India’s fascination with gold continues unabated. In the current year, we have already imported almost 550 tons of the precious metal, which exceeds the gold imports of all of last year. Gold imports into India, are expected to exceed 900 tons this year, entailing an import bill of USD 40 bn. After oil, it constitutes the largest item in our import kitty. Despite an extensive banking network and well developed investment sector, gold continues to be a preferred investment for household savings. To the Indian policy makers, this humongous investment in gold is anathema. They consider it as an illiquid and unproductive investment, which could otherwise have been available for investment in industry/infrastructure. Imagine having an annual fund of $ 40bn to invest in Indian infrastructure; its backlog would simply vanish. To the policy makers, there is also an urgent need to ferret out the huge gold savings of Indian households and infuse them into the organised sector investment mainstream. The taxmen consider gold with a prejudiced eye, as an easy mode to park black money. Large amounts of undisclosed investment in gold, is a common finding in tax searches. The government has often introduced gold bond schemes to pull out gold from Indian households, but they have all been miserable failures. The Bhartiya Nari will not part with her Stridhan so easily. While the current spurt in gold imports is attributed to the impact of demonetisation and GST, they will yet continue to be on a arising trend. The gold savings are the foundation of the Indian household and have provided it with stability in times of financial crisis. The attraction of the Indian woman to gold remains the bedrock of a common man’s family and it cannot be viewed negatively, merely because conventional economists think so. That’s the primary reason why our economy is resilient and does not collapse as the Western economies did in 2008. Y V Reddy the former RBI governor, thus remarks that gold imports cannot be discouraged, pointing out that gold is a long term store of wealth and Central Banks all over the world have been net purchasers of gold. Indian women have a marvellous and most prudent fascination for gold. It is our domestic repository of wealth and should not be discouraged.
POOR CONSUMER CONFIDENCE
A well known restaurant in Mumbai’s suburbs reports that its sales are down by 60% and so does a reputed beauty parlour report in South Mumbai. The footfalls at celebrated malls have receded considerably and many branded chains have shut down their outlets therein. Even the popular festivals of Ganapati and Navratri have failed to boost the sales morale of the retail sector. The PM may cite reams of statistics about the robust state of the Indian economy, but that still cannot undo the fact that consumer confidence is at its lowest point in the last three years. It was buoyant until November 2016 and post demonetisation it did show signs of recovery in May 2017, but after the onset of the GST, it has fallen flat again. The Reserve Bank’s Consumer Confidence Survey for September 2017 shows that based on the current perception, it is at its lowest point since December 2013. The expectation of the consumer for the year ahead too is at its lowest point since December 2014. The RBI findings are based on a survey conducted at the six metro cities of Mumbai, Delhi, Kolkata, Chennai, Bengaluru and Hyderabad. The Mint comments that if the sentiment is so bad in metropolitan India, which has the business and households best able to withstand economic shocks, things are likely to be worse in other parts of the country. Sales are a function of cash in the hands of the consumer and his willingness to spend it. It looks like the cash which was deposited in banks by the people in the demonetisation period remains there and that the consumer is unwilling to use it for consumption of non essential items, which includes visiting malls, beauty salons and restaurants. This reluctance of the consumer to spend, could be due to lack of confidence of the consumer in his own future earnings or the fear of being questioned by tax authorities. Each of these apprehensions cannot vanish overnight and until there is a huge turnaround in the economy, consumers maybe averse to open their purse strings. That is certainly not good for the retail economy, as also those worker/vendors etc. at the lowest rung of the economic ladder, who depend on the retailers for their livelihood. The real challenge for the government lies in restoring such falling consumer confidence, whose reality is perhaps hidden in the reams of statistics it quotes.
THE RATING FAILURES
The negligence of the rating agencies, that share an equal measure of blame, in the ongoing saga of unprecedented NPAs/loan defaults in India, is finally being questioned by the authorities. A rating agency plays a crucial role in the banking and capital markets. It conducts a detailed study of a company and its industry, akin to an investigation, studies its financial position and then issues a rating to the company, indicating its financial soundness, ability to repay/service debt and the probable chances of a default. A rating is used by companies, generally to raise funds. A good rating, such as a AAA, helps a company to raise funds on the best of terms, since the lenders have implicit faith in such ratings. These ratings are valid for a year, since a company’s financial position is bound to change in a year, whether for the better or for the worse. Thus, while ratings are reviewed/revised at the end of each financial year, yet during the year, like a sentinel, the rating agency is required to keep watch and look out for any untoward development, (such as loan defaults, adverse court orders etc.), and if needed, downgrade the rating given to the company. This serves as a timely warning to lenders, who have relied on the rating and given loans to the company. It has been the failure of the rating agencies to warn in time, that has aggravated the loan defaults in India. A recent such glaring negligence has been reported in the case of RCom, the ADAG company. RCom defaulted on debt repayment in February 2016, but its rating was downgraded only in May 2016, after a lapse of three crucial months, to the detriment of its stakeholders, including shareholders and lenders. SEBI has finally tightened the rules and has put the onus on the rating agencies to monitor the position of debt servicing by companies, on a month to month basis. They have been directed to proactively track all important changes relating to the companies, to yield timely and accurate ratings. In a similar situation during the 2008 economic meltdown in America, rating agencies were sued by investors and were punished by the regulator. Let us see what action SEBI takes for the glaring failure of the rating agencies, which has caused a collapse in India’s banking system.
MISSING CORPORATE ACTIVISM
Vigilant public activism, is what keeps a democracy strong and vibrant. A timely protest keeps the rulers of society in check and enhances public welfare. That applies to public life as well as corporate life in India, both of which are founded on the principles of democracy. What however weakens our democracy is that India lacks a mass based public activism. Our protests if any, are generally meek and muted or often tend to be betrayed by its very leaders who spearheaded it. A protest by a lone individual is either ignored or is brutally suppressed by the ‘system’, representing the interests of those in power. It is this lack of a mass based activism that curses us with rampant corruption in public life, heavy handed regulation and pathetic public services by our babus, who ironically are called public servants. What happens in our public/political life, also happens in our corporate world. Shareholders handover their hard earned savings to corporates, with no check on the promoters/directors thereafter. They do not bother to even question decisions of directors, that could endanger their precious life savings such as unviable expansion, risky borrowings, unreasonable remuneration to promoters etc. With the public money, company promoters build their empires, brooking little opposition from the individual shareholders. A lone shareholder activist is treated like a heavy hammer hitting a nail. It is only when a large number of shareholders come together, can they put effective checks on the management. If corporate India is in a huge NPA crisis today, which has eroded lakhs of crores of shareholder wealth, it is because they kept no check on the mindless/reckless decisions of the management. While the government has been amending corporate laws to strengthen the interests of the minority shareholders, they are not enough. The laws only provide the tools, which must be collectively wielded by the shareholders. Unless the shareholders are not alert and active, the laws are not enough to protect their wealth and interest. It is due to the unwillingness of the shareholders to join hands and take collective action against an unchecked management, that India often witnesses a fraudulent situation viz. the company is poor/loss making, but its promoters are wealthy. It is all because the shareholders merely deposited their wealth with companies and did little thereafter to protect it.