Sudip Bandyopadhyay’s Blog

When we are not well, we visit a doctor.  The doctor prescribes medicines based on the ailments and symptoms thereof.  We then visit the pharmacy and buy the prescribed medicines for our cure.  This well established model in healthcare needs to be emulated by the financial services industry for preventing mis-selling and unfair practices. Today in the absence of financial planners, the financial products and services are sold by the manufacturers through their agents or distributors.  This obvious conflict of interest leads to the distributor who is an agent of the manufacturer selling products and services without adequate care regarding the interests of the customers. Imagine a situation when we are not well and for curing ourselves we need to buy medicines from representatives of pharmaceutical companies, instead of visiting doctors.  This is exactly what is happening today in case of the financial services industry in the absence of financial planning and planners.

Financial planners are like doctors.  They are expected to analyse the specific situation and the needs of a customer before prescribing the customized solutions, just like what a doctor would do for a patient. The process of selling financial products and providing financial advice are two completely separate activities and any overlap always leads to “conflict of interest” situation resulting in a compromise of the interest of the customer.

In spite of its rapid growth over the last couple of decades, Indian financial services industry has still a long way to go in terms of growth.  Mutual Fund, Insurance, Broking (equity, commodity, currency) industries have significant growth potential as we are just scratching the surface in terms of this.  As a country, we are poised to grow between 8 to 0% during the next 5-10 years.  This growth will ensure that the demand for financial products and services grow exponentially.

To cater to this growth in an orderly manner, it is imperative that the delivery arm of the financial services industry, like healthcare, develops two distinct branches i.e. financial planning and financial distribution.  It must be understood that both the above components are critical for effective dissemination of financial services across the length and breadth of the country in a transparent and acceptable manner. Service providers in both these segments need to be remunerated for their efforts.  Since the financial planners are expected to be the custodians of customers’ interest and are providing services to the customers, they need to be remunerated by the customers.  On the other hand, the distributors represent the interests of the product, manufacturers and thus should be remunerated by them. It is critical for all of us, including regulators to understand and appreciate the criticality of both these roles and the need for financial compensation for both these service providers.

While the financial services industry has been working on creating, remunerating and nurturing a vibrant distribution network for the last couple of decades, more needs to be done to ensure further spread of their products and services.  On the other hand, financial planning industry is at its infancy in the country and requires nurturing by the Industry Bodies (as opposed to individual manufacturer), Regulators and the Government, to ensure protection of customers’ interest, prevention of mis-selling and creation of a vibrant financial market. FPSB has been working continuously for creating a financial planning community and it needs support from all quarters to make this a reality.

Just like we cannot imagine a Healthcare industry without the Medical Professionals and the Doctors, a well functioning of financial services industry cannot flourish without Financial Planning and Financial Planners.

The economic progress of the past decade has had differential impact across society, as a consequence of which inequality has increased.  Over 40% of the population depends on agriculture for their livelihood, making it a formidable sector.  Yet, food security eludes the grasp of many.  About 380 million Indians suffer from hunger and malnourishment today and, with rising food prices, up to 150 million more are expected to face the same fate by 2020.Food price inflation can always be blamed on the weather, on globalization, on evil speculators, and now also on faster growth in poorer countries.  Some of these factors do matter, but they divert attention from past policy failures and from what needs to be done going forward.  India’s inefficient and wasteful system of procuring food grains, storing them and distributing them to those in need is much more to blame for food price inflation than speculation or trade.

Transforming agricultural systems is essential for inclusive growth, and should draw upon the experiences of nations like Indonesia and China which have successfully accomplished this. Over the last 25 years, India has not invested enough in raising agricultural productivity.  As the largest investor in agriculture, the government sells seeds, fertilizer, water and extension services to farmers and also buys their products.  But the government’s investments have focused on subsidizing rather than developing agriculture, and this has been the biggest obstacle to food security in India.  For instance, the government has provided heavy discounts through the Food Corporation of India (IFCI) to make rice more affordable rather than investing in breakthrough rice hybrids, which raise productivity and lower prices.  In 2008-09, the government invested $2.27 billion in infrastructure for agriculture (markets, roads, and so on) but spent 15 times that amount ($37.5 billion) on fertilizer and food subsidies.

Fertilizer, water and electricity (used for pumping water) are subsidized in ways that lead to significant waster, as well as to poor choices of crops.  There is insufficient investment in irrigation infrastructure and irrigation techniques, development of new crop varieties, innovation in farming methods and in diffusing what knowledge already exists.  On the financial side, credit is not provided efficiently, nor coupled with insurance against crop failures.  Mechanisms for selling crops are costly and subject to the control of powerful intermediaries.  Storage, transportation and distributions of many agricultural products are still primitive, because of lack of government investment, and failures to enable private investment in areas where it could be financially viable.

