Vijay Kumar Gaba

Current account deficit

Interest rates

Equity market returns

Politics

Thought for the day

“Risk comes from not knowing what you're doing.”

- Warren Buffet (1930 - )

Word of the day

Balk (v):

To stop, as at an obstacle, and refuse to proceed or to do something specified.

(Source: Dictionary.com)

Shri Nārada Uvāca

Heard the Chief Economic Advisor Mr. R. Rajan yesterday!

He must be realizing that sitting in Geneva (IMF) and criticizing the government is a fun thing. Sitting in Shastri Bhawan in Delhi and doing something is tough.

Thursday, June 20, 2013

Keep it simple — politics

Prior to 2009 elections, the scare of communists and Mayawati coming to power was so pervasive that nobody was willing to even reason why the communists were bad and why it was not questionable for Dr. Manmohan Singh to risk the government in the extremely tough global conditions, for civil nuclear deal whose benefits, if at all, would be seen only beyond 2020.

In our view equal credit for MNREGA and RTI, two major reforms done during UPA I should be given to the communists, who ensured that the Congress Party stays focused on the promise of inclusive growth and accountable administration.

We do not consider UPA II a coalition. TMC, NCP, DMK all have same socio-economic agenda as the Congress.

Heading into a major election, especially when the outcome is as uncertain as it could be, it is natural for investors to be jittery about the politics & policy environment and its likely impact on the financial markets.

We however find little evidence to suggest that elections, the form of government or strength of a particular party in the parliament impacts the market performance significantly. Though, usually it is common to see higher volatility during or around elections. We believe that higher volatility prior to next general election will certainly precipitate the market bottoming process.

Insofar as the fear of third front or fractured mandate is concerned we believe the investors should be relieved by the prospects of a true coalition coming to power. Because, post independence the best periods for the Indian economy have been those when a “coalition” government was in power.

It is however important to note that by “coalition” we do not mean multi party governments. In our view, coalition government means where people with different and many a time completely diverging socio-economic policies jointly participate in a government. They arrive at the common minimum agenda of agreement and focus on executing the same, hence avoiding conflicts and logjams.

The first cabinet of India post independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we still got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajeev Gandhi (1984) are not really known for good governance or socio-economic reforms.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), Chandershekhar (1990 – disinvestment, fiscal reforms), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, MNREGA) were all coalition governments. These governments are all remembered for socio-economic reforms causing fundamental changes in the economy. None of these governments is remembered for non-governance, anti market policies or anti business stance.

(…to continue tomorrow)

Also read other posts in this series:

Current account deficit

Interest rates

Equity market returns

Thought for the day

“Disability is a matter of perception. If you can do just one thing well, you're needed by someone.”

- Martina Navratilova (1956 -)

Word of the day

Falcate (adj):

Curved like a scythe or sickle; hooked; falciform.

(Source: Dictionary.com)

Shri Nārada Uvāca

Uttrakhand disaster is a stern warning by the ‘Mother Nature’ to all those trying to mess with her.

Wednesday, June 19, 2013

Keep it simple – Equity market returns

Also read other posts in this series:

Current account deficit

Interest rates

Thought for the day

“Nothing defines humans better than their willingness to do irrational things in the pursuit of phenomenally unlikely payoffs. This is the principle behind lotteries, dating, and religion.”

- Scott Adams (1957 - )

Word of the day

Phosphoresce (v):

To be luminous without sensible heat, as phosphorus.

(Source: Dictionary.com)

Shri Nārada Uvāca

Most good things keep company with problems.

Good monsoon has disrupted the normal life greatly. Expect June food inflation to spike sharply, before it comes down later.

Tuesday, June 18, 2013

Keep it simple – Interest rates

‘Interest’ is the compensation for one of the most important resource needed for production, i.e., ‘capital’. The rate of interest in short term mostly depends on the forces of demand and supply much like for other sources of production like labor (wages), land (rent) and raw material. However, over a longer period there are many factors that structurally impact the demand and supply of capital and therefore influence the rate of interest demanded and offered for use of such capital.

The benchmark or policy rates established by the regulators or central bankers theoretically play a critical role in determination of interest rate structure in an economy under normal economic conditions. However, in extreme cases policy rates may fail to transmit to the ultimate provider or user of capital.

Indian economy presently is passing through such extreme conditions. Therefore, policy rates established by RBI are not as effective as these should be under normal circumstances.

