Debashis Basu of Moneylife is one of the few go to people on matters of economic and financial journalism . His earlier piece on payment banks when they were licenced was ahead of times as he was one of the few who dissented against their business model. We only saw later how as right of the licencees dropped from the race and just have started operations from remaining eight.
In this new hard hitting piece , he questions ignorance of India’s fund managers.
He says and rightly so that despite so called 25 years of liberalisation the fund managers continue to believe in big government, big and bold budgets/policy and so on. Whereas it should just be the opposite.
He keeps the discussion limited to fund managers but applies to so many others – economists, media, bankers, top businesses etc. They all talk and write in the same tone. It is unbelievable how even the private bankers respond so similarly to any policy. Just look at the papers today. Same old story.
….Another area they are not very clued on to is how political factors influence economic policies. I have been noticing this lacuna among institutional investors for over 15 years now. Unfortunately, all of us have a tendency to have an opinion even about things we don’t have much knowledge about; fund managers are no exception this which makes them impressionable about matters that they are not so familiar with.
Nothing illustrates this better than the rose-tinted glasses they don while peering into the future for the slightest impulse that will make a slothful Indian corporate sector break into a canter. What could these impulses be? The fact is that India’s economy is intensely political. And we have had a different political leadership in place for almost three years now. I have watched with interest how every single fund manager and analyst is convinced that the new leadership is taking the right steps in the right direction and that a few months, or years, of pain will eventually lead to a period of super growth. I cannot disagree more vehemently with this thesis, at least, given the trend of governance so far. Here is my logic.
Last year, we celebrated 25 years of liberalisation; yet, our companies are firmly tied to the apron-strings of a big government. The fortunes of Indian companies, the middle-class, farmers and workers are substantially dependent on government ‘policies’. These policies determine how much money the ever-expanding government will appropriate for itself through extortive taxes—mainly sales tax, service tax and excise duty.
This, in turn, determines what remains in the hands of households and companies for consumption and business investment. Remember, the impact of such taxes is the hardest on poor people—those who the government avowedly wants to lift from poverty and convert them into consumers. What makes it worse is huge continuous borrowing by the government that crowds out the money available for business credit. A small part of the money collected by the government boosts consumption and investment, too, because government employees are consumers and government purchases keep many businesses going. But government expenditure does not have a huge multiplier impact. Most of that expenditure is unproductive. The lion’s share of government revenue goes to pay interest on huge government debt.
A new political leadership that intends to change India’s fortunes will have to break away from this pattern. More money should be available with citizens to consume and for companies to invest. Productive jobs are created by companies, not by the government. You hope India’s political leadership will understand this and take steps to shrink the government, bring down taxes and put more money in the hands of households and companies. Has the government taken even one step in this direction over the past three years? Quite the opposite: taxes have gone up and the size of the government has expanded further.
Can’t institutional investors see this?
Too much to expect Sir. All institutional investors do is to keep dancing to the same music. As music starts to fade, they jump to replay the same song. As one of the commentator on the article says the find managers just catch on some bandwagon to continue the game. ANd what bettr than say look what government is doing.
He quotes from a letter from a fund manager whose ignorance of impact of demonetisation is baffling:
What does this person say about the disruption caused by demonetisation? “The latest development makes me even more positive on the future prospects of India’s economy and its growth in the long run. However, the transition will be even more painful for the markets as well as the country. Cleansing the system which was corrupted for decades won’t be so easy that things would normalise in a matter of few months or quarters…”
In other words, even the shockingly reckless and horribly executed ‘policy’ of demonetisation has not woken this person up; he is unshakeable in his belief that it was the right step to ‘cleanse’ the system, when not one measure of the government has struck at the root of generating black money—the enormous and arbitrary powers in the hands of a government officials and politicians.
This column is not about the Modi government. It is about the investing process of fund managers, who feel compelled to express an opinion on the political economy of which they may have scant knowledge. Every commentary by portfolio managers shows a steadfast belief that the Modi government is putting the country through pain for long-term gain. They offer no evidence about the changes that have been unleashed in this direction. I daresay that the pain is simply because there has been no substantial change in governance.
We have to stay focused on stocks that would deliver returns. That has little to do with macroeconomic policies over which we have no control. If you are, indeed, tempted to talk about ‘macro’, you may like to know that there is just one known recipe for sustained economic growth: lower costs and higher productivity. The first is directly in the hands of government—mainly through lower taxes. The second is indirectly in the hands of the government— mainly by encouraging a competitive private sector which alone creates jobs. As and when we see this happening, we should get excited about ‘India’s future’. Until then, we would be better served by sticking to our only job as investors—ferreting out growth stocks available at reasonable prices.
Brilliant! Couldn’t say any better..