India in a self-engineered financial crisis?

Larry Elliott of The Guardian writes in his post, "India's financial woes are rapidly approaching the critical stage. The rupee has depreciated by 44% in the past two years and hit a record low against the US dollar on Monday. The stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country."

At the time of writing Rupee breached 64.5/$

Yesterday, Ruchir Sharma along-with Dr. Pranay Roy and Arun Shouri dissected Indian economy in a talk show in NDTV's news channel. Ruchir and his team at Morgan stanley put together few charts to show where India stands today. I have extracted the data from video and

FDI flow shrunk to half in 5 years. Official data
can be found here

While Forex Reserve stagnated, CAD ballooned.
FM said that CAD will be contained to $70bn

ballooning short-term debt a disturbing aspect

put them in charts here. Since, May, 2013, FII are pulling money from both equity and bond market. Ruchir's chart showed that FII drew out around $12 billion since May, $2 billion from equity and $10 billion from debt. The tipping point as everyone seem to be pointing to is Ben Bernanke's announcement about "tapering" Quantitative Easing which in plain word means, from September, US will slowly reduce pumping money in the market in response to US financial recovery. As soon as the announcement came, foreign money [not locked in capital investment] started moving back to US putting huge pressure on Indian currency. But the fact is Indian currency is  losing ground since last year, may not be as fast as it is losing between May and August. Indian Government did not appear to figure out the right move for the whole of the last year barring usual discourse of "Fundamentals are Strong". As GDP slowed, Current Account Deficit and fiscal deficit both ballooned while foreign exchange reserve started coming down slowly.

India did really bad compared to other EE

Contrast this with China which is still an export-surplus economy and still growing faster than India. While India's financial policies are tentative at best, China maintains firm grip on the value of Yuan. Ruchir showed that top 10 Indian companies have expanded their debt 6 times. The direct effect from that is, as he pointed out, some of the companies do not have enough cash flow to take care of interest payment. It is interesting to note that these corporate debtors have taken loans mostly from Indian banks and as an effect, banks' Non-Performing Assets have expanded a lot. CBI director made a statement yesterday that they are investigating NPA with various banks and asked

Indian Companies are adding their share of debt

respective CVOs [Chief Vigilance Officers] to assist them with the data. So why are these relevant? Well that is the point Ruchir is making. He is saying India is actually in financial crisis and a large part of that has to be attributed to ill-decisions or confusing financial policies that Government owns. In other words, this crisis rather than an effect of global slow-down, is largely self-engineered.
You can watch the video here

What Ruchir explained in the hour-long session is summarized by Larry quite well. He wrote, "In a sense, this is a classic case of deja vu, a revisiting of the Asian crisis of 1997-98 that acted as an unheeded warning sign of what was in store for the global economy a decade later. An emerging economy exhibiting strong growth attracts the attention of foreign investors. Inward investment comes in together with hot money flows that circumvent capital controls. Capital inflows push up the exchange rate, making imports cheaper and exports dearer.

Widening FD and CAD signal the crisis

The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves."
How does India get out of this mess? Well, here things become less convincing. Investor's confidence has to be reinstated and that Bloomberg suggests, can only happen after the election! CAD has to be brought down to manageable 2% of GDP but that requires cutting down subsidies to corporates and energy prices and probably in food subsidies too. That is not going to happen before next election. Forex reserve may not be enough if the rupee continues its downward journey and India may have to go back to IMF again.
         Now one thing we must remember is that Economics as an applied body of knowledge is not an exact science, neither the economists can claim to accurately predict future given a circumstance. Things are messy because there are many competing interests and themes that are involved when one talks about country's economy. Dynamics between these competing chain of events are never clearly understood. So it become news when a prediction actually turns out to be true. Success of prediction is an exception rather than a rule, here. So, India's economy can collapse and go back by 5 years or circumstances may change and that could propel India to adopt right path. Indian FM spoke this afternoon and told that structural changes are being undertaken by the Govt. He assured that CAD and FD will be contained and growth will start by next quarter. While the market believes in his intent, it is not sure how those will be done and till people see any tangible results from Govt. policy changes, market sentiments are likely to remain the same and rupee will continue with its down-slide.
Either way, we have little options other than preparing ourselves for another gloomy decade of Indian economy. Journey will not be easy, weak economy opens political fissures, slows down country's growth, expands the rich-poor divide more, which in turn can lead to more social violence. But the silverline is that India has gone through worse phases in past. As one retired DRDO scientist told me once, fact that India still continues to exist as a country and a nation even after all the misadventures of its political masters and bureaucratic misdirections from its executives, proves beyond doubt [to him] that India is a holy land!
So let's hope that holiness of India will help us to sail through this time.

