Jamal Mecklai: Blowing my own trumpet

MARKET MANIAC

In my last column I had written about how the report of the committee on turning Mumbai into an International Financial Centre had made me lift my head from the nitty gritty of the here and now and think about the future and what India would be like in 15 years. It made me realise about how infrequently I, or for that matter most people, did stop and look into the future.

This comment was brought home to me in spades last week when Bhavani, who works in our Bangalore office, faxed me an article from Business India of July 21, 2003. In the article, I was quoted as follows: "But for corrections encountered in its upward march, the rupee could touch 38 in 5 years."

I was amazed. I knew I had forecast 38 in five years at some point in the past, but I didn't realise how uncannily accurate I had been.

The article was written just as the rupee, which had been falling steadily for over 30 years, had first started strengthening. It had turned up from a bottom of around 49 to the dollar and, by that time, had climbed to 46.50. There were other analysts quoted in the article as well""none of them still in the forex market, by the way""and while most of them did see a stronger rupee, all of them only looked out to a maximum of six months""year-end 2003 as I recall. My forecast was, to say the least, radical.

Of course, I didn't know that the rupee was going to strengthen to 38 in five years, and I'm both surprised and gratified that my "best guess" turned out to be almost exactly correct. But I did know that the reforms that started in 1991 were working, that, over time, India was going to be a significant player and that, consequently, the rupee would have to get much stronger. I also knew that, despite the sudden rupee strength, the long-held assumption that the rupee would depreciate by 3-4 per cent a year was still in place at most companies. Nobody was thinking in terms of a "strong" rupee. Thus, my forecast, while reflecting my belief that the rupee had turned, was really focused on getting companies to think about resetting their assumption matrix.

And, again, today, as we appear to be on the threshold of another bolus of deregulation, I write this both to blow my own trumpet (of course), but also to trigger another assessment of whether assumptions need to be reset again.

Could the rupee, for instance, reach 28 in the next ten years? I raised this possibility during a presentation I was making at the board of a client company and the CEO almost choked on the cup of tea he had raised to his lips. Focused as he was on execution in the here and now, building capacity, dealing with a hundred contingencies, doing all the things it takes to successfully run a growing company in India, he clearly hadn't thought about that possibility at all. He was horrified.

But, I said, think about other things that will change. For instance, today it takes 45 minutes (if you are lucky) to get to Bandra Kurla from Nariman Point, an hour to get anywhere in Bangalore, and even longer to get to Gurgaon from South Delhi. In ten years, there is no doubt that all of this wasted travel time will be, easily, cut in half. I would venture to say that time savings from improved infrastructure""not just in transport, but in zero (or, certainly, far fewer) power outages, improved shipping, communications, etc.""would be at least 5%, and much more in certain parts of the country. That improvement in productivity alone would take care of at least 2 rupees to the dollar.

Add in, if you will, the impact of substantially more open financial markets, which would, very conservatively speaking, improve the cost of finance by easily 1-2%, particularly at the SME segment of the economy. There's nearly another rupee on the dollar.

Again, it would seem very likely that as India globalises more and more, the import content of our export basket would doubtless rise from current levels, which would further offset the stronger rupee.

Next let's talk about labour reform and the ABSOLUTELY ESSENTIAL DEREGULATION OF EDUCATION""not yet on the anvil, but wait till tomorrow. This would not only address the biggest cost threat facing Indian business, but would create new waves of productivity as the heretofore unexploited creativity of millions of Indians was unleashed.

While I am not sure my CEO friend was fully convinced, I have little doubt that the die is cast. Of course, I don't know that the rupee will strengthen to 28 in ten years, but as India continues to globalise, as India deregulates, as the current acknowledgement that India is on track to become a world power crystallises, the rupee will move steadily closer to its purchasing power parity value, which, today, is around 15-20 to the dollar, depending on the basket of goods you choose to compare.

Indian business will continue to thrive, partly because of the surprise improvements in productivity that go hand in hand with liberalisation, and partly because confidence is self sustaining. There will be volatility, of course, both in growth and in the value of the rupee. But, net net, the direction is definitely up!

Be sure to check Business Standard in 2017""I expect to blow my trumpet again.