Category: Your Money

NREGA – A Failure No One Accepts

The National Rural Employment Guarantee Scheme (NREGA) scheme that was launched by the Central Government in 2005 was a noble initiative but badly implemented. Like many other rural empowerment schemes, NREGA has become a swindling racket for corrupt politicians, bureaucrats, and contractors to fill their pockets even as the intended beneficiaries bemoan delayed payments and rampant bribery.

NREGA – What’s it about?

Shovels readyNREGA, later renamed to Mahatma Gandhi NREGA (which was pretty much the only rework done on it), was started in 2005 to legally ensure employment of rural people for at least 100 days every year. The scheme was open to any rural household with adult members willing to do unskilled public work, using manual tools, for the minimum wage of Rs.130 per day (2009).

The central government rolled out the scheme to state governments, ultimately making the scheme active across 635 districts in the country through the Gram Panchayats.

How does NREGA work?

  1. Rural household members register in writing or verbally at Gram Panchayat, free of cost.
  2. After verification, Panchayat issues Job Card to worker; expectedly within 15 days of application submission.
  3. Worker may specify preference of days and time employment is sought; minimum 14 days.
  4. Panchayat must guarantee employment within 15 days or pay unemployment allowance.
  5. Worker is granted work within 5km radius or paid 10% extra beyond the parameter.
  6. Wages must be paid within a week and not later than 2 weeks.
  7. Permissible works predominantly include water and soil conservation, afforestation and land development works.

NREGA – The fallout

NREGA is under criticism for corruption as well as creating detrimental secondary effects in poverty stricken areas. Since the scheme mandates “manual unskilled” labour, undertaken rural projects suffer in quality. Furthermore, workers learn nothing new; there is no skill upgradation that makes them more employable down the road.

A 2013 Comptroller and Auditor General (CAG) report on NREGA reveals huge gaps in implementation:

  • only 30% of 129 lakh approved projects worth over Rs 1.26 lakh crore completed
  • rural households’ work dropped from 54% to 43%
  • 100 days of guaranteed employment factually only 43
  • wage disbursement lower than the minimum specified under NREGA
  • discrimination between men and women; women do not get jobs or are paid less
  • misappropriation of funds by creation of ghost workers (on paper only); highest in Karnataka and Assam
  • no filling of muster rolls at places of work and record manipulation
  • unsatisfactory monitoring by Center
  • Block Development Officers issuing cheques in their own names
  • staff shortage

New Delhi FamilyNREGA is turning into a sink hole that’s contributing to the growing fiscal deficit of the country. Despite NREGA being active since 8 years, there is no significant development in village roads and infrastructure or improvement in local job opportunities. Furthermore, there are concerns that NREGA is creating agricultural labour deficit during peak harvesting and sowing seasons. Though, if the farmers were paid well and taken care of in bad times, maybe they wouldn’t head out to cities.

The total expenditure under NREGA in 2011-12 was Rs. 37,303.30 crore. Bihar Chief Minister Nitish Kumar, however, states that the implementation of NREGA is suffering due to “non-availability of funds” and CAG findings are “untrue and deceptive.” Another political blame game is on the verge – and it will end nowhere.

Rural Development Ministry is talking about making direct payments to NREGA beneficiaries through Aadhaar cards. But the bottom line is that NREGA does not add long-term value to scheme beneficiaries. It would be wiser to divert funds to better implemented schemes that support farmers and rural populace rather than stick with NREGA that’s clearly a failure.


Sunder’s List

Roundup: S&P +0.72%, Dow +0.72%, Nasdaq +0.85%, Gold $1,471.10, London +0.49%, Germany +0.75%, France +1.54%

Gold could continue to bounce around in a relatively narrow range over the short term, but another big selloff is coming. The low-volume bounce off the lows has reinforced the negative technical bias. (WSJ) [stockquote]GOLDBEES[/stockquote]

Stages of Economic Growth with savings and inv...

Several years of aggressive monetary policy from central banks has failed so far to trigger a jump in inflation. Signs of slowing global economic growth and a pronounced drop in the price of many commodities – with copper entering a bear market – stand as a counterpoint to the notion that inflation is poised to accelerate soon. (FT)

US and Japan will soon be joined by UK and Europe in their money printing endeavors. This has lead and will lead to asset price inflation in Asia. Hong Kong property prices have more than doubled in the past four years alone. Stock prices in southeast Asia have repeatedly hit all-time highs. “The train has already left Tokyo station. It’ll probably take a few quarters until it arrives in Bangkok and Jakarta.” (FT)

Indians have traditionally preferred to employ services (a maid for cleaning the house) vs. products (a vacuum cleaner.) But that is set to change. The labor force is moving away from low-productivity jobs and in spite of the current growth slowdown in India, it has not made getting laborers any easier for employers. (LiveMint)

Good luck!


Watch what they do, not what they say

Whenever there is a new piece of technology, finance figures out a way to butcher it. Using social media for sentiment analysis is a great tool for manufacturers who don’t sell directly to the consumer to get advance warnings of shifting tastes or possible product recalls. If you look at the lead times between when the product is boxed and shipped to the retailer and when sales turnover numbers make their way back to the manufacturer, twitter is a god send of an early warning system. For example, it makes sense for a company like P&G to invest in social media monitoring tools to make sure that a new fragrance they released into the market is not met with backlash that spirals out of control.

However, I have seen a significant uptick in data vendors pushing social media sentiment analysis tools onto traders. Now traders can react to twitter sentiment in real time. Does it really make sense or did we just find a new way to lose money?

First, do investors really know how to gauge the impact of bad publicity on the stock price? For example, if P&G released a purfume that people on twitter hated, should investors really care and by how much?

