Fiscal and Monetary - Evaluation of Directional Priority

The transmission of money into capital is the essence of our economic activities. It is truly pervasive across the globe and has astutely survived all the worldly challenges since human memory. How and why has it shaped our financial fortune is a revealing truth.

Whether an ordinary household investor or a new Generation swanky Institution, irrespective of the global corner they belong to, all have the aspirations to add to their economic fortune through the most innovative experiment. Medieval Europeans efforts around 16^th century in coining and institutionalizing Banking, Stock market and Debt market together was a fascinating history.  The subsequent success of commerce in Italy, England, Holland and France finally fueled their imperialistic imagination. The financial resource turned a chaotic medieval feudalism to an Imperialist west, subjugating and plundering rest of the world for nearly two centuries. On similar line, the success of ancient Arab and Indian Traders led the world to believe in their oriental opulence and grandiose prosperity.  It grew into such an astounding illusion, that together Historians (Who wrote factual) and Poet (Who wrote imagination) changed the narrative of wealth and wisdom as synonym of east.

Nation in those eras, Devoid of consistent geographical Boundary and with near absence of  documentation of financial priority, could not narrate their achievement under the modern days jargon as specified as fiscal and monetary tool.

Post our past, the new age planet Earth civilization is more materialistic and less platonic. Index of National prosperity, human growth and development is now centring on the wealth we flaunt. Bigger population, escalating needs, higher growth, and competitive wealth led us to search and secure endless means called Capital.

During the process, we moved beyond Money to Physical Money finally turning to electronic money. The Nation Progressed beyond Banking and entered into the labyrinth of Capital Market. Banking system that facilitated creation of Electronic money allowed Capital Market to invent a range of capital market instruments from ordinary to complex as such Derivative, currency, commodity, financially re-engineered products.  Unbridled waves of Money, capital and liquidity dismantle the man made boundary and thereafter globalization knew no barrier. The defenseless nations rope in the most outstanding invention of 20^th century to discipline this rampaging ravenous rage and jargonized them as fiscal and monetary policy.

Since then the Economic activity became the function of two warring gladiators’ fiscalist and monetarist.  Wars never promote discipline and order. Nation in 20^th century used either of the two- Fiscal and Monetary tools with conditional, situation and directional propriety. Often disconnected to each other’s presence they were used as tools to compete than to complement.

Early US during post recession era of 1920s were guided by the priority set through the vision of a British Economist Keynes that stated to follow fiscal prudence and fiscal adventure for all the financial mess. Pursuing ahead for nearly next 5 decades till 1971, US engineered a Loose Fiscal Policy, invited and accepted Current account deficits as state policy, leading to a huge exodus of Dollar outside US. Little later the World arose from its slumber to realize that the Dollar is now a world currency. Post 1990, “Housing for all US citizens” led the US policy makers to sudden revert to easy monetary route contrary to earlier stand. ”Low rate, easy capital and liquidity for all” was the policy consequence. While in Europe, Germany and Italy successfully negotiated the humiliation of war reparation after 1^st world war through a self destructive extra loose monetary policy. Ms Margret Thatcher did prioritize fiscal prudence over monetary logic to rebuild their British economy few decades later. Especially Entire Europe after World War II orchestrated bizarre fiscal feast. Borrow, Build and Grow. Borrow build and grow. Leveraging was no taboo. Years of fiscal profligacy led Europe to present worrying Debt to GDP ratio and sobriquet like PIIGS. Contrary to Europe dependence on Fiscal philosophy, south East Asian had different take. Their economy barely survived the Capital flight of 90`s. A too bold and unimaginative monetary policy was attributed as the prime reason.  Far away, nearly a suicidal Fiscal measure led to sovereign and currency default by few Latin American countries. The surprise decimation of Eastern bloc nation led by Russian`s political disintegration was an policy outcome for their smattering with self destructive profligate fiscal policy. China displayed astute acumen of monetary priority thereby artificially manufacturing a weak currency to fuel and sustains its Export Led Growth, Employment and wealth.

India meekly followed a little late. Our monetary measures under the leadership of the Giant academician Mr Manmohan Singh brought down the Interest Rate, SLR , CRR, Repo  and other to substantial low from the height of pre 1990s. Monetarist planted small seed, Banking system augmented that to Tsunami of Liquidity through fractional reserve Banking.  A nation who used to beg few million dollar from World Bank, IMF have outgrowth today’s to fuel 1.8 trillion economy with 340 Billion Dollar of Forex reserve and sustainable Real GDP growth rate of nearly 6%. 

Emergence of IMF, World Bank, ADB etc further led the world into the lap of directional policy preference. There were instances when underdeveloped economies and developing economies were cajoled, negotiated, combated or manipulated to accept and adopt policy doctrine of these rich Bankers.

It is during these days of stated directional policy preference with visible and partisan choice between fiscal and monetary policy, Emergence of European monetary union on the shoulder of divided fiscal union was an welcome change.

