Vijay Kumar Gaba: February 2015

Thursday, February 26, 2015

Leaking roof and broken umbrella

Thought for the day

"Man has, as it were, become a kind of prosthetic God. When he puts on all his auxiliary organs, he is truly magnificent; but those organs have not grown on him and they still give him much trouble at times."

- Sigmund Freud (Austrian, 1856-1939)

Word for the day

Demassify (v)

To break (something standardized or homogeneous) into elements that appeal to individual tastes or special interests

(Source: Dictionary.com)

Teaser for the day

How does "Where is Rahul" debate reflects on India's security and intelligence apparatus?

Leaking roof and broken umbrella

Aur bhi gham hain zamaane mein mohabbat ke sivaa
Raahatein aur bhi hain vasl ki raahat ke sivaa - Sir Faiz Ahmed Faiz

(There are other sufferings too in this worlds besides the agony of love,
There are other joys too, besides the joy of union)

In recent months a whole lot of commentators have (over)emphasized on the extent of fiscal deficit India can or should or cannot or should not afford. I do not think I can add anything useful to the arguments in favor or against the need for expansion of fiscal deficit to support the efforts for revival of investment cycle in the country.

My point is that the government's fiscal policy needs to be in harmony with the popular mandate it has received.

I strongly believe that the mandate of this government is unmistakably for pragmatism, development, inclusivity, nationalism and good governance. This government does not enjoy the luxury of hiding behind the shields like limitation of coalition, party ideology and conventional political paradigms. People have afforded BJP complete freedom to deliver on the promised change and are entitled to expect an express delivery from the government.

Accordingly, I feel the budgeted estimate of ratio of fiscal deficit to the GDP should actually not figure very high in the priority list of the government. In my view there are a multitude of deficit that needs to be bridged on a higher priority.

In particular the following deficits (not necessarily in the given order) need to be assigned priority over the budgeted fiscal deficit:

1. Capital deficit

2. Demand deficit

3. Skill deficit

4. Employment opportunity deficit

5. Trust deficit

6. Social infrastructure deficit

7. Physical infrastructure deficit (

8. Productivity deficit

9. Compliance deficit

10. Corporate governance deficit

Fiscal prudence is good. But that discussion could wait for a sunny day. In overcast conditions, as forecasted for this Saturday, we need to bother more about leaking roof and broken umbrella.

Wednesday, February 25, 2015

Pendulum to stop in middle after a reverse swing

Thought for the day

"Sometimes a cigar is just a cigar."

- Sigmund Freud (Austrian, 1856-1939)

Word for the day

Abscond (v)

To depart secretly;

(Source: Dictionary.com)

Teaser for the day

If AAP truly believes in the democratic system, democratic values, Swaraj, and morality & ethics in public life - would it not be in order for them to assign the role of opposition to 20 of its MLAs (may be by annual rotation) and direct them to be a strong and forceful opposition!

Pendulum to stop in middle after a reverse swing

Contrary to my expectations, I received overwhelming approval of the investing community for the view that investors need to provide for contingency arising out of PM Modi running out of luck before May 2019.

Most interestingly, the worries are emanating less from the apprehension of likely decline in BJP's fortunes in next few years or the PM running out of luck and more from the prospects of complete decimation of Congress party and hence emergence of a disparate alternative regime like National Front of 1989 or United Front of 1996.

A small but highly informed minority also went to the extent of dreading a situation where some radical group gets overwhelming majority at national level and sets the clock back on economic reforms.

I guess the overhang of Delhi elections and political developments in Greece & France must be playing some role in sub-conscious.

Anyways, I do not wish to go that far a distance. I believe that—

(a) The incumbent government will perform better in the remaining four year term. Though it may not beget any radical changes in the present institutional framework of the country insofar as the socio-economic policy framework is concerned.

The market would have reasons to be pleased with the performance of the government once the overhang of over-expectations is neutralized in next 6months.

