Vijay Kumar Gaba: April 2013

Tuesday, April 30, 2013

Mandate 2014 – Reforms ain’t mean same for Delhi and Sangli

Scooty (e.g. Activa) and mobile phone have empowered women more than any policy initiative or legislation.

People were least sure as to how reform in power sector, insurance, banking, financial markets, FDI in retail trade, Direct Tax Code, sugar decontrol, highways development, disinvestment etc. would impact their lives.

Most traders in all states except Goa were quite wary of the GST.

During our road trip to six states including the poll bound states of Karnataka and Delhi, we tried to assess the views of the common people about economic reforms – relevance, need, direction, perceived benefits etc.

We discussed with numerous people to find out (a) what has happened in past decade or so that has made difference to their lives (for good or worse); and (b) what would they want the government to do immediately to improve their lives.

Without leading them to any specific direction, we kept the discussions primarily centered around their day to day life and future of their children.

The key highlights of the feedback we received from people were quite reassuring, though not surprisingly.

Key highlights:

(a) We found that the social sector schemes have impacted the people lives more than the economic reforms, especially in rural areas.

Despite frequent news of irregularities, people overwhelmingly suggested that schemes like mid day meal, girl child education, NRHM and MNREGA have positively impacted more lives in almost all the states.

Financial inclusion (SHG, MFI, Banking Correspondents) was the only economic initiative they could cite as having impacted their lives directly.

(b) Most in Maharashtra, Karnataka, and Punjab believed that the infrastructure situation has worsened over past decade. People in Haryana, Delhi and Goa suggested that infrastructure has improved in past decade.

Delhites however felt that it is still inadequate. Public health and education was commonly suggested as the “Worst in the world”.

(c) PMGSY (the flagship rural roads scheme) was widely suggested as the game changer in Maharashtra and Karnataka. (From our past experience we know that same is the case with a majority of the states.)

(d) Mobile connectivity was expectedly cited as the best technological evolution that impacted the rural lives.

(e) In Delhi most of the people we spoke to cited metro rail as the boon that has improved their life significantly.

(f) In rural Maharashtra and Karnataka, obtaining drinking water consumes 6-8 man hours. Electricity is still inadequate. We estimate focusing on these two could enhance productivity and income potential in rural and semi-urban areas substantially.

(g) We felt that strictly implemented prohibition legislation would bring more prosperity to Haryana and Punjab than any economic reform.

(h) Most urban residents felt that education and health reforms are more critical than economic reforms.

In the next phase of our journey we shall be covering Gujarat, Rajasthan, UP, MP, Chhattisgarh, Bihar, Jharkhand and some parts of Maharashtra.

Monday, April 29, 2013

Mandate 2014 – Corruption matters. Alas! Not the way it should

Corruption does matter positively to us, as it helps in circumvent the law and get our way. Not the way crusader like Anna Hazare would like it to matter.

No one minds corruption if his child gets admission in a good school/college through backdoor; if he gets his passport without waiting in queue; if he can construct an additional room in his house without permission; if he could encroach upon the pavement in front of his house/shop; if he can dig a deeper borewell in his house or put a powerful motor in his water supply line when his neighbors’ taps go dry.

Most office goers in Delhi were happy with the flyovers constructed during the CWG. They have long forgotten and forgiven Kalmadi and other people responsible for putting the nation to shame.

Once the home minister of a state visited the Jail on the Independence Day. After finishing his speech, he asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and quality of food. Few wanted new blankets. Some daring one asked for a TV in the library. No convict asked for freedom. No under-trial requested that his/her trial may be speeded up, or he/she be released on bail as the trail proceedings had procrastinated beyond the maximum sentence they would face if convicted. The minister granted their wishes and won their adulation.

Last week two leading media channels broadcasted the findings of their respective opinion polls on Karnataka assembly elections. The finding of these polls prima facie do not match with the assessment we made while we toured across nine districts of the state a week ago, as part of our nationwide road trip to feel the socio-economic pulse of the nation.

Both the polls find that the corruption is the primary concern of people. Paradoxically, both the polls see large support for the former Chief Minister B. S. Yeddyruppa, widely considered as the epitome of corruption outside the state of Karnataka.

