In conversation with Jim O' Neill – emerging markets guru at Goldman Sachs

Attended a Q&A with Manchester United mad fan – Jim O’ Neill – author of the BRICs report and Chief Economist of the mighty Goldman Sachs, in which he spoke about the I in BRIC. I thought the following was interesting:

He referred to the current economic crisis we’re facing as the “crisis of the developed world”; and highlighted the fact that countries like India were experiencing growth of over 6% at a time in which ours is contracting. Jim referred to this as being “pretty remarkable” as it wasn’t too long ago that economists believed that India wasn’t capable of breaching the so called 3% Hindu rate of growth that she was known of hovering around for a very long time.

In marked contrast to China, India’s growth is a result of her personal consumption. People are still spending money and it’s domestic demand is what’s keeping it going. Interestingly, the current challenges that China is facing, Jim said, was going to be good for the world as it’ll force China to rebalance their dependence on exports.

Often criticised about the inclusion of Russia in his analysis, which shows that despite what’s happened in the last year, Russia has long outperformed Goldman’s first tranche of projections to 2050 – hence keeping those arguing for the removal of the R from his BRICs analysis at bay.

On India, the recently concluded general election was welcomed by the markets, with a surge in the Sensex of approx 20% on the day after the results were announced. Interestingly, Jim’s co-authored a paper titled ‘Ten Things for India to Achieve its 2050 Potential (http://www2.goldmansachs.com/ideas/brics/ten-things-doc.pdf) in which he highlights the need for improved governance as one of these factors.

He was asked as to what indicators would demonstrate that India was taking this seriously, which was a brilliant question that needs further consideration. In many senses the answer may be as straightforward as some of India’s biggest crooks – bureaucrats and politicians – having to face penalties for their behavioural failings. O’Neill said he would start thinking of this and perhaps write something on this matter. Please leave any comments on this post if you have any ideas.

Also asked of the real impact of being surrounded by some very populous countries, he reiterated that the potential for the entire sub-continent being lifted onto a different plane if cross-border trade could be encouraged, was noted and well received.

The briefing was taking place a day after the first BRICs summit, in which the Heads of Brazil, Russia, China, and India were meeting to discuss substantive matters such as the establishment of an alternative currency to the Dollar. In response to a question on the potential of this bloc, his analysis explained that Brazil and Russia were commodity rich, whereas India and China weren’t, which suggested that if they were to work together to realise synergies like this, then the grouping would have a dramatic effect on global economics.

In addition, he highlighted that any discussion on tackling climate change without these four economies would be futie. He joked that it was time that international institutions like the G7 & G8, the UN, IMF could do more than just “invite them for coffee on the sidelines”, which drew a few sniggers from the audience.

There’s not many people on this planet that could take the credit for coining the name of an international summit that brings together future superpowers together to discuss major issues that should concern all of us.

For this and more, Jim – we salute you.

Being such a smart guy, it beats me why you’d want to support Manchester United! Viva Barcelona 🙂

Are foreign banks interested in the 1 Rupee loan?

Now that the dust from the Indian election has settled and portfolios have been allocated, with the Finance Minister going to Pranab Mukherjee, the question on everyone’s mind concerns whether we’re actually going to see reforms in various industry sectors. In particular, the one that interests me is the financial services industry.

In her joint address of the Indian Parliament last Thursday, President Pratibha Patil spoke of (a) the need to create a new pensions regulator, (b) easing foreign direct investment for international banks, and (c) the disinvestment of various public sector undertakings.

Whilst some of the largest international banks and insurance companies are already there, will the existing stakeholders – including the Indian banking fraternity allow this to happen? Lack of progress, only, holds back plans to make Mumbai an international centre for financial services.

It may be true that British insurers like Aviva, the Pru, Standard Life, Royal & Sun Alliance, and Legal and General have successful partnerships with Indian firms like Dabur, ICICI etc, but they’re held back from further expansion mainly as a result of the 26% cap on foreign ownership. Mr. Chidambaram, former Finance Minister, even commented that insurance penetration in India as being “pathetically low”. And that India must “move along with the rest of the world”.

With critical reforms not taking place, the insurance markets are dominated by inefficiency; stifling innovation and competition; and limiting expansion of life and health insurance to rural areas.

In the banking sector too, foreign banks have earned a good reputation . HSBC, Barclays, Standard Chartered all have a significant presence in India but the expansion of these and other international players is held back by high capital requirements, equity caps on foreign ownerships, restrictive limitations on new branch licenses, and burdensome licensing procedures.

With a population in excess of 1 billion, India allows only 12 new banking licences per year!

Indeed the need for further reform of the Indian banking sector is highlighted by the fact that only ten of the 27 publicly owned banks are fully computerised!

