Chetan Parikh: Friends, it gives me great pleasure to announce the formation of this book club which is a joint endeavor of capitalideasonline.com and Oxford Bookstore. I would like to welcome all of you. We have the legendary investor Mr. Chandrakant Sampat who will be giving the inaugural talk on ‘Peter Drucker and Investing.’

Let me briefly start about what this book club hopes to attain. We hope to be regularly meeting over here and we will be inviting speakers to talk on books and ideas on the themes of investing, economics, finance and management. This club promises to be a great venue for sharing of knowledge.

I would like to acknowledge the help of a lot of people who have made this endeavor possible. I would like to thank Mr. Rahul Khanna. He has been exceedingly helpful in bringing about this thing. I would also like to thank Sanjeev, Mahesh, Deepa, Rachel and Kanta of Oxford. I would like to thank Oxford Bookstore for their hospitality.

Mr. Chandrakant Sampat synthesises investing from many threads. He uses the evolutionary biology concept of "punctuated-equilibrium" posited by the late Stephen Jay Gould where sudden change after long periods is the evidence of how nature works. Capital markets are not immune from the laws of nature. He questions the Dawkinian emphasis on the scientific method, using mathematics, as an answer to analytical issues when taking investment decisions, preferring instead the Gouldian thesis that "averages represent only mathematical conveniences for centering a calculation about variation. Averages are not essences." Whilst investing, Mr. Sampat argues that Drucker’s emphasis on human behavior as evidenced throughout history is more relevant to investing than mathematical tenets.

Ladies and Gentlemen, Mr. Chandrakant Sampat.

Chandrakant Sampat: Thank you Chetanbhai. Thank you friends.

The other day I received my copy of The Economist dated 25 May. I read the obituary published in that issue of Stephen Jay Gould, the renowned paleantologist. And that made me wonder if we could apply his tenets to what is happening in the capital market.

Once when Mr. Gould was pottering among fossils, doubts arose in his mind that Neo Darwinism was too meek, too pat, to explain the records in the rocks. Neo Darwinism predicts smooth and gradually change. That is not what Mr. Gould saw. Instead the rocks record long periods when those fossils appear to stay the same, interspersed with eye-blink changes to new species. The old does not exist.

Now this is 450 million years of the earth\'s history. But that\'s not all.

"Mr. Gould worked this observations up into a theory that he and his co-researcher Niles Eldredge dubbed the punctuated-equilibrium model. Instead of continual and improving refinement as Neo Darwinism predicts, Mr. Gould and Mr. Eldredre saw a world in which optimum form is rapidly reached and then stays put until suddenly replaced - perhaps because of some arbitrary and catastrophic external event." I will argue how this is happening in the capital markets.

"Mr.Gould’s fellow paleontologists, those who worked with what is alive today, saw only gradual change and had the maths on their side." Is it that in the capital market we are seeing the gradual change and expect the things to go on as they did for any number of years?

"Those who worked with what was alive in an infinity of yesterdays complained that even though they had no good explanation of why punctuated equilibrium worked, you couldn’t argue with the evidence in the rocks, maths or no maths."

In his book called Wonderful Life, which analyzed the creatures in a piece of ancient rock called the Burgess shale, whose "formation provided a unique window on the world 540 million years ago when animal life was growing in a big way. Many of these fossils are soft-bodied creatures that are not preserved elsewhere. Many of them are also wierd looking — not at first glance related to anything now alive." Can this happen in the capital markets that we will be seeing something that is not alive today and something quite different?

The evidences that have been pointed out by the various scholars do point to this. The formations on the Burgess Shale "led Mr. Gould to muse on the contingent nature of the life. If this group rather than that had been wiped out, the future would have been different and the vertebrates, let alone the humanity might have never arisen at all."