In our numerous informal interactions with people in past one month we found that at first instance people do express corruption as their primary concern. However, on scratching the surface a little bit, we found corruption has permeated deep in the DNA of people. The adaptation is so complete that very few (we found no one) would not want to use the means which are ethically or morally undesirable for their convenience.

For example, we found most would vote for a hard criminal, if the candidate is known to them personally, or if they feel that he would help them in getting their constitutional rights like license to work, school admission for kids, passport, BPL card etc. Everyone in a midsized town admitted that they would feel privileged if they “knew” local municipality clerk, SI at local police station or even a bus conductor who will give them free ride whenever they wanted to visit the city.

Last weekend, we happen to attend a meeting of a housing society’s members in posh Bengaluru location with the local candidate of a national party. The only request these educated upper middle class people made to this politician was to “provide a right turn in front of the society gate, as they have to go 500mtrs ahead to take a U turn”. No matter if this “right turn” would be very wrong as it would cause huge traffic disruptions. No one asked him to give an undertaking that he would not encourage corruption, if elected.

In our trip to Delhi we visited a colony Patel Nagar in central Delhi. We were shocked to find that over 95% houses in the locality have hazardous illegal construction. Many studio apartments originally allotted to the refugees from Pakistan in 1947, have been converted into 4-5 bedroom apartments. All pavements have been appropriated by the residents and there was no room to walk even on the road due to illegal parking of vehicles. If someone suggests that corruption is a concern for these people – he is grossly mistaken in our view.

Friday, April 26, 2013

Mandate 2014 – beyond white sand beaches and mustard fields

Besides Delhi and Karnataka, we covered the states of Goa, Maharashtra, Punjab and Haryana in the first phase of our nationwide survey.

Goa

The best part of the journey so far has been the trip to Goa. We mostly focused on rural Goa, away from white sand beaches and luxury resorts. After an extensive 3day trip covering over 1000kms, we discovered that the popular debate on sustainable development model might be completely misplaced. While we often hear about the Gujarat vs. Bihar model of development, in our view Goa indeed presents a good example of sustainable inclusive development. We found people generally happy; infrastructure excellent; education system exemplary; police surprisingly courteous, friendly, honest and firm on the compliance; communities in harmony; and growth inclusive.

Insofar as the political mood is concerned, for a change, most people were found satisfied with the establishment. BJP should be advised to showcase Goa more prominently in the national discourse, despite its tiny size.

Haryana & Punjab

We avoided NH1 in our visit to Punjab and Haryana covering 9districts besides Chandigarh. The key highlights of the trip were as follows:

(a) In Haryana most people were critical of the political establishment, but would not do anything to bring a change. Alcoholism is a major concern both in urban as well as rural areas.

Sex ratio and Khap dictates were not found to be a real concern. The gender discrimination was absolute in rural areas and substantial in urban areas.

Traders, SME and real estate developers/investors were found to be financially stressed. Farmers in general were buoyant.

Corruption was not found to be a real concern. Congress continues to be the most preferred party in the current circumstance.

(b) Punjab appeared most impacted by the global slowdown. The cases of reverse immigration from Europe have increased in past year or so; though the youth still aspire to migrate to West.

Alcoholism is a major concern both in urban as well as rural areas. The gender discrimination remains high in rural areas, urban areas are seeing remarkable improvement.

Corruption is not a real concern in Punjab also. Unemployment is high and rising. Paradoxically labor availability is a major concern with all three sectors – farm, construction and manufacturing. SMEs, traders are financially stressed. Investment in farm sector is decelerating fast.

Middle classes and workers are mostly indifferent to political establishment. This might be a bad news for Congress and BJP both.

..…to be continued on 29^th April

Thursday, April 25, 2013

Mandate 2014 – Karnataka and Delhi

BJP appears losing in Karnataka, but there is no Congress wave. BSY appears headed towards political oblivion ala Kalyan Singh in UP.
Delhi will be a close contest between BJP and Congress. BSP could surprise with 3-5 seats in 70member assembly.
Drinking water is main problem in both states.
Rise in unemployment and crime due to mining ban and draught are real concern in Karnataka.
CWG scam/shame appears mostly forgotten/ forgiven.
Women security, inflation and corruption are not real concerns for the people in Delhi despite media blitzkrieg.

