There is buzz around town -- the recent economic polices of the UPA government, as announced via the Budget 2008, would lead them to electoral victory in Oct-Nov 2008. The Opposition is not really worried for at least two reasons. First, Budgets per se have little effect on elections; second, and more importantly, the reason for hidden complacency in the Opposition is because it has not one but at least two Trojan horses in the Congress camp!
There is an unfortunate myth about economic and political reality in India -- low inflation is an electoral winner. There is precious little evidence to substantiate this claim, and it is therefore unfortunate that even as good an economist as Dr Manmohan Singh keeps repeating this (false) mantra. Even more unfortunately, this mantra has led to misguided monetary policy in the mid 1990s, and today.
A major puzzle about the Indian economy is the constancy of the GDP growth rate post the economic reforms of the early 1990s (1991-93). These reforms have been politically popular; accepted by all parties, including most elected Left MPs.
Only post 2003 did the Indian economy experience a significant growth acceleration -- from 5.5 per cent (1980s and 1990s) to 8.5 per cent, 2003-2008. Congress leaders somewhat embarrassingly take refuge in long and variable lags, but such long lags only exist in virtual reality. So what really happened in the 1990s?
Why did the GDP growth rate not accelerate? It did, for three years 1993-94 to 1995-96 -- average GDP growth of 7.5 per cent. But "in the name of inflation" monetary sledgehammer made interest rates go sky high starting in 1995; investment declined subsequently, and GDP growth decelerated to a pre-reform level. One policy messed up the total effect of the mother of all reforms.
The political consequences of this strict monetarist (SM) policies were felt by the Congress in the 1996 elections. Except for 1991, inflation had been running at an 8 to 9 per cent rate. In the last year of Congress rule (1995-96), the inflation rate began to decline and reached a rate of 6.5 per cent in 1996-97, a rate close to then historical lows.
Despite this low-lowest inflation rate achievement, the Congress lost massively -- down from 220-odd seats before the elections to only 140 seats in 1996. Anyone for lower inflation getting you extra votes?
This extremist monetary policy is defended by the RBI, and its then governor, Dr Rangarajan (now the Chairman of the National Advisory Council to Manmohan Singh; the first Trojan horse). While electorally the Congress lost, India gained; inflation expectations got killed, and inflation was reduced permanently in India to an acceptable 3-5 per cent level.
How true is this belief? Quite false, actually. The table reports the identical pattern of Indian and developing economies' inflation rates; the other countries did not experience the Rangarajan SM sledgehammer. Yet inflation also collapsed elsewhere, and by somewhat more, 3 percentage points, compared to the 2.5 percentage point Indian decline.
The deeper one examines the inflation picture in India and the world, the less does the claim of extreme monetarist victory in India post 1996 hold true.
Sadly, history may be on the verge of repeating itself in 2008-09. Sadly for India that is, not necessarily for the political opposition. There has been an investment and savings boom in India, yet the present RBI governor, Dr Reddy (the second Trojan horse), believes that we have mostly been "overheating" these last few years.
And overheating begets inflation -- and inflation requires high interest rates. The RBI concern for inflation is touching, but in reality the RBI SM policy is geared towards the ideological belief that whenever the Indian economy grows faster than 6 to 7 per cent per annum, it most likely is overheating. This belief is logically and empirically inconsistent with the 14 percentage point jump in savings and investment rates that India has experienced over the last five years.
But what about gains against inflation? Again, the table shows that the RBI SM policy has produced a worse outcome than the average developing country. This average has stayed near constant for the last two years, as it has in India.
So no gains in inflation declines for India -- and losses in terms of much lower GDP growth. While China, Korea, Euroland and Australia have yet to slow down, Indian GDP growth has slowed considerably. From 9.6 to 8.5 per cent, and forecasts of 7 % GDP growth in 2008-09. Industrial growth is down considerably (data for Jan. 2008, at 5.6 per cent y-o-y growth, is half the growth observed in Jan. 2007).
Why this lower growth? Misguided inflation fighting has meant a large increase in real borrowing rates for corporates -- real rates of 10 per cent and above, while our competitors pay less than half this magnitude.
In the recent discussion about high food and energy inflation around the world, I have not understood the following. Agreed that food inflation hurts the poor the most and oil inflation hurts the middle class the most.
But can any of the so-called experts please tell me as to how raising interest rates in India to double-digit real levels is going to affect the probability of an Australian drought, which has driven food (wheat) prices to record levels? Or how does obstinate SM policy in India affect the prospects for the price of OPEC oil? These questions deserve answers rather than homilies about the need to fight inflation.
The more these questions are not asked and not answered, the greater the likelihood of an electoral defeat for the Congress in 2008, as it happened in 1996. Those who do not learn from history are condemned to repeat it. In the US, the Republicans are hoping for a Hillary Clinton win; in India, the Opposition is privately cheering Dr Rangarajan and Dr Reddy's strict monetarist tendencies.
Courtesy:Surjit S Bhalla,Business Standard,March 15,2008
Thursday, March 27, 2008
Wednesday, March 26, 2008
The Economist On India
Well, here I am, hard at it trying to write a review for this blog of the latest Economist Intelligence Unit country risk report on India (which, worry not, will follow in due course) and what I find myself doing is revving-up on all cylinders to come back and point out some of the facts of this life to all those people who spent their time during the second half of 2006 arguing that India was overheating when it was busily growing away at a mere 8%. In fact India’s growth has not only continued, it has even accelerated slightly since the debate got started, growing at an 8.9% year-on-year rate during the most recent quarter (following 9.1% and 9.3% in the first and second quarters of calendar 2007, respectively). And far from inflation shooting up and away through the roof it is currently not too far from the Reserve Bank of India’s 5% target. Perhaps it is towards China or Russia that people should be directing their attention, or towards Eastern Europe, or even - god forbid - the eurozone, but India it seems is one country where the “great overheating” argument is steadily running out of steam. Of course there is one country which everyone will readily admit is not overheating, and in comparison with the rate of negative price increases they have on their hands in Japan India’s inflation may seem serious, but I think we can safely leave that topic on one side for today.At this point I just want to repost part of a reply I gave to the Economist when they had the kindness to try to answer some points I had raised about the general quality of their economic coverage, and in particular about what I take to be their obsession with ignoring the demographic component in economic growth. For the Economist, it seems, growth and development is a single issue item, and is all about insitutions, and institutional quality. Which makes it kind of funny that Argentina, which must be among the worst of the emerging economy pack in institutional quality is still powering away, despite more or less openly manipulating their inflation data.
Obviously institutions matter, but so does demography. This is not a one horse race, or if you prefer, this particular horse doesn’t only run on one leg.
The topic in question here is India’s potential growth rate. Recent GDP performance at just under 9% must have been astounding many of India’s critics, especially given the way inflation, despite all that growth, has been kept pretty much under control.
Doesn’t look to bad at all, does it, in the light of what has been happening during the second half of this year. And remember this was written in the Autumn of 2006, not Autumn 2007 when just about everyone and their auntie is saying something like this. Of course this whole debate is ongoing.Again, I am really comfortable standing by this, and even the point about China, since the inflation problem really does seem now to be getting a grip there, in a way which it isn’t doing in India (and remember they have had nearly 30 years now of the one child per family policy, and at some point soon their labour market is going to tighten and tighten, and for a glimpse of what may well happen next in China see my recent analysis of the growing problem we now see in Russia: “Russian Inflation, Too Much Money Chasing Too Few People” (not too much danger of this getting to be a problem in India in the near future, now is there?).
Since this time of course, the whole recoupling/decoupling issue has really taken off as a live debate. My latest thoughts on this can be found here, and Claus Vistesen’s post - The Global Economy, Compass and Charts Needed - follows up on and continues the “uncharted waters” theme.
To The Economist
At the risk of having to assume some kind of modern “j’accuse” mantle (for which of course there are ample precedents in the early origins of your own magazine) I am going to put up yet another comment. Maybe this is because I would like to participate in that “severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress” which your contents page so boldly announces.
Maybe it is also because I want to pin down quite clearly for future reference just what the issues are, and just why it isn’t “absurd” to suggest that the Economist currently systematically fails to factor-in the demographic components in economic growth (or the lack of it). Well, saving the best (or should that be the worst) to the last, I would like now to come to the case of your India correspondent. This gentleman (and I sincerely hope that despite his evident predilection for strong Vindaloo curry he is one of these) has been systematically re-adjusting upwards India’s potential trend growth rate in recent months. In fact his estimate seems to have shot up from 6.5% in November 2006 to 7% in February 2007, to 8% in June 2007. Now that’s an upward adjustment of around 25% in trend growth in roughly 8 months. Quite an achievement, especially since he offers absolutely no explanation whatever for these adjustments, but what he does not fail to tell us - oh, he never lets a moment rest without beating this drum - is that: “India’s economy, like Delhi this week (or Vindaloo curry perhaps, EH), remains far too hot.”
Now just in case what I am suggesting here is questioned I would like to quote chapter and verse, since the issue is an important one.
In November 2006 the Economist’s India correspondent estimated capacited growth for India at around 6.5%.
Basically I find myself in agreement with the Indian economists he doesn’t like. It isn’t that these reforms aren’t desireable, as he admits, we all agree on this. But the point is, even ex-reforms (and of course there have been reforms and global opening) demographic momentum would indicate that substantial growth is now going to occur. How substantial? Hard to say, but I think it is quite probable that 5 years from now India will be growing faster than China, and may even peak out at the highest annual growth rates yet seen for a significant economy over the 5 to 10 year window. I can justify why I think this with some sort of coherent argument, but I think the big danger for the sort of view they are advancing at the Economist is that they imagine virtually nothing is possible without institutional reform, and this is just as big a mistake as saying demography is everything. You need to systematically take the two components into account. If you don’t do this you risk getting into the ridiculous position the World Bank found itself in earlier in the year, when countries like Argentina and Thailand complained that since their countries were registered as going backwards on the global governance index, while both countries were growing quite nicely, then logically the methodology used to construct the index must be wrong. IMHO the World Bank has been totally mechanistic about institutions and thoroughly deserves all the problems it creates for itself on this count. OK, so that’s it. I finally rest my case. The dialogue will continue.
