The other day one of my relationship managers came to see me with two of his senior colleagues to talk about how I should think about investments in the current environment. One of the senior colleagues started sharing the banks views on the market, the interest rate scenario and prospects for gold and oil with a great deal of confidence. His confidence would have shamed Ben Bernanke at his own lack of knowledge. There was also no embarrassment that he had in late January with similar confidence predicted that the market correction had made it a good time to buy into the Indian market!
When I look back just one year to 2007 and reflect on predictions around food supplies, oil prices, the rupee-dollar rate and the interest rate environment, I am struck by how much we missed. I got our knowledge group to do a literature search to analyse when the media started reporting food shortages and found there was almost nothing in the popular press before a paper published by the International Food Policy Research Institute came out in 2007. The world had apparently missed the fact that when the per capita of a country like India doubles it might consume more food.
It is no different in respect to oil prices. Oil prices between 2000-2003 were around $30 per barrel, in 2007 were at $70 per barrel and today are at $140 per barrel with predictions taking it to $200 per barrel in the next year with equal confidence. Experts disagree on the cause of the shortage?demand, supply or speculation. If Mr Ram Naik had known in 2002, when he sabotaged the oil price decontrol decision and kept the powers with his ministry, how sharply oil prices would rise maybe he would not have been so keen to control them. Certainly Mr Aiyar who similarily kept the power with the ministry might have reconsidered and our oil subsidy burden right now might have been manageable. The consumer would have been weaned of subsidy in 2002 with a price cut and would have accepted the global price hike today more easily or at less cost.
Let us come closer home and see the movements in the rupee dollar rates over the past year. In January 2007 the rupee dollar rate was at Rs 44 to the dollar. In July 2007 it had strengthened to Rs 40 and so it stayed till March 2008 but today it is at Rs 43 again. In a matter of three months the rupee had weakened by Rs 3 per dollar. So the $8 billion Corus deal would have cost Rs 240 crore more in rupee terms in July rather than March. Last year, a noted commentator talked with confidence about the rupee strengthening to Rs 28 in the near future!
The experts who guide Indian corporates on foreign exchange and interest rates, the banks, are not picking these movements very well for themselves either. In fact, if you were to witness the recent bank petitions to RBI about not being forced to mark-to-market their bond portfolios because of the sharp interest rate movements, then you can see that their ability to predict such movements even over a three month period are quite poor. I imagine bank profits this quarter will reflect this inability. It will be more severe for those chairmen who thought nothing of going for some short-term glory by increasing profits for 2007 by dipping their hands into the till.
The people in the world today are all suffering from the poverty of predictions. The lesson in all this is to be careful of predictions. Half the time they are made without sufficient research and so go horribly wrong. At other times, people miss discontinuities that will make the future very unlike the past. Planning thus needs to understand possible scenarios and how to react to them by pulling the important levers that create real value over the long term. Hard work actually, but worth it.
The author is managing director, The Boston Consulting Group. These are his personal views.