In past four weeks our team travelled extensively in the poll bound states of Karnataka and Delhi. While these two states have a little in common, the indifference of common people towards political establishment was too stark. The corruption, contrary to popular perception, was not a real concern though in Delhi it was major topic of discussion. The key points noted during these interactions and general observations were as follows:

Karnataka

We travelled to eight districts in north and central Karnataka viz. Belgaum, Uttar Kannad, Dharwar, Bagalkot, Bijapr, Gulbarga, Gadag and Bellary and spoke to over 300 individuals and few groups of people from different walks.

(a) The festive look usually associated with election was completely missing. People were totally indifferent to political parties and establishment. Corruption is an issue that does not bother many people.

(b) Mining ban and draught has caused substantial rise in unemployment, especially in rural areas, and crime in urban areas. The economic stress was too conspicuous to ignore even in remotest of places. 28km stretch of NH4A from Ramnagar towards Belgaum city which had only potholes and virtually no road aptly reflected the mood of the people. Electricity and drinking water are two major concerns for women.

(d) Insofar as political preference is concerned, BJP appeared losing but there was no wave for Congress. Former CM B. S. Yeddyurappa appear headed towards political oblivion, ala Kalyan Singh in UP.

Delhi

(a) Though elections are few months away, Delhi is already buzzing. People are discussing only politics and little else.

(b) Arvind Kejariwal is a topic of discussion but hardly considered a political force to reckon with. Large scams like 2G, Coalgate etc. do not excite people. People are mostly satisfied with the infrastructure created during CWG and largely appear to have forgiven the scam/shame part.

(c) BJP leadership is highly charged up but workers on the ground are completely disenchanted. Absence of strong local leadership is impacting the morale. Congress also remains a divided house. BSP is making further inroads into East, North East and South Delhi. In our view, it will be a close contest and BSP with 3-5 seats could be a critical force in 70member assembly. Announcing Modi a PM candidate may help BJP massively in Delhi election at least, as Gujarat CM is found to be extremely popular amongst youth and middle classes of Urban Delhi.

(d) Drinking water is a major concern in many pockets. Women safety, corruption etc. were not found to be real concerns.

(e) Real estate developers, auto dealers, commodity traders and SMEs are under tremendous financial stress. Inflation has impacted consumption patterns though it may not be an election issue..…to be continued on 26^th April

Tuesday, April 23, 2013

Mandate 2014 – Anxiously indifferent

In February this year we had conducted a small impromptu survey to assess the political mood of people across the country, with special regard to “Modi vs. Rahul” debate. (see here)

Encouraged by the response of the readers, we have decided to conduct a comprehensive ground level survey covering 16-18 states to assess the political and economic mood of the people.

The survey began early this month and shall be completed in two months in three phases. Our team will be travelling through various states across the country to assess the mood of the people, their top concerns and expectations from the political establishment. The basic idea is to form an assessment regarding likely political formation post 2014 elections and the likely impact on the economy.

This exercise is completely different from popular opinion polls, inasmuch as our team shall not be carrying any pre-structured survey questionnaires with pre-defined respondent sample in mind. We shall be informally meeting and talking to people on the roads, public transport, temples, shops, farms, village gatherings, schools & colleges, etc.

In the first phase, we travelled to six states, including two election bound states of Delhi and Karnataka besides Maharashtra, Goa, Punjab, and Haryana. In this phase we spoke to over 1400 people from a variety of profession/occupation and socio-economic strata.

Key highlights

(a) A vast majority of people were found to be totally indifferent to the political parties. The general refrain was that all political parties are same and there is little ideological differentiation to make.

(b) The youth in all state was found to be fretful. Lack of sufficient productive employment opportunity near home was the primary source of anxiety amongst rural youth.

(c) The urban youth had much more to bother about – electricity, drinking water, education, inflation, traffic congestion, pollution being some popular concerns.

(d) Prima facie corruption was the first thing most urban people were found to be agitated about. On deep probing however over 70% agreed that they count on corruption in public offices to get preferential treatment.

Politically also they would prefer to vote for someone who they believe will help them in getting odd jobs done, irrespective of the party or ideology of that person. An overwhelming majority (both urban and rural) suggested that they do not voting for a proven criminal if he can afford hem favors like bank loan, gun license, passport, government job, shop/hawker license etc.