(b) The Congress Party might have already bottomed in terms of its performance. It shall be able to stage a strong comeback on national scene as well as state levels, especially in central and western India in next 10years.

Accordingly, I would reiterate my view and strategy as follows:

1. In next 24 months, most of the weakness in Indian financial markets may be caused by the global factors, known, unknown and unforeseen. Regardless of growth stagnating in 5-6% band (old series) and rates hovering at current levels, we may not see only marginal de-rating of Indian equities from the current levels.

2. The domestic macro environment shall remain stable, with no major improvement or deterioration. The earnings growth therefore may not see any major jump.

3. The expected return on equities for FY16 should be lower at 12%, assuming lower interest rates and lower risk premium for equities.

4. Any major correction in any Indian equity prices, due to known global events like US Fed rate hike or defaults in commodities world, would be a good opportunity to leverage in Indian equities.

Tuesday, February 24, 2015

Should we wait for the cows to come home?

Thought for the day

"The liberty of the individual is no gift of civilization. It was greatest before there was any civilization."

- Sigmund Freud (Austrian, 1856-1939)

Word for the day

Gregarious (adj)

Seeking and enjoying the company of others.

(Source: Dictionary.com)

Teaser for the day

Should the government take a step back on Land Bill or stay put?

Should we wait for the cows to come home?

In October 2014 I cautioned against relying too much on PM's luck for investment gains. It is reasonable to believe that after 15yrs in power, PM Modi will eventually run out of luck some day.

The point to ponder is "Do we need to provide for contingency now or may wait till the cows come home, like our Public Sector Banks do?"

Many events have occurred in past one month that are noteworthy. The delirium arising from high ICC World Cup fever should not obliterate the sight of these events. For example,

· After failing to secure a simple majority on its own in Maharashtra, Jharkhand, and J&K, BJP suffered a demoralizing defeat in Delhi assembly elections. It is important to note that -

o It had to put aside the acrimonious election campaign in Maharashtra to form a sweet 'n' sour coalition with its natural ally SS;

o In Jharkhand it initially formed a tentative government with AJSU, but to have stability it had to absorb the breakaway group from bitter rebel Marandi's party;

o In J&K it is reportedly climbing down from demand of rotation CM and also compromising on core issue of Article 370 to form a coalition with PDP;

o In Andhra Pradesh BJP is an inconsequential coalition partner of TDP. Recently, the relations have soured over BJP's contemplation to invite the rival TRS to join NDA government at center.

o In Punjab also BJP is an inconsequential partner of SAD and relations have been worsening at local level due to poor performance of the coalition state government.

o In Bihar, the Manjhi fiasco has certainly dampened the spirits of local unit and is also likely to assembly elections due later this year.

o The by-poll results in UP post May' 14 have not been encouraging.

o The three term MP chief minister is consistently under attack for various irregularities and scams.

o In Delhi it's local unit is already showing deep concern about the municipal elections (still two years away).

· The Brent crude price is already 33% higher from the US$45/bbl it touched in January 2015.

· To test the resolve of the finance minister, the former RBI governor Bimal Jalan has proposed violation of red line on fiscal deficit drawn under FRBM Act.

· The incumbent RBI governor has not hesitated a bit in invoking "Hitler", in what is being seen as a veiled warning to the PM himself. Bad Omen!

· Food prices have obdurately refused to fall despite whatever effort the government has made.

· The recent Petrogate corporate espionage case will certainly sour the relationship between the government and some top industrialist. The "feel good" may "feel little less good" in Mumbai. The reputable Deepak Parekh has also hinted at diminishing feel good last week.

Monday, February 23, 2015

My dime on reforms

Thought for the day

"Children are completely egoistic; they feel their needs intensely and strive ruthlessly to satisfy them."

- Sigmund Freud (Austrian, 1856-1939)

Word for the day

Doggo (adv)

In concealment; out of sight.