Banks have not reduced interest rates in past one and a half year despite RBI easing the policy rates. The reason for this failure in transmitting the policy rates are varied and multiple. For example:

(a) The default risk and therefore credit cost for banks has risen substantially in this period. Most of the credit demand is for re-financing of existing stressed loans or working capital loans. Thus increasing the risk premium.

(b) Fiscal profligacy has kept demand for government borrowing higher whereas higher inflation and higher administered small savings rates have led to lower deposits growth (supply of funds).

(c) Precarious BoP conditions have prevented the regulator from aggressively enforcing transmission, as lower rate could impact inflow of much needed foreign capital.

In our view, higher risk, higher demand and lower supply should keep interest rates in Indian context relatively higher for next couple of years at the least.

Also read other posts in this series:

Current account deficit

Thought for the day

“The more a sensibilitist I am; The more I seem to want my mountains wild.”

- Robert Frost (1874-1963)

Word of the day

Palinode (n):

a poem in which the poet retracts something said in an earlier poem

(Source: Dictionary.com)

Shri Nārada Uvāca

Jayalalithaa’s googly to BJP – AIDMK supports for communist D. Raja for his Rajya Sabha election.

Monday, June 17, 2013

Impact of rate cuts on equity markets

In past there is virtually no trend as to how market reacts to a rate cut or hike.

However, the only time the rate cut happened after a 5% or more market rally in the preceding month was in January 2009. The market fell 3% in the month following the rate cut.

On four occasions since 2001 Sensex has fallen 5% or more in one month preceding the rate cut. On two of these occasions, Sensex was also down one month after the cut.

In our view, rate decision today will have little impact on the market direction in next one month.

Keep it simple – Current account deficit

Our policy makers, regulators, economic commentators and analysts have all expressed their grave concerns over the swelling current account deficit (CAD) of India. However, we have not seen any concrete steps to address the roots of the problem. Most of the efforts seem to be focused on containing the legal import of gold and attracting more foreign debt so that at least balance of payment could be maintained. Last week the finance minister suggested that if Indians could restrain themselves from buying gold for one year, current account situation will improve dramatically.

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

Theoretically, CAD arising from trade deficit is never a risk in itself. The excess of imports over exports essentially means that our economy is doing better than the other economies who import from us.

However, it could pose a serious risk if it becomes structural and persists for a long period, especially for a deficit emerging market like India. Consider the following:

(a) Substantial rise in social sector spending over past decade has led to unprecedented rise in consumption demand from lower socio-economic strata. Domestic supply has however not been able match the demand. Burgeoning middle class has been demanding more phones, computers, luxury automobiles, textile, food etc. not produced locally, besides leisure foreign travel. Young demography and rising aspirations have led to ever rising demand for global education and training as we have failed in constructing enough global standard institutions. These trends are not likely to change substantially even if our economic growth persists at current low levels.

(b) The structure of our exports has changed in past decade in favor of engineering products and services from predominantly consumer goods earlier; meaning our exports are now highly correlated to global growth, which is not likely to improve in near future.

(c) This structural weakness in trade composition necessitates higher capital inflows so that at least balance of payment could be maintained; meaning we have to maintain our interest rates at relatively elevated level so as to attract higher foreign capital; meaning domestic investment will continue to suffer and supply constraints will persist for longer period.

Only serious structural reforms that attract significant foreign equity capital and other resources to augment domestic supply could resolve this conundrum. The current political structure does not seem to be conducive for such reforms.

Insofar as gold is concerned – the government and RBI need to evaluate, is buying gold worse than splurging on fashion textiles brands, accessories, perfumes, luxury cars and boats, studying in third grade central European universities and holidaying abroad twice a year?

Also read:

20 Program: Agenda for 2014 election

Thought for the day

“A grievance is most poignant when almost redressed.”

- Eric Hoffer (1902-1983)

Word of the day

Diglossia (n):

The widespread existence within a society of sharply divergent formal and informal varieties of a language

(Source: Dictionary.com)

Shri Nārada Uvāca

In spite of everything BJP and Congress together may still get 35-40% of the votes cast in next elections.

Any front, alliance, strategy that talks about keeping them out of government is undemocratic, undesirable, and unsustainable.

Sunday, June 16, 2013

Third front may wait for another 50yrs.

Today in a significant development the Sharad Yadav and Nitish Kumar led Janta Dal (United) decided to part ways with NDA.