(e) The people in Delhi and Haryana were willing to discuss (only!) politics at length, while Maharashtra and Karnataka people were not too inclined. People in Goa mostly refused to talk to politics.

…to be continued on 25^th April

Monday, April 22, 2013

Gold is not aluminum as yet

As we all know before the turn of the last Century, Aluminum was thought to be more precious than Gold. Most powerful kings were served food in aluminum utensils while the lesser knights had to do with gold flatware. The sudden change in the value of aluminum took place when much cheaper means of refining the ore became available. Suddenly, it was disposable - as in aluminum foil or cola cans. In no time it transformed from most expensive thing in the world to garbage.

In past couple of weeks we have received numerous queries from many readers about the strategy for gold; some of these being panic struck. The underlying theme was the fear that the gold might have taken a wrong turn on the path that follows aluminum journey to south.

We asked the following three questions to some of those who were most jittery.

(a) Did you INVEST in gold? If yes, what prompted you to do so?

(b) Have any of the assumptions that prompted you to invest in gold changed in past couple of weeks?

We have got no reply so far. We are not expecting any either.

In our view, the gold is a non-productive asset that cannot and should not be considered as an investment option.

Traditionally, for many centuries, it has been considered as a store of value for its limited supply and physical traits that make it indestructible. It should be considered as such only and used for parking a small part of one’s networth (say 5%) for extreme emergencies. Normally, you should not bother about the market price of gold bars (or ETF units), as you do not about the market price of your home (unencumbered) or ancestral jewelry, unless you are on the brink of bankruptcy.

Insofar as the recent fall in gold prices is concerned, this could be a normal market cycle. The gold prices corrected more sharply during 1975-76 and to similar proportions in during 1995-99.

It is important to note that none of the assumptions that caused 12yr bull market in gold has changed dramatically in past 2months. Most large economies in the world remain fiscally challenged. Interest rates in developed world are close to zero and may only rise in the coming years. The only way for governments to ease fiscal burden would be to keep real rates negative - gradual rise in inflation as interest rates bottom out. In this scenario bonds and stocks may remain overvalued for extended period of time – creating a favorable environment for gold.

The so called currency war, will push central bankers to accumulate more gold; and poverty alleviation in India, China and other emerging economies will create enough consumption demand. A bonus could be if a sub-prime like bubble pops out in gold. Remember a few months back Germany asked for its gold back from US!

Friday, April 12, 2013

A midway diversion to nowhere – youth policy

The young demography is famously the biggest strength of Indian economy at this point in time. However, the rise in incidence of social unrest and violence; spread of Naxalism; rising unemployment and serious deterioration in the skill level of the educated youth suggest that if not managed properly this may as well prove to be the nemesis of the fabled India story.

There could be no argument on the fact that Indian growth in past two decade or so has miserably failed in creation of adequate productive jobs for the burgeoning workforce of the country. MNREGA has helped to some extent, but it is bound by fiscal constraints, leakages and lower productivity. Disguised and underemployment also continue to impact the productivity and earnings potential.

In our view, in spite of fully recognizing the potential of the youth and the problems faced by them, successive governments have mostly failed in implementing an integrated youth policy that would focus on harnessing this tremendous reservoir of energy.

India has so far issued three editions of national youth policy. The first edition was a brief 5 page vision paper which recognized the importance of youth but did not provide any conceptual framework for the growth and development of this one third segment of the population.

The second edition was issued in 2003 and contained a detailed framework for the implementation. It recognized that “the question of employment is, at present, of very serious concern for the Indian youth and that several social issues arise out of widespread unemployment and under-employment of the youth”. The policy emphasized that “critical issues in this area include a mis-match between skills-requirement and employment opportunities, low technology levels, low wages and low productivity, occupational shifts in employment, under-employment owing to seasonal factors, excess labor supply in relation to demand, migration of the labor force from the rural to urban areas and limited participation of women in the work force, especially in the organized sector”. Financial inclusion was included as one of the objective for the first time.

The policy was supposed to be implemented forthwith and reviewed after every five year. The change in government in 2004 however meant that it was hardly implemented.

The extant government has issued a draft policy in 2012 with the goal of “empowering the youth of the nation by bringing holistic development”. The objective, inter alia, include “Through a sustained programme of education and training and appropriate support services, help young people become economically self-reliant and productive units of the country, either by taking up employment or by setting up their own business enterprises.”