(Source: Dictionary.com)

Teaser for the day

Whose Robe could easily beat Modi's 4.31cr suit:

· J. Jayalalitha

· Rajnikanth

· Sonia Gandhi

· Amitabh Bacchan

· Salman Khan

· Other (pl specify)?

My dime on reforms

I have been insisting that the reforms must be distinguished from mere administrative corrections. A policy measure in order to qualify as "Reform" must change the status quo materially.

I f I may reproduce what I wrote few months back:

When faced with the task of catapulting the economic activity to a higher orbit it is imperative for the policy makers to distinguish between "administrative corrections", "systemic efficiencies" and "reforms".

The businesses, investors and consumers need to assimilate that economic reforms do not necessarily result in more profit in the immediate term. To the contrary, economic reforms are more likely to cause pain and inconvenience in the immediate term as these involve fundamental changes in the processes and practices of doing business and consuming goods & services.

For example, consider the following:

(a) 100% FDI in insurance per se may not qualify as a reform if it merely enhances the capacity of insurers to take more business on a larger capital base. Making health and accident coverage compulsory for all employees and petty service providers, including domestic helps, drivers, porters etc., compulsory would be a reform.

(b) Transfer of de jure power to fix prices for transportation fuel to IAS officers at the helm of public sector oil marketing companies from IAS officers assisting the Prime Minister and Cabinet Committee on Economic Affairs is merely a administrative change. A rise in global crude prices above USD110/bbl will most likely cause this change to reverse, as was the case in 2003-04.

A reform in this area would be implementation of an integrated energy policy that motivates and (where necessary) forces changes in the consumption patterns. Reducing energy intensity of water, improving quality of public transport, and improving fuel efficiency of roads would provide a sustainable solution.

(c) Cutting on some travel cost, curtailing number and place of meetings, stationary expenses etc. is a cost management exercise. Empirically, all these expenses tend to rebuild as the fiscal situation eases with the economic cycle. Labeling this as expenditure or fiscal reform might be a mistake. A small reform in this area could be to identify routine government jobs that do not involve public dealing or matters of national security; and allowing the employees to perform these jobs from their homes with use of technology.

(d) Food security programs have been integral part of the government agenda since independence. Despite leakages and inefficiencies, the public distribution system (PDS) has helped millions. Similarly mid-day meal schemes have also worked well. Now bringing the prices of food down to Rs1 or Rs2 per kg for BPL families may not qualify as major reform to the current system, in my view.

From this view point, I suggest the following 10 illustrative reform measure that may change the status quo materially. If you find these are highly idealistic, and impractical to implement, I beg to differ.

(1) To exploit the demographic dividend fully and generate demand, accelerate the wealth transfer process. Defining the upper bound of wealth and introduction of material estate duty on people above the upper bound could be one method.

(2) Transfer the power to impose direct taxes to the local governments.

(3) Transfer the ownership of natural resources to local governments. Encourage industry and investors to partner with local governments for setting up business ventures.

(4) Introduce competition in Railways. To begin with allow point-to-point private railways for intercity travel up to 100kms.

(5) Transfer all PSUs under a listed holding company. Majority voting power in this listed holding company may be owned by Indian citizens with no individual owning more than 1%. All these companies should be professionally managed with no intervention from the government whatsoever.

(6) Allow and encourage the federal states to have bi-lateral trade, labor and resource sharing treaties.

(7) Bring the Return on Investment (ROI) for elected representatives close to Zero level, by stripping all their discretionary powers.

(8) Constitute a Clean India Regulatory Authority (CIRA). Make all elected representatives from local government level to the members of parliament accountable to this authority. Each member should be mandated to submit a quarterly return of cleanliness in their respective constituency to this authority. The authority should cause an independent audit of such certificates. A wrong certificate should disqualify the person from contesting elections for 25years.

(9) Transform the Right to Education (RTE) into the Right to Uniform Education (RTUE).

(10) Set up a calendar for full convertibility of INR.