A holistic response, like the one for Punjab in the 1960s, bringing together water, seeds, extension services and the market through the FCI doubled the per hectare productivity of wheat in five years.  Similar success was reached with rice in Thanjavur.  But since then India’s green revolution has taken a long pause.  Agriculture-intensive states such as Uttar Pradesh, Bihar, West Bengal and Orissa, which have the potential to double their farm yields simply by applying known and existing technology effectively, are yet to benefit from such a concerted effort.  Going beyond increasing output, linking the farm to markets more efficiently to reduce waste and matching output to market needs can play a pivotal role in increasing the incomes of farmers.

Our aim of achieving inclusive growth and double digit GDP growth hinges critically on refocusing on Agriculture in the right manner. The ambitious target for growth in Agriculture for fiscal 2011-12 can act as the right catalyst for initiating this process.

2011 will be the make or break year for India.  2011 will present the opportunity for India to cross China in terms of GDP growth rate for the first time since liberalisation began. It also poses the possible threat of India losing its steam midway by getting bogged down with silly corruption issues along with nonfunctional governance.

As a country we are at crossroads and its upto us to make our destiny. The robust GDP growth needs to be truly supplemented by an inclusive growth. This needs to move beyond rhetoric and lip service. The danger lopsided growth poses needs to be understood in the context of social stability and acted upon without any further delay.
Considering the momentum gathered by the last few years growth India can surely attain next level of economic development soon subject to prudent economic management and completion of the long pending task of enacting the requisite legislations for speeding up and removing the impediments to growth. We need a functioning parliament and a national consensus on economic growth. We need quick and exemplary punishment for scamsters which will act as deterrant.
Indian capital markets should prosper in 2011 subject to the above referred governance issues being fixed at the earliest and also satisfactory outcome in certain other key areas like monsoon and crude oil prices.  In spite of all the developments, Indian economy continues to be dependent, to a great extent, on rain Gods.  Monsoon needs to be good and appropriately distributed.  This will result in continuance of agricultural growth and prosperity in rural India.  Good monsoon also has a positive impact on domestic inflation.

After Monsoon, second most important factor for  Indian capital markets continues to be international crude oil prices.  This needs to remain below $100 per barrel to ensure that inflation is under control.

Our expectation is that over next 3-6 months, crude oil prices will start coming down and stabilizes at around $90 per barrel.  Along with this, if the rain Gods are smiling on India, rapid growth of Indian economy and capital markets is a foregone conclusion.  The Central Government has also started showing signs of taking appropriate remedial measures to fix the governance issues.

Investors with a time horizon of one year plus should treat current softness of India capital market as a great opportunity for value buying.  Continued strong domestic demand and even a marginal recovery in international demand will propel Indian corporates to deliver 20-25% growth in earnings in 2011.

Looking forward to a great 2011 where India will regain its true position in the comity of nations.

For thousands of years, gold has been valued as a global currency, a commodity, an investment and simply an object of beauty.  In the 1981 Iranian hostage crisis, Iran refused to accept U.S. dollars in return for releasing the American hostages it held. So the U.S. transferred 50 tonnes of gold instead. As then Treasury Assistant Secretary Manuel Johnson went on to say in Congressional testimony in 1983 - and in the light of this recent experience - “The Treasury, of course, regards the US gold stock as part of our national patrimony and of value as a precautionary asset.”

Central banks started building up their stocks of gold from the 1880s, during the period of the classical gold standard. Under that system, for countries on the gold standard, the amount of money in circulation was linked to the country’s gold stock, and paper money was convertible into gold at a fixed price. The development of banking and credit meant that the amount of money in circulation was greater than the gold stock itself, but everybody had sufficient confidence in convertibility that there was no danger of this option actually being exercised. That at least was the case during the height of the gold standard for the UK, the then dominant economic, political and financial power. As other countries decided to join the gold standard, they also started to accumulate gold so as to be able to maintain convertibility at a fixed price.

Central banks, and official international institutions, have been major holders of gold for more than 100 years and are expected to retain large stocks in future. They currently account for about 20% of above-ground stocks. The process of rebalancing reserve portfolios to adjust to changing conditions has led to a reduction in the amount of gold held by some central banks recently.

As financial markets developed rapidly during the 1980s and 1990s, gold receded into the background and many investors lost touch with this asset of last resort. Recent years have seen a striking increase in investor interest in gold. While a sustained price rally, underpinned by the fact that demand consistently outstrips supply, is clearly a positive factor in this resurgence, there are many reasons why people and institutions around the world are once again investing in gold.