The policy has yet not been adopted. Given the political scenario we would need to wait till the next government assumes office and settles down “other priority issues”, before the next word is said on this extremely critical and potentially explosive issue.

Thursday, April 11, 2013

A midway diversion to nowhere – Energy policy

Energy deficiency had been one of the primary reasons for India’s fiscal and trade deficits. Failure in implementing an integrated energy policy has been a major failure of policy making.

It is widely recognized that “roof top solar panel” has the potential greater than the one seen in mobile telephoney in past one decade. Reducing energy intensity of water and developing a world class public transport infrastructure on priority basis, especially in tier II and III cities, and strict legal enforcement of energy efficiency should be considered.

The draft report of the Expert Committee on Integrated Energy Policy set up by the Planning Commission submitted in December 2005 explicitly stated that “India faces formidable challenges in meeting its energy needs and providing adequate energy of desired quality in various forms to users in a sustainable manner and at reasonable costs. India needs to sustain a 8% to 10% economic growth to eradicate poverty and meet its economic & human development goals. Such economic growth would call for increased demand for energy and ensuring access to clean, convenient and reliable energy for all to address human development. To deliver a sustained growth of 8% through 2031, India would, in the very least, need to grow its primary energy supply by 3 to 4 times and electricity supply by 5 to 7 times of today’s consumption. By 2031-32 power generation capacity would have to increase to 778095 MW and annual coal requirement would be 2040MT, if we don’t take any measures to reduce requirement. Along with quantity the quality of energy supply has to also improve. The energy challenge is of fundamental importance to India’s economic growth imperatives (empasis supplied).

The Expert Committee made suggestions based on the following approach:

(a) Markets that promote competition.

(b) Pricing and resource allocation to take place under market forces under an effective and credible regulatory oversight, as far as possible.

(d) Improved efficiencies across the energy chain.

(e) Policies that reflect externalities of energy consumption.

(f) Policies that rely on incentives and which are implementable

Despite having such a vivid idea about the problems and well documented approach to the solution, the government not only took a divergent route but also did all possible things to scuttle the growth of energy sector.

The NDA government had for once effectively dismantled the administrative pricing mechanism for transportation fuel; de-regulated the oil and gas exploration and production under New Exploration Licensing Policy (NELP); allowed private players in retailing of transportation fuel; privatized power production and related coal mining.

The successive governments however undid most of these steps in the interest of short term political gains. It dithered for many years on revision of market price of transportation fuel and LPG. Failed to implement the coal mining policy; national solar mission remained mostly on papers; nuclear energy program has seen very little progress despite all the political hoopla in 2009; subsidies have been misdirected and mostly remained uncontrolled till recently.

In past few months, the government again appears to have changed the course of the policy under severe pressure from global lenders, rating agencies and investors. But the diversion seems to leading nowhere as it is again an ad hoc step without proper framework and guidance.

Wednesday, April 10, 2013

A midway diversion to nowhere – Foreign capital

In the last five decades, policy towards private foreign capital has moved closely with exigencies of India’s external payments position, and with changing official perceptions of the role of foreign capital in alleviating or exacerbating that position. The early liberalisation of the late 1950s was in part motivated by a balance of payments crisis. The restrictive regime of the 1970s, and FERA in particular, was influenced by the belief that excessive remittances of foreign enterprises were worsening a precarious balance of payments position. The gradual liberalisation of the 1980s and the major reforms of the 1990s were, to different degrees, responses to external payments difficulties.

Recent spate of FDI liberalization (Retail, Civil Aviation etc,) is also mostly driven by the ominously placed CAD conditions.

There could be little argument on the fact that the changing structure of India’s socio-economic milieu require tremendous amount of capital investment.

The demand for civil and industrial amenities like power, transportation infrastructure (e.g., roads, airports, railways, ports, waterways etc.), sanitation, water, education and health etc. is rising with conspicuous rise in affordability. The demand for food, especially protein rich food, is also rising in non-linear trend since past decade or so.

However, the supply has not matched the demand in most of these areas leading to serious productivity constraints and persistently high inflation. This trend highlights the urgent need to invest huge amount of capital in building basic infrastructure and improving agro productivity. Unfortunately, all the required capital is not available within the country and we have to rely on the foreign capital for this.

