Vijay Kumar Gaba: March 2016

Thursday, March 31, 2016

A detour to economic recovery

Thought for the day

"Nothing can be beautiful which is not true."

—John Ruskin (English, 1819-1900)

Word for the day

Ostentatious (Adj)

Characterized by or given to pretentious or conspicuous show in an attempt to impress others

(Source: Dictionary.com)

Malice towards none

One of the accused in infamous Sheena Bora murder case - Peter Mukerjea is reportedly selling his house to pay for his legal fees.

This is certainly not an isolated instance. There are hundreds of litigants who have to sell their house, land, organs and even family members to pay for legal fees. Unfortunately, many of them still do not get justice!

First random thought this morning

I could not help noticing that after rattling that world markets for better part of past 12months, "China" is gradually disappearing from front pages and top headlines.

I am unable to decide whether "China" has cease to be a concern for global economy; or it's a strategy of Chinese authorities to keep low profile and carry out necessary corrections; or the global markets are just playing ostrich to the Chinese threat; or it's just a temporary pause before Chinese concerns again start dominating the headlines!

A detour to economic recovery

In a classical economic recovery (a) consumption rises, usually led by rise in wages and/or lower interest; (b) prices rise as demand growth outpaces supply; (c) demand for investment rises as producers rush to create additional capacities; and eventually (d) employment rises leading to further rise in consumption.

Whereas in a pump primed recovery driven by government stimuli, rise in employment leads the cycle. To begin with usually the rise in employment is at the cost of productivity. Hence, if the rise in employment induced by fiscal incentives fails to kick start the virtuous cycle of income—consumption—investment—income, there is a risk of economy getting pushed even deeper into slowdown. In past one decade we have seen beginning of the pump primed virtuous cycle, albeit at a lower trajectory. But the effort has so far been futile in Europe and Japan.

Now coming to Indian economy. Arguably an economic turnaround is taking shape here. Though these are still early days, but I strongly feel that the recovery is not taking the Classical path. More importantly, severe fiscal constraints and unsupportive external environment may not allow the recovery to be materially pump primed.

In my view, the economic recovery in India is taking a detour to the Classical path. Some of the key highlights of the recovery, as I see it, are as follows:

(a) The consumption level in the economy is rising, but it is not rising in the classical Maslow's evolutionary style. The consumption rise is more aspirational in nature. Accordingly, the demand for services is rising much faster than the demand of products. The capacity addition therefore is more likely in "seats" rather than "machines".

(b) Productivity gains are likely to play major role in the growth. The recovery may therefore not result in creation of much real assets.

(c) Faster and wider redistribution of wealth is the key underlying theme of the growth strategy. Higher taxation, exploitation of high savers through low or negative real rates, elimination of middlemen, and higher social sector spending will be amongst the key features of the growth cycle.

The good part is that efficient social sector spending (minimum leakages in subsidy distribution, emphasis on building quality human capital through better education, health and training) shall add to productivity gains achieved through better use of technology and management of redundancies.

The flight of capital is a real risk in the short term as the rich try to protect their wealth from being snatched by an aggressive regime. But I am not worried on that count. I feel that the new businesses will generate enough resources to compensate for the withdraal by traditional businessmen. Besides, foreign capital will also be encouraged by an open, transparent and receptive regime.

I shall discuss the investment strategy implication of this scenario in coming days.

Wednesday, March 30, 2016

"To cut or not to cut" is not the question

Thought for the day

"Punishment is the last and the least effective instrument in the hands of the legislator for the prevention of crime."

—John Ruskin (English, 1819-1900)

Word for the day

Wordmonger (n)

A writer or speaker who uses words pretentiously or with careless disregard for meaning.

(Source: Dictionary.com)

Malice towards none

Any guess why "112" has been chosen as "911" of India?

My take - It might be the extension number of the PS to TRAI chief, the authority that has suggested this as the national emergency number.

First random thought this morning

One business that is flourishing these days is the business of "likes" on social media.

A chance meeting with some professionals, who provide "likes" and "followers" on social media on payment basis, informed me that after politicians, the religious gurus are the second largest users of their services. This group of three IT professionals claimed to be providing services to at least 12 gurus frequently appearing on various TV shows and public functions. They were elated to note that the top BJP leadership has recently provided them a huge business opportunity in UP!