I call it coexistence of fiscal and Monetary Priority.

The World has changed after 2008. Nation lost huge assets in 2008. Scores of Banks and Financial institution collapsed. House hold and savers became poor. Worldwide capital market declined. A generation of Investment bankers vanished into thin air in US. Academicians shifted the discussion from financial Reengineering to risk Management. Structure of Finance and financial experiment were put under question. Isolated Policy and one directional policy were no longer strong reasons to inspire the aspiration of Nation`s capital formation effort.  Coordination between Central bankers and budgetary purity was now a welcome option. Stronger action of Monetarist now needed to be matched with fiscal discipline not profligacy.

Why Few Nations have entered the dubious vulnerable zone? PIIGS nation, disrupted North African zone and a few rogue Nations like Pakistan are on the brink of collapse.  US, Europe and Japan are experiencing an acid test of over leveraging.  Smaller economies are normally never counted.

World is back to another experiment. US, Europe, China and Japan are crediting more space to monetary authority in their Fiscal outlines and vice versa.  India is no exception.

Mr Modi taking over the reins of Governance in May-14 and promising to undo the stigma of policy paralysis and introducing “Make in India” was complemented by the Capital Marker rally as mark of Fiscal resurgence.  Mr Subbarao and Mr Rajan refusing to toe the line of loose monetary idea is complementary and matching monetary resurgence. Similar coexistence is visible elsewhere.

Cynics and renegade will term it as confrontation, futuristic and believers would term the same as complementary.

Shall we witness an era where discipline will lead the future Policy outline?  Directional priority would be an exception not a Law. 

How Equity should be a preferred Asset Class for Middle Class?

How  Equity  should be a preferred Asset Class for Middle Class?

Equity as an asset class is the youngest among all the available opportunity in the Indian Financial System.  Debt or Fixed Income Security, Real estate, Gold all have been long explored and practised as the major source of wealth creation since generations, and therefore our understanding of same are certainly much better than Equity. But ironically despite attached risk and volatility, Equity is fasted emerging asset class both in term of exposure and opportunity. And therefore it is necessary that we learn the basics of Equity investment.

Equity is rightly explained in terms of Ownership in any entrepreneurship. An Owner shoulders the burden of risk and hence deserves to corner the reward as well. Therefore the Risk and Reward are the attached attribute of equity. The Valuation of Equity is ordinarily explained in terms of Index movement popular are BSE – 30 and Nifty-50.  The Index represent few selected stock based on certain parameters.  For example BSE coined in 1979 at base of 100 for 30 stocks has now scaled up to 27500 while lurching between steep volatility and boring plateau. Conclusion is Stock Prices does not move in Linear straight line, rather they oscillate as its function of earning identified as Earning per Share – EPS, Return on Equity, Book Value, Dividend Yield.  Good Performance rewards its owner Poor performance mess up your capital even.  So while we invest in Equity both directly or through Portfolio of Mutual Fund, Must look at the EPS of underlying and compare them among the Peers.  

The next important is to understand the valuation mechanism in the Stock market. A Company`s equity or Portfolio can be valued differently at different time period depending on demand and supply  in the market along the line of its intrinsic Value also explained earlier as EPS.  The Market valuation is measured through the terminology called PE ratio, Price earnings Ratio. PE ration explain the strength of Market Price in multiple of its earning. A Low Price Earning Ration means a cheaper market and high Price Earnings ratio means a costlier Market.  Our understanding affirms when we buy cheap and sell costly we make Money or else we lose. While the understanding is brilliantly understood and executed in dealing with other asset class like gold, Real estate or debt, the opposite is practices in Equity Market. Yes ironically we buy when Index is High, when PE multiple is high When it is costly and Sell when Index is Low, PE multiple is Low and it is cheaper.

The result is always worrying past, a regrets and frustration. Why do we do this? We are prisoner of our biases and follow the dictation of Greed and Fear.  Discipline is said to be only remedy rather Panacea. Expert suggest follow Market closely but Invest regularly through SIP- Systematic Investment Plan in Mutual Fund.  This is the most scientific and disciplined way to approach Equity Market.

Equity since Inception say 1979 has earned over 17% return and that is tax free.  Wealth formation through this asset class is the easiest and natural corollary.  Must research and engage yourself with Equity.

The Entire World is watching the Business and Economic development of India. US and Europe that ruled the Economic growth story in Pre 90`s, has already past its prime.

China emerged to replace the predecessor`s hegemony. However it is now moderating and struggling owing to its own conflicting agenda. The totalitarian,command economy has its limit as it does not involve the pleasure of participation. China might have emerged and may continue to be so for years to come, but will always struggle to maintain the momentum due to selective and restrictive Intellect participation within the nation.

At this juncture emergence of India at the World Forum is set to reignite the future and Past glory of India. India has advantage of having concurrently a very Strong Political leadership, a true young democracy, a vigilant and free media and above all a long tradition curious learning.