Banks, airlines, companies, resources are being examined for possible distress takeover in case of an economic crash-landing.
New Delhi: Vultures dealing with business and finance that are based in foreign locations are looking at India with anticipation. They are hoping to pick up assets that the policies they advocate—if accepted by the government—will bring down to disastrously low levels. Banks, airlines, public entities, resources—all these and more are being examined for possible distress takeover should an economic crash landing take place, in a situation where dollars, euros, sterling and other such “hard” currencies are gaining steadily against the Indian rupee. For some time now, there has not been any expectation of the value of the rupee going up, the overwhelming forecast being that it will fall even further from its present historical low against key currencies. Meanwhile, the accomplices of these interests both within and outside the country are incessantly warning in public and in private against taking the fiscal and monetary measures needed to ensure a revival of the economy. A crash would result in the feasting on the knocked down values of Indian entities by external investment funds intent on squeezing out billions of dollars of profits from human misery. Their only fear is that Prime Minister Narendra Modi may overrule the toxic (aka conservative) advice that is coming from a section of the policymaking community quarters to be parsimonious on the overall stimulus package, “to prevent the rating agencies from downgrading India to junk status”. This when further delay in fiscal and monetary packages of the level and direction needed for not just recovery but the very survival of key segments of the economy is already resulting in vast swathes of activity being converted into wastelands that will soon become progressively more difficult to nurse back to health, even with a correct level of stimulus targeted at protecting jobs and ensuring working capital so as to ensure that businesses resume in accordance with the permissions given.
RATING AGENCIES’ INSIDER CONTACTS
Investigative agencies would do well to track the nature of the multitude of contacts of personnel employed by those reliable Wall Street boosters, the “international rating agencies”. Personnel within those entities have extensive contacts with the very officials in India who frame the fiscal and monetary policies which determine the level of their profits. They therefore come into possession of inside information that professional ethics demands of those giving them not be shared or used, but routinely are. Such agencies are in favour of assets in India becoming cheaper and cheaper in dollar terms with every passing month, thereby making takeovers more attractive in an economy that they know no force can keep down permanently. Those eager to ensure a fiscal and monetary stimulus sufficient to rescue the Indian economy from a Covid-19 economic meltdown say that some rating agencies are lobbying to ensure that any such effective (as distinct from token) stimulus gets blocked, so that their own interests get fulfilled. Their purpose has always been to serve the interests of their overseas clients (and those Indian clients who usually through their proxies hold vast reserves of cash abroad) at the expense of the 1.29 billion people of India. Rather than rescue the economy through fiscal and monetary stimuli of sufficient amount, such entities are goading their contacts within the governance mechanism to instead recommend the selloff of state-owned assets cheaply, in fact very cheaply. Recently, a particular cartel (that had been inseparable from UPA policymakers in the past) has fixed its gaze on Axis Bank and on the equity held by state entities in private sector blue chip companies such as ITC, which they are eager to snap up at steep discounts. According to an individual familiar with the goings-on in the “PC Network” (the most active and effective cartel of such operators), they are, among other planned low-cost acquisitions, seeking to get control of Yes Bank for less than Rs 25, 000 crore, when the actual value is nearly four times more. Instances of such feeding by vultures on state-owned assets are many. It is as though North Block, since the 2014 changeover, has seemed almost a continuation of UPA 1.0 and UPA 2.0. This is despite Finance being the Ministry particularly critical to growth. Only with the arrival of Modi 2.0 on the wings of the Balakot strike and the absence of a credible alternative is the situation changing.