Tuesday, March 29, 2016

Make hay when sun is shining!

Thought for the day

"The higher a man stands, the more the word vulgar becomes unintelligible to him."

—John Ruskin (English, 1819-1900)

Word for the day

Skullduggery (n)

Dishonorable proceedings; mean dishonesty or trickery; bribery; graft; an instance of dishonest or deceitful behavior

(Source: Dictionary.com)

Malice towards none

India could simply blame Pakistan for every act of terrorism on her soil.

But it's not easy for Pakistan.

In fact, in most cases, Pakistani establishment may end up blaming itself for the act of terrorism on their soil.

First random thought this morning

It has been a usual practice in India to put pictures or idols of Gods in staircase and on outside walls of properties to dissuade passerby from spitting and urinating on the walls.

I find a similar pattern in invocation of names of Ambedkar and Gandhi by the politicians these days. These two names are being frequently (mis)used to dissuade any kind of opposition to their respective ideas and arguments.

The funny part is that since no one appears to be an actual believer in strength of this Shield, they may not be using it when needed most.

Make hay when sun is shining!

In spring of 1992, soon after completing my education and training, I had my first tryst with the world of trade & commerce. It was the time when PVNR led government had just begun to unshackle the Indian economy from the clutches of pseudo socialist regime that worked under material influence of feudal lords and capitalist cronies. Many landmark events took place in the ensuing years.

I would in particular like to highlight three of those events - (a) Private competition for the civil aviation monopolies Air India (Overseas) and Indian Airlines (Domestic); (b) Private competition for the twin telecom monopolies MTNL (Delhi & Bombay) and BSNL (Rest of India) and (c) Private competition for monopoly fund manager UTI.

How these monopolies ended in ruins is there for everyone to see. BSNL that was reportedly valued at Rs1trn as late as 2007, is a cash guzzler today, so is MTNL and Air India. UTI survives in a miniature version of its old self.

In the events of past 2-3years, I see 1992 occurring all over again.

· Private competition in power equipment manufacturing is diminishing the stature of public sector behemoth BHEL. The day may not be too far when this cash cow will start reporting loss and guzzling cash.

· The commercial mining of coal is being experimented in a small way. I do not see why Coal India should not go the MTNL or Air India in next 10-15yrs, given its bloated cost structure, strong unions, bureaucratic management setup and peaking demand for coal as a preferred fuel.

· The government is making sincere efforts to boost local production of defence equipment by engaging domestic and foreign manufacturers. This will seriously undermine the dominance of companies like BEL and BEML.

· It may look little farfetched at this point in time, but I do not mind imaging demise of public sector banks from number 11 to 27 in next two decades. (I am leaving the top 10 just out of the fear that my readers may find me insane and stop reading further.)

The point I am trying to make that the government and trade unions (IDBI union please note) need to draw a lesson from the past experience.

The government should seriously consider selling larger stakes in these large institutions and let these reinvent themselves to stay competitive in the evolving scenario where global competition in domestic markets is going to intensify manifold.

The trade unions should actually be asking the government to initiate steps to professionalize these valuable institutions to safeguard the future of their kids. They need to realize and accept that by resisting the change they can save their jobs (with no growth whatsoever). But by adapting to change they can seek growth in their career and ensure a better future for their future generations.

Monday, March 28, 2016

Nifty: Preparing for the next market cycle

Thought for the day

"The essence of lying is in deception, not in words."

—John Ruskin (English, 1819-1900)

Word for the day

Amaranthine (Adj)

Unfading; everlasting

(Source: Dictionary.com)

Malice towards none

AK makes to Fortune's 50 greatest!

What does this reflect?

First random thought this morning

All appears well and the country has moved on. MSD has regained his mojo. We have got a new God in Virat Kohli. Mehbooba has finally yielded to the charm of PM Modi. Rahul Gandhi has proved his nationalistic credentials by playing Holi and dispelling rumors of his British citizenship. Shashi Tharoor has stormed the social media. NaMo is now following AK. Most important, no one bothered to report who played (and who did not) Holi with LKA.