The newly constituted NITI Ayog needs to tell the government that in past one decade it is not the farming, textile, railways, or SME but it is the telecom sector which has provided maximum incremental employment opportunities. And it happened in spite of the government.

Friday, February 20, 2015

Who will pay for the dinner?

Thought for the day

"Whatsoever is contrary to nature is contrary to reason, and whatsoever is contrary to reason is absurd."

- Spinoza (Dutch 1632-1677)

Word for the day

Probity (n)

Complete and confirmed integrity; uprightness.

(Source: Dictionary.com)

Teaser for the day

Deepak Parekh says Modi government did not deliver in 9months!

Thursday, February 19, 2015

Elephant and the blind folded men

Thought for the day

"Be not astonished at new ideas; for it is well known to you that a thing does not therefore cease to be true because it is not accepted by many."

- Spinoza (Dutch 1632-1677)

Word for the day

Maudlin (adj)

Tearfully or excessively sentimental.

(Source: Dictionary.com)

Teaser for the day

If you are here only to serve people then why do you need the designations like "Deputy CM" (not provided for even in the Constitution)?

Elephant and the blind folded men

The presentation of Union Budget on last working day of the February month every year is one British Legacy we have chosen to retain and nurture. The only change in the practice from the Raj period is that now the budget speech is read at Indian noon against the British noon.

Over the years I have observed the demeanor of various finance ministers carrying that cherry color suitcase containing budget document to the Parliament House and reading the budget speech. Regardless of their social, professional, economic or political background - they bear a distinct feudal look reflecting a sense of "Giver" to the subjects - rich and poor alike.

In my view, giving so much importance to the annual budget of the Union Government itself dissipates the importance of the Budget.

Budgeting is indubitably an important tool of financial planning and management. However, it may prove seriously counterproductive if this exercise in not continuous and dynamic.

It certainly defeats the purpose of an efficient government and good governance if a good and urgent idea has to wait till next April for implementation or a grave mistake in the tax laws has to wait for one year to get rectified.

Insofar as expectations of various sections of people from the Union Budget are concerned, I have concluded, after many years of observation, survey and analysis, that it is exactly like the story of Elephant and six blind folded people. Consider this:

(a) The Union Budget is presented in two parts - (a) The first part is the Budget of the Union government detailing from where the government will raise funds and how these funds will be spent on various administrative, developmental and social activities; and (b) The second part relates exclusively to the tax provision, i.e., how the government proposes to raise revenue from taxation.

(b) The urban middle classes, especially salaried people, are mostly interested in tax rebates on income from salary, house properties and investments. They are usually not keen to know about social sector and development expenditure.

(c) Businessmen are usually keen to hear about concessions in indirect taxes and incentive for investment. They do look for some business opportunities in social and infrastructure expenditure budget. However, most of them who do not see an opportunity for themselves find such expenditure wasteful if it would lead to higher fiscal deficit and hence higher government borrowing and therefore higher rate of interest.

(d) About 90% of the country's population which does not pay any direct tax does not look forward to the Budget. Although they are keen to know what more subsidies are being provided for them, they wait till the "Schemes" are actually implemented to get excited about that.

(e) Economists are interested in knowing a lot of things, but usually watch the figure of fiscal deficit and means to fund that deficit.

Social economists (usually left leaning academicians) are usually not concerned about fiscal deficit and want the government to spend more on poverty alleviation and development of social sector infrastructure in order to impart social justice and minimize economic inequalities.

On the other hand the market economists are seriously concerned about fiscal deficit, government borrowing to fund such deficit and ratio of expenditure on social and physical infrastructure.

Spending US$20bn on food security is a serious reform for the social economists, whereas it might be an unpardonable crime in view of market economists, given the current fiscal gap.

(f) Traders in stock market only wish for lower taxes that may cause a short term bounce in stock prices, even for a day or two. Whereas bond traders expect tight fiscal discipline that will cause a bounce in bond prices in the short term. They hardly care even for three month impact of budget provisions.

