Shaky fundamentals.

The rupee keeps falling, the Sensex is down and the economy looks, not just shaky, but on the brink of free fall. Our most revered Finance Minister blames the situation in Europe and the price of oil and keeps offering the same bromide of the government being on top of the situation. Europe has been in turmoil for over a year and oil prices are down 13% since the beginning of May at $92.81/barrel in New York. The problems have been created ever since the Congress came to power in 2004. Uncontrolled spending on social schemes to bribe voters led to runaway inflation. Yet the RBI was arm twisted into lowering interest rates. The reason given was that it was to lower borrowing costs for businesses. Surely, companies can borrow at very low rates in the US, UK or Europe where interest rates are between 0-1%. So why do they keep whining for interest rates to come down when inflation is reducing demand and is affecting profits? The danger of borrowing abroad, they say, is that the rupee may fall, as it is doing at the moment, and it will cost a lot more to pay back. An easy way to protect against rupee depreciation would be to open an account in any tax haven, say Cayman Islands. Borrow a $1 billion and invest $200 million in US government securities and AAA rated corporate bonds which will pay interest. Invest the rest in India. If the rupee falls this money will act as a cushion and if the rupee rises this money will become windfall profit. No need to hedge in futures and derivatives which can be dangerous, as Morgan Stanley showed in the last few days. When lenders are assured of returns cost of borrowing will be lower. So why don't our companies adopt such a simple solution to currency volatility? For 2 reasons - 1. Businessmen in India regularly divert money borrowed from banks into other projects. Borrow money for setting up a factory, buy land near a city somewhere, advertise luxury apartments in rural surroundings and, bingo, money starts pouring in. Take an initial installment for registration and demand regular payments which pay for the building costs and see your money more than double in 3-4 years. We do not know how many unsold properties companies are sitting on but this may account for the howls of anguish for lowering interest rates. 2. If you borrow from Indian banks, especially public sector backs, there is no pressure for repayment. There has been a 300% rise in restructuring of corporate debt this fiscal at Rs 762.51 billion and rising compared to last year when it was Rs 250.54 billion. Last year a US based bondholder group, QVT won a case against Wockhardt, a pharmaceutical company which had defaulted on loans of $110 million. Wockhardt sold off its hospitals business last year. Now QVT has filed a case against Zenith Infotech which defaulted on bonds $33 million last year leading to an automatic default on bonds worth $50 million maturing in August 2012. What is amazing is that we have been writing about such a situation for at least 4 years, even mentioning stagflation, yet experts were all lauding our " growth story ". Were they bribed or just plain naive? Strange fellows.