Vijay Kumar Gaba: August 2013

Friday, August 30, 2013

Will few more dollars and Sensex at 20K solve the problem?

In past few months we have repeatedly highlighted (see here) that the current socio-economic milieu of the country is quite reminiscent of the conditions prevailing during Mrs. Indira Gandhi’s decade of 1967-1977. Comparing this with current account crisis of 1991 or Asian currency crisis of 1997 is therefore fraught with risk of looking at wrong solutions.

Another evidence to support our fears could be seen in the reports that the government is looking to lower fuel consumption. At the first place, this distorted socialist mindset of curbing consumption rather than improving production and productivity is largely responsible for much of the ills plaguing Indian economy. Now perpetuating this legacy could only bring disaster, in our view. We hope, the government may wait to see the impact of curbs put on gold consumptions in past couple months before rationing petro/diesel or hiking duties on these products.

As the squabbling ministers of the Dr. Manmohan Singh’s cabinet play “pass the buck” and demonstrate to the world that they have absolutely no idea how to get out of this economic mess, the clamor for Narendra Modi is rising, especially in the urban middle class household and business community.

Many market observers and analysts have also highlighted that an early election and with Narendra Modi as PM outcome is perhaps the best solution at this point in time.

In our view, a strong decisive leadership is pertinent at all times. However, it is extremely critical during the periods of crisis like the one country id facing presently. Though not undisputedly supported by the evidence on the ground, Narendra Modi is popularly perceived as strong decisive leader. However, the perception is only small portion of the problem. The bigger part is the widespread social conflict about the appropriate development model for the country.

An overwhelming proportion of the population, which had been hitherto docile, is becoming assertive. Armed with constitutional protection for food, education, information, employment and resource ownership, this segment wants growth to be equitable, inclusive, and sustainable.

The model followed since independence has proven to be inequitable, exclusive and unsustainable. There has been no decade since independence when India did not face a significant economic crisis. The income disparities have grown, especially after economic liberalization since 1991. The policy makers and financial system have relied more upon global liquidity and charity rather than internal strengths in building the foundation of the growth and therefore growth has remain volatile and unsustainable.

Narendra Modi or any other leader so far has not offered a constructive agenda. From the resentment over proposed Maruti plant in Gujarat, it is evident that eventually Niyamgiri Panchayat decision will have to be accepted as the working template for the acceptable growth model.

A few extra billion dollars of NRI inflows and Sensex over 20k due to better perception will not matter much in bigger picture, in our view.

Thought for the day

“All things are subject to interpretation whichever interpretation prevails at a given time is a function of power and not truth.”

- Friedrich Nietzsche (1844-1900 )

Word of the day

Statis (n)

A state of balance, equilibrium, or stagnation.

(Source: Dictionary.com)

Shri Nārada Uvāca

Pray for a sub 4.5% GDP growth for 1QFY14 to be announced today.

That is the only thing that can keep the new RBI governor from raising rates later this month.

Indonesia and Brazil have already hiked rates this week to arrest the collapse in their respective currencies.

Wednesday, August 28, 2013

Two short stories

You cannot fool all the people all the time

In past 9 years there have been occasions when our economist prime minister and his colleagues have invoked coalition dharma to hide from their inefficiencies, lack of conviction, political convenience, misgovernance, and opportunism etc.

This politics of opportunism might haunt them for rest of their life as they would leave the country, especially the poor people who gave them two chances, in deep trouble in many respects – economic, foreign policy, socio-political divide etc.

The future generations will ask Dr. Manmohan Singh “If you could put your government at stake to get civil nuclear deal approved; If you could put your government at stake to get FDI in multi brand retail trade approved; If you could put your government at stake to pass Food Security Bill – why did you hid behind coalition dharma when it came to critical economic reforms?”

No one will trust when he writes his memoires and tell us that “he wanted to do so much but could not because of coalition dharma”.

Uncle Sam to have the last laugh

Post Lehman collapse, it appeared that the US is becoming a marginal force in the emerging global order. Emerging economies like BRIC, South Africa. Mexico, Indonesia etc. asserted themselves as leaders in a new multipolar world. G-20 was formed to undermine the supremacy of G-3, G-8 etc. The global multilateral financial and development institutions also saw rise in influence of these countries in their affairs.

However, the events of past six months are a subtle pointer to the fact that Uncle Sam may have lost a few battles, but it is certainly on course to win the war. Consider this:

· Plagued by sub-prime crisis which crippled its financial institution, the US did not bow down. It successfully transmitted the disease to these resurgent emerging economies and rescued its financial institutions.

