Transcript of the Podcast
Hi This is your editor Arjun Parthasarathy speaking. The Friday podcast is a value add feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.
This week’s topic is on “Trust Deficit in the Economy”
The “Trust Deficit” in the economy is much larger than all deficits put together. The “Trust Deficit” swamps the fiscal deficit and current account deficit and has the potential to pull down economic growth below trend levels. There is an urgent need to rectify this “Trust Deficit” if the economy has to go forward. Continued “Trust Deficit” will hurt your savings and investments as well if you are not careful about it.
The “Trust Deficit” is the complete lack of trust of anybody and everybody in the system. The general public does not trust politicians, bureaucrats and businessmen. Businessmen do not trust politicians and bureaucrats. Bureaucrats do not trust businessmen and politicians. Politicians trust no one.
The country has been hit by a series of scams, allegations and corporate failures over the last few years. Telecom spectrum scam, mining scams, coal allocation scam and irrigation scams have led to massive loss to the exchequer. Crony capitalism allegations have exposed the businessmen, bureaucrat and politician link. Corporate failures from Satyam to Kingfisher have exposed mismanagement.
The general public have been hit on all sides. Inflation has eaten into earning capacity, falling economic growth has hit job prospects, high property prices have hit ability to purchase a home and weak equity markets has hit wealth creation. Investors from the general public do not know whom to trust their money with. The government inflates away their savings and the businessmen take away the capital. Flocking to expensive real estate (those who can afford it) or gold does not make sense at such high prices.
The “Trust Deficit” keeps away investors from financial markets. It keeps away businessmen from capital expenditure. It keeps away bureaucrats from moving files and it keeps away politicians from undertaking infrastructure projects. In short nothing happens in the economy leading to a downward spiral in economic growth.
The media too is not trusted by the general public, as there is lack of transparency in declaration of paid news. Media houses are clubbed with political parties or with big businesses leading to a further lack of trust. Where does the investor, whether it is retail or even institutional, go to collect unbiased information to take investment decisions?
The RBI refrained from reducing the Repo rate in its 30th October 2012 policy review largely due to the question mark on the government’s commitment to fiscal consolidation. The Repo rate cut was kept on hold despite the government projecting a lower fiscal deficit for next year. The government did not take RBI’s status quo on rate cuts too kindly and made its displeasure public. “Trust Deficit” is visible between the government and its banker.
The question is “who will work towards rectifying the “Trust Deficit”? It is everyone’s job to bring down the “Trust Deficit” in the system but at this point of time there are more fingers pointing at each other leading to increase in “Trust Deficit”. Let’s hope someone wakes up soon.
Thank you for listening in. Have a good weekend.