation is putting increasing pressure on the economy and the common man, which is not a sign of healthy recovery. Also foreign flows of capital into India have been touching enormous amounts, and the weaker dollar is a nightmare for the exporters and RBI alike. But it was as expected that on Friday, 29^th January 2010 the RBI hiked its CRR by 75 basis points, as looks to mop up Rs. 36,000 crores of excess liquidity. RBI had indicated in its previous policy review in Oct 2009, of its intent to gradually withdraw monetary support, but had just increased the SLR back to 25%.

I was expecting 50- 100 basis point hike in CRR, and along with it increases in Repo rates as well. My analysis proved worthy on two grounds. First, the CRR rate would have been increased in a calibrated and gradual manner instead of giving sudden shocks to the financial systems. Second, the RBI would have succumbed to Manmohan Singh’s cabinet to control inflation.

However I do not expect a rise in bank rates and other rates too soon, because then the RBI leaves the door open to even more foreign capital inflows. This would nullify the desired outcome as more money would still be chasing the same amount of commodities. Also it will further cause the rupee to be more susceptible to the volatile dollar currency markets as the foreign investors would be looking to hedge their currency risks and attracting more speculative movements.

Could do better

Although we all feel that the RBI has done well enough to save the economy in the crisis and its previous prudent polices have indeed protected the banking system, but to me its recovery management has failed in many ways. Firstly, India witnessed a slowdown, not a recession, so the work was already half done. Secondly, the earlier populist fiscal policies of the government were more than a helping hand to its monetary policies. RBI’s ineffectiveness was visible initially (in last quarter of 2008) where banks refused to bring down their lending rates; especially at the time economy needed the most. Thirdly, its failure to control inflation is big embarrassment for the usually pompous banker. Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles. What and how it unfolds precisely is difficult to predict just like today’s economic crisis.

A World Oft Forgotten

Within the mainstream news these days, two parallels clearly emerge, the success of developing economies such as India and China, contrasted with the failure of erstwhile capitalist western nations. But sadly the third world remains the ‘third’ world which is still reeling under the bandits of economic growth: high poverty, low literacy, religious fanaticism and administrative inefficiency. It is as if there is no place for this third world on this planet. The everyday East-West comparison in newspapers and journals woefully neglects their presence. Globalization and its benefits are completely absent from the region. They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

As I am writing this blog post, a family somewhere in the far neglected corners of the world is being pushed below the poverty line. To my interpretation, the rise and revaluation of poverty line measures in such regions have been higher than the effective number of people coming out of poverty.

They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

Today the world has changed more than we can grasp in one go. New measures need to be employed to pull up such neglected and backward regions.  First on my mind is the need to shift from macro initiatives to the micro level. Focus should shift to micro-level programmes like micro-lending which have done so well in emerging countries. I feel that measuring and monitoring micro level support plans can be monitored and evaluated more easily and quickly.

Second, would be to eradicate “energy poverty” as coined by Thomas Friedman in Hot, flat and crowded. In simple terms, to enable the masses to fulfil their aspirations by giving them secured supply of electricity. Today, any rural programme even the basic ones from education to vaccination drives require electricity. Overcoming the third world’s inability to connect to the globalised world will be a big step in helping grow confidence.

There are many more measures which are being talked about. But these are the major recommendations which I feel are indispensable. The third world needs to be given more attention. But with tightening budgets of major donors in the West and exploitive bargain hunters of the East, I feel my worst fears for them are going to be true. 

No wonder they pray so much.

Reforming the Media: Influences & Suggestions

Media Corporations are getting bigger and bulkier than before, as they try to capture market share of multiple platforms of radio, print, television, movies and internet. The competition is high, margins are small and their business cycles are dynamic. There is so much stress and competition that today news reporting can be easily influenced in cash or kind. Let us see the various mechanisms of influence

1. Direct ownership: In many of today’s media corporations number of companies or interest groups have stakes in ownership and management. Shifting their focus to shareholders satisfaction and biased news coverage at times.
2. Influence of Advertising companies as clients: To keep their shows and prints running, media companies need advertisements. Thus media companies have to service their relationship with clients and that does imply a favour here and there.
3. Knowledge & data processes: You may have seen on business channels on tv, smartly dressed people with big company banners sharing their thoughts on the markets, which are as volatile as the market itself. Media needs these industry thinkers to lend credibility to their shows, but then it makes the audience credulous to their views.
4. Pre-existing political influence: Media thrives on the news makers and politics is very much intertwined with media coverage. Barack Obama showed us the power of social media in the US Presidential elections last year and I feel all of our Indian politicians are no less then drama queens. It is very well prevalent observation that India’s biggest print newspapers are lenient towards different ideological political parties.