Most emerging economies, especially India and China are now struggling with huge sub-prime assets with no clue as to how to get rid of these. After all their machines do not print US$ and Big Ben is threatening to slow down his printer.

· Many influential voices from the US have already suggested that the era of global economic cooperation and coordinated policy action is over. We will do only what is in the best interest of the US. If monetary tightening in the US disrupts common man’s life in 100 countries so be it.

· After becoming energy independent, the US does not bother about situation in Middle East or South Asia. Iraq was raided merely on the basis of unfounded doubts about weapons of mass destruction. Syria has actually used these weapons and no action is promised. The proposed Immigration Bill also indicates towards rising protectionism.

Thought for the day

“Hunger is a political issue, and there are several things politically that are keeping people hungry - not funding food stamps adequately, not funding school lunches adequately. So there is a political solution to the problem of hunger.”

- Tom Colicchio (1962 - )

Word of the day

Enervate (v)

To deprive of vigor, force, or strength; to render feeble; to weaken.

(Source: Dictionary.com)

Shri Nārada Uvāca

Early election or election on schedule?

Wonder why no one has spoken about delayed elections as yet!

Tuesday, August 27, 2013

What is ailing Indian economy and financial markets? – Part IV

QE tapering

One of the major concerns bothering Indian economy is the shift in the US Federal Reserve’s shift in policy stance – from very loose monetary policy to consolidation over next few years. Given that such shift shall be driven by improving economic fundamentals and not inflation, the USD is likely is strengthened by Fed tightening, much like 1999-2000.

The concern therefore is that at a time when Indian economy is struggling with structural weakness on account of falling growth led primarily by decline in investments, rising current account deficit, high fiscal deficit primarily due to unsustainable subsidies etc., a further fall in INR vs. USD and consequent hardening of interest rates may compound the problems and further delay the recovery.

In our view, it is a valid concern. However, we do not subscribe to the idea that it will lead to any collapse. For one, it is unlikely that any US monetary tightening will be disruptive, as economies outside are not showing much signs of economic recovery. Any disruption therefore may potentially stall the US economic recovery too, which is not a desirable outcome. Therefore, in our view, the easing process (popularly referred to as ‘tapering’) shall reverse if it causes significant disruptions.

Secondly, a weaker INR may not be a bad outcome for India as it may help growth of external sector. Nobody is betting on the recent bout of extreme volatility in currency value to last for long. Moreover, in the process INR may have accounted for a disruptive US monetary tightening, and therefore expecting further weakness in INR in near term may not be appropriate.

Thirdly, US monetary tightening may further restrain the already benign global inflation, a positive for India. This coupled with lagged impact of good monsoon, may actually bring the inflationary expectations down and thus alleviate the need for sharper rate hikes in near to short term Though we continue to believe that rise in US bond yields will lead to higher rates globally, including India, in midterm.

Fourth, monetary tightening in US may not necessarily lead to tightening in EU and Japan. In fact, it may lead to further easing, especially in Japan, to avoid the deflationary pressures to undermine the nascent economic stability.

For records, TARP – the US government US$750bn response to Lehman collapse, has more or less been withdrawn. No one talks about it. No one sulks over its withdrawal.

We had suggested in one of our earlier posts that QE is a matter of fact, not going anywhere. It will remain here till it completely outlives its utility – not likely in next 3yrs at the least, most likely till the time EU economy shows definite signs of revival, Japan achieves its objective of creating nominal inflation in the economy and gets out of decades of stagnation, and global trade rebalancing especially in relation to China makes steady progress.

We continue to suggest overweight on unleveraged exporters in IT, pharma and auto space.

Also read:

What is ailing Indian economy and financial markets?

Part – I

Part – II

Part - III

Thought for the day

“It is clearly better that property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition.”

- Aristotle (384-322BC)

Word of the day

Provenance (n)

Origin; Source

(Source: Dictionary.com)

Shri Nārada Uvāca

Should the Food Security Law provide for criminal liability for the minister and officers in-charge in case a death by starvation occurs?

Monday, August 26, 2013

What is ailing Indian economy and financial markets? – Part III

Indian currency

In our view, we shall see correction of speculative and cyclical fall in INR over next 6months and then a gradual depreciation over many years till we are able to correct structural reasons. The depreciation should mostly correspond to CAD and inflation.

Last week the finance minister appeared totally flabbergasted by the violent depreciation of INR. We agree with his current assessment that INR may be undervalued at this point in time. But the mute questions are “is this undervaluation without reason?” and “is it sustainable?”