Source:The Indian Economy Blog
Obviously institutions matter, but so does demography. This is not a one horse race, or if you prefer, this particular horse doesn’t only run on one leg.
The topic in question here is India’s potential growth rate. Recent GDP performance at just under 9% must have been astounding many of India’s critics, especially given the way inflation, despite all that growth, has been kept pretty much under control.
Doesn’t look to bad at all, does it, in the light of what has been happening during the second half of this year. And remember this was written in the Autumn of 2006, not Autumn 2007 when just about everyone and their auntie is saying something like this. Of course this whole debate is ongoing.Again, I am really comfortable standing by this, and even the point about China, since the inflation problem really does seem now to be getting a grip there, in a way which it isn’t doing in India (and remember they have had nearly 30 years now of the one child per family policy, and at some point soon their labour market is going to tighten and tighten, and for a glimpse of what may well happen next in China see my recent analysis of the growing problem we now see in Russia: “Russian Inflation, Too Much Money Chasing Too Few People” (not too much danger of this getting to be a problem in India in the near future, now is there?).
Since this time of course, the whole recoupling/decoupling issue has really taken off as a live debate. My latest thoughts on this can be found here, and Claus Vistesen’s post - The Global Economy, Compass and Charts Needed - follows up on and continues the “uncharted waters” theme.
To The Economist
At the risk of having to assume some kind of modern “j’accuse” mantle (for which of course there are ample precedents in the early origins of your own magazine) I am going to put up yet another comment. Maybe this is because I would like to participate in that “severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress” which your contents page so boldly announces.
Maybe it is also because I want to pin down quite clearly for future reference just what the issues are, and just why it isn’t “absurd” to suggest that the Economist currently systematically fails to factor-in the demographic components in economic growth (or the lack of it). Well, saving the best (or should that be the worst) to the last, I would like now to come to the case of your India correspondent. This gentleman (and I sincerely hope that despite his evident predilection for strong Vindaloo curry he is one of these) has been systematically re-adjusting upwards India’s potential trend growth rate in recent months. In fact his estimate seems to have shot up from 6.5% in November 2006 to 7% in February 2007, to 8% in June 2007. Now that’s an upward adjustment of around 25% in trend growth in roughly 8 months. Quite an achievement, especially since he offers absolutely no explanation whatever for these adjustments, but what he does not fail to tell us - oh, he never lets a moment rest without beating this drum - is that: “India’s economy, like Delhi this week (or Vindaloo curry perhaps, EH), remains far too hot.”
Now just in case what I am suggesting here is questioned I would like to quote chapter and verse, since the issue is an important one.
In November 2006 the Economist’s India correspondent estimated capacited growth for India at around 6.5%.
Basically I find myself in agreement with the Indian economists he doesn’t like. It isn’t that these reforms aren’t desireable, as he admits, we all agree on this. But the point is, even ex-reforms (and of course there have been reforms and global opening) demographic momentum would indicate that substantial growth is now going to occur. How substantial? Hard to say, but I think it is quite probable that 5 years from now India will be growing faster than China, and may even peak out at the highest annual growth rates yet seen for a significant economy over the 5 to 10 year window. I can justify why I think this with some sort of coherent argument, but I think the big danger for the sort of view they are advancing at the Economist is that they imagine virtually nothing is possible without institutional reform, and this is just as big a mistake as saying demography is everything. You need to systematically take the two components into account. If you don’t do this you risk getting into the ridiculous position the World Bank found itself in earlier in the year, when countries like Argentina and Thailand complained that since their countries were registered as going backwards on the global governance index, while both countries were growing quite nicely, then logically the methodology used to construct the index must be wrong. IMHO the World Bank has been totally mechanistic about institutions and thoroughly deserves all the problems it creates for itself on this count. OK, so that’s it. I finally rest my case. The dialogue will continue.
Source:The Indian Economy Blog
Tuesday, March 25, 2008
A Very Special PoliceIndia's 'Special Cell' and Abuses
Nirmalangshu Mukherji [Published earlier on ZNet Activism,June 29, 2005]
Keeping to the subcategory that Noam Chomsky calls "doctrinally acceptable," (1)óótheir terror against usóóthe real threat of terrorism in India cannot be denied. While preventive measures, which conform to principles of democratic governance, are needed to combat this threat, any exaggerated perception of the threat, and the resulting fear, is likely to affect the roots of such governance itself.(2) Allowed to grow, the combination of fear and helplessness may promote both a loss of confidence in open, democratic procedures, and an increased dependence on the peremptory features that any state has. The spiraling cycle of distrust, violence and loss of democracy only helps the terrorist. It is now acknowledged that "human rights, along with democracy and social justice, are one of the best prophylactics against terrorism."(3) From this perspective, recent developments on the terrorism-frontóóespecially, its handling by law-enforcing agenciesóóraise worrying questions about the functioning of civil institutions in India. Going by newspaper reports in the past four months, the national capital of India must be one of the most dangerous places on this planet. Apart from big-time extortionists, hired killers, gangsters, and highway robbers, the city of Delhi seems to be teeming with militants from a variety of terrorist organizationsóóall armed to the teeth with sophiscated weapons and explosives, and flushed with astronomical funds. The panic is so extreme that, when an explosion due to gas-leak took place in a Delhi Metro site, television channels rushed in. As the news was aired, "within an hour, we received over 500 calls where harried people inquired about the explosion," according to the Delhi Police. (Hindu, 6 March).The reports also suggest that, despite the presence of this terror, sustained bloodbath and mayhem could be mostly averted in time due to impressive police work by a small group of brave men belonging to the Special Cell of the Delhi Police. The following reports, collected basically from one respectable newspaper (The Hindu), bring out the picture. We give a brief description only of the 'terrorism'-related incidents. (A much longer version with more details is available on request)Factsheet Special Cell(1) February 18, 2005: Ex-Supreme Commander of Al-jehad arrested Aziz, ex-militant, "chairman of the Jammu and Kashmir People's League," arrested. Fake Indian currency worth Rs. 1 lakh, and UAE dirhams worth Rs. 16 lakhs "obtained" from the Pakistan High Commission, seized. (Hindu, 19 Feb)(2) February 25, 2005: Two Kashmiri ex-militant 'activists' arrestedSouth-West Delhi police arrested ex-militant, "self-proclaimed human rights activist" Mohammad Ahsan Untoo on February 12. Rs. 70, 000 in cash, allegedly received from the Pakistan High Commission in exchange for defence information, seized. At Untoo's "instance," Gulam Nabi Nazar, had been arrested from Srinagar on February 17. Special Cell, among other agencies, interrogated the arrested persons. (Hindu, 26 & 28 Feb)(3) March 2, 2005: Kidnappers of notorious gang arrested(4) March 3, 2005: Extortionist and aide of Chhota Shakeel arrested(5) March 5, 2005: Three militants gunned down, two arrestedHamid Hussain and Sariq, "functioning as LeT operatives," arrested. 10.5 kg of RDX seized. At their instance, a Special Cell team led by Additional Commisioner of Police, Rajbir Singh, "laid siege" to a house in Bharat Vihar in South-West Delhi, and gunned down three LeT militants. Gelatine sticks weighing 100 kg., 450 detonators, three AK-56 assault rifles, four hand grenades, live cartridges, satellite and mobile phones and some documents seized.(Hindu, 6 & 7 March).(6) March 6, 2005: Pakistani conspiracy to destabilize economy foiledLeT militants were planning to attack the Indian Military Academy, Dehra Dun, and IT companies in Bangalore "in a bid to destabilize the country's booming economy fuelled by the IT sector." Hamid disclosed that one Salim who took him to Kathmandu to meet Abdul Aziz, "a senior Lashkar functionary." Abdul Aziz works under the command of Saifullah, who operates mainly from Saudi Arabia." "Irrefutable evidence"óópassport, ID card, diaries, etc.óófound to show militants were " Pakistani nationals." (Hindu, 7 March)(7) March 7, 2005: Widespread terror network exposedOne slain Pakistani militant, Shahnawaz, obtained driving licenses from Aligarh and Patna. "Intelligence agencies" listed terrorist outfits spread over Nepal, Jedda, Jakarta, Bangladesh, Kapilvastu, Kashmir, Purnea, Champaran, Darbhanga, Saharsa, Malda, Murshidabad, and so on. (Hindu, 8 March)(8) March 8, 2005: Arrest of LeT "conduit", more revelations21-year old LeT conduit, Mohammad Iftekar Ahsan Mallick, arrested; he revealed that the third slain militant, Shams, was an activist of SIMI. A hunt was initiated for Salim, "aka doctor," who is the link between Hamid and Abdul Aziz (see (6) above). (Hindu, 9 March)(9) March 10, 2005: Criminal gunned down, Pak spy arrested, profile of Salim42-year old Pakistani national Mohammad Sayeed arrested. "Incrimating documents" recovered. Sayeed was instructed by one Major Taimoor of the "Pakistani intelligence agencies" to receive a set of documents from a person near Jama Masjid. (Hindu, 11 March) The Cell also released a photograph of Salim, alias "doctor." (10) April 4, 2005: Robbers, extortionists arrested(11) April 12, 2005: Contract killers, highway robbers arrested(12) April 25, 2005: Two Lashkar militants gunned downA team of Special Cell, led by Rajbir Singh, intercepted a white Maruti car near the gate of the National Science Center in the Pragati Maidan area in New Delhi. When the two occupants came out of the car and opened fire; the police returned the fire and killed the militants. 