The Great Indian Parliament

We all make a fuss about the government not doing anything and the politicians taking too much of time to resolve even the slightest of issues. I use to think earlier that its just like blaming someone when we do not have any solution to a problem. However now I am sure that this is in fact the real truth.

A few days back was Mr. Nandan Nilekani's first day in the parliament and his narration which I would be sharing with you clearly justifies the fact. This is a really an awesome narration on how the parliament functions:

The House was in pin drop silence. I was brimming with anticipation and excitement!! !! Manmohan had informed me that my introduction was one of the important points of the agenda. I hoped that I will be able to make my speech properly. After so many interviews and conferences, I was nervous today!!!! After the Speaker indicated that the proceedings of the House could begin, Manmohan formally introduced me to the entire House. He mentioned that as the head of the Unique Identification Authority of India, I was responsible to ensure that each and every Indian had a digital smart card as a proof of his existence.
Manmohan spoke about why I was selected and also some references to the various projects executed by me in Infosys were mentioned. The House listened with rapt attention. I was asked to say a few words and I did exactly the same!!! I thanked the Government of India for having given me this opportunity and I assured the House that I would strive to successfully deliver this project. The Speaker then formally inducted me into the House and before the proceedings could move any forward, there was a small commotion on the other side of the hall.
It was Minister of Textiles who had a comment to make before the next point on the agenda. He made a request that I should be attired in a more austere way instead of a flashy suit. It did not go well with the image of a minister who should live to serve the common man and should be less ostentatious in his habits. I stood up to reply. I offered my apologies to the Honourable Minister and assured that I shall be in a more acceptable dress next time. I felt that he was right. We also used to have corporate dress code in Infosys. So it's here as well!!!!
I sat down and felt somebody nudging me. I turned around and to my surprise; it was the former Indian skipper and one of my favourite batsman Mohd. Azharuddin. I remembered that he had recently won the elections. I smiled at him and mentioned to him that I used to like his game very much, shaking his hand. No Rolex, I noticed. Azhar told me that he would “fix” me an appointment with an Italian designer who had designed his dapper Kurta suit. An Italian designer in Milan doing Kurtas!!!!! I made a note of this and reminded myself to give this example to Friedman for his next book,” The World Markets are flattened”.
Since there was no doubt about the “Fixational” capacities of Azhar, I told him to give me the details and I would consider. The proceedings of the House went on with numerous bills being debated and passed as I sat as a passive audience waiting for my project’s turn to come up.

After the lunch break, it was the moment for me!!!!
MY PROJECT’S FIRST REVIEW CAME UP FOR PRESENTATION.
I was at sea. My laptop did not have any reserve power. I went to Manmohan and apprised him of the situation. I was sweating. He calmly replied that this would not be a cause of concern. I was flummoxed!!! ! The Speaker asked me to explain to the House on what were my plans for the Unique Identity Project. I replied that I have a plan prepared for 30-60-90-120 days’ milestones and I have presentation to make for which I need a power socket, a projector and a screen. I had no idea what was going to happen after this.
The next couple of minutes were a complete jolt for me. I was completely in a tizzy. Let me just summarize what happened. A Joint Cabinet Secretary Committee was set up to judge the feasibility of my request. The Under Secretaries for the Ministries of Power, IT and Broadcasting will prepare a Viability Report after scrutinizing National Security threats to my request. This was because the power socket comes under Power, laptop comes under IT and projector comes under Broadcasting. I have also been told to reconsider my timelines of 30-60-90 days and start thinking in terms of years. Probably, they are right. I did not have the foresight in this matter.

The summary of the issue is that I need to come up with a more inclusive, democratic, comprehensive long term plan for this project to be executed over the next five years. I have also been given a presentation slot 3 months from now (by which the issues related to the power cord etc will also be resolved). I am filled with mixed reactions. I was planning for a quick resolution; the management wants a strategic solution.

I come out of the House and text Murthy.

“You won’t believe it but these guys work just like us. I am on a NATIONAL BENCH for the next three months!!!!!!

The Joy of Sachs

Goldman Sachs created history on 14th of July with record breaking profits of more than $3bn in the second quarter. The wall street took this very very positively and the already on a roar Dow Jones sneaked even greater heights.

Goldman claims that most of its profit came not from “proprietary” trading, or punting its own money, but by acting as a middleman, making markets for clients in everything from bonds and shares to currencies and commodities. Such business, were barely profitable in the bull market however has become a gold mine as competition has evaporated and bid-ask spreads (the money dealers pocket on trades) have ballooned. This is because there aren't any big player into market making after the demise of the Lehmans and the Bear sterns of the world.