Conceptually, like any other tradable thing, the exchange values of a currency vis a vis other currencies depends on the relative demand and supply of these currencies at any given point in time.

The recent sharp depreciation of INR vs. USD in recent months indicates that the demand for USD vs. INR has sharply outpaced the supply. There could be several reasons for this higher USD demand versus INR. For simplicity, we may classify these reasons in three categories (a) structural, (b) cyclical and (c) speculative. Some examples are as follows:

Structural reasons

· There have been some significant changes in the composition of foreign trade of India in past one decade or so leading to structurally higher demand for USD.

The structure of our imports has changed in favor of consumer goods. (A large part of this demand has in fact been generated through massive government social spending and failure to rationalize fuel and food subsidies.) On the other hand the composition of exports has changed in favor of engineering goods, from dominantly consumer goods. This has increased the correlation of exports to global growth which is not likely to improve dramatically in near future.

· A spate of scams, scandals and policy flip flops in past 5-7yrs have seriously dented the credibility of the Indian political establishment and administration. This has certainly led to increase in risk premium for INR denominated assets. Besides this has also prompted higher outbound FDI. There is nothing to suggest that this trend will reverse in near future.

· Serious infrastructure and procedural constraints have impacted India’s export competitiveness especially relative to China, thus resulting in slower exports growth.

Cyclical reason

· Persistently high inflation and huge fiscal deficit has led to higher rates and therefore higher value of INR in past few years. With inflation easing and fiscal deficit in control, the interest rates are forecast to come down. This may adversely impact capital inflows and therefore BoP. The recent sharp fall in INR could be attributed to this factor alone.

Speculative reason

· The Fed Chairman’s recent remark about tapering of QE has led to widespread speculation about rise in US bond yields and USD value. This has led huge speculative short positions in EM currencies (including INR), that have seen large USD inflows in recent years, anticipating outflows.

Also read:

What is ailing Indian economy and financial markets?

· Part – I

· Part – II

Thought for the day

“The best way to find out if you can trust somebody is to trust them.

- Ernest Hemingway (1899-1961)

Word of the day

Probity (n)

Complete and confirmed integrity; uprightness.

(Source: Dictionary.com)

Shri Nārada Uvāca

Will diesel prices hike by Rs. 8/ltr rationalize consumption and promote energy efficiency?

Friday, August 23, 2013

What is ailing Indian economy and financial markets? – Part II

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.

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. The equilibrium is achieved through currency and interest rate adjustment. Currency depreciation should normally lead to demand for imported goods falling and exports becoming more competitive and hence bringing trade account to balance. Higher interest rates should attract more inflows, contain inflation, encourage savings and eventually lead to current account balance.

The CAD is concern if you do not allow market forces to operate freely, for socio-political concerns.

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 also been demanding more phones, computers, luxury automobiles, textile, food etc. not produced locally, besides increasing the spend on 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.

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 substantially in near future.

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.

Higher interest rate, larger convertibility for INR and unhindered FDI is inevitable, unless we choose to become a closed economy again. A large majority of our businesses are absolutely unprepared for this eventuality. So are our politicians who would not like to lose control over economy.

Consequently, notwithstanding small 2-4year period of exuberance in between, longer term structural imbalances should continue to prevail and so do CAD and weaker INR…..to continue on Monday

Also read:

What is ailing Indian economy and financial markets? – Part I

Thought for the day

“Women and cats will do as they please, and men and dogs should relax and get used to the idea.”

- - Robert A. Heinlein (1907-1988)

Word of the day

Quincunx (n)

An arrangement of five objects in a square or rectangle, one at each corner and one in the middle.

(Source: Dictionary.com)

Shri Nārada Uvāca

Former PM Rajiv Gandhi discovered the huge (85%) leakage in social sector spending 27years ago. The government is claiming that it is making effort to plug it through DBT and touting this claim as big achievement.

Anyone expecting a faster action by government on anything else should relax and watch TV commercials.

Thursday, August 22, 2013

What is ailing Indian economy and financial markets?

The popular discourse about “what’s ailing Indian economy and financial markets” during past 6months has been mostly focused on five issues:

(i) Policy paralysis;

(ii) Economic reforms;

(iii) CAD;

(iv) INR

(v) Fed tapering.

Apparently, the government, regulator, businesses and investors have expressed concern over these issues from their own perspectives. However, most have refrained from discussing what in our view is core of these issues. Consider the following:

Policy paralysis – who caused it?