Moreover, large advertisers can influence even competing media outlets by threatening to withdraw their advertising; numerous small advertisers can exert influence if they share a common interest and can coordinate (e.g., when represented by an advertising agency). As a result, media competition alone is not always sufficient to prevent commercial media bias.

The Possible Solutions

There maybe many more ways of influence, present but what is more important is to see what all can be done to improve news reporting, specifically financial journalism. I have certain measures in mind, radical they may seem but radical change is the need of the hour.

Firstly, removing advertising from public TV stations as imminent in France and Spain. This reduces commercial bias of their content and pressures their competitors to reduce bias; it also shifts ad revenues to private media, complementing plans to subsidise media consumption and media entry.

Secondly, making the consumer or viewer or reader more aware that certain views and opinions of this show or column maybe biased. This can be done by running a disclaimer before or during the programme, reminding viewers that it is just an opinion, not advice.

Thirdly, moral suasion is what is most required and most practical. Readers should advocate more investigative journalism, especially in business and finance. This should prevent scams like Enron or Satyam to ever happen again. Most importantly nip improbable frauds and thefts in the bud, and prevent full blow ups in the future.

Another important step would be to remove views or suggestions from the main report and keep them collected on a few pages or a different show. An easy example is the ‘Times View’ section in India’s leading English daily, which comes along with the news event; at times even on the front pages. This is bad journalism, as it induces the reader to opinion of the newspaper, rather than give him time to formulate his own. Opinion sections like these should be put in separate pages of the editorial.

Has Financial Journalism Lost Its Teeth??

John Friedman of MarketWatch was at the press conference announcing the Bank of America's acquisition of Merrill Lynch and wrote,

"the media were so polite and deferential to the two CEOs; they behaved as if the press conference were a victory lap for the financial services industry."

The above comment just so simply describes the present appalling state of financial journalism. It is true as I pointed out earlier and how easy it is for the media to be susceptible to external influences and how financial dailies and shows can influence the markets themselves.

Too much respect for seniors
One of the main problems affecting financial journalism today is the that business reporter are too close to the Wall Street that they forget the Main Street, and have too much respect for the institutions they are covering. If you have pre-bias towards the organization your covering, then most certainly you would end up asking sugar coated questions.

Also the innate behaviour to idiolise famous public figures like Warren Buffet, Richard Branson or George Soros is very damaging to prejudice free reporting. Every word that comes out of their mouth is said to be the view of the market or industry. It is shown as an implied piece of advice. Rather the journalists should be reviewing their decisions and investments.

Losing reality
Besides the above pre conceived impressions that have set in, many angry bloggers point out gradually financial journalists become part of niche circles in the industry and lose touch with the base and the common people they are writing for. They become very influenced by the views of the circle and many a times their daily columns show their responses to each-others opinions.

A major part of the flaw lies in the fast paced media culture, where ‘journalists are like fireman, going from one fire to another, dousing flames and moving on’. So they publish what is seen and avoid going to the heart of the story and dig out the facts. This surely leads to ‘the death’ of investigative reporting.

Listen then seek to be understood
During an interview recently on the Editors Weblog, the Financial Times's Managing Editor Daniel Bogler said, "It's unfortunate that the financial literacy and understanding of how things work in the City and of basic accounting and so on, is actually very thin in financial journalism." Thus this amplifies the need to have more knowledgeable people covering events which they fully understand and thus are more effectively communicate with their readers or viewers.

Looking back over the rapid collapse of the world's financial markets, and the uncertainty ahead, I very confidently say it is, a financial system failure, a regulatory failure and a media failure.

Everyone is willing to talk about the first two, but they are not willing to discuss the last one. We are all in this. It's a media failure of omission and commission.

Two Worlds Apart

The world is clearly split today. With one half looking forward to a bright future and with big aspirations in their hearts and the other half of the world looking behind, still picking up rags from the remains of the last bust and trying to rebuild their economies. One half of the world is flush with liquidity and raising money is just a blink away. Whereas the other half is still carrying heavy debt burdens on their shoulders and has no idea how to lessen it. One half of the world is witnessing rapid economic progress and expectations of growth, even better than before the recession. Meanwhile, the other half is still finding it hard to recover and repair, with its problems ranging from looming inflation to mounting unemployment.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge. Okay enough of euphemism, let’s make it more simple! What I mean is the rebalancing of global economy is taking place more quickly than anticipated, with the current recession being just a catalyst. According to my understanding, the change was always happening, but not noticeable.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge.