An example of a matter that calls for probing in a manner free of the influence of the PC Network are the goings on at MCX. This is the largest exchange for commodities trading, the way the NSE is the largest for stock trading. According to a source familiar with the situation, while some brokers operate only in the commodity exchange, a group operates in both. The exchange allows brokers to trade on commodity futures, with settlement being made in cash at the close of the trading period. Such a practice may be contrasted with several other commodity exchanges, where settlement takes place on delivery. Any shortfall or margin therefore gets offset by the exchange’s settlement fund if the broker goes broke. Otherwise each broker is expected to make up the margin shortfall on a continuous basis. Why SEBI has not looked closely into such practices while dealing with the situation in India is among questions needing to be answered, but which thus far do not seem to have even been raised. Simultaneously, taking an entirely different position in Dubai, HK or Singapore than was done in Mumbai may make possible the keeping of profits on such overseas trade in offshore accounts. Where the money for such trades comes from, and who the possible fronts or sources of those making them, needs to be in the list of questions asked by the relevant authorities in this country. Estimates vary of the potential gains made abroad by such brokers, but some put the amount in just this set of trades at well over Rs 50, 000 crore. It is possible that the brokers sought to be enquired into for such trading in multiple locations are innocent of wrongdoing, but finding that out requires an enquiry, which thus far does not seem to have taken place. Besides of course zeroing in on a few obvious (and peripheral) matters involving far smaller sums of money. The good news is that Modi 2.0 has ensured better coordination between the Ministry of Finance and the PMO in accordance with the Prime Minister’s Zero Tolerance policy towards illegal harvesting of moneys abroad or in India. Finance Minister Nirmala Sitharaman will need to prod agencies such as SEBI and the ED to be much more active in the matter of multiple trading, so that accountability gets fixed. Given that financial data cannot be eliminated thanks to electronic records and their retrieval, it is only a matter of time before guilt or innocence gets proved in the matter relating to some high profile brokerage entities. Of course, whether it be co-location or other matters, thus far only cosmetic enquiries appear to have been made, for whatever reason.
A cursory forensic audit would suffice to reveal how public institutions have lent moneys repeatedly to entities that have neither the intention nor the ability to repay even the loan capital, much less the interest. Several such mega loan mela recipients have not been able to repay even part of the capital borrowed for months. They are unlikely to lose sleep over this. Loan after loan has either been wholly written off or disposed of at a massive haircut that is of course suffered by the public institutions who made the advances, usually on the verbal instructions of VVIPs. That an agency such as SEBI has the ability to generate moneys from targeted businesses was clear in the Sahara matter, where substantial sums amounting to Rs 25, 000 crore were swiftly recovered despite the promoter being in jail. However, such activity by SEBI has been the exception, even while suspicious dealing by select brokerage and corporate entities reached unprecedented levels, many during the UPA period.
Why SEBI and RBI during the tenure of successive SEBI Chairmen and RBI Governors have been so lenient and forgiving to so many who are under suspicion of having siphoned off substantial sums abroad through frauds committed in India has been a puzzle to students of the markets in India, something that electronic evidence could with ease resolve in Modi 2.0. Given existing regulations and the manner in which they are enforced, even those who have looted as much as (and sometimes more than) Rs 50, 000 crore (first by securing loans from public entities and thereafter shifting funds through various routes from the corporates they milk) at worst may face a few months in prison in Arthur Road or Tihar before getting out on bail, in many instances permanently. As for civil suits against such depredators by those they have cheated, such proceedings may finally get decided after their grandchildren become grandfathers.
15% OF GDP OVER THREE YEARS NEEDED
The Indian economy needs a carefully directed fiscal and monetary stimulus amounting to an additional expenditure 5% of GDP each year for the three years that the effects of the Covid-19 pandemic and the countermeasures taken by government wear off. The financial history of countries across the world is littered with accounts of the pain and collapse of multiple economies whose Finance Ministers adopted the playbook of the international rating agencies. Milton Friedman (whose favourite saying, “there is no free lunch”, indicated that he had yet to meet a journalist or a politician) founded the Chicago School of economic theory, which believes in the maxim that suffering by the poor is good for their souls. This is the same credo adopted over the decades by vulture finance and its accomplices. In India, many of those at the higher levels of framing monetary and fiscal policy (for a country with immense potential waiting to be utilised) consider the firmans of Wall Street-oriented foreign agencies as gospel. This despite the obvious bias these have almost invariably shown against India, an economy where the debt to GDP ratio stands at a healthy 62%, and which debt can be tripled without coming close to the level of Japan, whose debt to GDP ratio is 245%. Or doubled like the US, where at last count this had breached 110% and is expected to climb much more this year itself. Despite its much lower level of debt relative to GDP and its always having met its obligations so far as external loans are concerned, Moody’s has given India a Baaa2 rating, which is just below junk status. In other words, Moody’s has relegated almost to junk status the financial paper of a country that is already the third biggest economy in the world in Purchasing Power Parity terms. As for the US, whose financial problems Moody’s and other agencies constantly gloss over, the same agency gives a rating of Aaa, while heavily in debt Japan has an even higher rating, Aa3. Standard & Poors rates India a lowly BBB, as does Fitch, while for the much more in debt US and Japan, their ratings are AA+ and AA- respectively. The Chinese have tossed such ratings out of the window, and India should do likewise. And, like the Chinese began doing in the 1980s, focusing on formulating and implementing strategies for high growth, including from domestic and external investment. The first requirement of such growth is the bringing back to health of the economy through booster shots of monetary and fiscal measures designed with an eye on domestic interests rather than a the type of vulture financial entities that were among the primary reasons why the 2008 crash (not to mention that of 1929) took place.