New Frontier of Marketing: Leveraging your emotional vulnerability

For last two years, I have been writing about this in this blog in different posts. The web has changed the world permanently and irrevocably. A large chunk of world population literally live inside the web. New generations will never know what it used to mean to live in analogue not-always-connected world. Thanks to myriad digital contraptions that you carry all the time, your location trail is available to anyone who is interested. New tools are continuously being developed that enhance the depth and breadth of the information trail that you leave behind in the web. But you already know that! You buy more powerful, more sophisticated smartphones, tablets which provide you faster apps to post your photos and videos, chat with your friends, 'like' posts and comment on the posts in real time while on move. They make your web-presence lot more richer, more lively. You want people to know and feel the length and breadth of your persona. At both conscious and unconscious level, web is your new sense organ, it breaks the local limits of your sense experiences and makes you expressions available across the web for others to notice.. Noticed, they definitely are but probably not the way you thought. We all like to believe that each of us has his/her own unique persona with his/her own evolved way that arms him/her to deal with reality in a manner that is different from other. So, even though we know that advertisers and product marketeers are targeting us to sell their stuff, we think that we know how to manage them, how not to let them intrude into our emotional space, how not to let them influence our decision making..But do we?
  There are experiments made and being made that try to find out how far your emotional irrationality is unpredictable. And do not be alarmed. Most of the researches overwhelmingly conclude that your emotions are predictable, however irrational they are! You panic when situations are presented that unsettle you, like everyone does; You feel vulnerable when you face unfavourable situations, like others do irrespective of where you live or which language you speak. You react, when you feel violated, belittled, like others do. You believe however ludicrous the content appears to be, when the same content is fed continuously to you through all your trusted information channels.
Now to be able to reliably guess your emotional state, one needs histories of situations and your reactions to them. I am sure you would agree that those who you consider closest to you, are closest because you think they understand you i.e. they know your emotional topography; what you like, what your soft spots are, how you react in a given scenario. And they sure do, otherwise, why would you confide them in?  Why would you reach out to them when you are disturbed, when you feel emotionally vulnerable? And they know you because you have let them know the trail of emotions and situation that you have gone through. In the new scheme of things, more you lose physical human touch, more you lay bare your emotions in the social portals, in your chats. And with the power, sophistication and reach of the analytics engines that present marketing world has at its disposal, those emotional signatures of yours are computable and usable in real time. After a heated argument with your spouse, when you are feeling particularly low and probably are looking for bear to cool you off, you are likely to welcome a pop-up ad that tells you about a new waterhole at just 1 km distance. Or if a sudden change of events at the stock market has made you feel particularly shaken financially, and you have a payment date nearby, how would you react to a call from bank offering some mortgage offer specifically customized for you? These, you probably would think benign. But how would you react when you learn that your kids are also being subjected to this type of massive, focused advertising manipulations? And they will not be limited only to product marketing, these tools can and will be used for mass opinion engineering. The Extreme the views are, the more pitched and intense would be the manipulation. Who draws the ethical boundary? Who monitors whether that boundary is being respected?
        Welcome to the world of new age marketing manipulation! You just cannot run away from this new reality of personalized advertizing and campaigning. Typically, a country would have legal framework to protect its citizen from this type of manipulative assaults but in this case, technology developed faster than the laws governing the advertising Industry. Which means you have no laws to protect yourself or your kids from advertisers to use your online /on-device data in order to present you their product/solution when you cannot refuse. There is no law to stop the advertisers/online campaigners use your personal data to get the result that they want. I saw a recent study report, by M. Ryan Calo from Washington University, that highlights the incompleteness/inadequacies of existing consumer protection laws.
He observes, "Today’s firms fastidiously study consumers and, increasingly, personalize every aspect of their experience. They can also reach consumers anytime and anywhere, rather than waiting for the consumer to approach the marketplace. These and related trends mean that firms can not only take advantage of a general understanding of cognitive limitations, but can uncover and even trigger consumer frailty at an individual level.
A new theory of digital market manipulation reveals the limits of consumer protection law and exposes concrete economic and privacy harms that regulators will be hard-pressed to ignore."
I definitely would urge everyone to read his report which is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2309703. But more importantly, we should actively participate in public discussions so that fast erosion of private space be arrested now with strengthened legal definition of digital market/campaign manipulation.