Will India learn from this biggest banking scandal?

Cartelisation! Over the last one year, this has been one term that has got many Indian companies penalised by the Competition Commission of India (CCI). The allegations have been that firms within the same industry colluded together to manipulate prices.

But this is too trivial compared to what we are just going to tell you about. Imagine a cartel of big global banks manipulating the global financial system. We are referring to the Libor banking scandal. For a lay Indian, this may not be quite a popular term. But in the global financial system, it is a very crucial pivot. For starters, Libor stands for London interbank offered rate, the rate at which banks think they can lend and borrow money themselves. Libor is a globally accepted benchmark interest rate for over US$ 350 trillion in financial products.

Regulators are said to be of the view that the manipulation of the Libor interest rate was the result of "organised fraud". As per news agency Thomson Reuters, Barclays paid a hefty fine of about US$ 453 m to authorities in the US and the UK to settle allegations that some of its traders had colluded with employees at other banks to manipulate Libor. Several other financial institutions are reportedly under the scanner of regulators for their alleged role in the fraud. This comes as another striking evidence of the threat big banks and financial institutions pose to the health of the global economy. But they are not the only ones to be blamed. Such scandals also reflect the negligence of the regulators. What were they doing all this while? Worse still, these are the same too-big-to-fail institutions that the central banks rescue in times of crisis.

What lessons does this financial scandal have for India? It must be noted that in 1998, the Mumbai inter-bank offer rate, referred to as Mibor, was set up on the lines of Libor. The Mibor acts as a benchmark rate for all interest rate swaps, forward rate agreements, floating rate debentures and term deposits. Though most key interest rates in India are benchmarked by the Reserve Bank of India (RBI), the Libor scandal may be a reminder for the Indian central bank to ensure adequate checks and balances to ensure that a similar fraud does not occur in India. Already discussions are underway to switch to an actual screen-based traded price of Mibor as the current system could be susceptible to manipulation. We really hope the Indian bank regulator and the banks initiate appropriate steps to avoid a similar disaster in our country.

Does India really need a sovereign wealth fund?

Sovereign wealth funds (SWF) enjoyed a lot of interest from investors and policy makers alike during the heydays prior to 2008. So much so that it even caught the fancy of otherwise sedentary Indian policy makers. SWFs did have appeal until 2007 since several countries seemed to be making money through canny investments.  Particularly the oil-rich countries like Norway, the UAE, Saudi Arabia and Kuwait. As per Business Standard, all these funds have assets of close to US$ 500 bn. But how relevant is the idea of having such a fund for India is the question!

Well, for one, our policy makers are keen to have such a fund. Even if that means pulling out Rs 10 bn from budgetary resources. But that very idea reeks of imprudence! Most obviously, India does not have a large amount of money from natural resources that it needs to invest. Nor does it have a sustained current account surplus, such as China runs. The budget deficits are everyone's knowledge. The RBI is opposed to the idea of using India's falling forex reserves for capital investments. And rightly so. It has therefore been suggested that alternatively the government would raise money from the market. Or use surplus cash lying with public-sector units. With our government already having destroyed enough investor and tax payers' wealth, this could be the last nail in the coffin!

Indias trade deficit with China a big worry

                          Data source: Ministry of Commerce & Industry, Department of Commerce

                                                              *April to December 2012

Today's chart shows India's trade imbalance with China. While India's imports from China have been growing steadily, our exports to the dragon nation are not growing at the same rate. This has been the biggest contributor to our economy's overall gap between exports and imports, leading to a high current account deficit. It is worth noting that India's current account deficit was at an all-time high of 4.5% of GDP (gross domestic product) during the quarter ended March 2012. The steep depreciation in the rupee has been one of the adverse impacts of the wide trade deficit. This has become a major concern for the Indian government. If some solid steps are not initiated to correct the trade imbalance, it will pose a serious threat to the long term well-being of the Indian economy.

What Hitler can teach us about investing?

Rewind back in time to 1944. The long drawn World War II was nearing its end. With massive forces of the Western Allies pushing from the West and Soviet armies closing in unrelentingly from the East, Hitler's defeat was a certainty. But would he accept the reality? No chance. He continued to delude himself with the idea that he could strike a counter-attack with his two reserve armies and win the war. Similar was the case with Japan around that time. It had lost terribly in the Pacific against the Americans. Yet it lived under the illusion that the enemy would not be able to invade its homeland. We obviously know what the end result was in both the cases.

What is the reason for this kind of irrational behaviour? A certain gentleman by the name of Mr Christopher Mahoney offers an insightful explanation. He opines that it is very difficult to accept defeat in a long war. The human mind refuses to accept the brutality of defeat and suffering. In its own defence, the mind tends to delude itself in an alternative reality.