Now the punctuated equilibrium theory as originally conceived has made few converts -- the role of accidents in evolution is more widely appreciated. Asteroids collisions and near Super Nova are recognized as hazards that can wipe out the whole groups of organisms arbitrarily. That this clears the space for natural selection to do its work is now an accepted wisdom. And finally about Mr. Gould. "In 1982 Mr. Gould was diagnosed with mesothelioma, the cancer that eventually killed him. Everything biological was grist to his mill and he wrote about that in his essays too — even using it a piece entitled ‘The median isn\'t the message’ to illuminate the different meanings of the word ‘average’. When his disease was discovered he read that the median time from diagnosis to death was eight months. He survived for 20 years. "

These kind of things do happen in the nature. Now I will come to how relevant the concept of punctuated-equilibrium has today in the capital markets. This is also from the Economist which appeared a few years back.

The long booms eventually petered out as the technologies matured and the returns to investors declined with the dwindling number of opportunities. After a period of much slower expansion came the inevitable decline — only to be followed by wave of fresh innovations which destroyed the old way of doing things and created the conditions for a new upswing. The entrepreneur’s role, as Schumpeter saw it was to act as a ferment in this process of creative destruction allowing the economy to renew itself and bounce onwards and upwards again. All the evidences suggest that the fifth Industrial Revolution based on semiconductors, fiber optics, genetics and software is not only well under way but even approaching fast maturity.

The question that arises: was the Unit Trust of India, a victim of this wave? What it got it invested in the old economy and started investing at the peak of the new cycle which was about to mature. So, the basic questions that we will have to ask as an investor look at whether the waves are now compressing. The new wave will not be more than 10-15 years long. Now in this 10-15 years, how do we invest? And for whom do we invest? These are the two questions because there are tremendous amounts of social responsibilities. I will come to the question of what are the responsibilities of the financial community for the future generations very shortly.

At the very outset let me quote again or read from Drucker again. This is on profits, the basic driver of the markets. "Managing fundamentals include earning today the cost of staying in business tomorrow. A business that does not earn those costs is bound to fade and to disappear. These are not future costs. They are costs incurred now; they are not paid out until later. They are accrued or deferred costs and we learned long ago that these are the true costs that must be shown in the current accounts of business. A business that does not earn the accrued cost of staying in business impoverishes the economy and is untrue to its first social responsibility: to maintain the wealth producing and employment producing capacities of the resources entrusted to the enterprise and its management.

"Profits" it cannot be said often enough is an accounting illusion. Except in a rare case of government monopoly such as OPEC, there are no profits; they are only the deferred costs of staying in business. In the first place, capital is a resource. And these are as by now we should all have learned, no ‘free’ resources. The minimum cost of staying in business therefore is the cost of capital.

But economy activity by itself has a deferred cost, it\'s the cost of staying in business which have to be earned today so that there is a business—or an economy—tomorrow. Economic activity can be defined as the commitment of present resources that are certain—the seed corn, to future expectations of a harvest. Future expectations always entail a risk and a high risk; yet no economy activity is possible without risk, just as no agriculture is possible without retaining a part of the current harvest as seed corn of the next year. The economic advances need the ability to incur larger and more complex risks to commit present resources to longer time periods and to the greater uncertainties of change and innovation. Economic advances thus depend on the ability of an economy to form capital, and that is, to generate the surplus current production over the costs of the past and present."

Is this what is about to happen in the stock market? Is the stock market becoming ripe for that? The answer to that came from Peter Drucker who said that stock markets have not innovated anything in last 50 years. The financial markets will have to destroy itself to re-create. Are we nearing that time frame of re-creation? Or we are going to go in the same linear way of doing things as we are doing today. Is this equilibrium, the punctuated equilibrium, about to happen?

The answers have been provided by Mr. Drucker. I will quote from him. I would also talk about very briefly of DeBono who has talked about the stock market. Then the third issue would be what could be the catalyst for this punctuated equilibrium. Is it greed? Is the greed today permitting the capital markets to function in a way that is absolutely necessary for the existence of the society for which it really exists? When good ideas, noble ideas like communism, welfare states and socialism could not fulfill their duties to the society, they had to disappear. Are free markets doing their duties to the community? If the answer is no, then are we moving into that punctuated equilibrium?