The welfare states of the West were gradually piling up debts and unproductive government spending was further exacerbating this debt. The 2 ‘lost decades’ of the Japanese economy clearly highlight the implications of an economy saddled with expensive welfare programmes. However, not many have taken notice. For instance in America, healthcare as a percentage of GDP was just 5% in 1962. It has grown to 15% in 2010 and even after the present Obamacare reform; estimates are poised at 20% in 2017 and 25% in 2025.

Difficult fiscal outlooks are not the only problems the West faces today. Other depressants are heavy national debts, aging workforce, slowdown in consumption, expensive factors of production and the growing social and cultural discontent, especially towards immigrants and minorities.

On the other hand the East is brimming with optimism and consumption is rising at a frantic pace. Emerging economies are filled with opportunities. Innovation is growing with leaps and bounds. They successfully decoupled themselves from the collapse in the West, which was a surprise to many pundits. But again many had learnt their lesson from the Asian crisis in the 90s, and their adjustments in policy making were gradual, but not that impactful or noticeable. Strong domestic consumption accompanied with prudent foreign exchange controls built over the last decade or two have helped them recover from the crisis and in general brought in public glare their economic might. Even politically they stand taller than before. The extension from G-8 to G-20 is a significant reflection of today’s time.

Cooperation or Isolation?
What the West needs is not to grow discontent against their growth but, to learn and partner in their success. The West still holds the cards on many fronts. Ranging from intellectual asset base and technical prowess to existing influential shareholding in global institutions like IMF or UNSC. But now starts the real challenge to build partnerships, rather than blocs and give the world a better tomorrow.

Why Germany Lost To Spain And Continues To Lose In Finance

Part 1-

On the onset I would like to start by saying that, it was a fantastic match, which surely lived up to the expectations of a World Cup Semi-final match. For keen observers of the game, it was a real treatise; quality of the highest order. The blackboard strategies and planning were implemented well by the players on the pitch, and it took the match to another level. Nevertheless, Spain proved to be a better side, with their fine passing and skill. For me, the Spanish flair and game-play had more of a Barcelona character than the traditional Spanish style of play. (7 out of Spain’s 10 outfield players were Barcelona players.)

It was heartbreak again for Germany, and the prominent thought on everyone’s mind was ‘Not again!.. when will they?’. The next day, the match had a better hangover on me then any vodka-rum mix has had. Thus, in one of my erratic moods, I started to think about last night’s thought. How Germany often falls, just before reaching the zenith. I tried to correlate it with the recent Euro debt crisis and the role Germany has played in it.

Yes I think, Germany truly deserves the blame for exacerbating the Debt crisis, by holding on to bailout kitty until the last moment, and then the surprise and uncalled ban on short selling and CDS. If you look deeper into the German economy and their socio-political structure, you will find them to be very different to their fellow Europeans. Germans are more thrifty and prudent, but yet still pertinacious and very conservative in their opinions and preferences.

The Germans have always held pride over their seemingly impregnable defence, which has been their legacy for the last five decades. They have invariably been a defence focussed team, but what we saw in the beginning of the world cup was a radical shift in strategy. The Germans were bursting with energy and youth, and so an aggressive and attacking approach came naturally to them. Thus, they performed exceptionally well in every match except the last, beating some good opponents by 3 goal margins. (I said ‘good’, so please lessen by one if you included England.)

But I was really surprised to see their strategy in the Semi-final. They left their wining for their old defensive strategy. From what I understood they planned to soak up all the pressure and to release only on the counter-attack. But, what really transpired on the pitch was the frustration of German players of not getting the ball enough, and eventually then not holding the ball in possession long enough.

From then onwards it was a downward spiral, till they finally suffered a goal and so they were forced to go all out and attack. If you remember closely they had more chances in the last 20 mins than before. So what really did them in? In one word- Hubris. The Germans felt that they could rely on their archaic style of play and because they have always been so good in the past, then why not depend on it as always. It is truly said, that when you walk with your head in the clouds, you either flying or dead. Either ways you lose touch with reality. So did Germany and they paid the price for shunning the modern for the old.

But why finance?? Follow up in sometime.