The Manipulation Game

I learnt this a part of economics- The Circular Flow of Income.

Industry produces goods: people buy the goods with their wages :: People work for the industry making the goods: Industry pays people wages.

This was simple and pretty basic. Then there was the government which taxed the people and industry to provide for the infrastructure for both. The next layer was financial institutions which gathered surplus from the wages and loaded it to the governments and industry to bridge gaps and grow larger. In return, people earned interest and bought more goods…. And so the cycle grew larger with a global perspective and international trade come in.  

In an ideal world, we have actually set in motion a perpetual growth system that is worldwide and self- sustained. But somehow this never happens. There is always a rouge element which tries to play folly and break the complete cycle. In most cases globally, a government- industry- financial institution nexus has often played havoc and has left communities, countries and even entire financial structure around the world jeopardised. Enron, the crash of 2008 are just a few examples which have left a mark on global economy.

Living in a world where nothing seems to be robust leaves a lot of gaps for me to think in all the places where greed and instant profits are linked to a scenario that seems a calamity but seems like a cover- up for a larger plot. I can’t help but speculate that sometimes it almost seems like a crisis is being created to manage the financial bearings. When companies issue stocks, they are borrowing from people with the idea of mutual ownership and sharing of profits. When the company buys back their shares; dividend is no longer a liability to be paid. A recent article by Jayant Vidhvauns in a Marath daily drew my attention that this is actually a big possibility. (http://epaper.loksatta.com/521248/indian-express/15-06-2015#page/13/2)

Let’s take the recent case of Maggi in India. A legendry brand that’s almost 30 years in existence and stands to take 70% of the instant noodles market. It contributes in the range of 20% of Nestle India’s revenues and is almost a habit for most people who have grown with the brand. We always knew it was not healthy, had MSG and other flavouring agents. So why all of a sudden did one fine morning in June we got alerted? How did this happen to a company that was over exceeding analyst expectations? Why all of a sudden did the share prices fall for a few days and bounce back? Its hard to imagine how many shares might have been bought back by Nestle within the sessions it was running low and how much money was lost by the investors in the process. 

I can’t help but question, is this a planned move to buy back shares in a bid to retain profitability? The company has recovered its shares in the few sessions of panic sale and now the stock is back on track. People have lost money- the company lost nothing. As for its reputation: the entire set of packaged food market with all its competition has gone sluggish; so no loss of market share. The losses in sales are going to be far less as compared to the dividend to be spread amongst shareholders.

Now wait a minute… How did Cadbury’s get worm infested in 2003? Never happened before or after? But that was the time Cadbury got "Delisted" and there was an active buy back. How come Coke had pesticide residues one year and is sharing happiness ever since with no issues? Not to mention the pesticides later got bottles from all the brands and no one lost anything in the market. 

I don’t have enough evidence, study and the understanding to put my finger on things. But one thing is for sure; there are more ways to manipulate and control the business outcomes- especially when big numbers exchange across over a matter of few days. Shares have often been subject to allegations of insider trading, bubbles and scams- but this seems to be a new way that even the regulators might find tough to manage and distinguish as a rouge activity. No matter if you agree or call me a skeptic-  Business today is not just a PnL statement- it is an entire manipulation game. 

Time to shape up the Economy???

The words seem to echo in every quarter of the business world- industry is in a slowdown, there is no money and there are no new projects to latch on to.  India is marking its 67^th independence day and the mood around is nothing close to rejoicing. The days of double digit growth that we enjoyed in the late 90s and early 2000s is no longer the case. Today, very few companies are posting strong profits, most stocks are falling and rupee against dollar has gone through the roof. Expectations rely highly on speculation that the government will call for some reforms and announce new projects and policies in the walk up to the elections next year. But it is disturbing to know that hope is riding speculation and nothing hard core in the pipeline.

So how are we still holding on? What is driving the country today is predominantly is the Indian Middle Class, the strong workforce India possesses which is skilled and competitive in terms of cost on the global sourcing front. Even in these trying times, IT/ITES is surviving as the back office development hot shop to the world. The consumerism and the ‘want more’ attitude of the middle class are driving the sales for FMCG, pharma and retail finance. It is more on consumer led confidence than industry drive which is maintaining the money cycle.

I remember I had studied an economic model known as the circular flow of income; a symbiotic relation between industries and people.  People produce for industries, industries pay wages to people; people buy goods and services from industries and industries make money. There was another angle to this relation, the government. They collected money in the form of taxes from people on their income, buying of services as well as from industries as they manufactured or sold goods to people. This income for the government was then invested in infrastructure and welfare which boosted growth. At times, industries themselves invested their profits or used funding tools to facilitate growth by themselves. Also, banks which hold saving for people also finance governments and industries and propel growth.

The above scenario is still valid but has a new element called the overseas sector which is altering the balance. The post-1991 India attracted an influx of overseas companies into India as the country held immense potential waiting to be tapped. Possibility of joint ventures with Indian companies, the SPVs for investments into infrastructure projects was all seen as the perfect growth platform. But the government is still very much in control as the facilitator for driving this structure and the lack of clarity on policies and slow response is today choking the country’s growth.

I read in a report on ease of doing business index, India is at the bottom of the heap. Clearing the hurdles and seeking the permission to set up something has become such a task that Indian companies today prefer to go and set up or buy companies abroad rather than invest in our own country. While projects in India are stuck in the long chain of approvals, companies from India are setting up businesses in Africa or East Asia as their next big market. It is amazing to see that an industry flagship like Tata Motors is bleeding in India and its growth is actually coming in from sales from its JLR division which is boosting heavy profits in China. 

Not to mention, the interest for private partnerships in infrastructure projects like the trans-harbour link in Mumbai just talks of the faith in partnering governments in long term. Delays in approvals, clearances from various ministries, changing policies and political intervention have more often run into project cost overruns which reduce its profitability as well as putting a strain on the financial machinery behind the project. Energy, Telecom, Retail, Airports- all sectors which actually build the infrastructure to rise have seen either delays or misdealing.

I do not wish to get into the favourite past time of government bashing- but I do feel that the system of governance has broken down somewhere. Why should a bureaucrat take any strong decision which might be industry friendly but against a political promise of the government or likely to unsettle his position? Irrespective of which political party rules, governments are corrupt and the common man in India has accepted this at par with a direct sermon from god.   

Political willingness can make a difference and there are states in India which have demonstrated its success in many ways. 22 years after India opened its doors to the world economy; the growth potential as well as the advantage of its mass consumer market is still intact. What is required is the government to clear its hurdles and put the house in order. Governments have no business to be in business- but they do need to clear the path of progress. Else, I don’t see the rupee devalue further and the balance of trade drive us back into the pre 1991 situation.