In our view, this is as simple as it sounds and we need not have complicated the matter. If we need foreign capital, which we do desperately, we need to be consistent in our approach towards investors.

The basic rule of capital investment is that the investor needs (a) reasonable protection of his capital from systemic failures, (b) reasonable return on the capital, (c) mobility of the capital and (d) consistency in laws, including tax laws, governing the capital.

Despite the East India Company phobia at the time of independence, Nehru gave assurance to foreign investors in 1949 that there will be no discrimination between foreign and Indian capital and foreigners will be given full rights to earn and remit profits. The first industrial policy in 1956 also highlighted the importance of foreign capital.

The emphasis was however changed in early 1970’s with the implementation of Foreign Exchange Regulation Act, 1973 (FERA) which marked the first major departure from the stated policy of welcoming foreign capital. Ironically, the current Prime Minister Dr. Manmohan Singh was one of the key forces behind designing and implementing FERA first as adviser to the then finance minister L. N. Mishra and later as finance secretary.

In 1990’s FERA was repealed and replaced with much softer Foreign Exchange Management Act (FEMA). However, there have been frequent flip flops on the of issue foreign investment in India despite deep recognition of the need and desirability of such capital.

Frequent controversies surrounding foreign investment through Mauritius route and recent cases like Vodafone and Etihad highlight the lack of conceptual clarity and consistent framework for foreign capital.

It would be wrong to suggest that the complete removal of capital controls is desirable at this stage. However, inconsistency and incongruence in the framework governing the foreign capital is completely avoidable.

We need to remember investors will come when they like and not when we want them desperately.

Thursday, April 4, 2013

A midway diversion to nowhere - Disinvestment

A midway diversion to nowhere - II: Disinvestment

In spite of full recognition of the pertinence of limiting government’s role in business to core and strategic areas and exiting all non-strategic businesses successive governments have failed in achieving the stated objectives and targets. The February 2002 President address to joint session of the Parliament categorically admitted that “Learning from our experience, especially over the last decade, it is evident that disinvestment in public sector enterprises is no longer a matter of choice, but an imperative. The prolonged fiscal hemorrhage from the majority of these enterprises cannot be sustained any longer.”

The primary reasons for the abject failure, in our view, are (a) lack of a comprehensive policy framework on the issue of government role in business and (b) lack of commitment to the stated objectives of disinvestment. Evidently, the disinvestment program has been mostly used as a measure to manage fiscal balance rather than as a business or policy decision.

Consequently, in good times when fiscal and market conditions were favorable miniscule disinvestment took place; whereas in adverse market and fiscal conditions maximum disinvestment took place. Also the actual disinvestment in most cases did not follow any conceptual pattern. It was mostly on “what could be sold today” basis. The price realization was also substantially below par in most cases. Recently concluded NALCO, SAIL are classic example of distress sales. BSNL is probably epitome of government’s policy blunders.

For records, the Chandershekhar government in 1991 originated the idea of disinvestment in public sector enterprises (PSE) with the stated objective to “broad based the equity, improve management and enhance the availability of resources for these enterprises”. In April 1993 the Rangrajan Committee that was set up to make recommendation on the issue of disinvestment, made some radical suggestions which obviously remained unimplemented. The NDA government added the term privatization to disinvestment policy in 1999.

(Source: Department of Disinvestment) PSE Disinvestment so far

A midway diversion to nowhere

The desperation shown by the government functionaries especially by PM and FM in past 7-8months is exemplary. The “whatever it takes” façade presented by the duo did indeed enthused everyone for a while.

However, a conspicuous lack of vision, leadership and commitment that had in fact been the key weakness of most Indian governments since mid 1980’s has exposed the reality quite early in the day. The enthusiasm has given way to frustration and dejection all over once again.

In our view, the current socio-economic mess in the country is outcome of total adhocism in policy and program formulation & implementation, non compliance with the comprehensive socio-economic structure conceived in the Constitution, and lack of committed leadership, especially in past three decades.

The political establishment has so far mostly failed in justifying the midway diversion from the prescribed socialist framework taken in mid 1980’s. The obduracy shown by successive governments in relinquishing enormous amount of discretions enjoyed by political establishment has been a consistent obstruction in the way to evolve the intended quasi capitalist or neo-socialist policy framework that would lead to sustainable and faster growth.