For a firm that probably would have collapsed without government capital, debt guarantees and generosity of Mr. Buffet and fast-track approval to turn itself into a commercial bank such large profits sounds a little fishy. Moreover the hand out huge bonuses,comparable to what it was paying before the crisis.

However simple economics say that in any business if a single firm is making super normal profits, will attract new players and will ultimately bring down the profits to the normal levels and I believe that this precisely will be case with the US financial services industry. Thus the profit figures on which the US and the global markets are rallying today will abate gradually.

As Mr. Paul Krugman Says "Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong. The huge bonuses Goldman will soon hand out show that financial-industry high fliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand. The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to pre crisis levels. But it’s bad news for almost everyone else.

Hence the true recovery, at least for the Indian context will not happen if Goldman reports higher profit, but will occur when the basic macroeconomic data like the commercial vehicles sales, steel and cement production will start showing positive signals. These are the sectors one should invest because whenever the economic will take place they will definitely gain for sure.

Banking Sector: A Betting Sector

The present state of someone who has invested in the Indian Banking sector post the budgets is very much like someone who have bought a lottery ticket or have placed bet on a Derby horse. The reward if the luck favours are huge and so also the risk of getting your capital eroded.


However, at Peter Lynch says "Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business"

That's precisely my view is related to the Indian banking sector. On one hand it has plethora of problems that was created by the Budget 09:

• A higher than anticipated raising the fiscal deficit leading to a higher bond yield and thus pressure on the treasure income
• The finance minister has also said that the banking and financial services
  companies will not be considered for the process of disinvestment, this will
  also lead to a dearth of the much needed capital to comply with the
  applicable BASEL II norm
• The government has increased the amount of necessary allocation for
  banks to underdeveloped sections of society, these kind of loans are likely
  to put strains on their balance sheet and profitability
• A combination of reduction in interest rates, extension of payment dates for the loans made to the agricultural sector

These issues are really hurting the banking sector and has already resulted in a more than 1000+ points fall in the bank nifty index and is expected to continue. Moreover given the high beta and expensive valuation the sector carries, any correction in markets will lead to a blood bath in the banking stocks.

However on the positive side, the banking sector is expected to deliver the best first quarter results among all the other sectors and the performance by Axis Bank and HDFC bank clearly shows the trend. This is mainly on account of a huge increase in treasury income (YoY basis) and a lower cost of funds because of a cut in the key rates over the previous year. Thus if the this continues the upside potential for the banking sector is pretty good.

Hence, the reward comes with a very high risk. I believe that the ones who love adventure sports could go long in the banking sector with a short term view, but ones who want to play safe should avoid this sector or could go short also, the risk here is a less than going long.

Budget 2009: The Media Hoopla

"It is generally known, that he who expects much will be often disappointed; yet disappointment seldom cures us of expectation, or has any effect other than that of producing a moral sentence or peevish exclamation." This famous quote by Samuel Johnson sums up the Budget 2009-10 for me.

Its an event which I believe will make only one group of people laughing all the way to the bank, yes you are right.. Its the Indian Media. Media is portraying this budget as the biggest budget of our life time, the BIG B and similar crappy adjectives, which for sure is not the case.

Yes the budget will be delivered so that Indian economy grows and flourishes. But people need to understand that its just the first budget by the UPA government when its under no pressure from allies and there are 4 MORE TO GO. Thus all the reforms are not possible in one year.

Abolition of STT, CTT and other such euphemistic measure will not be taken by any finance minister who is already facing a 11% + deficit as the government would want to hold on to even the smallest stream of revenues. Also the government would not increase the FII limit in Banks, given the current global financial crisis that was only because the banks became too greedy.

The most likely reforms are disinvestment of PSUs, extension for STPIs’ tax holiday, implementation of GST by 2010, increase in FDI in insurance sector and a increase in excise duty which was cut during the fiscal stimulus package.

Thus, under no circumstances one should play long in the markets since much of the expected reforms have already being discounted in the current stock prices . Let the media mint the money and we can remain happy by sitting on the sidelines rather than entering at these levels.

P.S. You can also view our research team's consensus budget expectation report (link Below) where we have given a consensus estimate of all the expected reforms.

http://www.scribd.com/doc/17077278/KBSLConsensue-Budget-Expectations