Instead of continual and improving refinements as neo Darwinism predicts Mr. Gould and Mr. Alberts saw the world in which optimum form is rapidly reached and then stays put until suddenly replaced perhaps because some arbitrary catastrophic event appeared. Are these things happening? Is Enron going to be the catalyst? Is the greed of U.S. executives be the catalyst? I will give a reference to Mr. Larry Ellison who sold his options worth $706 million a fortnight before downgrading the stock. What kind of a free market we are moving into?

Peter Drucker feels that the maximum that the chief executive should earn is about 12-13 times the average earning of the employees. Today it is 660 times. Are we creating a new capitalism and trying to destroy it by our greed? So, there is some small data which points out to that also, especially the options about which I will quote from Drucker and from Mr. Buffett and also from Mr Mulraj.

Most of you must have gone through the survey on Capitalism in the June 20,2002 issue of the Economist in which the excesses being committed in the free market were being pointed out.

The most frightening one is from Stephen Roach (Morgan Stanley) who says that the U.S. needs roughly $ 6 billion a day to keep on doing what it does. There are no savings. It\'s the rest of the world that provides it with savings, through the capital flows! I will later quote Drucker to show what happens to the capital flows and how they behave. Are these things pointers to punctuated-equilibrium? Then as a financial community what we should be doing, what are our responsibilities to the future generation?

As Drucker says, the new demography would mean you will have to save for the younger generation now, after 20 or 30 years. That means the corporation should exist not quarter to quarter, but next 20 or 30 years to provide income. Now look at the words he has been using—to provide income. Now the income means dividends—please understand. Income means something that is left over the cost of staying in business tomorrow. After having corrected an anomaly, we have started taxing dividends again and buybacks have been freed.

Now if we look at the amount spent on buybacks 30 years ago and compare it to to the dividends paid out, and if we then see what they are today in relation to the dividends the figures are astounding! (and for those who are really interested I can give the numbers). Through buybacks most of this wealth is being straightaway transferred to just one percent of the American population. Do we want to have that kind or do we want to provide for the future generation, which is our duty?

As an analyst, we look at the next quarter. We just don\'t pause to think what are the possibilities. We think of what is today. As DeBono says more important is to think about the possibilities then what it is today. Are we thinking of these possibilities while fulfilling our duty to the society?

NASDAQ now offers 10 cents for every 100 shares for providing the liquidity to the exchange. It\'s NASDAQ that is paying the day traders, namely the speculators, which is amazing! So amazing things are happening at the capital markets. It is the greed that is driving this again. As Buffett points out the profits of corporate America is around $340 billion. He estimates that of this, $140 billion is appropriated by analysts and investment bankers. What is left for the society?

It was a few months back, I was sitting with Mr. E A Sundaram and we started working out the companies having positive cash flows i.e. those throwing out cash which is over and above the cash flow needed for investment. The results that he showed me were phenomenonal! That most of them don\'t throw out positive cash flow! They can\'t even provide, you know, for the future costs. And the question then arises is are we valuing them right? And now I come to the fashion of \'90s and that is the venture funds. This is from Drucker again.

"In high-tech we have the old casualty rate among the young companies. 8 out of 10 or 7 out of 10 don’t succeed." Now this rate, this is from an article written somewhere in 1985-86, has gone up after 1999 or 2000. Now Drucker says that you need a competence to manage your enterprise and to manage yourselves. That\'s the most difficult thing for a person who starts his own business at a very young age—to redefine his own role in the business. A traditional background in a regular company is important. In retrospect what does that do for them. They learn, they get the tools, they learn how to do a cash flow analysis, how one trains people and how one delegates, how one builds a team. The ones without that background are entrepreneurs, who no matter how great their success, are being pushed out. The following conversation with Drucker in an interview in 1986 clarifies this:

Drucker: For example, if you ask me what\'s wrong with (Apple computer cofounders) Wosniak and Jobs?

Q:That\'s exactly what I was going to ask?

Drucker: They don\'t have the discipline. They don\'t have the tools of the knowledge.

Question: But that\'s a company that we look for the past five or six years as being prototypical of entrepreneurial success.