Nifty: Preparing for the next market cycle

As I have been insisting for past few weeks, Indian markets have completed the market cycle that started on 28 August 2013. The cycle started from Nifty 5285 level (closing), peaked at 8922 on 04 March 2015, and ended on 29 February 2016 at 6987 Nifty level.

The cycle was one of the smaller ones, both in terms of time period and the distance covered. I expect the next market cycle to be the largest one yet both in terms of time period and the distance covered.

However, as of today, the market appears to be in no hurry to announce beginning of the new cycle. I would say the market is presently witnessing some nice sunny days in the winter.

It is difficult to say whether we would get some wet, chilly and grey weather before the spring arrives. But I would not lower my guards. I would rather stock up dry wood, keep my woolen stuff ready and carry my umbrella and fur coat even during warm sunny afternoon stroll in the market.

Simultaneously, I would be preparing for the spring as well. I shall diligently plough the fields, buy good seeds that would blossom into colorful fragrant flowers and sweet & juicy fruits in spring time.

Though I have not yet fixed my tryst with the spring, I expect this to take place sometime in next 4-5months.

In the meantime, I do not expect Nifty to fall below 7200 level, with a 50% probability of it not falling below 7490 level.

Monday, March 21, 2016

Nifty: on the way to 8K, lack momentum to move beyond

NEXT DAILY POST ON 28 March 2016.

WISH ALL THE READERS A HAPPY and COLORFUL HOLI

Thought for the day

"Sunshine is delicious, rain is refreshing, wind braces us up, snow is exhilarating; there is really no such thing as bad weather, only different kinds of good weather."

—John Ruskin (English, 1819-1900)

Word for the day

Saturnine (Adj)

Sluggish in temperament; gloomy; taciturn.

(Source: Dictionary.com)

Malice towards none

Following the footsteps of his mother, Mukesh Ambani's son has shed half his weight only to gain weight in his father's business empire.

First random thought this morning

The government has taken a brave step towards implementation of a critical structural reform, i.e., achieving fully market linked small saving rates. The resistance is likely and natural. Nonetheless a path has been shown. Even if the present government fails to tread on it, someone will traverse it, in not a long distant future.

Nifty: on the way to 8K, lack momentum to move beyond

Since beginning of this month I have been insisting (see here and here) that Nifty faces a credible resistance in 7600-7610 range and a successful crossover will take it to 8000 mark in no time.

The market closed last week right in the top resistance zone. It however looks like that the resistance will be overcome this week and the up move will strengthen further, led of course by financials.

However, the momentum, measured as a matrix of cash delivery volumes, volatility, market breadth, etc., has failed to pick up with the latest up move in the market.

In my view, therefore, it is more likely that the current move may terminate in 7889-7940 range (with a small possibility of going up to 8065 level) and not culminate into beginning of a new market cycle.

My trade in the current circumstance would be (a) Cover shorts immediately; (b) initiate fresh long in large banks; (c) liquidate all trading positions above 7860; (d) initiate aggressive shorts close to 8100 level.

Friday, March 18, 2016

Could it be different this time - 4

Thought for the day

"The true triumph of reason is that it enables us to get along with those who do not possess it."

—Voltaire (French, 1694-1778)

Word for the day

Rodomontade

To boast; brag; talk big.

Malice towards none

Joke circulating on Whatsapp - "The government banned 'Corex' cough syrup just to debilitate Arvind Kejriwal!"

First random thought this morning

As per a recent research report 20 OECD countries might have $78trillion in unfunded or underfunded government pension liabilities. Inarguably, the ultimate sufferer of the so called unconventional monetary policies will be the poor pensioners of the world.

The Ponzi in the name of ZIRP or NIRP can only end when poor & old savers lose most of their savings. Imagine the pain of a pensioner who does not get any return on his savings for 10-15yrs and then suddenly hyper-inflation sets in.

I am suddenly feeling like converting to Marxism.

Could it be different this time - 4

Despite experiencing a number of false starts in past three decades, I am inclined to bet on "it could be different this time".

The events of past 2-3years give strong reasons to believe that the time is finally coming when the interest of people could override the interest of feudal lords and pseudo socialists.