But is this tendency only specific to wars? Certainly not! Take the eurozone crisis for instance. The actual crisis is much bigger than what most policymakers are willing to believe. They still think that through policy intervention, they can save the euro from disaster. The President of the European Central Bank (ECB) Mr Mario Draghi recently declared that he would do "whatever it takes" to save the euro. To point the truth, nothing that the ECB has done so far has solved the crisis any bit. There is no tangible rescue plan so far that is likely to lessen the Eurozone's woes. The fact of the matter is that the euro is an inherently flawed financial instrument. Secondly, the Eurozone economies afflicted by the sovereign debt crisis have little choice but to face the consequences of their past excesses. There is no quick pill to escape pain.

Forget the Eurozone. Even many investors behave in this irrational manner when faced with massive losses in their stock market investments. Of course, stock price volatility owing to prevailing market sentiments must be certainly ignored. But there is strong reluctance among investors in accepting investment mistakes and booking losses on stocks whose fundamentals have turned sour. Even after facing huge losses on them, they continue to hold on. The vain hope being that the stock price will reverse and they will recover their losses. This, they believe not because the fundamentals say so. But because the alternative reality is very difficult to accept.

Drought may not severely affect India's growth

                                                              Data source: Business Today

India is facing a drought. This has finally been confirmed by the government. The culprit is the El Nino weather pattern which is expected to reduce the rainfall in the July to September period. The last time India had suffered such a drought was in 2009. As more than 50% of Indian agriculture depends on the monsoons, rain plays an important factor when it comes to food production in India. Food prices have already started heating up as rainfall started to fall short of average. If this continues, food prices would most likely hit new highs.

However, the current drought may not affect India's GDP (Gross Domestic Product) growth as much as it did in the past. Today's chart of the day shows that agriculture's contribution to India's GDP has been consistently declining. In the past, a drought tended to severely affect India's economic growth. But despite 2009 being a drought year, the GDP growth in the financial year 2009-10 (FY10) remained robust.

Will India's problem be China's gain?

Over the past few days, loads of print spaces were devoted to India's pitiable power sector. How the country's super power dreams have sunk into darkness was the most widely read headline. Not just in domestic but also in the international media. But unlike the ego brushing West, the Chinese have a more practical way of dealing with this news. They did not criticise Indian policy makers. Nor did they ridicule India's ambitious plans for the power sector. They are in fact quietly trying to make the most of the opportunity in disguise.

The Chinese companies in power equipment space are well positioned to feed the unmet demand in India.  Some like Shanghai Electric, Harbin Electric and Dongfang Electric have already established themselves in the country. They are competitive on costs and are giving local equipment suppliers, including Bharat Heavy Electricals Ltd (BHEL), a run for their money. As reported by Firstpost, Chinese players are expected to participate in projects set to generate an additional 40,000 MW of power over the next few years.

India has missed every capacity addition target since 1951. Despite this, nearly 30% of the total planned infrastructure outlay over the next five years is on the electricity sector. Transmission and distribution losses still account for 27% of power generated! It is time India takes some concrete steps. One is to facilitate private sector participation in the power equipment space. That, along with partnership with Chinese players, could be the only way to reduce our electricity woes.

This is how a good investor becomes great!

The Olympics are currently underway in London. So what better way to start than take an example out of the world's biggest sporting extravaganza? You see, all the champion athletes who compete in the games seem to put in the same amount of training hours and possess a similar level of work ethic. Yet, at the end of it all, there is only one winner who walks away with that elusive gold medal.

And here in lies the biggest mystery we believe. If all the participants pass through virtually the same work routine, why is it that some achieve success and others remain perennial underachievers? Most of us would put the reason down to some inborn talent.

However, a recent research in this area has shed light on a completely different reason behind this phenomenon. It has argued that if one wants to get good at something, how a person spends one's time is far more important than the total amount of time spent. Thus, the number of hours and the amount of sweat that one puts behind an activity is only a weak indicator of performance. What matters is that one should closely watch where one fails and then learn from the mistakes. In other words, unless we are constantly pushing ourselves to the limit and continuously monitoring our performance, we are never going to improve in our chosen field. On most occasions, we do our activities in our comfort zone. But true progress happens when we move out of there and get into the zone of learning.

Can this approach be used in investing as well? It certainly can but we believe it will require a small twist. As a financial blog points out, unlike sports or music, there is this problem of not getting an immediate feedback in investing. Whenever we make certain long term investing decision, its results will be known only after a time lag of 2-3 years. This could thus lengthen the whole process of learning. Fortunately, there is a solution at hand. And it says that we can become much better investors by studying the past investment made by successful investors. By recreating the situation when the other successful investors made their investments, we get a chance to understand what exactly must be going through their minds when they made their investments. You can then compare your conclusions and your logic behind investing with theirs and thus keep getting continuous feedback. Done over and over again, this approach has a much greater chance of turning you into a great investor than the one you currently seem to be using we believe.