Drucker: I am on record of saying that those two young man will not survive. The Lord was singularly unkind to them.

Question: Really?

Drucker: By giving them too much success too soon. If the Lord wants to destroy, He does what He did to those two. They never got their noses rubbed in the dirt. They never had to dig. It came too easy. Success made them arrogant. They don\'t know the simple elements. They are like an architect who doesn\'t know how to drive a nail or what a stud is. A great strength is to have 5 or 10 years of, call it a management, your belt before you start. If you don\'t have it then you make these elementary mistakes."

You look at what has happened to entrepreneurs especially the dotcoms. How much of the wealth has been really destroyed in this process. Trillions have disappeared. And now this is a very important piece. And I have great respect for the economists, having being trained a bit in it, but when I read this from Drucker I started thinking. Now here it is in question and answer form.

Q: Would you like to say something disrespectful about the economists?

Drucker: Yes. Economists never know anything until 20 years later. There are no slower learners than the economists. There is no greater obstacle to learning then to be the prisoner of totally invalid but dogmatic theories. The economists are where the theologians were in 1300: prematurely dogmatic. Until fifty years ago, economists had been becomingly humble and said all the time, "we don\'t know." Before 1929 nobody believed that the government had any responsibility for the economy. The economists said "Since we don\'t know, the only policy with a chance for success is no policy. Keep your expenditures low, productivity high and pray." We have no economic theory today. We have as many economists as the year 1300 had theologians. Not one of them, however, will be sainted. By 1300, the age of saints was over, more or less and there is nothing worse than the theologians who no longer have faith. That\'s what our economists are today."

And now I come very specifically on the duties of the financial markets to the society.

The future economic security of more and more people—that is of people who can expect to live into old age is increasingly dependent on their economic investment—that is, on their income as owners.

We have started taxing dividends. And we don\'t tax buy backs which increase the share of the management, share of the multinationals at the cost of the ordinary shareholders. The person who is going to be really deprived is the person who is going to need this income when he grows old. And mind you the demography suggests that the average age by 2025 may go well into 90s. There have been quite a number of carriers and when you change the carrier you are going to need the umbrella. And it is the duty of the financial markets to be doing that. The basic question is are we as a mutual fund, are we as a the trust, are we as a financial community thinking about this or are we merely thinking of how to make it big for us.

Let me point out from the last paragraph of Corrosion of Character, a book by Richard Semmler, I just completed. It says that the society which cannot legitimately fulfill the aspirations of its ingredients soon loses its legitimately. Are we about to go the way this has happened elsewhere? Witness the demise of communism, socialism and the welfare state. Or do we want to change and see that the future generations is provided for and which I believe is the function of the financial community.

As the emphasis is on economical investment, the emphasis on performance has to be—that which most benefits the shareholders will therefore not go away. Immediate gains, whether in earnings or share price however are not what we need. Now what we really don’t need is to look at the next quarter. Or by how many percentage profits have jumped? What are the proforma earnings? What is the guidance? How are the analysts looking at the stocks? Who is going to acquire what?

Do these numbers say how long the company is going to last? Do we think this corporation is going to provide the income when the future generations need it the most? And if we don\'t, are we heading for the first signs of the punctuated-equilibrium that Steven J Gould is talking about? I think so. If we don\'t do it, the capital markets, as Drucker has said, will not survive. It will have to re-create. I am not talking in terms of 450 million years. I am talking in say the maximum of the next 25 or 30 years.

We will have to learn to establish new definition of what performance means in an given enterprise and specially in the large publicly owned enterprises. We will have to learn how to balance short-term results which is what present emphasis of shareholder value amounts to with long range prosperity and survival of the enterprise. Even in the purely financial terms we face something totally new. The need for an enterprise to survive 30 or 40 years, that is to survive until the investors are reaching pensionable age. This is a formidable goal. And so far quite utopian.