2 kg of RDX, an AK-56 assault rifle, a .3 mm pistol, two magazines, four detonators, a satellite phone, two timers, alongwith ID cards and e-mail addresses were recovered. "Intelligence inputs" gave their names as Osama and Sabir, both belonging to Sialkot in Pakistan. (Hindu, 26 April)(13) April 26, 2005: Hunt for more terroristsDiary recovered from Osama contained satellite phone numbers of Pakistan and Jammu and Kashmir. Scrutiny of the calls made and received by the terrorists indicated that they were in constant touch with "top commanders of the LeT," Abul Alqama, based in Jammu and Kashmir. More members of the "module" could be hiding in the capital. (Hindu, 27 April; Times, 27 April)(14) April 27, 2005: Gangster gunned down(15) May 15, 2005: One gangster killed, several arrested(16) May 16, 2005: LeT Militant arrestedOn 12 May, ACP Rajbir Singh arrested a LeT militant, Harun Rashid, ay as he arrived at the Delhi airport from Singapore. Rashid is an "active member" of SIMI. He was in touch with "doctor" Salim, Abdul Aziz in Kathmandu, Shams, Shahnawaz, and Hamid (see 6 and 8). (Hindu, 17 May)(17) May 19, 2005: Two hard-core criminals arrested(18) May 21, 2005: Three criminals gunned down(19) May 22, 2005: Blasts in Delhi cinema hallsThe blasts resulted in one death and several dozen injured. Although the case was "handed over" to the Special Cell the same night (Hindu, 23 May), a number of other agencies ó the Inter-State Cell of the Crime Branch, The Intelligence Bureau and the Central Bureau of Investigation ó also seem to be conducting the investigations. (Hindu, 1 & 10 June; Times, 2 June) It is unclear how the responsibilities (and laurels) are to be distributed among them. The stellar role of ACP Rajbir Singh in arresting terrorists from Punjab was repeatedly highlighted in the reports. (Times, 6 June)(20) May 23, 2005: LeT militant arrestedLeT militant, Ishaq, arrested; 5.5 kgs of RDX, 2 detonators, and Rs. 2.5 lakhs seized. (Times, 24 May) (21) June 4, 2005: Three Hizb militants arrested Two agents of the Hizb-e-Islami, Ejaj Ahmed Wani and Shabbir Ahmed Peer, arrested on May 28; fake currency notes worth Rs.1.1 lakh seized. Subsequently, another LeT operative Nazir Ahmed Khan was arrested by the Special Cell and half a kg of RDX was recovered. (Hindu, 5 June) Nazir had also received Rs. 60 lakhs through hawala channels arranged by Sarfaraz for further delivery. (Times, 5 June)Unanswered QuestionsA. What explains the sudden exponential increase of terrorist activities in and around the city of Delhi during the specified period, especially when it was well-known that the city was placed under close police surveillance after the attack on S.A.R. Geelani (see below)?B. What explains that organizations such as LeT would allow themselves to be repeatedly caught in the traps set up by the Cell? Consider the arrest of Harun Rashid, on 12 May. The LeT 'module' he is supposed to be a member of was decisively 'smashed' by the Cell in a series of operations between March 5-10. Yet, Rashid compulsively landed at the Delhi Airport with the Special Cell waiting for him. C. What explains that the Cell is able to recover huge amounts of explosives, weapons, incriminating material, IDs, diaries, phone numbers, e-mail messages, cash, etc. such that the identity and the goals of the organizations are immediately exposed?D. What explains the remarkable ability of the Special Cell to remain unharmed? As documented, considerable arms and ammunition were recovered during most of the operations. We also saw that in many cases, allegedly seasoned terrorists/ gangsters were arrested or killed after gun battles. However, we could locate just one instance in which two members of the Special Cell received 'minor injuries,' and that too in a shoot-out with gangsters in Hardwar; in Delhi, there's not even a scratch. Even in Jammu and Kashmir, where we would expect the security forces to be better trained, more experienced, well-equipped and informed, a large number of security forces were killed in anti-terrorist operations during the same period. (Times, 12 June)Protest by Human Rights GroupsThere were at least two reports of protests by human rights groups on some of the incidents listed above.Arrest of Mohammad Ahsan Untoo (See case 2 above)As noted, the police reported the arrest of an ex-Hizb militant Mohammad Ahsan Untoo on February 12. Newspapers reported the arrests with the following headings: 'Former Hizb unit head and assistant arrested' (Asian Age), 'Two held for allegedly passing defence documents' (The Hindu), 'Ultra, Pak agent held for spying' (The Pioneer), 'ISI agent received donations from Pak High Commission' (Times of India), etc.On 16 May 2005, the All India Defence Committee for SAR Geelani and All Jammu & Kashmir Trade Union Centre held a press conference in Delhi on the Untoo case (see case 2). In their press statement, the Centre affirmed that Untoo is in fact a well-known human rights activist and is the Chairman of the Human Rights Forum, Jammu and Kashmir, and a member of the UK based International Forum for Justice. He has taken up over 3000 cases with the State Human Rights Commission, National Human Rights Commission, and Amnesty International among others.In an application filed before the Chief Metropolitan Magistrate, Delhi, on 12 May 2005, the advocate for Untoo, the noted human rights lawyer, N. D. Pancholi, submitted that: (i) Untoo came to Delhi on 5 February, 2005 for some personal work.(4) and to file some cases with the NHRC; (ii) after learning of the attack on Geelani on 8 February, he went to the All India Institute of Medical Sciences the next day to show solidarity as a human rights activist, but the police did not allow him to see Geelani; (iii) the same evening, some unidentified policemen arrested him from Priya Guest House in Daryagunj; (iv) he was kept in police custody and was brutally tortured for the next ten to twelve days; (v) the police compelled one scavenger to sodomize him and subjected him to all kinds of humiliation; (vi) the police wanted Untoo to make a false confession stating that he was involved in the attempt to murder Geelani; (vii) the police forced Untoo to sign blank pieces of paper; (viii) he was produced before a Magistrate only on 13 February; (ix) he was denied access to any lawyer; (x) there were reports in the papers that Untoo had been arrested in connection with the attack on Geelani; (xi) Untoo is a victim of communalism and prejudice against Kashmiris who have been portrayed as "terrorists."The Pragati Maidan Encounter (See case 14 above)A team of People's Union for Democratic Rights, PUDR, visited the site of the shooting, examined the car in which the alleged militants were travelling, and questioned the guards at the National Science Center who were present during the operation. PUDR made three observations, among others. (Hindu, 3 May)First, since a large number of policemen, were already stationed in and around the area much before the time of the encounter; it was highly unlikely that the alleged terrorists would have failed to notice the arrangement and stopped the. Second, bullet holes on the car's body suggest that the persons were fired at close range. Third, the guards did not see any cars parked there for any length of time, or a car being chased. The PUDR also pointed out that "the police are never hurt in the cross-fire even when they are wearing only civilian clothes and the encounters always take place in high-profile places like Ansal Plaza, Humayun's Tomb or Pragati Maidan." PUDR requested the National Human Rights Commission to investigate the matterIn a seminal piece published in The Guardian (5 July, 2003), Basharat Peer began a recounting of the Ansal Plaza 'encounter' with a quick portrayal of Rajbir Singh, the ACP of the Special Cell, who led the police operation on the concerned occasions: "A tall, sturdy man with rugged features, Singh has risen from the lowly position of sub-inspector to his present prestigious position in just a few years. His record of eliminating terrorists is matched only by the allegations of human rights violations against him. His role in six separate killings of alleged terrorists and gangsters has been questioned by the Indian media, and his involvement in a shoot-out at a shopping mall by the National Human Rights Commission of India." In November 2002, Singh and his men claimed to have killed two terrorists of Lashkar-e-Taiba at Ansal Plaza shopping mall, but "a local Hindu doctor, Hari Krishna, told the media that he saw the police shoot in cold blood the two unarmed and apparently drugged men, who, Krishna said, could barely walk." In the 30-odd months that have elapsed, both Hari Krishna and the Ansal Plaza incident have disappeared from public view. How many of the alleged arrests, encounters and recoveries detailed earlier are fake? And why were they needed now?A Perspective: December 13Much of the concerns about possible false cases and fake encounters can be traced back to some of the salient features of the Parliament attack case. The hearing on this case has just ended at the Supreme Court of India, and the Court has reserved its judgment.(5) In what follows, we will just cite some reports and documents that are currently before the Court, without commenting on their veracity. The Cell and December 13To recall, five armed persons entered the Parliament complex in New Delhi on 13 December 2001 at about 11.30 A.M. when Parliament was in session. On being challenged near the carcade of the Vice-President of India, they opened fire. For half an hour, a fierce battle raged outside the building. All five persons died on the spot before they could enter inside the Parliament building. Nine other people, including some members of the security forces, died in the attack while sixteen persons from the security forces were injured. Soon after the attack, four people were arrested by the Special Cell for their alleged role in the conspiracy: Mohammad Afzal, Shaukat Hussain Guru, Syed Abdul Rehman Geelani, and Afsan Guru. The case went on trial in the designated POTA Court in May 2002. The Court delivered its judgment in December 2002. On appeal, the case went to the High Court in Delhi, which delivered its judgment on 29 October 2003. On cross-appeal, the case went to the Supreme Court where the hearing has just ended, as noted.Throughout the trial, the defence raised a series of objections against the conduct of the investigations by the police. Some of these were reported in the press even before the judgment of the POTA Court.(6) During the High Court stage, the defence was joined by seniors lawyers Ram Jethmalani and Shanti Bhushan, both former Union minister of law. Commenting on the investigation, Jethmalani submitted that it "is riddled with illegality. The evidence discloses concoction and fabrication. All these have been grossed one and have resulted in a grave miscarriage of justice."(7) In his submission on behalf of Shaukat Hussain Guru, Shanti Bhushan contended that his client "has been falsely implicated in the conspiracy case by the investigating agency." The agency has not only "gone out of its way in concocting evidence," it "had even gone to the extent of forging and fabricating important documents for framing the appellants and police officials had clearly given perjured evidence." According to the Senior Counsel, "the investigating officials have clearly committed offences punishable imprisonment with life under Section 194 and 195 of I.P.C." "When such a serious offence has been committed by the investigating officials," Shanti Bhusan continued, "it is only by having them punished that such fabrication of documents and the giving of perjured evidence can be stopped by the Court."(8)The High Court not only acquitted Geelanióósentenced to death by the POTA Courtóóand Afsan Guru of all charges, they made several adverse remarks on the conduct of the police. First, concerning Mohammad Afzal's 'confession' before the media conducted by Rajbir Singh, the court observed: "It has indeed become a disturbing feature as is being noticed by us repeatedly that the accused persons, after their remand by the Magistrate, are brazenly paraded before the press and interviews are being allowed."(9) Moreover, the Court observed that "the prosecution stands discredited qua the time of arrest of accused S. A. R. Geelani and accused Afsan Guru." In particular, they noted that "The presence of Bismillah's [Geelani's brother] signatures as having attested the arrest memos of the three accused probabilises the testimony of DW-5 that Bismillah was in illegal confinement and was forced to sign papers."(10) However, the Court stopped short of suggesting punishment for the concerned police officers.The outright acquittal of Geelani and Afsan from all charges naturally gave rise to some obvious questions. Why should we now believe in the prosecution's story for the rest of the case? In particular, what justifies the underlying assumption that, although the police, the prosecution and the POTA Court have been horribly wrong in one part of the case, they have been vindicated for the other parts? Some publications began to appear that examined these and related questions with full seriousness.