Whilst HMG will continue to push for change, I believe that the Indian financial services community also stands to benefit from reforms and should push for it.

Not so long ago, KV Kamath, ICICI Bank’s Chairman made a point to me that made me think. He argued that the Indian banking environment and opportunity is limited for international banks for the reason that he didn’t believe that a HSBC would be interested in providing a 1 Rupee Loan to a villager living in the remotest part of India.

In defence of globalisation, wouldn’t it be great if the option existed? They may not want to participate in the growing micro-finance opportunity, but surely that’s a commercial decision for them.

Is a Congress Party win good for global commerce?

Now that we know that the Congress have won the general election with a comfortable margin, which allows them to be that little bit more confident in their agenda setting, the question that I’ve been most asked is whether a Congress victory is good for the international business.

If what a business leader most wants is stability, then I believe that the people have delivered a much more stable government than the last, which was run on the whim of the Communist Comrades of West Bengal.

We must also take some comfort in the fact that senior Ministers like Chidambaram and Kamal Nath have made statements that recognise that the reforms process must move forward – whether this is to do with labour reform or increasing FDI in various industry sectors. The latter is what I’d like to examine further.

Its proven that in sectors such as IT, biotech or telecom – which are ‘open’ to foreign equity and participation, we’ve seen huge growth – some commentators estimate around 40% growth year on year. Whereas in ‘closed’ sectors such as retail, legal services or accountancy, you’ve only seen single digit growth. The argument being that the more ‘open’ India becomes, the greater the chances of her becoming more competitive and successful.

Chidambaram has commented on the inadequate level of life insurance cover in India as being “totally pathetic”, and also often stated the need to bring reforms to the banking sector, does this mean that we should expect the reforms required to ensure that the Indian consumer gets more value for their money?

Well, without the Communists holding a gun to their heads, it seems that the Congress Party has a range of options to pursue to take the globalisation agenda forward. The international community expects it, and to be honest, I’m not sure the Indian Government will have any plausible excuses to defer critical economic reforms or on delivering on Doha much longer.

Briefing on Indian Elections

Following from the briefing that we’d organised yesterday evening at the House of Commons on the upcoming Indian elections, our inbox has been swamped with requests for the presentation made by Yashwant Deshmukh – who’s one of India’s top pollsters. Whilst we’re probably more immersed than others in keeping on eye on the machinations of Indian politics, I found the insights provided by the panelists and also some of the audience very logical and agreed with their analysis.

In particular, I felt that Lord Desai, who’s advised several Indian Prime Ministers, and clearly, has the inside track on politics, was exceptional in his comments. Despite the pro-Congress Party perception that people have of him, I felt he was very balanced and gave the Congress as hard a time as the BJP. He narrated a story to me of when he was awarded the Pravasi Bharatiya Sanman Award from Prime Minister Vajpayee and asked why, depite the stinging criticism of the NDA and of the BJP was he being awarded the honour. Vajpayee, in his response, said something to the effect of: “We take heart in the fact that you’re equally critical of the Congress”. 🙂

What Desai explained was that he expected the Congress to make it back and cited examples such as of the confidence that the Congress has shown through the very conservative interim budget a few weeks ago. He said that the lack of throwaway gestures and sops are a clear sign of their thinking. In addition, what I thought was a very personal insight, was his admiration for Sonia Gandhi’s long term strategic thinking – for example, her placement of Naveen Chawla (Chief Election Commissioner) and Pratibha Singh (President) in their current roles to coincide with the probable dates of the election and therefore strengthening her ability to fix the result, if required. I’m lead to believe that such moves are par-for-the-course across the political divide, but are less well thought through or executed.

Yashwant Deshmukh’s clear view was that he forsees a situation in which a minority party like Mayawati’s Bahujan Samaj Party could stake their claim to high office with the support of either principal party. What was interesting was that he termed the upcoming election as a ‘semi-final’ for the main event in 2012, in which he expects the contest to be between Rahul Gandhi and Narendra Modi.

I’ve placed his presentation for on our company website for you to download – www.saffronchase.com – let me have your views. Do you agree with his analysis?

The really interesting thing about the event was that apart from the panelists, there were several individuals in the audience who have been offered seats in the Indian parliament, or are involved in politics in India but make London their base. Such as, a past Mumbai region Organising Secretary for the NSUI; which is the Congress affiliated student body; a eminent businessperson who is regularly consulted by the Samajwadi Party and the Congress on various issues; a business magnate who’s been offered a party position in Delhi, a lawyer with equations with the gen-next of Indian politics etc etc.

In summary, all panelists agreed that in the next election, we’re going to see an overwhelming influence by regional parties, which may result in a minority government that is kept alive with the support of the Congress and will fall within two years.