Businesses and investors have vehemently castigated the government over policy paralysis, e.g., inordinate delays in taking critical economic decisions and execution of large infrastructure projects.

The government on its part has denied the allegations, though the macro economic data would suggest otherwise. What nobody is telling publically is what caused this paralysis at the first place.

In our view, infamous Radia Tapes offer the answer to this. The responsibility lies equally on the vested interest in corporate world and political circles. Our analysis further suggests that paralysis was a direct consequence of CWG and 2G scams, which at first place widened the rift between bureaucracy and executive. Remember, at first instance only bureaucrats were arrested and politicians were spared.

The Supreme Court attempted to set the record straight by castigating unusually subservient attitude of CBI. The investigating agency responded well by immediately engaging Mr. Pawan Bansal and Mr. Navin Jindal. But the mystery of missing coalgate files and hardship faced by couple of IAS officers from UP and Haryana suggest that the struggle to retain control continues and so does policy paralysis.

Economic reforms

The outrage seen after announcement of GAAR in 2012 union budget and alleged irregularities in coal block and 2G spectrum allocation, in our view, arouse suspicion that the Indian corporates who are used to working under the patronage of political establishment might be averse to economic reforms, contrary to what they claim publically.

That is perhaps why no one is discussing is that economic reforms often mean transformational changes that not necessarily lead to immediate rise in corporate profitability and aid in resource grabbing. On the other hand these usually do lead to lesser protection, more competition and larger accountability for corporates. If you do not want to pay taxes, cost of compliance and market linked compensation for exploitation of natural resources clamoring for economic reforms may not yield much.…to continue tomorrow

Thought for the day

“They didn't want it good, they wanted it Wednesday.”

- Robert A. Heinlein (1907-1988)

Word of the day

Plaintive (adj)

Expressive of sorrow or melancholy; mournful; sad.

(Source: Dictionary.com)

Shri Nārada Uvāca

NAFED has reportedly floated import tenders for Onions, as retail prices again shot up to Rs80/kg.

So much for current account deficit.

DTC proposes to raise tax rates. Another step backward!

Wednesday, August 21, 2013

Humpty dumpty sat on a wall

Humpty Dumpty sat on a wall,

Humpty Dumpty had a great fall,

All the king's horses and all the King's men,

Couldn't put Humpty together again.

The prime minister, finance minister, their advisors, and RBI governor, all would be wondering why the markets are not listening to them. They have been repeatedly and vehemently exhorting the participants in Indian financial markets and businessmen that there is no need to panic over falling INR, higher CAD, rising inflation, declining growth, etc.

They also have been making attempts to convince people that situation is not as worse as 1991. The finance minister also suggested a couple of days ago, that the Indian markets should only be concerned about the events in India and should not react to data and concerns emanating from other economies like US and EU.

The following questions beg answers:

(a) Why there is so much emphasis on 1991?

(b) Through measures like imposing custom duty on import flat screen TVs for personal use, and barring Indian nationals from buying property abroad, what the government actually wants to achieve?

(c) Does FM seriously believe that India is still a closed and controlled economy that it was during Asian currency crisis of 1997?

In our view, the situation is actually much worse than 1991 and calls for substantially larger structural reforms that those initiated in 1991. May be 1991 timeline is critical for the image of the prime minister, as he would not like to be remembered as someone who undid his own legacy, i.e., economic reforms. But you cannot escape any peril just by acting ostrich.

Secondly, by denying any interference in the currency market and then taking some random irrelevant measures, they are giving all the wrong signals to the market. In our view, sooner the market forces discover the true and fair value of INR, better it would be for the economy. For example, USDINR at 70 may bring current account to equilibrium faster through destroying demand for imported goods, especially transportation fuel and consumer discretionary, and giving some edge to exporters.

Thirdly, the fast worsening economic conditions in other Asian emerging markets like Indonesia and Thailand, suggests that the current situation has the potential to degenerate into a full blown Asian crisis. Japn Korea currency war is not helping either. India being not so closed and insulated as it was in 1997, may suffer substantially through flight of capital out of Asian emerging economies. It is therefore naïve to suggest that Indian markets should not watch or react to the external events.

Insofar as the markets are concerned, we maintain the following targets:

· Bank Nifty ~8000 by March 2014. Sell all rallies.

· Nifty in 4730 – 5850 range till March 2014, with some downside risk. Risk reward negative at current levels. Sell all rallies.

· A consistent 3% annual depreciation in INR in next many years, after the current volatility subsides and USDINR finds an equilibrium.