(11) As the trial moved to the Supreme Court, these write-ups penetrated much of the readership in the activist and human rights circles. Briefly, they raised the following issues, among others: (i) there was a complicity between the media and the police for projecting a largely unproven story, (ii) the police possibly forced statements and confessions from the accused, (iii) public witnesses were coerced into making false statements, (iv) the accused were brutally tortured by the police, (v) crucial documents and records were fabricated or tampered with, (vi) the accused, especially Mohd. Afzal, a surrendered militant, did not get adequate legal representation.(12) In a recent interview, Shanti Bhusan complained that the government "pushed us to the brink of a nuclear war" following the attack on Parliament. However, "the police failed to crack the case" as "all the five militants died in the attack." So the police, Shanti Bhusan suggested, "framed people" in order "to create a conspiracy case." (Tehelka, 16 Oct, 2004) Outside the courts, these concerns were largely restricted to the activist and human rights circles, as noted.The Attack on SAR GeelaniThe noted concerns exploded into the full public domain with the murderous attack on SAR Geelani on the evening of 8 February 2005. As the grievously-injured Geelani was rushed to the All India Institute of Medical Sciences, a large number of lawyers, activists, journalists and university teachers gathered in front of the hospital within the hour. In front of live television, speaker after speakeróófrom the eminent lawyer Kamini Jaiswal to student leaders from the Jawaharlal Nehru Universityóópointed their finger at the Special Cell.In the following days, the entire mainstream media highlighted the allegations against the Special Cell for the first time in the brief history of the Parliament attack case.(13) The day after the attack, hundreds of writers, artists, academicians, activists, and journalists gathered in front of the Police Headquarters in a spontaneous demonstration that lasted for hours. A delegation was formed and sent to meet the Union Home Minister, Shri Shivraj Patil, to submit an 'Open letter' that was signed by hundreds of those gathered. The letter stated: "although we do not wish to pre-judge any specific complicity in the attack on Geelani at this stage, we strongly feel that the involvement of the Delhi Police itself, especially its Special Branch, in the crime can not be ruled out." The letter then went on to describe the treatment meted out to Geelani and the other accused in the Parliament attack case; it also detailed Geelani's refusal to submit to police pressures despite torture. Further, it described how "after his acquittal, Geelani has been a prominent voice in defence of democracy and human rights. Following his own bitter experience, he has drawn attention of the country to the abject violation of the rights of prisoners, especially Kashmiri muslims, in the Tihar jail." Thus, the letter suggested, "no wonder his presence has been a thorn in the flesh of cynical power enjoyed by the Special Branch with the undisguised blessings of the erstwhile NDA government in the name of anti-terrorist operations."(14)Recounting some of the more sinister aspects of the Parliament attack case, Arundhati Roy wrote, "I have no idea who pumped those bullets into S.A.R. Geelani. However, in deference to the general public unease with the Special Cell, the investigation ought to be conducted by an agency other than the Delhi Police. While it may be unfair to accuse them without evidence, they certainly cannot be considered above suspicion, and must be investigated."(15) In a subsequent article, we observed that there is no report as to whether the police have interrogated their own brethren in the Special Branch, the hoodlums that ransacked Senior Counsel Ram Jethmalani's office when he decided to defend Geelani in the High Court, and the right-wing forces that burst crackers in front of the Special Court when Geelani was sentenced to death. In other words, people with demonstrated enmity towards Geelani have been systematically spared. At the same time, there is a constant attempt to implicate shadowy terrorist groups, persons lodged in prison, and even Geelani himself for "crafting" this attack.(16)Questioning the investigative methods of the Delhi Police on the attack on Geelani, the Delhi University Teachers In Defence of SAR Geelani submitted a petition to the National Human Rights Commission on 15 February. This petition was signed by a large number of academicians, lawyers, and human rights activists. After a careful review of the police investigations, the petition stated "these actions not only show the failure of the police to launch a serious investigation into this massive crime, there is an attempt to personalize what is clearly an enormous political crime. Who are the police trying to shield with these diversionary tactics?"(17) As noted, these concerns were openly expressed and covered in the mainstream papers and television for several days after the attack. The matter was placed before the Supreme Court who asked for a report from the police. (Hindu, 10 Feb) Also the defence filed an application, with supporting documents, before the Court praying for transfer of the case to the CBI. Although, the Court rightly refused to join the issue given the pending Parliament attack case, they suggested that the petitioners appeal before the High Court in Delhi.We must also mention the publication of the book December 13: Terror over Democracy, with a foreword essay by Noam Chomsky, in March 2005. The book recounts the allegations of fabrication, concoction and conspiracy by the police in detail with supporting documents. Simultaneously, a national Committee for Inquiry into December 13 was launched. The committee is chaired by the veteran Gandhian and Rajya Sabha member Nirmala Deshpande and has Mahasweta Devi, Rajni Kothari, Prabhat Patnaik, Ashish Nandy, Prashant Bhushan, Mihir Desai, Gautam Navlakha, Sumanta Bannerjee, among others, as members. One of the first actions of the Committee was to send copies of the book to the highest political and judicial leadership of the country. Quite evidently, for the first time in recent years, the heat is on the police, especially the Special Cell. It is also natural to assume that, especially in view of recent developments, the Supreme Court will pay the closest attention to the conduct of the police in the Parliament attack case.From this perspective, it is difficult to ignore a telling pattern in the operations of the Special force listed above. The first sequence of aggressive media publicity of the anti-terrorist operations of the Special Cell begins a week after the attack on Geelani, when the public outcry on the attack was at its peak. The sequence lasts nearly a month and reaches a crescendo with the gunning down of three alleged LeT militants in Bharat Vihar. After this huge success, a period of lull followed as public protests died out. However, the Cell was never out of news: it turned its attention to gangsters. The second sequence begins in the third week of April, the week of final hearings at the Supreme Court as the Court prepares to write the judgment. This sequence begins with the high drama at Pragati Maidan and continues today with a careful mix of operations against both gangsters and terrorists. How can the general public and the Court ignore the supreme efficiency and the indispensability of the Cell in making the life of the citizens of Delhi safe?In a way, the police spilled the beans when, in response to a question about allegations of illegal arrest and police brutality by rights activists in the Untoo case, a senior police officer said, "This is a desperate attempt by them as the Supreme Court is going to pronounce judgment in the case soon." (Indian Express, 17 May) The questioner did not even mention either the Supreme Court or the Parliament attack case.
Full text of the petition at www.sacw.net/hrights/letterNHRC14022005.htmlNirmalangshu Mukherji is a Professor of Philosophy, Delhi University, India. E-mail address: somanshu@bol.net.in
Monday, March 24, 2008
The Article About Nothing
Hmmm, no ideas? So what? Ever thought of writing about….nothing? You know this is actually common nowadays. Free ArticlesI don’t know how you feel but I am overwhelmed about the abundance of information that can be found everywhere.Everyone is writing about everything. The same subjects are written and rewritten and rewritten and I look and them and wonder how the hell is this supposed to help the modern man become more efficient? The truth is that we are in a hurry, our whole lives are spent running from place to place, trying to keep up with the others around us. We sleep less trying to make more time for ourselves, but we end up wasting that time on useless things. How about TV ? How useless is that? I really think that you are in the danger of becoming dumber if you spend too much time in front of it. There are people that spend half of the day, that becomes half of their life in front of the TV. You know what the worst part is ? Most shows on TV are for complete morons … instead of watching someone live a stupid life on TV maybe you should go outside and live your own life…maybe you’ll start liking it.Internet….oh this is a big one. At first I thought wow, what a useful thing, and don’t get me wrong, if you know what you’re looking for and how to find it, you’ll probably find it on the internet. The sad thing is, that besides information, it is full to the teeth with crap. People selling made-up information, spammers, people trying to scam other people. How in gods name is it possible to search for something and the first 10 or so results you find are scams? Let me tell you why…because these guys know SEO, they will do anything to be listed first in search engines to make more money. Instead, the good old sites that offer information and recreation aren’t well placed in search engines because they don’t do SEO, they just rely on offering good content .This is not good, I’m at paragraph 5 and I still have nothing to write about…this is turning out to be just another useless piece of article, made just to confuse the common man. Another article in the immensity of useless articles that just take up space and help no one. Hope you didn’t reach this point and I’m really sorry for wasting your time in this manner, you know the other day I read something I found really enlightening. It said something like this : “If you stay and do nothing, you don’t kill time, you commit suicide”.At least let me give you an advice I hope you’ll take, because it’s for your own good. Stop wasting time and do something with your life. Never say I’ll do this tomorrow, if you have time, do it now, and live to the maximum ! Have a nice life !
Source: Taitelul Verde, http://www.articleset.com
Source: Taitelul Verde, http://www.articleset.com
Why Bangalore is India's suicide capital
Vicky Nanjappa in Bangalore
Source:Rediff.com
Bangalore is India's suicide capital.
According to the National Crime Records Bureau, at least 35 in every 100,000 people in Bangalore commit suicide.
Why is Bangalore seeing an increasing number of suicides?
Experts say most suicide cases in the city are related to stress; its citizens are unable to cope with Bangalore's quick growth. If you walk into Bangalore's leading hospitals, you will find a large number of patients suffering from stress-related ailments.
Doctors specialising in this disorder told rediff.com that, on an average, they treat at least 10 patients a day for stress-related ailments.
A doctor at the city's Manipal Hospital said, on condition of anonymity, "We admit such patients to monitor them. They remain in hospital for at least a day or two before they are discharged. We keep them on medication if necessary or we advise counselling."