Have are we as the financial community focused on this? Have we come together along with many learned people at the government, more learned people who are managing our institutions, the stock exchanges for a better tomorrow? Or are we coming together to behave, as a recent issue of The Economist puts it, in a NASDAQ kind of manner—that is pay 10 cents for $100 for providing the liquidity. So, where are we going? That\'s the question that\'s being raised by Drucker.

And now, there is one more evidence of punctuated equilibrium which Drucker says in his latest book, Management Challenges for the 21^st Century.

These corporate banking giants, American, British, Japanese, German, French, Swiss have increasingly resorted to trading for their own account, that is, to outright speculation so as to support their swollen overheads. This, however, as centuries of financial history, beginning with Medici in 15th century Europe, teach us, has only one—but an absolutely certain outcome—catastrophic losses.

We are seeing these losses in our own country. If you look at the news only two days back that college pension funds investing in Global and Himachal through a broker whom they did not know. Was there any responsibility towards the society, towards the people who have given the college funds to them to see that they fulfill their duties? Perhaps this is also happening in -- but why perhaps -- this is also happening in USA where the university funds are being put into equities and the losses have been tremendous. So entire greed is driving us. We are not looking at the fundamentals. What fundamentals I mean, I will talk when I end the presentation.

And there are huge losses resulting from misreading of the trends. You can see in the LTCM (Long Term Capital Management) ibroglio. It was leveraged to such an extent that despite all the models which those Nobel Prize winners who were it founders, put forward, they weren’t good enough. And it was Mr. Alan Greenspan and the banks that had to come to their rescue. Another such model also has been described in The Economist and that is on Fannie Mae and Freddie Mac. The title is aptly called Unexploded Bomb. If house prices fall by 20 percent and the interest rates go up, these two bombs will explode.

Now, do we see any parallel here? Are the housing finance companies going into these kind of leverages and mismatches? If they are, then I don\'t know about U.S. but in this country I can\'t date it, very soon, there will be a reason when the interest rates will skyrocket or perhaps the property prices may go down. McKinsey has recommended to the government to open up the land ceilings and as a matter of fact the Indian real estate prices are the highest in the world. Are housing finance companies properly financially structured? And if they are leveraged, what can happen with this mismatch of 3 years to 15 years when the interest rates go up. Are we thinking of this or we are merely thinking of per-share earnings, growth rate instead of looking at the durability? Are we becoming greedy or we have just not thought about it.

As Drucker says, "There is no country today that is immune to sudden currency fluctuations for the simple reason that the world is awash in ‘virtual money,’ that is, in liquidity for which there is no profitable investment. Every country therefore is awash in money that is not invested in property, in businesses, in manufacturing or in service enterprises, but kept in liquid and volatile ‘portfolio’ investments. And very few countries have enough surplus in their balance of payments to service the interest of ‘portfolio investors,’ let alone to pay it out should it take the flight. Every country\'s currency in the other words is at the mercy of the short-term movement of money for which there may not be any economical rationale whatsoever.

I would at the time of conclusion come to this why this could happen to us and if this were to happen to us what the banking system would do? And I think it is very likely. I am a bit positive about it. I can\'t date it but I am positive about it. So we will talk about it. So this forms the base and now I come to the most discussed part of the accounting reforms, namely the ESOPs.

Here is a question that is asked to Mr. Drucker in the January 2001 issue of Red Herring.

Q: You have said that giving knowledge workers stock option amounts to nothing more than bribing them with currency that will have diminished value after the stock market boom subsides. This is really happening.

A: I have told some of my friends and my clients five years ago that we have plenty of experience with this, especially if you have been around a long as I have. Financial incentives don\'t prevent people from leaving. They motivate people to leave because the moment they can get that bonus or exercise all those options, then the immediate financial gains becomes their only motivation. Companies that have gone in more for these things have had the greatest turnover. IBM once had the largest alumni association in the world"

Now, let us look at the phenomena called day traders. Let me quote Drucker, "If I sound like an old financial man, now, I am, you know. But we believed that when you see that the trading volume isn\'t people who buy shares or who sell shares but traders buying and selling short term than the market has become out of control."

Is this market going out of control? Please listen.

