Sunday, September 8, 2013

Raghuram Rajan Effect on Brokocracy

A rally in FII controlled stock market. A marginal retracement in the badly battered Rupee. That is all it takes for the economic pundits to say that Indian economy has bottomed out and the Raghu magic has started.

Is it true? In my opinion it is too good to be true. What is true is that Raghu has done some home work and has come well prepared. He has taken a gamble. Whether that is a calculated gamble or not will be known in due course. The outgoing Governor is spot on when he says Raghu should try to come out of the chakravyuga in Indian Economy. We will see in detail later in the article.

Let me summarise clearly. What is the problem now?

1. High Current Account Deficit 
2. High Fiscal Deficit
3. Low Rupee Value
4. Corporate Balance Sheet Stress
5. Banks Asset Stress

Simply put this is all due to a single reason, and that is corporate greed. The growth which we see now is a myth and you ask anybody. Except a handful of people everybody else is feeling a lot insecure today than 10 years back. Even for the rest, the secure feeling they have is mostly false. The perceived value of their real estate asset is the reason for their brave face and that too will go in few months time from now.

Before go into further details, please read the following article    which says  that the The size of the RBI’s balance-sheet in March 2002 was close to Rs 3,50,000 crore. In March 2013, it had ballooned to as much as Rs 22,00,000 crore.

This mindless expansion has increased the inflation hugely and any economist who has a different view should be either a idiot or a cheat. In India the problem is without applying the basic economics everybody is talking about out of box solutions. Because these cheats very well knew that the basic economics is not supporting their cheating ways. Hence, if any corporate or bank guy says that RBI is following a tightening monetary policy, either he should be a lunatic or cheat.  And since a majority of them falls under the category of cheats. What are their arguments?

1.  India needs 9% growth every year because the population is huge and inflation is not at all a problem and many people has come out of poverty because of monetary expansion.

I am asking why there should be 9% growth and how it can sustain? The corrupt politicians fell into the trap and to satisfy the corporate crooks they made this expansion happen and now we are in the situation where we are now.

In 1990 if they fix 10 Rupees per day as poverty line limit and if they use the same 10 Rupees per day as poverty limit now in 2013, then we have no other option then to doubt their pa knowledge.   The figures I use may differ. But the matter of fact is we need to calculate accurate figures there and try to fix the poverty line and then decide how many came out of poverty? This should also includes the life style of current years. This should also include the kind of social security we have. Even a dog cannot believe that quality medical facilities and education facilities are available free in India.

Let us see, how this expansion spoiled the country. This is nothing new.Easy money flows to banks first because rates are low. Due to inherent weakness in the Indian system the money is not properly monitored and so most of this money went into unproductive areas. This very well explains that except the Golden Quadrilateral which is the contribution of BJP, we have not built any infrastructure. The money thus printed only helped a select set of corporates and they are the people who having tasted the cheap money is still asking for cheap money. I can give some names. You can add entire CII and FICCI goons in that.  Not to forget the Real Estate Mafia. The easy money flows into real estate naturally because the sector is run by black economy. The easy money finds real estate as the parking space. The 2000's is the time where government pushed the housing loan in big way. This along with the balance sheet expansion shows that it is a planned conspiracy by the government. The government supported real estate by giving income tax concessions and also it gives virtually free hand to the real estate goons to loot the country.

One interesting observation I make here is that entirely 90% of Indian upper middle class is heavily invested in real estate and 50-60% of middle class in invested in real estate. Now these people who has heavy presence and influence in media and other places are supportive of government's expansion policy only because it further increases their real estate asset value. This personal interest is stopping them from seeing the real effects. 'The emperor is naked' effect.

Coming back to the point, the bad thing about the easy money is that it asks for blood continuously. This we are seeing in US and Japan as well. First you reduce rates. Then when you hit 0 % rates, then you buy bonds ( Japan). We are going against the basic economics here and these countries are finding it hard way. In India's case, this is further complicated. These countries with huge money printing still do not have run away inflation. But we do have all the extra problems.

We, Indians by nature are not disciplined. So now almost all corporates lost the ability to do the business with decent returns. We found real estate is the best investment and almost all the corporates in India dabble in real estate. The problem is that the corporates compare the profit they make in their core business with real estate and conclude that real estate is the best business, or conversely they expect the same profit margin of real estate in their core business also. We do not know who spoiled whom. Finally everything is spoiled.