Work and the city's chaotic traffic contribute to increased stress among Bangalore residents. Anoushka Tripathy, a clinical psychologist, says, "Several of my patients, especially from the IT and BPO industry, complain that they are unable to cope with their work. Extended work timings, competition and, most importantly, insecurity at work are contributing to an increase in people's stress levels."
Another reason is that many young people working in these industries have no family life. "By the time they return from work, it is quite late. Their family members are either sleeping or they themselves are too tired to talk, which makes them very lonely."
Take the case of Ravi Varma (name changed), a customer service adviser at a reputed BPO. Unable to bear the stress and loneliness, he attempted suicide five months ago. Luckily, he was saved due to quick medical attention. Ravi says the loneliness and stress got to him. He hardly had any time to spend with his family or friends. "Sometimes I felt like discussing work-related issues with my family, but never got the opportunity because of my work hours."
Ravi's mother says she never thought the problem was this bad until he attempted suicide. "We now take him for regular counselling and yoga class. We are making attempts to create time to spend with each other. Giving up his job is not the solution," she says.
Traffic-related stress is another problem Bangaloreans are grappling with. The number of vehicles in the city has grown five-fold and Bangalore just does not have the infrastructure to cope. Between 8 am to 10 am and 6 pm to 8 pm, the city looks like a village that has exploded.
Those working in the IT sector have to travel at least 20 kilometres to 25 kilometres to reach their work place and, thanks to the traffic jams, the travel time increases by a good one-and-a-half hours at the very least. The pressure of meeting deadlines and making it on time to meetings prey on their mind as they try and beat the traffic. This, in turn, contributes to increasing stress levels.
The National Institute of Mental Health and Neurosciences in Bangalore also treats patients for stress-related ailments. Doctors at NIMHANS say software engineers in the age group of 24 to 30 years form a large chunk of the patients facing this problem. The doctors add that such patients complain of restlessness, lack of concentration, anxiety and body pain -- all of which are symptomatic of stress.
In the last two months, over 100 IT professionals have made a beeline to Ayurvedic centres for de-stressing programmes, where they are taught how to strike a balance between their personal and professional lives.
A close study indicates that work-related insecurity, extended working hours and stringent deadlines also contribute to Bangalore's rising stress levels. Psychiatrists say those afflicted by stress should spend more time with the family and talk about their problem.
Moreover, people working in the BPO and IT industries constantly need to adjust to different cultures as they keep interacting with different people of different nationalities. This constant change also takes a toll on them, the doctors say.
The common factor, the doctors add, is that most of these youngsters are stressed out about money. Since the IT boom took place, salaries are at an unbelievable high. This has prompted banks to make tempting loan offers. At least five out of 10 IT workers fall into the trap.
Says Kishore Alva, a software engineer, "It is the EMIs that worry us. How do we repay the banks if we lose our jobs? This factor is on my mind almost every day and increases my stress levels."
While hospitals deal with at least 10 patients a day on an average, counsellors see five patients a day as against five patients in five days three years ago.
Saturday, March 22, 2008
Holi's Muslim history
Holi, being celebrated across India March 21, may bethe most colourful Hindu festival but it has a Muslimhistory as well.Sufi saints like Hazrat Nizamuddin Aulia and AmirKhusrau in their chaste Persian and Hindi loved thefestival. Emperor Bahadur Shah Zafar, whose Holi‘phags& #8217; (songs) are relished even today,allowed his Hindu ministers to tinge his forehead with‘gulal& #8217; during Holi festival each year.During the Shahjahani tenure of Delhi, Holi was knownas Eid-e-Gulabi (Pink Eid) or Aab-e-Pashi (Shower ofColourful Flowers), and truly so owing to its carnivalspirit and hysterical rejoicing for both Hindus andMuslims.The nobles, kings and nawabs exchanged rose waterbottles and sprinkled them on each other along withthe frenzied drumming of the ‘nagaras& #8217;(drums).This enlightened spirit percolated in the Mughalsright from the time of the greatest Mughal emperorAkbar. Jahangir is shown holding Holi festivities inTuzk-e-Jahangiri.Many artists, especially Govardhan and Rasik, haveshown Jahangir playing Holi with Noorjahan, his wife.Mohammed Shah Rangila, in a remarkable painting, isshown running around the palace with his wifefollowing him with a ‘pichkari& #8217;, or watercannon.Such examples are umpteen in India’ s culturalheritage; and this has been enriched by the harmoniousamalgamation and assimilation of various faiths andethnicities.Mirza Sangi Baig in Sair-ul-Manazil narrates that therollicking and frolicking Holi groups were alternatelypowdered and drenched till the floor had been coveredwith a swamp of crimson, yellow and orange colour,with the faces being multi- coloured, a spectacle veryenthralling and exclusive.“Who says Holi is a Hindu festival?” asksMunshi Zakaullah in his book Tarikh-e-Hindustani .Zakaullah writes that the carnival of Holi lasted fordays during the Mughal rule during which people,irrespective of religious or social distinctions,forgot their restraints. The poorest of the poor threwcolour on the emperor.Children’ s Urdu monthly Khilona (March 1960)mentioned that during the days of Bahadur Shah Zafar,special arrangements were made for Holi festivities.And Jam-e-Jahanuma, an Urdu newspaper (March 10,1844), reported that on such occasions, both Hindusand Muslims joined hands.The above post is excerpted, with slightmodifications, from different sites.
The link between financial markets in the US and Indian stock markets
Today, as the Indian markets get lashed by something called sub-prime mortgage, we are being asked to remain calm and cool as there is no linkage between what happens to the financial markets in the US and to the Indian stock market.
Well, that is a partial truth and, in effect, a partial lie.
Stock markets are influenced by 2 factors:
how much do companies earn, and
how much are people willing to pay for those earnings.
The earnings power of a company is a function of the business of the company, its management, and the overall growth rate in the economy in which it operates. There is little change here in our view and we should safely assume that India's GDP will grow at a 6 per cent to 6.5 per cent per annum rate for the next few years. (Many more optimistic people have a higher GDP growth rate for India at 8 per cent plus but we don't subscribe to that view as yet.)
Understanding liquidity & sub-prime debt
How much people are willing to pay for those earnings is a function of what economists call 'liquidity' and though there is no clear definition of what 'liquidity' is, one can assume that it is how much money is sloshing in the system. Imagine you are at a bar and everyone is feeling a little good from the various other liquids that the bar tender has to offer for a price, of course. Then the bar tender says, "Hey, folks, how about I cut the price of the drinks by 50 per cent - anyone want some more?"
You bet! The crowds get bigger and people feel even more elated. With all those drinks available on the cheap, they lose their sense of judgment. Human nature is anyways tuned to drift into flirtations. With a few more drinks, the drifting becomes a reality. The poor bloke standing next to you in this bar - a total stranger - suddenly feels like a friend.
You begin chatting. By the end of the fifth glass, the poor fellow who works as a waiter in some corner restaurant in some obscure town in USA now looks like a promising young man who could one day start his own restaurant, build his own mall, and maybe have a chain of restaurants. So you lend him money to buy a house. He is actually what the credit rating agencies would call a "sub-prime credit risk".
But, because that bar tender gave you all those free drinks, in your eyes he becomes a good risk and better still, you turn to the other drunk next to you and re-sell the loan you made to this sub-prime fellow for a profit. And why do you sell the loan for a profit? Because the guy you sell it to (a European, Japanese, Middle Eastern, whoever) is more drunk than you because the bar tender in his country also gives him free drinks.
And he cannot assess the risk profile of that sub-prime American any better than you can. So all the drunks are happy. And you use that profit to make another loan to another poor sub-prime fellow and so on and so forth...
Since 2003 all the drunks are having a good time, lending and buying and selling sub-prime loans to each other.
All the sub-prime folks who got this silly money in 2003, 2004, and 2005 from the folks at the bar thought they were rich and started buying big houses and big cars and spent money which was not earned, but borrowed.
The bar tender is serving the drinks because he needs to make sure everyone feels good. There may be an election around the corner. Or if he serves his drinks quick and fast, some big bank group may come in and hire him as a consultant or make him a chairman of a global financial conglomerate riding this tide of global liquidity.
So the central banks were the bar tenders, doling out drinks and money as if their printing presses had to print, and print and print. Rather than being the men in grey suits with grumpy faces worried about the fate of the financial world, they became the stars on TV channels and the toast of conventions: their suits were grey but they were talking about this perfect world and this goldilocks, fairy tale.
And that fairy tale found its way to India and the rest of the emerging markets. From being the poor countries with corrupt governments and inept governments that have consistently failed to look after the needs of their people, these countries got a new name: BRIC.
They became the darlings of the drunks. Yes, while there have been significant improvements in many countries - including India - the perception of the depth or the sustainability of these improvements were exaggerated when the drunks at the bar came calling.
India has seen nearly US$ 50 billion of foreign inflows - of which US$ 40 billion have come in since 2003. Yes, the Indian companies and the Indian stock markets did deserve a lot of that but the assessment of risk has been, in my opinion, absent.
The sub-prime fall out
The sub-prime blow has so far seen some US$ 2 billion of losses from funds that have been closed down. There is maybe another US$ 50 to 100 billion of losses that may yet be exposed, according to people who track this industry. While US$ 100 billion is nothing in a world where the market cap of stocks is US$ 30 trillion (300 times the potential losses) and where bonds worth maybe US$ 100 trillion float around, the bar tenders are now serving less of that booze. The drunks are getting more sober.
They now see that sub-prime person as someone who may be lucky to keep his job in a restaurant as opposed to their previous assumption (over the rim of their liquor glass) that they were lucky to stumble on the founder of the next new big restaurant chain in USA. And they will price that loan accordingly.
And they will see the investment opportunities in the emerging markets with a little better understanding of risk. Don't get me wrong: the fundamentals for India are fantastic, and money will flow in to India over the next decade. Sensible, risk-assesses money. But for now, the silly money will go out. The P-Note folks will vacate and that will cause the Indian market to suffer.
India has, via its P-Note policy, linked itself to silly money. We enjoyed the ride for the past 4 years, now we will feel a bit of pain.
Keep your money ready to invest. Stay disciplined, never be carried away, politely tell the bartenders to keep their extra, free drinks. And you will profit: steadily but surely.
