Published Date: January 23, 2019
Guest of honor Shri Ramasamy, Chairman CA S.Rajesh, Ex Offico member CA Thalapathi, Speaker CA Sharath Kumar, my good friend and former chairman of SIRC, Shri P.V Raja Rajeswaran, former SIRC Chairman K.A. Shanmughasundaram. Office bearers, members, students, friends - Good morning, welcome to all of you.
I thank you for the honor of addressing all of you today on this very important day in this chapter’s history, on the inauguration of this building.
I must actually start by giving you a caveat on the topic given to me, the topic which I agreed to is "Economic Scenario at the Global & National level & the role of Chartered accountants". First I must confess, I am not an economist, I did not study economics as a major. I am also not a Chartered Accountant. So, at some level, I am uniquely unqualified to address this topic. But as a mitigating factor, I had, as mentioned earlier, about two decades of experience in the investment banking industry.
First in the highly advanced markets, pre 2000 crisis, working on structured products, derivatives, global products mostly and then a second kind of period in investment banking in mostly emerging markets, former colonial areas where my employer Standard Chartered had been active going back decades if not centuries. So, with that background I have kept up a little bit with global economy because it was my daily bread and butter. Fixed income products, money market and those are very subject to change where billions of dollars in my case. My team raised about 135 billion dollars on an average, daily, financing the balance sheet of the bank and it could change in a heartbeat in different parts of the world. So we have to keep mitigating the risk and monitoring the economy.
But, at some other level I have this very unique privilege of having a long association with ICAI. Back in 2013, while I was still a banker I was invited to give the Vaidaynathan Iyer memorial lecture in Chennai, and actually that I was a bit qualified to do. I gave the lecture about the value of having “Efficient capital markets and the extent of economic growth in countries and regions”. Sometimes relationships develop out of chance but I'm happy to say that after that lecture, I have been continuously engaged with the ICAI at some level or the other. I was invited to Hyderabad to speak at the annual conference of the SIRC, a couple of times last year, I have spoken at the memorial lecture conducted by the Kanchipuram branch and also the student conference held in Madurai and now here. So, one of these days I would like to ask for honorary membership (collective laughter).
But I am always happy to be here, because as you’ll see when I speak, I have very great, both expectations as well as respect, for the profession. Based on my experience, both prior to entering politics and after that in particular serving as a member of the public accounts committee where we are continuously looking at audit reports.
But let me talk about the economy first. So where is the global economy today? I think the easiest way is to tell you a little story. I was a long term student. At some level even now I consider myself a student. I went back for my 4th degree I think at the age of 33 and I got it at the age of 35. And one of my professors was the legendary economist Lester Thoreau. At the MIT Sloan School of Economics where Nobel Prize winning laureates are always there as a faculty or students. I had the privilege of studying with them.
Lester Thoreau asked us this question. He said, “What has happened in Japan, why has it happened”. 10 years after the big crash of the 90s, I don't know, many of you are too young to know that but Nikkei was on demand and Japan's economy was heating like crazy. The Nikkei index, all these indexes have a built-in propensity to rise because they are not inflation adjusted. In proportional terms, generally they should rise, but the value of the Nikkei index in 1990 was at 40000 something. It went down to Ten thousand or so, so if you want talk about classic market bubble there is a classic market bubble in the history of the world.
When that crash, the usually think so how put back the economy after it publicly crashes, came up and it turned out that the crash was a leading indicator of most of structural problems in Japan’s economy. A desperately and rapidly aging population, they were not having enough young people born not enough immigration and there are others factors that went into it, like whether or not bankruptcy was socially acceptable and there was this whole cultural thing about honor and net result when I went to school 10 years later, the problem had not been resolved.
Japan had continuously faced 10 years of deflationary pressures, they have not been growth, they are being picked up and this was despite the innovation of new banking concepts like quantitative easing. There has never been in the history of the world this notion of quantitative easing, where the central bank purposely goes and pumps money into the market, taking up securities and forcing, at least attempt to force lending, therefore growth, therefore activity and support.
And at that time Dr Thoreau said that this will never happen In America, this will only happen in Japan because they are afraid to deal with bankruptcy. They cannot take short term pain so they are allowing this problem to fester. Ironically, 10 years after the global financial crisis, exactly what happened in Japan between 1990 and 2000 has happened in America, in Europe, in Britain, in every part of the global economy for the last 10 years.
Central banks have pumped trillions and trillions of dollars into the economy. They have taken all kinds of bonds back into the balance sheet, have messed up the fixed income market, got the rates close down to zero and yet, they have not been able to stimulate growth and have not been able to recover from the crisis. We have just kept kicking the can down the road. So, the first lesson from that is “never say never”. Never say his problems will never be my problems. Problems sometimes are everybody’s problems. But the best way to understand the global economy today is to start from that point.