A brief spell of high growth, which many may find accidental in hindsight, has probably misplaced the popular aspirations and thus added to the complexity of the problem.

The following are some of the glaring examples of lack of vision leading to ad hoc policy and program formulation leading to faulty implementation and avoidable strain on the fiscal balance.

(a) Lack of vision and commitment on public sector investment policy, especially public sector enterprises.

(b) Completely adhoc policy framework on foreign capital, through FDI, portfolio investment in equity and debt.

(d) Misdirected sustainability program – reflected in incongruent environment protection norms, inequitable resource allocation, imbalanced agri pricing, marketing and input subsidy policies.

(e) Attempt to implement massive social security and inclusion programs, like MNREGA, PDS, RTE, no-frill banking etc., without developing a conceptual framework and adequate delivery mechanism.

We shall be discussing these in some details in coming days.

We feel that the country needs to comprehensively review the constitutional framework for evolving a wider consensus on the policy direction for sustainable socio-economic development in the current context. Leaving many things to the discretion of the government of day may not serve much purpose.

To be continued…

Wednesday, April 3, 2013

Get, set…wait!

Dwindling car and home sales, slower air traffic despite sharp cut in fares, first negative reading on core sector growth in a decade, virtual collapse in capex announcement, slower project credit growth, and persistently low stock market volumes and volatility – all indicate the present state of confidence in the economy. The investors, consumer and businessmen all seem to have lost confidence. Pessimism is the only graph that seems to be moving up sharply.

Historically speaking this is a valid sign of imminent economy and therefore market bottoming out. However, in our view, the markets are yet not reading these signs and therefore not yet close to bottom.

We feel the concerns like depleted order books, rising NPAs, fast eroding margins, collapsing revenue etc. are well recognized and documented but not yet truly reflected in analysts’ earnings forecast. This might occur once 4QFY13 result are announced

Similarly, investors have been very vocal in their expression of concerns over worsening fiscal and current account deficits. The market volatility, volumes and flows are indicating that they are however not walking the talk.

The market tops and bottoms are usually associated with rise in volatility. During 2007-10 the market witnessed 121 daily moves of over 3%. Out of this 33 daily moves were greater than 5%. In past 2years we have seen just 6 moves of over 3% (none over 5%). No such move has occurred in past 15months. This suggests that the panic usually associated with market bottoming has yet not set in.

Post conclusion of budget session in May 2013, we expect the politics to completely dominate the economics. Monsoon and winter sessions may not see much activity given a heavy election calendar and minority status of the government.

Nonetheless, we continue to believe that the economic downturn that started

Q2007 shall bottom out in next 3-4 quarters. The market downtrend that started in early 2008 shall bottom a little earlier.

Watch out for the following signs before you set off the block:

(a) RBI panicking – watch for couple of unscheduled announcement.

(b) Collapse in G-Sec yields below 7%. This could be preceded by a sharply lower reading on core inflation chart, sharp cuts by RBI, and a sharp rise in NPA provisioning by banks.

(d) Nifty trading 10% or more below 200EDMA, and RSI is below 30.

(e) Nobody talks about stocks at social gatherings you attend, and you get a strong urge to sell the stock you have been holding for more than 5years.

(f) There are few large daily moves, ideally over 3% on closing basis, in Nifty.

(g) S&P500 in USA falls below 1275 and US 10yr yields breach 1.5%.

Tuesday, April 2, 2013

Why this kolaveri over current account deficit

Current account has conspicuously emerged as one of the primary concerns in past couple of months. Everyone – Government, RBI, investors, analysts, economists and financial institutions – seems extremely concerned about the current account deficit. The other deficits – fiscal, governance, trust, energy, infrastructure et. al. have taken a back seat for the time being.

In our view, the concern over high current account deficit, though not completely unwarranted, may be slightly misplaced. We worry that more than due emphasis on the problem may lead to desperate solutions leading to introduction of some structural imbalances in the economy, e.g., RBI postponing the replenishing of forex reserves, unwillingly liberalizing FII debt investment rules, enhancing export subsidies, etc.