The immediate consequences of this decision include:

(a) Exit of BJP from the NDA government in Bihar. Bihar will now have a solo JDU government. Though technically JDU is 4MLAs short of simple majority mark in the state assembly, there is no apparent threat to the government as some Independent and Congress MLAs would be happy to extend support to the government.

(b) The Congress led UPA II government at the center can breathe easy for the time being as it gets another potential “outside supporter” in JDU, should SP or BSP threaten to withdraw their support. Implying that the elections though look imminent would happen only in 2014.

Though JDU is limited to Bihar only, this move may have larger national implications in future. For example:

(1) As things stand today there could be greater understanding between various non-aligned regional parties like JDU, TMC, BJD, DMK, SP/BSP, TRS, TDP etc. Providing a larger ready block to Congress and BJP post poll, but with a larger negotiating power.

(2) Our ground assessment suggests that JDU may not be able to maintain its tally of 19 MPs without BJP support. Whereas BJP should be able keep its 10-12 MPs from Bihar. This may see the so far covert Sharad Yadav – Nitish Kumar conflict coming to the fore and leading to new equation in the state before next assembly elections. It is not improbable that Sharad Yadav supporters try to work out a split in JDU legislative party and form a government with BJP, which is just 30 short of half way mark, after 2014 parliament elections.

(3) BJP now has no option but to come together and put its entire weight behind Narendra Modi. With Shiv Sena still split and BJP faring badly in Punjab assembly(to the discomfort of SAD), BJP has only AIDMK as a large potent pre-poll ally. This implies that failure to reach 175+ mark on its own would cut Narendra Modi to much smaller size and emergence of Rahul Gandhi as undisputed National leader.

(4) The key battle for the government will therefore be fought in UP. Expect a violent fierce battle there as all four (SP, BSP, Congress, BJP) try to get maximum out of 80 seats at stake. In this context Amit Shah, Narendra Modi, Uma Bharti, Kalyan Singh and Varun Gandhi (a potent mix of Hindutva, backward, OBC, Youth, development) become critical. BJP will go all out to polarize non-Muslim votes.

(5) MP, Rajasthan, Delhi and Chhattisgarh election later this year will make things more clear. A 4/4 BJP win will accelerate the polarization process. Whereas a split of honors with Congress will accelerate the infighting within BJP.

In our view, as things stand today, Congress is marginally better placed to maneuver a majority in next general elections. A 4/4 verdict in assemble election will definitely tilt the scale in BJP favor. In both the cases expect a stable, lasting and better looking government in May 2014.

The third front will have to wait at least for another 5yrs, may be 50yrs.

Read our special series Mandate 2014

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Modi Vs. Rahul

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Thursday, June 13, 2013

Keep it simple – Economic growth in India

In our view India has a potential grow 6-6.5% on sustainable basis over next decade. This rate of growth is excellent provided we make it inclusive and sustainable.

Hopes of getting back to 8%+ growth trajectory on sustainable basis would only fuel frustration and motivate inaction.

In prelude to general election no government would want to admit a serious economic collapse, but the fact is that after growing over 8% (seasonally adjusted 5yr CAGR) during FY08 to FY12, the Indian economy has slowed down to more sustainable 6- 6.5%.

The optimists would want to believe that low growth is a temporary phase and we would soon get back to 8%+ trajectory. However, there is small section that accepts that 8% growth in current context is not only unsustainable but undesirable also. We are in the second school.

In our view, Indian economy and people are not yet prepared for higher growth, for the simple reasons:

(a) The current status of basic infrastructure, both social and physical, cannot sustain more than 6-6.5% growth. A forced higher trajectory would only lead to (i) crumbling of even this grossly inadequate physical infrastructure; and (ii) heightened social strife as the system will not be able to complement the burgeoning aspirations.

(b) The brief incidence of higher growth has only led to larger income disparities. With 5% people earning, saving, consuming, investing – we can reasonably expect to grow only 5%-6%. For 8-9% growth we would need 25-30% participation, which seems a distance dream as yet.

(c) 6% growth is not bad per se, provided it generates employment. This could happen only if additional productive employment is generated in rural economy and industry. 8% growth with little additional employment is completely unsustainable.

(d) On more philosophical note, we need a different mindset to sustain higher growth. Corporates not willing to comply with law and governance standards and blatantly refusing to share wealth with other stakeholders; total civic disobedience on citizens part; and badly fragmented society and hence political establishment – certainly do not constitute a conducive background for sustainable higher growth.

Also read:

Keep it simple – INR

Keep it Simple - QE