I would like to highlight just five points to emphasize my viewpoint:

(1) The government, regulators and courts have taken a series of decisive actions to mainstream the infamous parallel economy. The steps like cancellation of 2G spectrum licenses & coal block allotments; e-auctioning of resources; real estate regulation; direct cash transfer of subsidies and mandatory linkage to Aadhar; transparency in defense and railways procurements; tax surveillance of large value purchases; challenging the misuse of tax exemptions for agriculture income; charitable purposes & LTCG; one time amnesty for declaring domestic and foreign unaccounted money; etc. some of the measures that would deter corruption in public office & tax evasion and forcefully discourage the parallel economy.

As the traditional ways of doing business are challenged consistently, the business momentum may get disrupted in the short term. But in mid to long term the benefits would be tremendous and sustainable.

(2) The superior emphasis on enablement of people rather than just providing for them is a structural reform, that could make India potentially a globally competitive economy. Undertaking the task of development of occupational skills and entrepreneurship in youth on mission basis could potentially fill the gap between the aspiration and actualization.

(3) The past three union budgets of have shown strong commitment to the mantra of growth with fiscal responsibility. Ignoring the interests of political expediency and short term economic the government has shown firm resolve to make the growth fiscally sustainable. Most state governments and RBI have supported the government efforts well, enhancing the confidence of global investors. The efforts have been widely lauded in the global arena, including by rating agencies. Though analysts are still skeptical of the feasibility of government meeting its fiscal targets, I find no reason to doubt the budget numbers.

(4) There has been a conscious effort to devolve more powers on the state and local governments. The difference this time is that devolution is coming with assignment of various responsibilities. The states are being engaged actively in the development of railways, upgradation of civic infrastructure and ensuring sustainability of power sector.

(5) The best part is that unlike the past, the promotion of self reliance is not being sought to achieve by stifling global competition. To the contrary, the global participation is being encouraged to make India self reliant in technology, manufacturing and optimum exploitation of local resources.

Also read

Could it be different this time - 1

Could it be different this time - 2

Could it be different this time - 3

Thursday, March 17, 2016

Could it be different this time - 3

Thought for the day

"Judge a man by his questions rather than his answers."

—Voltaire (French, 1694-1778)

Word for the day

Natter (v)

To talk incessantly; chatter.

Malice towards none

If 2014 Bihar elections were Modi vs. Nitish; 2015 TN elections are Jaya vs. Karuna; 2015 Bengal elections are Mamta vs. Sitaram; — what will be 2017 UP elections like -

Maya vs. Mulayam

Modi vs. Mulayam

Amit Shah vs. PK

Hindu vs. Muslim (Yogi vs. Azam)

Tolerance vs. Intolerance

Where does Akhilesh fit in this?

First random thought this morning

The central government has revised grid connected solar power generation capacity target from 20GW to 100GW by 2022. The current installed capacity is 5.7GW. Besides, the off-grid use of solar power is also rising fast.

This is happening at a time when the growth in conventional power supply is outpacing demand growth, leading to sustained fall in merchant power tariffs. Given the economic forecast for FY17, the condition is not likely to change materially in next one year.

Would be interesting to know how Rajan & Arun Jaitely plan to manage PM & Piyush Goyal's ambitions, without compromising banks' asset quality?

Could it be different this time - 3

Personally I do not prefer the term "black-money", as (a) I am never able to distinguish one money from the other and (b) I find it kind of racist.

From my experience I know that trading, real estate, and bribery have been the most prominent amongst various sources of generating un-taxed money in the economy.

Besides gold, Agriculture income and long term capital gain in listed equities have been the most popular methods to regularize the un-taxed money. Both these methods have been used blatantly in past decade to evade taxes on income.

There has been a concerted effort on past of the government to plug these avenues of tax evasion through various legislative and administrative means.

In an ideal world, GST shall curtail under reporting of trading income; real estate and land acquisition regulations shall institutionalize the real estate business; and duty/TDS on purchase of valuable items will constrict use of un-taxed income.

However, taxing fraudulent agriculture income and capital gains will deal a fatal blow to the parallel economy.

For decades, politicians have avoided the issue of tax on agriculture income for obvious reasons. It is common knowledge that they themselves are the largest beneficiary of this exemption.