Once of interest mainly to central bankers, Swiss jewelers, and Indian ladies, gold is now the world’s “it” investment. At department stores in London, you can pick up a 27-pound gold bar along with a sweater and bed linens. Gold is sold like candy out of train station vending machines in Germany. Indian households are borrowing against jewelry the way Americans did not so long ago against their homes. And U.S. investors poured $15 billion into gold funds in 2009, as they were pulling money out of stock portfolios.

Philip Klapwijk, Chairman of GFMS, the London based independent metal research consultancy, while speaking in London providing first update of gold survey of 2010 ,mentioned last week that gold prices are likely to touch $1300 before the end of this calendar year. Exponential rise in gold prices over the last couple of years and the possibility of a continued rally even in the near future is probably one of the most intriguing fallouts of the international economic crisis.

Rising investment demand is the prime driver in the rally of gold prices during the year. Gold lived upto its reputation as a safe haven in troubled times.  Investor interest explosion in gold followed the sovereign debt crises in Europe.  Other factors including shaky outlook for the industrialised world’s economies, low interest rates and feared threats of inflation stoked investors’ interest.  Experts believe that the key to the ongoing price strength of gold is also the extraordinary monetary and fiscal policies being enacted by the industrialised world’s governments in the face of sluggish economic growth, the spectre of a double-dip recession and already uncomfortably high unemployment.

US is almost certain to re-start “Quantitative Easing” relatively soon and UK is likely to follow.  Somewhere along the line European bank will also fall in line.  This might not make much difference to consumer prices, but will surely undermine the value of the paper currency making gold a pretty good alternative currency.

Post the International Economic Crisis, Central Banks across the world have started buying gold.  China, India and Saudi Arabia have announced large addition of gold to their reserves since the start of international financial crises in 2008 providing psychological boost to the gold prices.  Even though buying of the Central Banks on an overall basis remain relatively low, the shift in policy, stands as an important departure from the past decade when Central Banks sold on a average of 442 tons of gold per year which is equal to about 10% of the total world bullion demand.

In the very short term, the gold price may shoot up by Rs.1000/- per gram from the current level and reach its peak in the forthcoming festive season.  In the long term, investment demand in gold will overtake the traditional jewelry demand.  This investment demand will come from across the globe and one can very comfortably remain bullish in gold even for the long term.

With urban young generation having fancy for diamond and artificial jewelry, gold jewelry demand as a percentage of gold consumption will come down in future.  However, gold investment products will become very large.

Fashion Jewellery has little or no store value. Gold Jewllery was always also bought for store value of Gold. Recent studies/surveys suggest a clear shift in the consumption pattern in India and the projections are as below:

Considering all of the above, gold buying and accumulation at all levels can be recommended as a long term financial strategy.  Of course while buying gold, one needs to focus on the investment products that are reasonably priced.  One should minimize investment in jewelry from financial investment point of view, and acquire certified gold bars which are available with a small loading of 1-2 %.  Branded bars have much higher loading on the basic gold price.

The calibrated fiscal correction happening in India will, in the near future, ensure that the weaker sections of the society are reached  directly for financial and other assistance.  Introduction of UID from the next fiscal will facilitate the above process significantly.

One of the significant wasteful economic activities carried out by the Government of India has been the PDS (Public Distribution System) which does not deliver the desired results and distort decision making process. If the government wants to help low-income groups, organized retail could be the way. ICRIER discovered that it is low income consumers, rather than affluent shoppers, who save more when they shop at organized retail outlets because they target discounts. Should retailers get it right with their private or store labels, as many are threatening to do, FMCG companies will be compelled to start giving customers better deals.  Indeed, retailers believe that if they are allowed to access the farm gate for fruit and vegetables, with time and scale, they will be in a position to sell at competitive prices.  So if customers get access to greater variety at lower prices, what can be better?

This might just be the right time to be talking about FDI in retail, since food inflation is raging and shows few signs of coming down meaningfully.  There’s way too much wastage of farm produce in this country, at Rs 1 trillion a year. What’s a bigger shame is that more than half of this, or 57%, can be avoided.The reason FDI needs to be encouraged is that farmers in this country realize only a third of the total price paid by the end-consumer as compared with two-thirds earned by farmers in countries with a higher share of organized retail. Indeed, that’s the clincher because in a study conducted a couple of years ago, ICRIER  found that farmers are much better off selling directly to organized retailers rather than to intermediaries or to the mandis—their profits, are 60% higher when they sell to the former. So, it’s unfair to let a few intermediaries flourish at the cost of the farmer.

Thus all available information indicates that both farmers and consumers are likely to gain when Organized Retail is encouraged. The recent indications emanating from the Government in this context are reassuring and an expeditious decision on amongst others permitting FDI in Retail will go a long way in providing necessary fillip to our farmers.