Well, that is a partial truth and, in effect, a partial lie.
Stock markets are influenced by 2 factors:
how much do companies earn, and
how much are people willing to pay for those earnings.
The earnings power of a company is a function of the business of the company, its management, and the overall growth rate in the economy in which it operates. There is little change here in our view and we should safely assume that India's GDP will grow at a 6 per cent to 6.5 per cent per annum rate for the next few years. (Many more optimistic people have a higher GDP growth rate for India at 8 per cent plus but we don't subscribe to that view as yet.)
Understanding liquidity & sub-prime debt
How much people are willing to pay for those earnings is a function of what economists call 'liquidity' and though there is no clear definition of what 'liquidity' is, one can assume that it is how much money is sloshing in the system. Imagine you are at a bar and everyone is feeling a little good from the various other liquids that the bar tender has to offer for a price, of course. Then the bar tender says, "Hey, folks, how about I cut the price of the drinks by 50 per cent - anyone want some more?"
You bet! The crowds get bigger and people feel even more elated. With all those drinks available on the cheap, they lose their sense of judgment. Human nature is anyways tuned to drift into flirtations. With a few more drinks, the drifting becomes a reality. The poor bloke standing next to you in this bar - a total stranger - suddenly feels like a friend.
You begin chatting. By the end of the fifth glass, the poor fellow who works as a waiter in some corner restaurant in some obscure town in USA now looks like a promising young man who could one day start his own restaurant, build his own mall, and maybe have a chain of restaurants. So you lend him money to buy a house. He is actually what the credit rating agencies would call a "sub-prime credit risk".
But, because that bar tender gave you all those free drinks, in your eyes he becomes a good risk and better still, you turn to the other drunk next to you and re-sell the loan you made to this sub-prime fellow for a profit. And why do you sell the loan for a profit? Because the guy you sell it to (a European, Japanese, Middle Eastern, whoever) is more drunk than you because the bar tender in his country also gives him free drinks.
And he cannot assess the risk profile of that sub-prime American any better than you can. So all the drunks are happy. And you use that profit to make another loan to another poor sub-prime fellow and so on and so forth...
Since 2003 all the drunks are having a good time, lending and buying and selling sub-prime loans to each other.
All the sub-prime folks who got this silly money in 2003, 2004, and 2005 from the folks at the bar thought they were rich and started buying big houses and big cars and spent money which was not earned, but borrowed.
The bar tender is serving the drinks because he needs to make sure everyone feels good. There may be an election around the corner. Or if he serves his drinks quick and fast, some big bank group may come in and hire him as a consultant or make him a chairman of a global financial conglomerate riding this tide of global liquidity.
So the central banks were the bar tenders, doling out drinks and money as if their printing presses had to print, and print and print. Rather than being the men in grey suits with grumpy faces worried about the fate of the financial world, they became the stars on TV channels and the toast of conventions: their suits were grey but they were talking about this perfect world and this goldilocks, fairy tale.
And that fairy tale found its way to India and the rest of the emerging markets. From being the poor countries with corrupt governments and inept governments that have consistently failed to look after the needs of their people, these countries got a new name: BRIC.
They became the darlings of the drunks. Yes, while there have been significant improvements in many countries - including India - the perception of the depth or the sustainability of these improvements were exaggerated when the drunks at the bar came calling.
India has seen nearly US$ 50 billion of foreign inflows - of which US$ 40 billion have come in since 2003. Yes, the Indian companies and the Indian stock markets did deserve a lot of that but the assessment of risk has been, in my opinion, absent.
The sub-prime fall out
The sub-prime blow has so far seen some US$ 2 billion of losses from funds that have been closed down. There is maybe another US$ 50 to 100 billion of losses that may yet be exposed, according to people who track this industry. While US$ 100 billion is nothing in a world where the market cap of stocks is US$ 30 trillion (300 times the potential losses) and where bonds worth maybe US$ 100 trillion float around, the bar tenders are now serving less of that booze. The drunks are getting more sober.
They now see that sub-prime person as someone who may be lucky to keep his job in a restaurant as opposed to their previous assumption (over the rim of their liquor glass) that they were lucky to stumble on the founder of the next new big restaurant chain in USA. And they will price that loan accordingly.
And they will see the investment opportunities in the emerging markets with a little better understanding of risk. Don't get me wrong: the fundamentals for India are fantastic, and money will flow in to India over the next decade. Sensible, risk-assesses money. But for now, the silly money will go out. The P-Note folks will vacate and that will cause the Indian market to suffer.
India has, via its P-Note policy, linked itself to silly money. We enjoyed the ride for the past 4 years, now we will feel a bit of pain.
Keep your money ready to invest. Stay disciplined, never be carried away, politely tell the bartenders to keep their extra, free drinks. And you will profit: steadily but surely.
Friday, March 21, 2008
Discrimination rife in Indian economy
Jo Johnson in New Delhi
Male graduates applying for private sector jobs in India are far more likely to progress to the next round if they have high-caste Hindu names than if they have surnames associated with dalit (formerly untouchable) or Muslim origins, new research has found.
Far from being a hangover from the past found only at the margins of a newly meritocratic society, such discrimination is rife in the most dynamic sectors of the Indian economy, according to a joint study undertaken by academics from Princeton University and the Indian Institute for Dalit Studies.
Making use of techniques pioneered in the US to measure discrimination against blacks and other minorities, researchers made 4,808 job applications to 548 graduate level openings advertised in newspapers by blue chip Indian and multinational companies, changing only the names of identically qualified candidates.
Appropriately qualified applicants with a dalit name had odds of progressing to the next stage of the recruitment process that were two thirds of those of an equivalently qualified candidate with a high caste Hindu name, while those of an equally qualified Muslim candidate were only around a third as good.
The findings, published in India's Economic and Political Weekly, have been released at a politically sensitive time, with the government threatening to extend a system of quotas to the private sector unless businesses voluntarily boost the number of recruits from disadvantaged social groups.
The private sector has argued that the under-representation of dalits, tribes people and Muslims should be solved by improving the public education system - on the grounds that these communities attend inferior schools - rather than through quotas that would crimp freedom to hire and fire.
The studies, however, cast some doubt on whether, without government intervention, the self-interest of theoretically economically "rational" recruiters, who would want to minimise wage bills by recruiting from the widest possible pool of qualified talent, would be sufficient to correct the problem.
"Reaching the pinnacle of what the Indian education system has to offer is not sufficient to create full and open opportunity," wrote Sukhadeo Thorat, founder of the Indian Institute of Dalit Studies, and Katherine Newman, a sociologist and director of Princeton University's Institute for International and Regional Studies, two of the academics involved with the project.
"Far from fading as India modernises, the problem of discrimination remains a serious one, even at the very top of the human capital hierarchy," the authors said, arguing that recruiters in major companies continued to "subject low caste applicants to negative stereotypes that may overwhelm their formal accomplishments".
Business groups have argued that mandatory extension of quotas to the private sector would hit productivity. They say the organised private sector, which accounts for less than 5 per cent of the workforce, is already suffering from labour market rigidities, such as the need to secure government approval to fire employees.
Manmohan Singh recently became the first sitting Indian prime minister to acknowledge openly the parallel between "untouchability" and apartheid, describing the latter as a "blot on humanity". His government is poised to establish an Equal Opportunity Commission, whose powers have yet to be defined.
Islamic Finance
ISLAMIC BANKING AND FINANCE #13
Education demands intensifyThe rapid growth in Islamic finance activities in recent years has led to an increasing demand for qualified personnel. Tan Su Lin reports on the availability and quality of courses worldwideAfter more than 10 years of service at Hong Leong Bank, a household name in conventional banking in Malaysia, Bernard Khoo chose to leave for a posting as branch manager of the newly opened Asian Finance Bank in the capital city, Kuala Lumpur. With its generic moniker, nobody would have had an inkling that it is actually an Islamic bank until they notice the absence of interest-free banking. In a way, this also illustrates how quickly Islamic finance is spreading. Naturally, this has led to the industry’s recruitment net being cast onto the talent pool for conventional banking and finance. “It’s not very different from normal banking, operations-wise, but I am thinking of a course in Islamic finance, maybe a post-graduate diploma,” says the 42-year-old. “It would be difficult to sell our products without it.”As Islamic banking activities flourish across Europe, the Middle-East and Asia, opportunities exist for executives with a combination of market savvy and the ability to differentiate between mudharabah and murabaha contracts. For job-seekers, the Islamic finance qualification may help to set them apart from the competition. “It’s impossible for me to know, but I had four interviews, and in most of those it came up as a topic for discussion,” recalls Morris Blumenthal, a 32-year-old legal counsel with Standard Chartered Bank UK. Mr Blumenthal cut his teeth in private practice at Clifford Chance and later DLA Piper. It was at his Canary Wharf office that he first worked on a sukuk deal. While networking and attending free lectures offered at the Institute of Islamic Banking and Insurance (IIBI) in Northwest London, he then enrolled in its postgraduate diploma programme, which he completed two years ago.“I thought the course looked interesting and it was an opportunity to cement the knowledge I had and learn more,” he says.
Commodity-linked investmentsThe Shariah-compliant commodity-linked and structured product market is increasingly presenting more comprehensive offerings. David Kemp focuses on the latest developmentsIt should come as no surprise that Shariah-compliant commodity-linked investments have become available in the market, given that Shariah finance and commodities as an asset class are leading themes in finance. A combination of the two are highly sought after by Islamic investors Commodity investment predates Islam and is a natural Islamic investment, being both tangible and representing the raw material necessary to the means of production. Shariah-compliant commodity-linked investment began with the physical holding of a commodity, accompanied by the associated issues of sourcing, storing and funding. A further development enabled investors to hold a commodity through an intermediate vehicle such as a metals fund, which frequently imposed high running costs and limited scale. The market can offer fully fledged commodity-linked structured products. These include investment certificates, providing exposure to risk-return profiles ranging from a single commodity or basket of commodities through to modified benchmark indices and beyond into bespoke commodity indices. Each of these products is discussed. Many believe that now is the time to invest in commodities.Islamic investors, as with their conventional counterparts, are aware that an investment in commodities can provide otherwise unobtainable diversification benefits to a balanced portfolio. In particular, research has shown the low correlation of commodities with the traditional asset classes of equities and bonds. In addition, the high Sharpe ratio and low volatility of commodities enable a portfolio that includes commodities to move along the efficient frontier in a way that both reduces volatility and increases returns (see diagram 1).