Following the oil price shocks in the 1970s, there have been large swings in the current account balances of most countries. Australia, New Zealand, Portugal and the US have been running large current account deficits for the most part of the 1990s. At the end of 2000, the US current account deficit had reached to $415.5 billion, equivalent to 4.5 percent of US GDP. There is enough empirical evidence to suggest that while some countries such as Ireland, Australia, Israel, Malaysia and South Korea were able to sustain large current account deficits for many years, other countries such as Chile and Mexico suffered severe losses. Excessive current account deficits in crisis countries were also a prevalent feature of the 1997 Asian crisis.

Current account measures trade, international income, direct transfers of capital, and investment income made on assets. A current account deficit is when a country's government, businesses and individuals import more goods, services and capital than hey export.

The current account by definition should correct itself in due course. For example - the fall in currency value, a natural outcome of high CAD, should normally result in rise in the value of foreign and gold reserves of the country; it should make the exports competitive and destroy the demand for inflated imports if CAD persists for longer period; the high yield on currency should attract more capital resulting in higher investment, employment and savings rate resulting in creation of additional local capacities leading to import substitution.

However, artificial curbs like capital controls, managing the currency value at artificially higher level, and forced import substitution and subsidization, may introduce structural imbalances in the economy that may take longer to correct.

Given that the Indian currency is mostly convertible on trade account now (this was not the case during Asian crisis of 1990s) we need to be little more cautious. But interfering with market forces will only exacerbate the problem.

We continue to suggest a short trade on INR, with the expectation of a 7-10% fall in next 6-9 months.

Monday, April 1, 2013

It ain’t over till the fat lady sings

When the cows come home, the world might realize that the QE was nothing more than a scare crow assigned to protect the wounded and feeble global economy.

The money printed itself does not create inflation. It has to reach the hands of consumers who are willing to spend it at a time when supply of goods and services is constrained. None of these conditions exist or are likely to exist in foreseeable future.

Moreover, the liquidity created by Central Bankers does not automatically become capital. Somebody needs to take risk of losing it, to give it the color of capital. The liquidity chases 20-30bps arbitrage without taking additional risk. It is neither spent nor invested.

The Black Swan, if any, might come flying from the commodities’ world. By definition it will be visible only on the day it is visible. Bothering too much about that will not help.

The series of financial crisis that started in summer of 2007 has definitely taken an interesting twist with the latest episode (Cyprus). The script that was becoming boring and predictable has turned interesting again.

When the whole world thought that with the quantitative easing (QE) now effectively open ended in US and EU, and “committed to do whatever it takes” approach of BoJ and BoE, the Central Bankers might have run out of options, Cyprus solution has opened up many new vistas.

US had successfully experimented with a similar solution through IRS going after Swiss deposits of “tax evaders”. But this is much more direct and effective.

In our view this should make three things reasonably clear:

(a) The global financial system and investors are significantly better positioned and prepared for a Lehman like event and therefore chances of a 2008-09 like collapse in the global markets are substantially lower, irrespective of what the prophets of doom may wish.

(b) Incessant QE is proving to be a blessing despite all its criticism. The trends in global commodity prices in past one year clearly show that QE has not and will not result in the kind of hyper inflation many are expecting. In fact it may end up regulating inflation whenever the next super economic cycle begins (may be a decade or two down the line).

Inflation usually occurs when the amount of money available is more than the goods available. QE has just created cyber money to take care of volatility in financial markets. So far there is little to suggest that it has any impact on the real market for goods and services.

The commodity prices are down despite lower supplies (due to capacity shut down), largely in line with the trends in consumption demand. Banks and corporates have accumulated huge reserves to handle any black swan event and households are saving more. The business consolidation process is gathering momentum to complete the bottoming process.

(c) The USA will once again emerge a winner out of this crisis. Historically, most large European crises have been settled through a war. However, this will not be the case this time. You need truck loads of young people and trunk load of gold to fight a war. The struggling Europe may have none this time.

The emerging nations, including so called BRIC, have demonstrated that they are yet not prepared to move above their “developing” status. China may be the biggest short term loser of this economic down cycle.

So, we need to watch only the USA. So far its global leadership is not seriously challenged; the world is not coming to an end.

Focusing back home, India once again becomes a domestic story that would soon be pregnant again with hope of a better government post next election. Any investment strategy that assumes a higher than 7% sustainable growth is bound to fail, in our view.

We are accordingly restructuring our model portfolio – based on the USA and Hope.