On the foreign direct investment / commerce front, what was was clear was that there would be no rolling back of policy decisions, but you couldn’t guarantee the fast-tracking of initiatives such as the lifting of the caps in the financial services, retail sector and others. All agreed that they saw such decisions at a standstill for the next few years.

We’re organising a visit for those interested to India at election time to soak up some of the atmosphere by attending mammoth rallies (100,000 people minimum), and to see for ourselves the key issues that candidates face in their constituencies. We received great interest from the audience, please let me know if you’re interested in joining our delegation. We hope to take some UK parliamentarians, businesses, journalists and others to witness the largest democratic exercise conducted on the face of this planet.

The budget shows democracy is deeply rooted in India

If you wanted an example of the strength of Indian democracy, then today’s interim budget provides that opportunity, as it demonstrated that despite the incumbent government being on its last legs, and faces the very real prospect of being voted out of office, they’ve resisted the urge to announce concessions that may have increased their chances at the ballot box. The Foreign Minister – Pranab Mukherjee went as far as acknowledging that they “didn’t have a mandate to do more”.

Media reports suggest that over a trillion rupees were wiped off the stock market today as investors were hoping that various sops would be provided for key industry sectors to stimulate growth. Given this loss of confidence, I’m surprised that no concrete proposals have been floated to outline what each party would do to revive the economy.

In Britain, I believe that the economy will be the only story at election time, for this reason, I’m intrigued as to why this isn’t the case in India. With the elections so close, doesn’t it make sense to set your stall out on this issue?

With respects to the strength and maturity of Indian democratic values, I hope our politicans show the same depth when it’s our turn to go to the polls.

Faith & Globalisation: Dear Tony…

Dear Tony,

I wanted to thank you for your kind invitation to the multi-faith breakfast meeting held this morning in London. I enjoyed exchanging ideas and hearing about perspectives that were new to me and my way of life.

Running a growing business communications firm in London, opportunities to view things from a faith perspective are few and far between. In actuality, it’s only when things start going wrong that we remember the big man (or woman). I would guess that if you asked, you’d find that a lot of people actually have religious views and believe in the middle path that you espouse, but its also a ‘truism’ that religion remains an intensely private affair for most of us. One where the mention of a ‘God’ makes us cringe with embarrasment.

That’s why my travels to other parts of this world are so fascinating. Take India for example, faith plays a central role for a huge number of people. From temples and mosques in the middle of busy road junctions, to spiritual blessings for every stage of human development, faith informs and determines behaviour and is a very open subject for everyone to observe – how so different to our experiences in Britain!

Your work on using faith (www.faithsacttogether.org) to eradicate global poverty and meet other millenium development goals (MDGs) is praise-worthy. Like you, I agree that if we were to focus our energies, I’m confident that illnesses like Malaria can be wiped off the face of our planet within our lifetimes. My own experience of leading a campaign on the MDGs that targeted the Hindu & Jain communities last summer, shows that despite a decline in attendance of churches and temples, religious identities still play a central role in our daily lives.

However, what I found of most interest was your Foundation’s work on faith & globalisation. Frankly speaking, I don’t think you’ll find many people objecting to your view that we need to inject the global financial services industry with and extra dose of morals and values. In my view, leadership from industry figures is at the heart of this debate. With media hype as it is in advance of the Treasury Select Committee’s face-off with the banking world this week, it’s important that the opportunity is provided for those in leadership positions to reflect on the need for values driven behaviour, at all levels in their organisations. A sensible suggestion was that each bank’s graduate recruitment programme, should encompass a module on ethics and values as part of their induction into these hallowed institutions. Only then, may we witness a shift in behaviour from the future leaders of these organisations.

Bringing the focus back to how religion is viewed as a private matter, later in the day I was invited for a meeting at the House of Lords, where I was reminded that we live in a Christian state in which the Archibishop of Canterbury and other senior Bishops sit in the House of Lords casting their eyes and commenting on Bills going through the second chamber.

It seems odd to me that at one hand we view religion as a private matter and on the other we’re ready to accept the undue and open influence of the Church on the laws of our country. At one time, I would have argued that the Bishops should be removed from the second chamber, but today, I argue the exact opposite – let’s have religious leaders from every faith in the Lords. After all, we both agree that diversity is a strength of this country, let’s follow this up by injecting a multi faith perspective to parliamentary debate which ultimately leads to the formulation of laws that provide the framework for our daily lives.

In summary, I’d like to thank you for the opportunity to meet a wider group of people who share some of my values despite representing different faiths. With the challenging times we live in, I’m confident that some of the teachings handed down through our scriptures are not only relevant but can offer solutions and choices to resolve many of the issues we watch on our news channels on a daily basis.

Yours sincerely,

Vikas Pota