Unlocking French banking codeFrance must remove restrictions on foreign banks if it wants to share in the expansion of Islamic banking and protect its markets, says Fehmy Saddy. Sooner or later, there will be a tide of change Establishing an Islamic bank, or any bank for that matter, is usually a simple process. A banking institution or an investment advisory firm assembles a group of investors and retains a law firm, an accounting firm, a bank technology firm and a public relations firm. It selects a couple of experienced bankers to oversee the preparation of a feasibility study, develops a business plan and submits an application to the regulatory authorities. The capital is then deposited, a banking license is issued and a bank is born. It is a fairly straightforward process. However, the process is more difficult in some countries. The extreme case is Brazil, where a moratorium on issuing new bank licenses has been in effect since 1988. In the United States there are strict requirements, such as holding hearings for the community to express its views and meeting the requirements of the Community Reinvestment Act. Probably the most flexible is the UK, where Her Majesty’s government is determined to make London the world centre of Islamic banking. There are certain basic requirements, particularly with respect to transparency, but once they are met and the funds are there, a license will be issued, regardless of the nationality, ideology, religion or skin colour of the shareholders. In France, the issue is a little more complicated. The nationality of the majority shareholders is a critical factor and there are explicit as well as some unwritten requirements. First, foreign banks or investors (defined as non-EEC or EEC space nationals) must have a French or European financial institution participate in the capital structure of the new bank and hold at least one-third of the equity. This national or European bank shall act as parrain (guarantor) for the foreign shareholders. Second, the French or EEC parrain must have been engaged in the banking business in France for at least 15 years and must be financially strong enough to sustain the loss in case the new bank failed.
On the crossroads of Shariah complianceShariah scholars have arrived at the minimum criteria to provide investors with a wide choice of compliant equities. MH Khatkhatay and Shariq Nisar assess the norms set by three organisationsIslamic banks, investment companies and equity funds have their own norms for assessing Shariah compliance of companies in which they consider investing. Most do not publicise the norms they use for selection or screening. Organisations such as Islamic Development Bank, the Association of Islamic Banks, IFSB and the Islamic Fiqh Academy of the OIC also have not laid down any definite criteria.Information is available on the screening criteria of Dow Jones for inclusion and tracking of equities in its Islamic equity indices. Similarly, the screening criteria of the Securities and Exchange Commission (SEC), Malaysia are available as are the criteria of Meezan (Pakistan). The rationale they apply for a particular norm is not available.The Dow Jones Islamic Index screens for acceptable business activities by stating that activities of the companies should not be inconsistent with Shariah precepts. Therefore, based on revenue allocation, if any company has business activities in the Shariah inconsistent group or sub-group of industries, it is excluded from the Islamic index. The supervisory board established the following broad categories of industries as inconsistent with Shariah precepts: alcohol, pork-related products, conventional financial services, hotels, entertainment, tobacco, and weapons and defense industries.Dow Jones also screens for acceptable financial ratios by removing companies with unacceptable levels of debt, liquid assets and receivables. It excludes companies for which total debt divided by its trailing 12-month average market capitalisation (TTMAMC) is greater than or equal to 33%. It also excludes companies for which the sum of cash and interest-bearing securities divided by TTMAMC is greater than or equal to 33% and those companies whose accounts receivable divided by TTMAMC are greater than or equal to 33%.
Expansion is only the beginningDemands for portfolio diversification have led to greater private equity opportunities for Islamic financial institutions and investors. Robert Varley looks at the benefits and possibilitiesThe last two years have seen a massive expansion of Shariah compliant private equity (PE) funds. By 2006 there were 126 Islamic PE funds with a collective value of US$16 billion. Apart from volume, though, the market has developed in terms of sophistication and range of assets. By looking at where the market has come from, we can start to see what it is likely to do over the next two years.It is worth taking a moment or two to look at the origins of Shariah-compliant PE funds and, in particular, the economic drivers. Shariah-compliant funds are nothing new. Cayman Islands-domiciled funds with Islamically acceptable structures and products were being established before the turn of the century for US real estate investments, and not long afterwards for UK, European and GCC property portfolios. The assets were relatively easy to screen for Shariah compliance, while the massive—and growing —liquidity among Islamic investors in recent years justified the additional marginal cost of ensuring Shariah compliance. Indeed, the compliance costs were (and are) far from prohibitive, even for the more complex funds structured to take advantage of conventional leverage.Shariah-compliant PE lagged behind the real estate funds sector by several years. The reasons are straightforward. Investors in Shariah-compliant funds had a preference for real estate as an asset class. This was reinforced by the spectacular returns available on GCC real estate funds in particular in recent years.However, a number of factors have changed in recent years. First, the success of Islamic financial institutions has led to growth and an appetite among those institutions for expansion into new areas. At the same time, greater sophistication on the part of the investors has driven demand for portfolio diversification.
An interest-free commodity currencyMost modern money exists as the balance sheet counterpart to the interest-bearing loans of commercial banking. Tarek El Diwany discusses why the underpinning of paper currency is so precarious and proposes a less volatile interest-free alternativeThe origin of money is a rarely discussed topic in media outpourings on economics and finance. This is rather strange, given that money is the measuring rod by which the worth of so many other efforts are judged. Supply and demand determine price, but this is only part of the story, because the value of money itself helps to determine price. If the measuring rod of economic activity is unreliable, then the conclusions of myriad arguments among economists may themselves be unreliable, as may the commercial decisions of individuals and corporations the world over. While the man in the street typically believes the government alone has the right to create money and regulate its value, the professional economist usually acknowledges that both the state and deposit-taking financial institutions create the monetary medium of the modern nation. Given that commercial banks are the most common form of deposit-taking institution, the following discussion refers to two types of modern money, “state money” and “bank money” (see box, Paper tiger cannot stand up to gold).In 1935 Professor Irving Fisher proposed the elimination of the power of the commercial banks to create money on the basis that they had consistently used this right to profit at society’s expense. The side-effect of their profit-seeking action was, argued Fisher, a boom and bust economy, unnecessary levels of debt, and the needless paying of interest on money that the commercial banking system had, in effect, created out of nothing.The method that Fisher proposed for achieving his objective was the gradual raising of required reserve ratios for commercial banks (that is, the ratio of monetary base to a bank’s sight deposit liabilities) to 100%. The entire money supply of a nation would then comprise money issued by the state, from which point onwards the state alone would have the right to create money. Over the years, economists such as Frank Knight and Henry Simons have argued in a similar vein to Fisher, and so the idea is not an entirely novel one.
Why London is so influentialLondon has been involved with Islamic finance for more than 30 years. Professor Rodney Wilson examines its role and suggests how its standing could be enhanced to curry even more favour in the years aheadInitially the major Islamic finance activity in London involved wholesale operations, with banks in London providing overnight deposit facilities for the newly established Islamic banks in the Gulf. These Islamic banks could not hold liquid assets such as treasury bills, which paid interest, but the joint venture Arab banks in London, accepted deposits on a murabahah mark-up basis, with the associated short-term trading transactions being conducted on the London Metal Exchange.The next milestone was in 1982, when the Jeddah-based Al Baraka Investment Company bought Hargrave Securities, a licensed deposit taker, and converted it into an Islamic bank. This served the British Muslim community to a limited extent, but its main client base was Arab visitors of high net worth who spent the summer months in London. Its business expanded from 1987 when it opened a branch on the Whitechapel Road in London, followed by a further branch on the Edgeware Road in 1989, and a branch in Birmingham in 1991, as by then the bank had between 11,000 and 12,000 clients. Al Baraka’s ambitions were in wealth management rather than banking, however, and in 1992 it converted into being an investment company, and it was no longer constrained by the regulatory requirements that applied to banking.As the Muslim population increased and many became more affluent, there was clearly scope for developing and marketing Shariah-compliant financial products. Housing finance was the key to this, as for most UK residents, their mortgages represent their largest financial commitment. Al Baraka provided some Shariah-compliant housing finance during its years as a bank, but the first serious attempt to reach this market was made by the London-based Islamic Banking Unit of the United Bank of Kuwait in 1997. The trading transactions necessary to make these mortgages Shariah-compliant attracted double stamp duty, however, making the financing relatively expensive. It was only when this was abolished in 2004 that the market for Shariah-compliant mortgages took off. Further tax concessions with respect to diminishing musharakah mortgages, arguably the product best suited for housing finance, resulted in it becoming the most popular vehicle, with funding of more than £150 million. The Alburaq division of ABC Islamic Bank accounts for much of the market, with its products being distributed by Lloyds TSB and the Islamic Bank of Britain.
Education demands intensifyThe rapid growth in Islamic finance activities in recent years has led to an increasing demand for qualified personnel. Tan Su Lin reports on the availability and quality of courses worldwideAfter more than 10 years of service at Hong Leong Bank, a household name in conventional banking in Malaysia, Bernard Khoo chose to leave for a posting as branch manager of the newly opened Asian Finance Bank in the capital city, Kuala Lumpur. With its generic moniker, nobody would have had an inkling that it is actually an Islamic bank until they notice the absence of interest-free banking. In a way, this also illustrates how quickly Islamic finance is spreading. Naturally, this has led to the industry’s recruitment net being cast onto the talent pool for conventional banking and finance. “It’s not very different from normal banking, operations-wise, but I am thinking of a course in Islamic finance, maybe a post-graduate diploma,” says the 42-year-old. “It would be difficult to sell our products without it.”As Islamic banking activities flourish across Europe, the Middle-East and Asia, opportunities exist for executives with a combination of market savvy and the ability to differentiate between mudharabah and murabaha contracts. For job-seekers, the Islamic finance qualification may help to set them apart from the competition. “It’s impossible for me to know, but I had four interviews, and in most of those it came up as a topic for discussion,” recalls Morris Blumenthal, a 32-year-old legal counsel with Standard Chartered Bank UK. Mr Blumenthal cut his teeth in private practice at Clifford Chance and later DLA Piper. It was at his Canary Wharf office that he first worked on a sukuk deal. While networking and attending free lectures offered at the Institute of Islamic Banking and Insurance (IIBI) in Northwest London, he then enrolled in its postgraduate diploma programme, which he completed two years ago.“I thought the course looked interesting and it was an opportunity to cement the knowledge I had and learn more,” he says.
