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Broadband Offers Big Opportunity In India
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Dr Jerome Booth is an economist, entrepreneur, investor, commentator and an expert on emerging markets. Through his private office, New Sparta, he manages a number of his investments. He is the principal shareholder and chairman of UK phone services company New Call Telecom, which recently picked up a 70 per cent stake in Nimbuzz for $ 175 million. He is also the chairman of the investigative news journalism company ExaroNews.
Booth was in India recently. There is his book - "Emerging Markets in an Upside Down World - Challenging Perceptions in Asset Allocation and Investment" - that is aimed at institutional and retail investors. Booth was ranked by Sunday Times at number 425 on its 2013 Rich List with a personal wealth of £189m. BW|Businessworld’s Anup Jayaram spoke to Booth on his India initiatives and also delved deep to understand his interpretation of the world economy today.
Immediately after the FIFA World Cup, the BRICS leaders met in Brazil. What is your opinion on the formation of the BRICS Bank? Is that the way forward?
I am quite supportive of the initiative. I don’t have a crystal ball. So I can’t tell you whether it will work, but I do hope it does. Development is not a technical problem. It’s a myth that it is a technical problem. Thinking up policies is relatively easy. It is certainly true in development banking. The enormous need for infrastructure is very well met by development banking norms. And after the Latin American crisis we have two things that we did not have in the 1930s, which was the last time we had a similar crisis. One, Keynes invented macroeconomics and second we do have the potential for massive global exit norms from emerging markets.
And if you want to do that, the obvious target in a non-inflationary way is infrastructure and housing. Primarily the need is clearly in infrastructure. That needs trillions of dollars in India and in many other countries as well. I think an organisation that can start to address that in an effective way, particularly in building on the experiences of China and other developing countries is very important. I have had lot of discussions in the central bank area. When we look at some problems in recent times in the developed world, central banks have been in some respects not as quick or not as knowledgeable about crisis management as countries in emerging markets. So when Northern Rock had its problems in the UK, I was really quite shocked at the length of time it took the central bank to react. And partly that was because of the responsibility being split three ways.
So I think there is a very real role for the BRICS Bank. And I would certainly hope that it takes off. There is a wide range of developing countries and obviously not just the five. On the ownership issue there are some parallels. If you don’t have ownership you lose some business.
How do you see the US quantitative easing (QE) affecting emerging markets?
It’s a bit like bad weather, we can all complain about it. But, all you have to do is bring your umbrella out and it becomes bearable. QE for emerging markets is an excuse to whine about things. It is not really something that you cannot deal with because policy makers have the policy tools. I am not saying that it is not the problem, but it needs to be put in context. Realistically, you can never expect a central bank of a single country to subjugate its own monetary objectives to the needs of the international community. It’s never going to happen.
QE I think has been very deliberately mis-sold. We had the banking crisis of a systemic nature for hundreds of years. The first really big one in modern times with money printing was in 1720 in France. When you have a banking problem, you seize the bank. There are hundreds and hundreds of cases. You seize the bank, sack the management and the fiscal authorities directly control the bank and you decide what lending activity has to be promoted to continue lending. You recapitalize the bank. And you do that quickly. For ideological and political reasons, government in Western Europe, United States did not do that.
So you have depression-like conditions emerging. That happens when you have mass uncertainty, which is the best way to create a systemic banking crisis. So QE was a technique to bolster the balance sheets of banks. You see that in not just in the fact that banks could recapitalize, but the asset prices were pushed up which helped banks recapitalize themselves.
Keynes told us that when you have a lot of uncertainty, entrepreneurs will not invest, they will not employ people. And that will in create uncertainty for others. That is why you get depression. If the policy makers are so worried and that they are taking desperate action to avoid depression scenario, the last thing they want to tell investors is that is what they are doing. People then stop all investments. So you tell them that everything is fine. And you tell them that QE will stimulate the economy. So there was this sort of double thinking. That’s the genesis of QE. Because people thought that it would stimulate the economy, they also thought that there was liquidity in the economy.