Questions lile whether it has productivity, whether it has innovation, whether it preserves capital, the answer is that it is not important. The answer is greed of financial communities for bigger commissions which includes the stock exchanges. It includes NASDAQ, it includes NSE and it includes the BSE. How many terminals can we sell? How much of turnover can we have? Nobody has ever asked how do we provide for the future generation? That is not important to us, it appears. Aristotle’s wisdom is not important. Aristotle said once that in a civilized society parents save for their children. Whereas the barbarians they have consumed everything before them and pounce on the accumulation of others. Is this what is happening?

And if it is, are we again going into punctuated-equilibrium? Again to quote Drucker, "It is a period of change in which one must invest in things that, firstly, have high risk and secondly, require some years. Anybody who understands anything understood that."

Do we talk about what is called considered long term? Today going by the financial papers or for that matter the electronic media, six months is considered long term. I don\'t know how you write six months is long term or three months is long term. So what would be needed for a Corporation? Let there be a dialogue, let there be a national dialogue. What will be necessary for the corporates to survive? What is the misfortune I would say of Unit Trust that historically it could only invest in something that was not going to survive. That has happened to ICICI, that has happened to IDBI, that has happened to IFCI. Why has it happened?

It\'s very simple. And the simplest explanation is given by Drucker, "I, with my clients, go on a simple assumption: you cannot survive as a manufacturing company. You must become a knowledge company based on the distribution." What are the characteristics for the companies to go because the entire asset base is just moving out. I have been telling people that no cement company has ever made any profit at all. If you go back to 1985, the capital cost was Rs 600 a tonne. Today it is Rs 3600. We have provided the depreciation over a 20 years lifespan on this Rs 600. Now the plant life is over, so you need Rs 3600 for which the community is going to pay. There are no profits. All the depreciation and all that you collected has gone back to the repayment. So we have to think a lot. Because I mean is this a subsidy? Or what we can do about it? How can new technologies contribute? Now, we need a national debate for this. The debate from the intellectuals. Not lay persons like me.

So, are we going to survive this kind of a free market capitalism? That is another question. AOL buys Time Warner in a deal worth $ 183 billion which later resulted in a $54 billion write-off, the largest ever. So, what we have done? The entire 90s belonged to such greed. Nothing else. Greed and the destruction of the wealth. There are two ways of looking at it. One is as from Joseph Schumpeter pointed out in his theory of creative destruction. The another way is as I am trying to point out is the destructive creation that we are implementing through this free market. It\'s a destructive creation. It\'s not creative destruction. Warren Buffett says owners suffered losses in billions while CEO and the promoters who fathered this disaster walked away with immense wealth. That means that as shareholders face losses, owners escape with billions.

So, you know why Mr. Buffett takes $100,000 a year as his remuneration, the lowest among Fortune 500 companies. Why is he still living in a $38,000 house that he purchased some 50 years back? Why is he still sleeping on the same mattress? Is he creating the wealth? I mean all these questions are coming up here.

I will like to quote a short write-up from Jeffrey Sachs, "Most importantly the policymakers should stop catering to the whims of the short-term investor and should impose regulations that favor long term investor relationships rather than volatile short term capital flows."

Is this what is happening to us? Or the other thing he says: "Financial industries should adapt tougher codes of conduct to avoid the conflict of interests in financing. The financial industries should overhaul it\'s training so that the analysts understand the economics of markets in which they operate."

Now, here I am coming to what it is. Have we thought about the macro picture that is emerging in this country possibly -- you can’t swear to anything -- we all have to talk about the possibilities. There are no certainties in this world except the taxes and the death. So let\'s talk about this possibility. Let\'s for the time being look at our GDP at $500 billion. The forecasted deficit is 5.7 percent. Then we also have a deficit of all the States, of about 4.3 percent. As a matter of fact day before yesterday that was a write-up in Economic Times which suggested that Maharashtra government may default on Rs 60,000 crores worth of guarantees they have given on the bonds.