(g) Foreign investors look at the budget from an extremely myopic angle. They expect the government to allow them more concessions and freedom to operate in the country. Protection of their investment and promotion of their vested interest is their only concern.

(h) Professionals, regardless of their public posturing, take sadist pleasure in finance minister's silly mistakes in writing the tax provisions. This allows them to explore loop holes to save taxes for their clients. This also triggers more litigation allowing them to make more money.

(i) Politicians from ruling party expect the budget to buy votes for them through populist measures. They could not care less for things like fiscal prudence, etc. Whereas the politicians from the opposition benches

The point I am trying to make here is that "Big Bang Reform" which the people are talking about and expecting seriously, is not the same for all. It has widely divergent and often contradictory meaning for various stakeholders.

It is obviously not possible for any finance minister to please all; though sometime they do try and end up making everyone unhappy. Mostly, however they stick to pleasing their political constituency.

Fiscal discipline, market prudence, investor friendliness, etc. may be incidental and not the desired outcome of the Union Budget.

...to continue

Wednesday, February 18, 2015

The big bang theory

Thought for the day

"Those who are believed to be most abject and humble are usually most ambitious and envious."

- Spinoza (Dutch 1632-1677)

Word for the day

Belie (v)

To show to be false; contradict.

(Source: Dictionary.com)

Teaser for the day

ICC World Cup gives much needed breathing space to AAP and AK.

Media at least is not bothered about what they do, and for that matter do not do, in next six weeks.

The big bang theory

The NDA regime led by Atal Bihari Vajpayee (1998-2004) is remembered, in market parlance, for its big and bold decisions. The tenure started with the big blast (May 1998 nuclear test) and was punctuated by major initiatives like NELP (hydrocarbon exploration), SEZ (key reforms in land, labor and tax laws in select zones), NHDP (highways), PMGSY (rural roads), AAY (food security for poor), SGRY (employment for rural poor), SSA (primary education for all), airports privatization, port privatization, Electricity Act 2003, spread of mobile telephoney, 100% FDI in core sectors, etc.

These initiatives excited the global investors at a time when Indian IT professionals were making big impression on global technology canvass. A supportive regime, Y2K problem, easy credit post LTCM and Asian crisis (rates lowest since 1970s) and depressed commodity prices (inflation lowest in decades) helped big investment initiatives.

The problem was that many of these programs were initiated hurriedly without putting an adequate institutional mechanism in place, thus leaving the scope for misuse (of discretionary powers by minister and bureaucrats), litigation (ownership of natural resources), misappropriation (of natural resources by scrupulous allottees), non-compliance (environment and sustainability norms) and wide viability gaps (in absence of immediate demand) and thus planting the seeds of financial stress, economic slowdown, mistrust and corruption we are witnessing today. Subsequent UPA government watered and nourished these seeds well.

Now, having learned from the mistakes of omission and commission made and follies committed during past two decades, Indian businessmen and investors are hoping (or should I say assuming!) that new leadership will carry further the “big bang” initiatives minus the follies, and thus reinvigorate the Indian economy.

I am fully with them in their hopes and assumptions.

However, the only caveat is that the new leadership will not be able to plant the seeds of prosperity unless the field is cleared of the poisonous crop of mistrust, misdeeds, and misallocations that has taken deep roots. Like Chankaya the new regime will have to first uproot these plants and appropriately inoculate the soil.

This is not going to be easy. It will cause tremendous pain to investors and entrepreneurs, and disruption of business activity and financial stress.

We have seen some glimpses of this cancelling of telecom licenses by the Supreme Court, deallocation coal blocks by the government, de-notifiaction of a number of SEZs, withdrawal of investment proposals by road developers and steel companies and rising financial stress in the economy.

PSB results of past two quarters are indicative of this. We shall see more of these. IDBI, ICICI, IFCI, UTI all stand witness to what happened when last time these correction were carried out.

That is not exactly good news for someone looking for immediate gains in stock market....more on this tomorrow