ERROR-PRONE RATING AGENCIES
That rating agencies loyal to Wall Street and to global offshore banking hubs awash with illegal cash are less than reliable is acknowledged worldwide. Beijing refuses to take them seriously, which is why their ratings have had no effect on the performance of the Chinese economy. Even countries favoured by them such as the US and Japan have complained about these agencies, the latter for example in 2002, when a downgrade was given that had the effect of handicapping Japan against a particular country that the agencies seemed to favour at the time. It may be remembered that Lehman Brothers, whose downfall triggered the 2008 global financial crisis, was given a rating of AAA even on its sub-prime loans to the very end. Thus far, there does not seem to have been a serious enquiry into the obvious fact that the US sub-prime bubble had reached skyscraper proportions over many years under the approving gaze of the rating agencies. Earlier, S&P had given not junk but investment grade rating to both Worldcom and Enron when they went bust. It may be remembered that Italian police raided the house of a key rating agency executive for “spreading false information designed to manipulate the Italian financial system”. Such manipulations appear to be routine in India, with the perpetrators going undisturbed by those specifically tasked with protecting the economy from harm. What has taken place in some Indian banks, brokerages and exchanges as a consequence of the operations of the PC Network have been documented several times in the records of agencies and much is even in the public domain. Such activity is continuing in the present, including the often successful efforts of the network to protect favoured individuals and institutions from being held to account for financial crimes. And indeed, to ensure in the past that many got placed in high positions. Foxes are given the responsibility of guarding the poultry farm. No less a personage than Economic Advisor to President Barack Obama, Austan Goolsbee had choice words to say about a rating agency (S&P) that is treated reverentially by Mint Road and in North Block, who seem unable to understand the severe cost to the economy and to the public interest involved in following the copybook of those for whom mass misery is a bagatelle and profits to their hyper-rich clients is the only goal. At present, some agencies seem intent through dark forecasts of driving down the equity values of some banks and financial institutions, so that the same may get picked up cheaply by offshore vultures later. The recommendations and actions of Wall Street and offshore banking-oriented rating agencies favour the needs of a small segment of the financial markets rather than the interests of the population as a whole, the latter being the very interests that politicians have been voted to power to safeguard.
India has never defaulted on its public debt obligations, yet this fact has been ignored by rating agencies working ceaselessly to constrain the Government of India and the Reserve Bank of India from spending anything close to the moneys needed to protect the economy from the 2020 Covid-19 shock. Indeed, the very term “default” is subject to multiple interpretations. Moody’s calculates on the (subjective) basis of “expected loss” and “ability to pay”. The data path by which its analysts reach such conclusions is of course changeable and usually opaque. Fitch talks of “default probability” along with “willingness to pay”, yet fails to explain why India with its perfect record on both counts is given such a miserably low rating. Such ratings, thanks to the outsize influence of such agencies, handicap domestic companies to the benefit of foreign competitors, an outcome that seems far from coincidental. Fitch relies on an aggregation of these two factors. It is obvious that the terms used are elastic and subject to interpretation on an industrial scale, which is why these agencies have escaped censure despite their record of bloomers. Rating agencies profess to rely on quantitative data, when the reality is that a heavy overlay of qualitative (i.e. subjective) deductions gets amalgamated with data analysis. The process of mixing of the subjective with the objective is hidden from public view, with only the briefest of reasons being given in public for an upgrade or a downgrade. Investors have been trained to swallow the prescriptions of these agencies without question, although recently contrarians have become more frequent.