· Yield curve to stay inverted till March 2014 at the least. Stay parked in the short term debt (upto 2years).

Thought for the day

“It's discouraging to think how many people are shocked by honesty and how few by deceit.”

- Noël Coward (1899-1973)

Word of the day

Psaltery (n)

An ancient musical instrument consisting of a flat box with strings which are plucked.

(Source: Dictionary.com)

Shri Nārada Uvāca

Rajan announces his arrival with India QE.

Is USD1.3bn long dated bond buying enough to defend yields and currency?

Why not, for God sake, say we will buy USD100bn, beginning with USD1.3bn this Friday.

Tuesday, August 20, 2013

Hold your shopping plans till Diwali

Every time market volatility rises and prices move sharply, a valuation debate gets automatically triggered. While it is universally acknowledged that the current market price (CMP) of equity stock is based on future outlook, it is not uncommon to hear buy-sell arguments based on historical data.

In our view, CMP as determined by the collective wisdom of all the market participants is mostly true and fair value of a particular stock under the given circumstances.

However, there are brief periods of extreme market momentum (as the one we are witnessing currently), where CMP may not reflect the collective wisdom of market participants due to some technical factors like involuntary forced supply due to liquidity issues or absence of execution of demand due to non-financial non-economic reasons like some rumors, political uncertainty etc. These deviations from the true and fair value however do not last long and usually get corrected in short periods of time.

The valuation debate therefore is mostly irrelevant inasmuch as it hardly provides any actionable theme.

Insofar as the actionable at current juncture is concerned, we believe that the return on investment in publically traded equity is a function of 3 factors (a) earnings growth; (b) changes in price earnings (PE) ratio and (c) dividend.

(a) 1QFY14 has seen first earning contraction since 2QFY10. Post results FY14 consensus Sensex earnings have been downgraded by ~4%. In our view, 2QFY14 results will likely be much worse than 1QFY14 and therefore earnings will be downgraded further.

(b) In next 8months India shall hold general elections for Lok Sabha or the lower house of the Parliament. Given the current fluid political scenario, the perceived political and policy risk in the country is high.

Therefore, given the low growth, stressed balance sheets, policy risk, uncertainty over continuation of global flows and fragile global economic conditions, there is little probability of any noteworthy re-rating of Indian markets in next 9months at the least.

(c) Given rising cost of capital, tight liquidity, slowing growth, and margin compression, the dividend payouts are more likely to contract.

Under these circumstances, the most optimistic equity return that could be expected in next 12months is 5-12%, with equal chance of similar losses. The most likely scenario is single digit return with high risk.

With risk free debt returns running close to 9% and bank deposit rates on the rise, any investment strategy has to consider this matrix to be practical.

A lame duck government at the helm, prospects of tighter global liquidity, inflation bottoming, currency in doldrums, we suggest wait till this period of indecision is over and the market arrives at true and fair value for making any fresh investment in Indian equities. We expect to go out for shopping closer to Diwali by when 2QFY14 macro and corporate performance data would be known and true and fair value discovered.

Thought for the day

“I am the wisest man alive, for I know one thing, and that is that I know nothing.”

- Socrates (469-399BC)

Word of the day

Lacerate (v):

To tear roughly; mangle.

(Source: Dictionary.com)

Shri Nārada Uvāca

All denials notwithstanding, the government on Monday disallowed import of flat screen televisions as part of free baggage allowance! An instance of penny foolish and pound foolish.

Monday, August 19, 2013

Live for another day

“Have faith in God. But never forget to lock your car.”

Indian equity markets witnessed substantial rise in volatility and short term momentum last week. There were multiple immediate triggers to cause this.

Some hope raising economic data from western world that sparked the fears of Fed tapering the magnitude of monthly bond buying. Some knee jerk reactions from RBI and government raised concerns that clock may be set back to early 1990’s on Liberalized Exchange Rate Management System (LERMS) and Liberalized Remittance Scheme (LRS). Onions threatened to undo whatever governor Subbarao achieved in past couple of years. Yield curve topping ~9%, raising fears of imminent rise in lending rates jeopardizing prospects of any imminent economic recovery. Prospects of some distress selling by large brokers to fill the hole created by reincarnation of Harshad Mehta in NSEL.

Thankfully, no one yet talked about a systemic crisis in equity market; though sharp spike in implied volatility and consequently option prices does make a case for a crisis this week. Watch out for liquidity in at the money (ATM) and close to ATM put options. Any sign of illiquidity there should prompt a panic like reaction. Remember, on past two occasions, options becoming illiquid after a couple of days of rise in IVs, has led Nifty to move 5-10% in a single trading session.