For statistical purpose, I may highlight that about 92.5% of Indian farmers own less than 5acre of land. In fact only 2.24% own land in excess of 10acres. 68% of total land is used for growing cereals and pulses and only 2% each is used for orchard and animal husbandry.

Given the standard of yields in India, it is therefore safe to assume that 95-97% of Indian farmers do not fall in tax net (Annual taxable income Rs2,50,000 or more). So what tax exemption politicians are debating about is not difficult to guess.

If I am forced to hazard a guess, I would say in next five years appx. Rs20lakh crore of income could be brought to tax net by implementing GST & real estate regulation, and preventing misuse of exemption for LTCG and agriculture income. The other things remaining same, this will almost double the income tax collection.

The fringe benefits will include, material fall in housing prices (and therefore accelerated growth in construction sector), material improvement in banks' CASA deposits and therefore lower cost of funds businesses, better targeting of subsidies, etc.

This combined with materially lower leakages in the public expenditure due to use of technology, direct cash transfer, engagement of local bodies in executions, shall be good enough to move into higher growth orbit for Indian economy.

...to conclude tomorrow

Also read

Could it be different this time - 1

Could it be different this time - 2

Wednesday, March 16, 2016

Could it be different this time - 2

Thought for the day

"If God created us in his own image, we have more than reciprocated."

—Voltaire (French, 1694-1778)

Word for the day

Apatetic (adj)

Assuming colors and forms that effect deceptive camouflage.

Malice towards none

What is more worrisome for Americans at this point in time:

(a) Trump may become the president of the country; or

(b) If Trump gets Republican Party's nomination, then a woman might become the president of the country?

First random thought this morning

After ECB, the BoJ has also cautioned the market about the poor economic outlook. All eyes are on FOMC meeting outcome today. If Fed also holds rates and uses a similar language to express its concern over global economic outlook, the alarm bells may begin to ring rather raucously.

The best case for markets would be if FOMC decides to stay on course by hiking 25bps and shows flexibility by assuring in "whatever it takes" language.

Could it be different this time - 2

Since past two years, we have seen some material changes in the Indian economic policy framework. The impact of these changes, though not yet being acknowledged publically by anyone for obvious reasons, is far reaching. Though, I do not want to ascribe these changes to any political party, it would be unfair to deny the role of the strong commitment of the current leadership in enforcing and accelerating the pace of these change. And it is this pace and intensity of the changes that is giving me confidence that it could be different this time.

I would highlight few examples to explain my point:

Like all other emerging economies, the debate in India has always centered around “crony capitalism”. All political parties have accused each other of pursuing crony capitalism. I have always maintained that this debate is completely misdirected, for (a) it leaves the biggest scam out of the purview of debate and (b) it does not focus on “crony socialism”, which to my mind has harmed the country more than anything else.

Maintaining the negative real rates for households (household inflation minus term deposit rate) for a very long period is the biggest scam perpetrated on the poor people of this country. The inflation tax, as I call it, paid by poor and middle class savers for cheaper financing of “crony socialism” for the benefit of politicians and "crony capitalism" for the benefit of unscrupulous businessmen, has caused tremendous damage to the fundamentals of the Indian economy.

It has resulted in wasteful public expenditure, misallocation of capital, and unsustainable economic growth (that is visible mostly in the statistics). Not many social and qualitative indicators corroborate the kind of growth politicians claim to have delivered.

For years, poor and middle class households have probably funded almost the entire subsidy bill of the government through this inflation tax. Whereas it is common knowledge that large part of subsidies has historically gone to enrich a few. For records Rajiv Gandhi put it at 95%. Current claims range between 50-70%.

The best way to understand "crony capitalism", I often use the example of a typical municipal school child in Mumbai or Delhi wearing a worn necktie, torn & dirty shirts, and plastic or rubber Chappals.

Politicians and administrators have sought to achieve the equality between government and private schools by prescribing a necktie as part of uniform for poor kids who cannot even afford to wash their uniform thrice a week!

To make the matter worse the parliamentary debate is focused on “who is the supplier of the neckties” instead of “how to improve the level of education in government schools”.

The current political dispensation at the center is taking both the menace - "crony capitalism" and "crony socialism" - head on.

...to continue tomorrow

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Could it be different this time - 1