The effects are showing now. This has become a ponzi scheme. Now to continue this business we need the following:

1. The inflation has to go up in the same rate ( 10% per annum)
2. People earning also should go up in the same pace

We know the later cannot happen. Even the inflation also cannot go up at this rate, and if we continue at this rate, then we are staring at Zimbabwe kind of situation in few years from now. Please google search for inflation in Zimbabwe to find the scary things.

To cut the story short, the income levels are not increasing. The government cleverly avoided investing in education and health care. It is strange that Indian governments, instead of building hospitals giving insurance cover to people for private hospitals. We, like a beaten to death dog, not asking any question. All education is privatised and shamelessly ask us to go for education loan in nationalised bank which again has our money.

Now to cut the story further, Raghu is expanding our balance sheet further. Basically in my opinion he is buying time for Congress until the elections.

But still I trust Raghu for the following reasons

1.  He may know all this and he may want to really help the country.
2.  Based on the above assumption, by buying time he may want to
                  a) Prick the RE bubble
                  b) Discipline the corporates
                  c) Control the inflation
3. The noises he made so far made me think that he intends to do all this given above.

But again, he has to face heavy opposition from

1. Corrupt Government
2. Corporate Mafia
3. People ( yes, having invested huge in Indian real estate, we Indians ourselves may not allow him to do right things. It is strange but it may happen)

However in short term, the SWAP things can go against him if he cannot deliver in Rupee front. Because the hedging cost is borne by RBI now and he is giving fixed cost of 3.5% to the banks now. As usual banks are going to splash the money to real estate brokers as we are in brokocracy ( we are not a democracy). So the real risk is that RBI will have to borne the hedging cost. That may complicate the situation further.His brave pitch against corporates (promoters) may look good initially. But he will be taught a lesson or two from our corporates shortly.

I may continue the article :)


  1. Great post Mangoman!You have clearly stated India's Quandry.Unlike US and Japan,We have to confront inflation as well.So RE bubble definitely will be burst(already getting anecdotal evidence of this happening).This will greatly reduce the wealth effect enjoyed majority of India and will cause severe demand destruction for all discretionary items like car,tv,computer etc(again already underway).I hope all of this will happen in an orderly fashion.We can only keep our fingers crossed.My hunch is Raghuram's gamble may not come off as he has to fight too many vested interests.For eg govt want status quo till the election gets over.So I am not holding my breath on this one.

  2. I read all of your post. I have some agreements and disagreements with you. I think you are too optimistic about Raghuram Rajan and you are bound to be disappointed.

    His first move was to ask for gold in South Indian Hindu temples. That shows where his and the government eyes are set on. What the British colonizers couldn't do will be finished off by our new kings in Delhi. But I'll leave it aside.

    We cannot continue with an overvalued currency. Like you said, it has already distorted our economy with people investing in non-productive assets and spending on discretionary items. So I do not understand your argument for a strong overvalued rupee. Devaluation is necessary for making our export industries competitive and creating actual productive jobs for a lot of people.

    You say that a weak rupee is good for the upper middle class and middle classes who have invested in real estate. I say that a strong rupee is also good for the upper middle class and to some extent the middle classes as well. A strong rupee allows these people to vacation abroad, buy flat-screen TVs and cars. Many have a lot of black money in cash and do not want to lose their spending power abroad and on imported goods. They have become addicted to these goods and services.

    What we need is a devaluation of a rupee along with a pricking of the real estate bubble. I am not knowledgeable enough to suggest what can be done to achieve this.

  3. I do think you will get your wish for a hard-currency policy from Rajan. That will bring in massive unemployment and political instability to this country. All that if he actually survives in office for too long. I think he will get thrown out in a year or two.

    You are focusing too much on the real estate bubble and not on the short-term, destabilizing effects of a hard-currency policy.

  4. I think people dont understand...what is going on the currency is under attack coz there is a sovreign debt crisis goingon.THE INTEREST ON THE DEBT IS putting a lot of pressure

    And btw the devaluation is killing the debt scenario.It is not somethign the govt wants but it is happening.THe credit mkt debt has gone up 10 times in the last 10 years and 45 times from 1990.