Commodity-linked investmentsThe Shariah-compliant commodity-linked and structured product market is increasingly presenting more comprehensive offerings. David Kemp focuses on the latest developmentsIt should come as no surprise that Shariah-compliant commodity-linked investments have become available in the market, given that Shariah finance and commodities as an asset class are leading themes in finance. A combination of the two are highly sought after by Islamic investors Commodity investment predates Islam and is a natural Islamic investment, being both tangible and representing the raw material necessary to the means of production. Shariah-compliant commodity-linked investment began with the physical holding of a commodity, accompanied by the associated issues of sourcing, storing and funding. A further development enabled investors to hold a commodity through an intermediate vehicle such as a metals fund, which frequently imposed high running costs and limited scale. The market can offer fully fledged commodity-linked structured products. These include investment certificates, providing exposure to risk-return profiles ranging from a single commodity or basket of commodities through to modified benchmark indices and beyond into bespoke commodity indices. Each of these products is discussed. Many believe that now is the time to invest in commodities.Islamic investors, as with their conventional counterparts, are aware that an investment in commodities can provide otherwise unobtainable diversification benefits to a balanced portfolio. In particular, research has shown the low correlation of commodities with the traditional asset classes of equities and bonds. In addition, the high Sharpe ratio and low volatility of commodities enable a portfolio that includes commodities to move along the efficient frontier in a way that both reduces volatility and increases returns (see diagram 1).
Unlocking French banking codeFrance must remove restrictions on foreign banks if it wants to share in the expansion of Islamic banking and protect its markets, says Fehmy Saddy. Sooner or later, there will be a tide of change Establishing an Islamic bank, or any bank for that matter, is usually a simple process. A banking institution or an investment advisory firm assembles a group of investors and retains a law firm, an accounting firm, a bank technology firm and a public relations firm. It selects a couple of experienced bankers to oversee the preparation of a feasibility study, develops a business plan and submits an application to the regulatory authorities. The capital is then deposited, a banking license is issued and a bank is born. It is a fairly straightforward process. However, the process is more difficult in some countries. The extreme case is Brazil, where a moratorium on issuing new bank licenses has been in effect since 1988. In the United States there are strict requirements, such as holding hearings for the community to express its views and meeting the requirements of the Community Reinvestment Act. Probably the most flexible is the UK, where Her Majesty’s government is determined to make London the world centre of Islamic banking. There are certain basic requirements, particularly with respect to transparency, but once they are met and the funds are there, a license will be issued, regardless of the nationality, ideology, religion or skin colour of the shareholders. In France, the issue is a little more complicated. The nationality of the majority shareholders is a critical factor and there are explicit as well as some unwritten requirements. First, foreign banks or investors (defined as non-EEC or EEC space nationals) must have a French or European financial institution participate in the capital structure of the new bank and hold at least one-third of the equity. This national or European bank shall act as parrain (guarantor) for the foreign shareholders. Second, the French or EEC parrain must have been engaged in the banking business in France for at least 15 years and must be financially strong enough to sustain the loss in case the new bank failed.
On the crossroads of Shariah complianceShariah scholars have arrived at the minimum criteria to provide investors with a wide choice of compliant equities. MH Khatkhatay and Shariq Nisar assess the norms set by three organisationsIslamic banks, investment companies and equity funds have their own norms for assessing Shariah compliance of companies in which they consider investing. Most do not publicise the norms they use for selection or screening. Organisations such as Islamic Development Bank, the Association of Islamic Banks, IFSB and the Islamic Fiqh Academy of the OIC also have not laid down any definite criteria.Information is available on the screening criteria of Dow Jones for inclusion and tracking of equities in its Islamic equity indices. Similarly, the screening criteria of the Securities and Exchange Commission (SEC), Malaysia are available as are the criteria of Meezan (Pakistan). The rationale they apply for a particular norm is not available.The Dow Jones Islamic Index screens for acceptable business activities by stating that activities of the companies should not be inconsistent with Shariah precepts. Therefore, based on revenue allocation, if any company has business activities in the Shariah inconsistent group or sub-group of industries, it is excluded from the Islamic index. The supervisory board established the following broad categories of industries as inconsistent with Shariah precepts: alcohol, pork-related products, conventional financial services, hotels, entertainment, tobacco, and weapons and defense industries.Dow Jones also screens for acceptable financial ratios by removing companies with unacceptable levels of debt, liquid assets and receivables. It excludes companies for which total debt divided by its trailing 12-month average market capitalisation (TTMAMC) is greater than or equal to 33%. It also excludes companies for which the sum of cash and interest-bearing securities divided by TTMAMC is greater than or equal to 33% and those companies whose accounts receivable divided by TTMAMC are greater than or equal to 33%.
Expansion is only the beginningDemands for portfolio diversification have led to greater private equity opportunities for Islamic financial institutions and investors. Robert Varley looks at the benefits and possibilitiesThe last two years have seen a massive expansion of Shariah compliant private equity (PE) funds. By 2006 there were 126 Islamic PE funds with a collective value of US$16 billion. Apart from volume, though, the market has developed in terms of sophistication and range of assets. By looking at where the market has come from, we can start to see what it is likely to do over the next two years.It is worth taking a moment or two to look at the origins of Shariah-compliant PE funds and, in particular, the economic drivers. Shariah-compliant funds are nothing new. Cayman Islands-domiciled funds with Islamically acceptable structures and products were being established before the turn of the century for US real estate investments, and not long afterwards for UK, European and GCC property portfolios. The assets were relatively easy to screen for Shariah compliance, while the massive—and growing —liquidity among Islamic investors in recent years justified the additional marginal cost of ensuring Shariah compliance. Indeed, the compliance costs were (and are) far from prohibitive, even for the more complex funds structured to take advantage of conventional leverage.Shariah-compliant PE lagged behind the real estate funds sector by several years. The reasons are straightforward. Investors in Shariah-compliant funds had a preference for real estate as an asset class. This was reinforced by the spectacular returns available on GCC real estate funds in particular in recent years.However, a number of factors have changed in recent years. First, the success of Islamic financial institutions has led to growth and an appetite among those institutions for expansion into new areas. At the same time, greater sophistication on the part of the investors has driven demand for portfolio diversification.
An interest-free commodity currencyMost modern money exists as the balance sheet counterpart to the interest-bearing loans of commercial banking. Tarek El Diwany discusses why the underpinning of paper currency is so precarious and proposes a less volatile interest-free alternativeThe origin of money is a rarely discussed topic in media outpourings on economics and finance. This is rather strange, given that money is the measuring rod by which the worth of so many other efforts are judged. Supply and demand determine price, but this is only part of the story, because the value of money itself helps to determine price. If the measuring rod of economic activity is unreliable, then the conclusions of myriad arguments among economists may themselves be unreliable, as may the commercial decisions of individuals and corporations the world over. While the man in the street typically believes the government alone has the right to create money and regulate its value, the professional economist usually acknowledges that both the state and deposit-taking financial institutions create the monetary medium of the modern nation. Given that commercial banks are the most common form of deposit-taking institution, the following discussion refers to two types of modern money, “state money” and “bank money” (see box, Paper tiger cannot stand up to gold).In 1935 Professor Irving Fisher proposed the elimination of the power of the commercial banks to create money on the basis that they had consistently used this right to profit at society’s expense. The side-effect of their profit-seeking action was, argued Fisher, a boom and bust economy, unnecessary levels of debt, and the needless paying of interest on money that the commercial banking system had, in effect, created out of nothing.The method that Fisher proposed for achieving his objective was the gradual raising of required reserve ratios for commercial banks (that is, the ratio of monetary base to a bank’s sight deposit liabilities) to 100%. The entire money supply of a nation would then comprise money issued by the state, from which point onwards the state alone would have the right to create money. Over the years, economists such as Frank Knight and Henry Simons have argued in a similar vein to Fisher, and so the idea is not an entirely novel one.
Why London is so influentialLondon has been involved with Islamic finance for more than 30 years. Professor Rodney Wilson examines its role and suggests how its standing could be enhanced to curry even more favour in the years aheadInitially the major Islamic finance activity in London involved wholesale operations, with banks in London providing overnight deposit facilities for the newly established Islamic banks in the Gulf. These Islamic banks could not hold liquid assets such as treasury bills, which paid interest, but the joint venture Arab banks in London, accepted deposits on a murabahah mark-up basis, with the associated short-term trading transactions being conducted on the London Metal Exchange.The next milestone was in 1982, when the Jeddah-based Al Baraka Investment Company bought Hargrave Securities, a licensed deposit taker, and converted it into an Islamic bank. This served the British Muslim community to a limited extent, but its main client base was Arab visitors of high net worth who spent the summer months in London. Its business expanded from 1987 when it opened a branch on the Whitechapel Road in London, followed by a further branch on the Edgeware Road in 1989, and a branch in Birmingham in 1991, as by then the bank had between 11,000 and 12,000 clients. Al Baraka’s ambitions were in wealth management rather than banking, however, and in 1992 it converted into being an investment company, and it was no longer constrained by the regulatory requirements that applied to banking.As the Muslim population increased and many became more affluent, there was clearly scope for developing and marketing Shariah-compliant financial products. Housing finance was the key to this, as for most UK residents, their mortgages represent their largest financial commitment. Al Baraka provided some Shariah-compliant housing finance during its years as a bank, but the first serious attempt to reach this market was made by the London-based Islamic Banking Unit of the United Bank of Kuwait in 1997. The trading transactions necessary to make these mortgages Shariah-compliant attracted double stamp duty, however, making the financing relatively expensive. It was only when this was abolished in 2004 that the market for Shariah-compliant mortgages took off. Further tax concessions with respect to diminishing musharakah mortgages, arguably the product best suited for housing finance, resulted in it becoming the most popular vehicle, with funding of more than £150 million. The Alburaq division of ABC Islamic Bank accounts for much of the market, with its products being distributed by Lloyds TSB and the Islamic Bank of Britain.
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