Moody’s calculates economic, institutional and fiscal strength, helpfully adding “susceptibility to event” risk. What these are or how they are calculated seems to vary with the seasons. S&P employs the grandly proclaimed RAMP (Rating Analysis Methodology Profile) method, which is as vague as it sounds. This comprises of a 5-point score that again seems at bottom intensely subjective and prone to reaching wrong conclusions. Examples of criteria are “Institution and governance effectiveness” or “Economic structure and growth prospects”. Given the serial errors in such forecasting, the method used is probably astrology. Scores are calculated by use of data that is simply not there or not accurate and timely in many cases, and this is the “objective” part. In the case of the Indian economy, the ridiculously named and impugned “informal” sector (which creates more than three-fourths of jobs outside farming) has consistently been given a negative rather than the positive score the sector deserves for its invaluable contribution to overall economic wellbeing. It may be borne in mind that the UK and the US have on several occasions sent Wall Street’s associated personnel to jail or levied billion dollar fines on them, but not India. The few fines or punishments levied by regulators in India are derisory in comparison with the misdeeds committed, an example being the co-location scandal at a prominent exchange that has been and remains a favourite port of call for Finance Ministers of the Union of India. Another is the ongoing effort to disguise the monumental snafu perpetrated in oil futures by passing it off as a matter involving less than Rs 400 crore, when in fact the actual cost of the full transactions is several times higher. How much have Indian public institutions lost as a consequence of such activity? If India were the US or the UK, the PC Network would have been disbanded years ago, with billion dollar fines and stiff prison sentences for a few of its key players, rather than having many of its known elements ensconced in key policy slots. While some point to the remarkable coincidence that several scions of influential political and official personages have found employment in Wall Street and its satellite agencies, it would be an expedition into hypothetical scenarios to claim that governance decisions are being taken in accordance with the wishes of such foreign agencies only because of such family ties. Awe and reflexive acceptance of the presumed wisdom of the international rating agencies is a syndrome common within the portals of Mint Road and North Block, despite the consistent failure of such agencies to warn against global crises or their visible bias against India. The only task they fulfil efficiently is to favour short sellers, including those who bet repeatedly against the rupee.
WEAPONISE THE QUAD
India must weaponise the Quad and move robustly into the US-led military alliance rather than see-saw between that grouping and the Sino-Russian military alliance. Such a move would have an immediate effect on perceptions of India in a manner that even rating agencies would need to recognise positively. Lower tax rates and less minatory regulatory systems need to be implemented at speed. Lower rates, including in GST, mean higher growth and therefore more collections. Prime Minister Narendra Modi has immense goodwill across the country and retains the trust of the people. This opens the path for the success of innovative schemes for monetising this country’s immense gold reserves in an entirely non-coercive way. This would include the tax authorities forgiving past sins, many of which caused by regulations that are designed to stifle growth and boost bribes. Such changes would generate a push for growth, as would slashing taxes and therefore prices on feedstock such as petroleum. If this be done, it would help ensure that inflation levels do not rise even if the estimated amount of necessary stimulus (5% of GDP as extra spending each year over three years) gets pumped into the hands of workers and farmers, as well as in meeting the working capital needs of those employers suffering from the effects of measures taken to protect the population against Covid-19. Unlike what the Chicago School preaches, the Indian economy needs an effective level of stimulus precisely because so many within the population are poor and vulnerable. This is especially the case with the small, medium and “unorganised” sector (although this term is a misnomer, as is “informal”). Tax rates need to incentivise employment, rather than focus only on the replacement of men with (usually imported) machines.
Infra programs such as highways need to get completed not by relying on high-cost machinery but on labour. Given honest implementation, quality will be as high or higher should many people rather than a few machines be put to work. It is clear from the improvements made since 2019 that the control lever in North Block has now firmly shifted into the hands of Narendra Damodardas Modi. The PM will be aware that by August 15, 2020 the country needs to experience the cool breeze of hope sparked by a reviving economy rather than chill winds of despair caused by economic storms. Fiscal and monetary policy should not be dictated by international rating agencies, but by ground realities focusing on the need for high growth and employment. India has immense reserves of strength. Those seeking to block the utilisation of those strengths so that billionaires make even more money at the expense of the middle class and the poor need to be regarded with the disdain they deserve. Nothing succeeds like success, and once an effective stimulus package places the economy on the track towards ensuring a generation of double digit growth in the manner Deng Xiaoping did for China in the 1980s or Zhu Rongji in the 1990s, the same rating agencies now lobbying for a measly and disastrous fiscal and monetary response to the existential crisis caused by Covid-19 in the economy will come flocking back. They would be full of praise for effective policies, forgetting their own past advice, as they hunt for renewed relevance. What India needs is a sufficient and well-directed stimulus package which gets implemented under the direction of PM Modi.