    HAVENT U HEARD THIS TIME IT IS DIFFERENT.You cant pay this debt .Period.

    NOW they see crude and rates going up everyone will think it is it is deflationary coz the BOND mkt will be screaming for a defualt
    THE BOMB which subu kept ... it happened coz rates started bursting up in US yields
    EMERGIN MKT capital who were doing this spread trade borrow US and lend emerging debt trade suddenly freeked out .THEY WILL BE SHOCKED to see their values go to nothing soon.

    7 trillion capital has flown from 2003 to 2013 to asia
    check sensex 3000 to 21k (get the picture)

    NOW this debt will blow up u can imagine.IT was tough tto understand 3 years back how it will coz of this moron BEN printing and giving money .Now the game is up. yields have broken out 2.7% it is doubling from here soon.Capital is flowing into US and that is why u see things moving up to USD .DEBT 25% of the world is in USD which is blowing up 75 trillion and 25% is what 20 trillion approx.GRAB your popcorns and keep ur eyes on the mkt there is a lot of money to made shorting banks if yields spike 3.1% UST.

    Currency is waste if u cant buy anything with it (food)

  5. Tapering may not happen at all. The US jobs report wasn't so good this time. Even if tapering happens, it will be abandoned soon. That's my feeling. The world economy will not be allowed to go into a deflationary spiral.

    I think a solution for India would be to devalue the currency while imposing currency controls. This will make the industry competitive while blocking hot money from flowing in later. Richard Koo also said that emerging markets should have imposed currency controls when QEs started happening. Of course, he never said any of this earlier. It's always easier to talk based on hindsight.

    The truth is that the Indian economy is not as globalized as it can be. Let those real estate brokers and other industrialists who borrowed in foreign currency go bust. A new generation of leaders will rise up.

    Yes, I can dream. But sadly none of it would happen. Rajan is an IMF man who is already talking about opening up the currency. Our political and industrial leaders will never accept defeat.

  6. RIchard koo ..isnt he the guy who told japan to solve the balance sheet recession ?According to me he is nuts .Read Steve Keen much better to read him that other nut jobs who increase the problems.Btw QE happened didnt we all enjoy it first ? so it doesnt make any sense .

    THE WEST is bust and they want take everything down 30 years they are telling everyone to print their way out .Imaginge all mkts go back to 1990 levels .You may se it wont happen .If it does it will be fun to watch .

    WORLD has to go back to gold standard thought it is not the best solution.
    Imagine SUZLON stock like situation for indices

    *one more line--- things are globalised including india ,DOnt blame it on political class.everyone enjoyed the boom from 2000 with real estate going up and still i hear people buyin gup plots in rural india and selling it ..TOTALLY nuts .

    The size of the RBI’s balance-sheet in March 2002 was close to Rs 3,50,000 crore. In March 2013, it had ballooned to as much as Rs 22,00,000 crore.

    7 times in 10 years wow that is some inflation

  7. I did not enjoy the boom :(

    I was in the US, at the epicentre of the financial disaster. I learnt my lessons there and I am frankly scarred for life. I have never invested in land or gold though now I understand why Indians invest in those two unproductive assets. People in our country are smart in their own way.

    Krugman got it right. Everyone said that inflation would rear it's head. But it's been 5 years now and there is no serious inflationary pressure in the US. There has been not much inflation in Japan either.

    I prefer stability over moralistic austerity. There is not set moral that people who went crazy during the boom should suffer. As a saver in cash, I would suffer a lot due to money printing. But I would rather have a job and go through a so-so life than see massive unemployment and political instability that austerity-led deflation will bring.

  8. i think ur getting it wrong...these fools are destroying 50 years of growth in few months...forget jobs we need to grow our own food the system is unstable...they are doing this knowing that it will blow up...gosh madness lunatic is when he knows it is wrong maniacs...imagine the banks shut all over the world they wont or cant do anything...
    REad about crowd destroyers in US built AST something

    Frequency which makes ur skin burn ...they know it will blow up still they are doing it.

  9. So the Chicago Boy came through. He is indeed going to follow a hard currency policy at a time when the Fed is not going to taper (now or ever). This will cause a lot of pain in the economy. This won't end well. There is a reason why IAS officers are chosen for such positions. They have actually lived and worked in rural areas and seen the how precarious the lives of the poor are.

    This won't end well.