Second, the stock markets are reflexive. Investors will say a lot of nice things about a company whose stock is going up and will start finding faults with it when it starts going down. You don’t need twitter to tell you that.

Third, does it really matter what they say? For a day-trader, the order-book summarizes how others are voting, in real-time, with their own money, on where the stock should trade. For investors, daily or weekly charts neatly summarize the sentiment of people willing to bet their capital, i.e., people who put their money where their mouths are.

Fourth, it only makes sense if you get this news ahead of everyone else who is going to react the same say as you did. For example, Reuters releases the University of Michigan Surveys of Consumers to “ultra low-latency” subscribers 2 seconds before it is made widely available. Since you might expect all investors watching this news to react the same way, those 2 extra seconds allow you the front-run the “muppets”, so to speak. But if only you have the news, and nobody else cares about it or have differing opinions on how it is going to impact the stock, then it makes no sense for you to have it.

And lastly, remember this: the market is the news.

Sunder’s List

Roundup: S&P -0.18%, Dow +0.08%, Nasdaq -0.33%, Gold $1,453.60, London -0.25%, Germany -0.23%, France -0.79%

Johnny come lately: Sebi may get greater powers to check money-pooling frauds. (ET)

RBI: Not so fast on that banking licence – between priority sector lending norms and having 25% of the branches in un-banked sectors – it may not be all that profitable for new entrants as it is cracked up to be.(ET) [stockquote]LICHSGFIN[/stockquote] [stockquote]SRTRANSFIN[/stockquote]

Seriously, what is the difference between a car and a “quadricycle”? Car companies: quadricycles should ply as transport vehicles for intra-city movement with a limited number of registrations every year. It should come in one particular colour with a fare meter and quadricycle written over it on a display board. Bajaj: cars should be restricted in city centres to avoid pollution and congestion and should be accessible only by two-wheelers, three-wheelers, and quadricycles. (LiveMint) [stockquote]BAJAJ-AUTO[/stockquote]

When we get the May 1st holiday, are we celebrating the International Workers’ Day or the spring festival? If it is the former, isn’t it ironic that the stock markets are closed – shouldn’t they be open double-time?

Paul Krugman: “The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1% wants becomes what economic science says we must do.” Ken Langone responds: Runaway deficits are the older generation “stealing” from the young, and Paul Krugman has never met a payroll and doesn’t have to worry about profit margins. (NYT, Bloomberg, StockViz)

Good luck!


What is Investment Banking?

Investment banking covers a wide spectrum of activities, basically most banking activities other than accepting commercial deposits from customers would come under the purview of investment banking.

Bonds and Equity Issues

Question of money

Issues involve both new issues and rights issues. New issues are first time issues of bonds or equity. Investment banking activities for new issues include pricing the securities, selling them to investors, underwriting and general advice to the parties involved. Underwriting is the practice of the investment banks buying the securities if they cannot be sold to any investors. Of course, substantial fees will be charged for all these activities! Often, several banks perform the underwriting jointly in order to spread the risk – the consortium of banks is called a syndicate. In the case of equities, the underwriters purchase the unsold shares only after it is evident that any investors are not taking it up. On the other hand, in the case of many bond markets, the underwriters buy the issue first and then attempt to sell them to investors.

Rights issues are similar to new issues – the key difference being that in the case of rights issues, there are already shares of the company in the market i.e. there are existing investors, and the company wants to issue more of the same. In this case, there are laws and regulations in place to ensure that the existing shareholders get the first rights to purchase the new issue often at a discount. The investment banking activities associated with a rights issue is similar to a new issue.

Mergers and Acquisitions

Mergers and Acquisitions are the mainstay of investment banking. Mergers, as the name suggests are the coming together of two or more companies and acquisition is the taking over of one company by another. In both these activities, the advisory role of investment banks is paramount and there are hefty fees involved. Due to the often acrimonious nature of these activities an interesting set of phrases has come to be associated with them.

If a takeover is looming, the target may try to find a rival bidder who is preferable to the original predator. This more acceptable candidate is called the ‘White Knight’. Sometimes a few people can be found who will take a small stake in the company and block the takeover – these are the ‘White Squires’. Sometimes, the ‘White Squire’ may become a ‘Trojan Horse’ meaning he tries to take over the company himself! If you remember the old computer came, you may be interested to hear about the ‘Pac-man defense’ where the company being taken over turns around and gobbles up the monster trying to take it over! Sometimes, the bidder may be forced to withdraw by the target who buys back the price at a higher price. This is called ‘greenmail’ as opposed to blackmail. In the US, a legal provision provides for a popular defense against hostile takeover bids. Called the ‘poison pill’, it allows the target company to give all existing shareholders the right to buy new shares are a large discount, thus diluting the stake of the bidder considerably.

Securities Trading

Investment banks usually have a separate trading wing in which they invest in securities by trading. Trading may be on behalf of their clients or for the firm itself – called ‘Proprietary Trading’. Usually, there are different departments dealing with different types of securities like bonds, equity, derivative products, commodities etc.

Investment Management

Mergers and Acquisitions (The Sopranos)

Lastly, investment banks often manage clients’ money on their behalf. The reason some clients opt to let investment banks manage their money is that the banks are likely to get higher returns on investment than the average investor. These clients may be private individuals, in which case banks usually stipulate that they’re net worth must be above a certain value (high net-worth individuals) or corporate institutions.

Some banks have both an investment banking side as well as commercial banking interests. In this case, it’s important that the interests of clients of the bank are put ahead of the profit making strategies of the bank. All countries have regulations in place to separate the commercial and investment banking activities to ensure this.