Then there is an oil pool deficit. The total deficit should be around 10% of GDP. That takes our national deficit to $50 billion. Now let\'s compound this for five or six years. This means that by the next five to seven years we will have to finance a deficit of half a trillion dollars. I am not talking in rupees. I am talking in terms of dollars. Now where do we go in a scene what Drucker has defined or has said what the capital flows are? We say we have got $56 million reserves. It\'s not a reserve. It\'s a deposit. It can go out next day. Or even if it is a reserve it\'s equivalent to just one years deficit.

Let\'s look at other statistics. Are we using our resources well? Or are we are merely talking about per share earnings, book values or the NAV\'s performance? In India there are about 22 million acres under cotton. We produce roughly Rs 96,000 crore of cotton, which is 2.5 percent of the GDP. Our average yield per acre is 500 kg. If you go to our under developed neighbor, that is Pakistan it is 860 Kg. If you go to China it is 1800 Kg. If you go to Australia it is 3700 kg per acre. So are we making good use of the land that we have?

Or you know as McKinsey points out that the total wheat consumption in UK is equal to the wheat loss in India. Why is this so? There are no roads, there are no ports, there are no storages, the water levels are coming down, the size of the farm has come down to 0.18 hectare per plot. If we are growing at say 4 or 4 1/2 percent of the GDP, it takes about 18 years to double your GDP in real terms. How is the government going to collect that tax and beat this deficit. Where is it going to come from? Are there any answers for them? I think there is one answer that has been provided which appeared in Business Standard on 16 March. And this is from Mr. Shankar Acharya who left the finance ministry for reasons I don\'t know. He gives the following table.

Principal Crops: Growth of Production and Yield (% per annum)

See the fall in productivity. So, what is happening? The productivity which is the very base of the economic growth has suffered.

Today we are getting capital flows of about $4 billion. That is the sanctions and the real flows are only $2 billion. As a matter of fact China gets around $50 billion a year. We are going to need capital. We are going to need to use it well. Our allocations are very poor and these are very poor allocations. So where is the purchasing power going to come from? And if this purchasing power is not going to come, then what happens?

This is the last submission that I want to make.

Today the 15 or 20 year government paper is quoted at around seven percent. Am I right? Now if these capital flows have to move out because of their very nature or because of our economic neglect what would be the interest rates? If the interest rates, if something similar to what happened in Mexico, I was in San Diego in 1994 or 1995, when interest rates in Mexico went to 40 percent per month. This was because the capital flows moved out. You can look at Argentina. Or you can even look at Japan where the moneys have been invested in not productive assets.

Now if this paper, presuming that instead of 7 percent yield is quoted at 15 percent yield, then what would happen to the banking sector? So, a time has come when the bankers should shun this government security, start lending to the smaller enterprises. Let the government encourage education, let there be schools here—because the education is the finest catalyst that this country can create. Let there be schools, let there be entrepreneurs, let our lending go there rather than financing the government deficit of 10 or 11 percent. So as Drucker pointed out as what Schumpeter said that in Austria the government started financing the First World War through the borrowings and not through the savings. In this country today whatever we are doing we are financing everything by deficit and not by savings. We have a 22 percent savings, but where are the allocations? That allocations if we look, destroys all our savings.

So with this background, the last part of this talk is from DeBono. He has written a book titled word power. It\'s a description of 265 words. One of them is GoGo. He says that striptease plays for you, bares for you, till you have the money. The moment the money is exhausted, she runs away. And that is what is called GoGo. He describes that the capital markets are in the GoGo mode. So those who are interested in looking at the capital market, should look at DeBono, what he has to say about this new definition of the capital market. I think this should be good enough to make us all think whether we are in for this punctuated equilibrium or we can carry on as we did for number of years.

The two guide posts of our economy must be productivity and innovation. If we achieve profits at the cost of downgrading productivity and not innovating, they aren\'t profits. We are destroying capital. On the other hand if we continue to improve productivity of all key resources and our innovative standing, we are going to be profitable, need not be today but tomorrow. And by looking at the knowledge applied to the human work as a source of wealth we also see the function of economic organization.

Thank you.