There are still millions of dollars of excess liquidity compared to any other historical point prior to 2008. Central banks have pumped in close to the region of 3 to 4 trillion dollars of excess liquidity into the market. But this time the crisis is not an American crisis, it is a global crisis. It started in America and dollar is the reserve currency of the world. So whatever America's problems are become the world’s problems. The globalization of finances happened in unimaginable ways. Capital moves freely.
And therefore if you originate liquidity in America thinking that that money will be used in America you would not know where the money is used. Most of the times the money goes to Europe or India or China or emerging markets. So you pump out money thinking the central bank, that you are managing the monetary policy of your country. In fact you are not. You are pushing that money into the global economy with consequences that are, in many cases and the basic problem is inequality and this is the biggest problem and this problem is not financial. It is common to politics, to India, to the rest of the world.
We have reached a point in global economy where inequality has become so big that it has become a structural problem. In any kind of classic theory that is to say the concentration of wealth and access to liquidity pumped out by central banks is held by so few people that the behavior of those people towards the economy of the bank. Let me put it in another way.
When the banks pump out liquidity what you want to happen is for that money to go and create new enterprises, increase employment, pay wages thereby providing economic growth. In fact, what you learn from the last 10 years is that's what happens once upon the money is pumped is that it doesn’t go to the people who can use it, it goes to the large conglomerates to Ultra-rich people and they are not going to increase the spending or investing just because they have access.
They only have access to a lot of money what they do with that money is to put it into asset acquisition. So they will be creating a new assets by going and buying shares, sending the money to India, sending it to China starting asset price inflation. So the liquidity pumped out by the banks intended to increase economic activity gets diverted and asset prices keep increasing. When people see asset prices increasing without an underlying increase in economic activity, this is the definition of again some way building pressure. So we go to the central banks and say this is nonsense please pull your money back but the Central Bank says but “if I pull the money back, the market will crash”. But the market price everything transfers, because it has also have been infected by the securities market. Where central banks closes the liquidity, they are set prices will crash and when the set prices crash unfortunately who are in the middle class, the weak, the working class also get affected but not as much as the rich.
But if increasing the liquidity is not going to do the job, the economic theory or monetary theory is supposed to do. This problem has manifested itself continuously for years in places like the US. It's not as bad as it used to be, but the fact that they started unloading the security, the economy is almost over heated, unemployment is at historic lows, and have all kinds of risk. Especially political risk, the president is undergoing all kinds of criminal investigations, the Congress has been taken over by the opposition party, the president has ordered a government shutdown, the federal offices have not been working for 20, 25 days, and federal employees are not getting paid. So you know the activities that are going are related to the financial monetary policy.
In Europe, the economy has not yet gone to the pain of raising the liquidity, of lowering the rates, liquidity in the emerging markets are actually feeling the pain, and most of China has been massive capital outflows, market values. In India we have a unique situation where money worth billions and billions of dollars, somebody reported 18000 Crores have been withdrawn by Foreign Institutional Investors last year and here the market continues to be at level mostly because, as somebody was saying in a private discussion earlier, the Prime Minister and his cabinet have taken control of everything. Taken control of the Institutions, of the Reserve banks, of the agencies, taking control of the balance sheets of the public sector enterprises, forced them to get into the market and buy the securities foregone by the Foreign Institutional Investors on the way out.
So we have 18000 Crores withdrawn by the Foreign Institutional Investors and yet the markets are stable because it is soaked up by the LICs, the balance sheet rich public sector units, companies should not be exposed to the equity markets because there will be flaw in balance sheet and they won’t be fractional and it will, the market will crash because we cannot keep something artificial ahead for very long. We are going to pay the price. We will add to the crisis of the world let the foreign investors walk away with full value. And then when the devaluation will be done, we will take note of our own books. But at some level, this is not going to be a good year for the global economy because we still haven't paid the price for kicking the can down the road from from 2008.
The greatest risk in America is political. But everywhere else, it is economical. As they have not yet started unwinding equally. I just want to make, you now for those of you who think I am being unrealistic or unnecessarily pessimistic, I say that we are not in a great place in economy. But the variations are not that bad even if you have a look at the US markets, of European markets are not that great but they are not that bad.
So the problem with market prices and that most people see the market and equity market, the share market in fact the real important market is the fixed income market. The rates are set and that's it and the all the applications Government Bonds credit rates of corporate bonds, agencies, exchange rates, markets are actually designed by equity market. So equity markets are not exactly clear indicators or current indicators of global economy. In fact equity markets are retrospective they do not crash ahead of time, they crash after, which most people who are not in the market historically do not understand.