The just concluded result season and latest round of macro data has not offered much hope. The commentary, except from handful of technology and pharma managements, has been guarded. The good part is that the hope appeared still alive. The bad part is that investors are not willing to give any benefit of doubt. Any sign of weakness in performance or lack of conviction in outlook has been punished severely.

We would therefore like to reiterate the strategy discussed earlier this month:

(a) Overweight on consumer companies (FMCG and Auto). Telecom likely to do well, but we suggest avoid due to continuing regulatory uncertainty. In our view, with consistent margin improvement and ~3-5% volume growth, these companies will more than address the valuation concerns, insofar as currently high P/E ratio is concerned. Moreover, expect payout and ROEC to increase.

(b) Nil to extremely low weight on financials. Some financials have reported decent growth in income and margins though the asset quality has deteriorated substantially. The market reaction to their results is a clear indicator that investors are not convinced about the sustainability of their profitability. There is obviously more pain to come in following quarters.

(d) Nil to very low weight in capital goods and infrastructure. Remarkably positive commentary about future outlook suggests that many of these companies continue to be denial mode and therefore may not have taken adequate corrective measures.

(e) NIL weight in commodities Most of these have indicated sever margin pressure, lower capacity utilization and cut in capex plans.

Thought for the day

“How do you nurture a positive attitude when all the statistics say you're a dead man? You go to work.”

-Patrick Swayze (1952-2009)

Word of the day

Impolitic (Adj):

Not politic, expedient, or judicious

(Source: Dictionary.com)

Shri Nārada Uvāca

Will 2% CSR spend by companies likely go to fund local politicians only?

Friday, August 16, 2013

Urgently required – a Gandhian face

The recent utterances by the prime minister & finance minister and the steps taken by the RBI & government to handle the economic problems being faced by the country confirm at least three things:

I. The government is unwillingly coming out of denial mode and accepting that the economy is in a serious mess.

II. The policy makers are terribly short of ideas to get out of this mess.

III. The country is losing badly in the game of perception, at a time when most troubled countries, including China, Italy and Spain, have successfully managed the perceptions.

This provides further support to our fear that in this corrective phase we might regress all the way to 1967-1975 period rather than halting at 1991.

Consider the following:

(a) The political leadership of the country is feeling as insecure as Mrs. Gandhi might have in the years prior to imposition of emergency.

(b) At a time when the general public is overwhelmingly concerned with price of onions, the prime minister is promising 13 new airports as a solution!

(c) By bringing back capital controls, the government has successfully mismanaged the perceptions. The club circuit has already started discussing reincarnation of FERA. No surprise if lower BTQ, overseas travel tax, 25% duty on gold imports are next on the agenda. Money laundering through over-invoicing of imports and under-invoicing of exports would be the logical follow up.

(d) The rising strife between (i)) bureaucracy and executive, and (ii) judiciary and legislature is also reminiscent of that period.

(e) Scuttling the move to bring political parties under RTI and restricting criminals from contesting elections are also indicative of low political tolerance.

(f) With an onerous responsibility to provide cheap food to 800mn people under the National Food Security Bill, the food grain trade may likely get nationalized at state level. Rationing, hoarding, black marketing, restriction on interstate trade, crop mismanagement etc may stage comeback. The trial is already on with the government setting up vegetable shops in various parts of the country.

(g) Unable to manage stress, most power and commercial road projects could get devolved on public financial institutions and thus get nationalized, much the same way as banks were done in late 1960s’.

(h) The perception of threat from external forces is being fueled much like 70’s and 80’s.

Last but not the least, Narendra Modi is trying hard to create a JP like national movement making the establishment more jittery. So far, he has not been able to enlist much support from non-BJP parties. A strong movement led by Modi with a Morarji Bhai like Gandhian face as PM could perhaps spring some hope. Amen!

Also read:

Cyclical vs structural

Do not bother about buying and holding

Higher growth – unsustainable and unmanageable

Thought for the day

“You never know how soon it will be too late.”

- R. W. Emerson(1803-1882)

Word of the day

Jilt (v):

To reject or cast aside (a lover or sweetheart), especially abruptly or unfeelingly.

(Source: Dictionary.com)

Shri Nārada Uvāca

Everyone concerned in the world, except BJP parliamentary board, seems to have acknowledged that Narendra Modi is a candidate for PMship and does stand a chance.