If you go to the US, the idea that it is recovering is a nonsense argument. If you look at the measures of underemployment, remembering that there are lot of people on the unemployment register, people are not signing up, because they don’t qualify for unemployment insurance. It is very difficult to measure, but the measures are available. Underemployment in the US is between 15-17 per cent of the working population.
It is still a good scenario compared to where we might be. There are 46 million people on food stamps in the US now and it peaked at 47 million. So you could say that we are getting better. But the idea that there is a recovery in the US is absurd. We had a very strong inventory cycle. It looks good for a couple of quarters then it will look worse again. So the economy won’t actually recover, till you get a consumer-led boom again which is traditionally the main driver of US growth. And that is not going to occur until you get a household debt to income that is much, much less. It has to come down to that 90 or 80 per cent. That will take at least three years or so.
One of the other things is that there has not been a global rebalancing. It has a lot to do with interest rates. So when historians look back at international monetary history, one of the great anomalies was the Asia crisis. It was this massive export of savings from poor countries to the United States and Europe. One reason why you got the bubble bursting was the lack of proper regulation of banks. And the second was the massive savings from emerging markets, effectively pushing down the US yield curve creating an artificial benchmark of risks.
Today, the really big reserves are with the emerging market central banks. They account for 85 per cent of global reserves. There are 20 more countries in emerging markets that have more reserves than the United States. There are countries like Algeria and Angola that could cause major disruptions in the treasury market if they started selling.
I consider India’s reserves large and very sufficient, there’s no need to build it any further. The goal should be to stabilise. In other words, one should not be worried about a current account deficit in India. It’s a good sign of confidence in a country. The role of the central bank in managing reserves is to diversify them, certainly in line with trade patterns.
Where do you see India in all of this?
Our understanding of risk is very perverse. What it means for India is that India should not subscribe to the finance theory view of the world that risk is some linear thing and that US treasuries are non risk. That’s complete nonsense. There’s no such thing as risk free. Everything is risk; risk is a much more complex thing than volatility. My book is a frontal assault on finance theory. Basically, it’s misapplication. It’s not a critique of the academics. What you have is a lot of theories that are not relevant. Friedman himself said if a theory had unrealistic assumptions and no tactical results, then it’s perfectly useless. And about 80 per cent of finance theory falls in that category.
Practically for policy makers in India it means that one should be thinking about foreign investment when it comes to allowing pension funds that are based abroad. That has not happened yet in India. But when it does, you need to have a different perception of global risk. China has its own sovereign rating agency Dagong, and frankly their ratings of the sovereign are much more realistic in my opinion than using the most established rating agencies.
Could you provide some details on your investment in telecom in India?
We see huge potential in India’s nascent Internet, broadband, instant messaging/data sharing markets. With e-commerce newly arrived in India and the government focus on broadband access, we hope to generate and expand a number of new/traditional revenue streams across our growing international telecoms business.
We have New Call, the sixth largest provider of broadband in England. We achieved that very quickly by being deft and nimble in a competitive and fast changing market. We are a virtual operator, so we don’t have huge infrastructure. We know how to operate without owning the infrastructure. We are the best value for money broadband provider in the UK. We see a huge opportunity in India.
The incumbents in India are very, very focused on mobiles. They have sunk billions into the licences and the infrastructure. And of course, they are all fighting for market share. The real great opportunity in our view is broadband. In India it is lower than in Africa. And broadband not just in the home and office, but also in public spaces which is what we particularly want to concentrate on. We want to do that by using other people’s infrastructure.
We are not competing with the large mobile companies. We want them to get into business opportunities that they would not have otherwise got into. That’s what we are doing. We are in new areas of the digital economy. We faced a similar regulatory environment in the UK. We have managed to compete with BT and Virgin on their home ground. We can partner with the big operators like in the UK.
What do you offer in the UK?
We offer access to broadband at a value for money that other providers cannot provide. We offer connectivity to people who are not connected still in the UK. Here, it is massive. So the opportunity here is huge compared to the UK. We have spent many, many months looking at the best companies to acquire. We don’t have any deals to announce yet. We wanted to do this before the change of government. We are excited by the 100 cities agenda of the government and its priority to get broadband into every village. We feel we can contribute.