This last December was one of the worst performances in in any December in the past few years. It indicates for the equity market and and particularly the US markets but if you look at the percentage drop it was not like 50%, it was not like a market crash or anything like that. It was probably 20%. So why is it, and if you look at like, how many times a drop like that has happened in the last many decade, there weren’t many in December.
So why it is that in December the market price drops? Because in most advanced economies, the market assets are professionally managed by professional asset managers. People whose job is to manage the investment, who make the bonus at the end of the year and based on that performance they get the bonus in January. And once it becomes December and the market is up, nobody will sell the shares, if it drops a little they will keep it and when they are marked for profit and that's my bonus level, and after that in January. Just human behavior based on personal compensation insets this number. December has historically been a very good month for almost it never drops, January is always the reverse. January is a month they make all these corrections and all there are 11 months ahead to get your performance right. If you see, this time it's gone the other way. Basing normal human behavior, for people who don't understand once a given up all their claims for this year.
Let's come back to India. India as most of you know has two major structural impediments to growth. First so long standing won the close the large corporate banks borrowing tell corporate Saha draught in balance sheet Nexus Everest taking for division no back back handling in banks particularly in Nationalised banks has led to over leverage and kind of death over hang problems economics in the big corporate sector the second problem is problem now some call it double balance sheet problem in that balance sheet problems has has affected the back so much so many problems that there in capable of providing new norms of course the government is working on this unfortunately the government is so focused on maintaining is image and worrying about reaction that they are not in my opinion then such a good job of reform in a the terms of banks are the large corporate but even that we could have suffered because at the end of the day the last corporate Sai headlines and their big problems for the Nationalized banks they do not drive employment, they do not drive economic growth that was in the country that is driven by the MSME the small scale Enterprises unfortunately self-inflicted completely unnecessary damage from Demonetization and then compounded by GST have set all the sectors in deep pain and and permanent damage to their business models many so many are closed down never to reopen again. Someone left to struggle right along the system of credit has become very difficult, mistake but the problem is of the Indian economy are so structural, that we will see Revival and growth anytime soon.
We also must keep in mind that a country like India kind of breakeven growth, increasing population and the workforce entering. Its like 7.5% to 8%, it is 7 and have to 8% you keeping it even inside of the economic growth cycle that we have in Tamilnadu. I tried to to start a Consulting company. I used to be a Consultant for banks. I have been waiting for something like 3 months for the government to upload the objects and process of the LLP. Can you do business like this? So, we need to do like fundamental reforms in the building blocks of business.
Coming to Tamilnadu, it was not on the topic and I couldn't say much because I am sitting elected representative so I don’t want this to be political but I just want to point out the problem we have. Ever since the passing of Jayalalitha you don't have a policy vision. We have not seen a statement of policy which is a priority. They are going to do a second Global investors meet now. The first Global investors meet by their own admission in the Assembly has got less than 25% of investment. So, if you cannot convert the existing MOUs what is the need for second Global investors meet? So this time they are saying that the target is going to be 25% of the 2015 target. The amount of effort put in for the kind of publicity take away from having a fundamental vision of policy. In 2011 when the DMK Regime came to an end Tamil Nadu was paying 8500 Cr or so per year in interest payments and made around 18500 Cr in capital investment. Whereas, according to the 2018-19 budget we are going to pay 29500 crores in interest payments which is a 300% increase and we are slated to do about 20000 crores in capital investment.
From a user's perspective, I am well aware of the importance and value of this profession. The accounting profession has a great role to play not just not thing but every part from the beginning from Management Accounting from financial accounting and then to do things like audit but the complexity and the scale of an organization’s growth, the global economy with ongoing Merger. Take food, alcoholic beverages, Tractors, cement, construction, political consultancy etc. it is a global market now what used to be tens and hundreds of companies 20 years ago thousands of commitments today.
Accounting profession in general and auditing in particular are gaining more & more importance. And as I said in a student’s conference in December there will be no reduction in demand, you are in a very safe profession. The demand for your profession will always, always go up. I am impressed with the level of detail and the level of it's a bit depressing to me the thousands of audit purpose of very successful persons, that always a brilliant. Always both good and bad. In the end we all make personal choices. As the father of a nation Gandhi said “Satyamev Jayate” and as the Tamilnadu Government logo says “Vaiymaye Vellum”. At some point the truth will come out, so we should always keep that in mind.
I am very grateful again for the opportunity and I am very happy on my continued Association with the ICAI, I'm happy to meet with some seniors and to spend some time with all of you. Thank you again for the privilege. I wish you all success for this conference and for your careers. Thank you.