Vijay Kumar Gaba: November 2016

Wednesday, November 30, 2016

In support of "The Radicals"

Thought for the day

"Some people mistakenly think nature is very nice and benevolent and never betrays"

—Margaret Atwood (Canadian, 1939)

Word for the day

Toggery (n)

Clothes; garments; togs.

A clothing shop.

Malice towards none

BJP and SAD should contest forthcoming Punjab elections separately.

If need be, they could come together post election, like BJP and SS did in Maharashtra.

First random thought this morning

I am unable to find an appropriate expression to describe the present state of affair of the Congress Party.

It's got to be more than a tragicomedy, when the usually sober people like Dr. Manmohan Singh and P. Chidambaram start talking like the usually indecorous people like Digvijay Singh and Rahul Gandhi.

In support of "The Radicals"

Try and imagine a situation where a post graduate class of literature is given a question paper of quantum physics to solve within stipulated three hours with no outside help.

It would be fair to assume that most students will leave the answer sheets blank leave the examination hall, distraught.

Some may try to test their ingenuity and offer literary solutions to the complicated problems, still hoping to score zilch.

A few would however contend that being students of literature, they are naturally the only genius around. These few would offer detailed literary explanations which may not make any sense to the conventional students of physics or literature; and still insist that the solutions offered by them are the best. Hoping to pass with distinction, they might also take this opportunity to ridicule the students of physics and celebrate their superiority. This small group is popularly referred to as "The Radicals".

I am inclined to view the present day global economy as the examination hall described above. Almost none of the participants (economists, bankers, administrators, politicians, regulators, traders, borrowers, lenders, consumers, producers, et. al.) seems to have any clue.

Absolutely clueless most may be about solutions, they can apparently read the problems. And that is precisely what they are doing day and night - reading the problem; sometime in hush-hush sounds; sometimes raising the decibel to the maximum; sometimes in the secret chambers and sometimes in front of the mammoth crowds; sometimes with audacity and sometimes with jitters in their spine.

The Radicals are the one who are offering solutions. Totally unassimilated, these solutions naturally do not appeal to the conventional mindset.

These solutions are therefore mostly liable to be rejected as hazardous, for these seek to rattle the status quo.

These are also condemned to the derision of the conformist and purist, as they approach the problem from a completely unexpected tangent.

Admittedly, these solutions may very well fail to solve any of the problems, global economy is facing today; or even exacerbate the problems. Although this cannot be known today. As Shakespeare would tell us “There are many events in the womb of time which will be delivered.”

What matters today is to make an effort, howsoever radical or unassimilated it may seem. That is what is needed to administer a sense of calm on the stressed nerves of the common people, who are finding the current conditions unfairly severe to them.

On my part, therefore, I fully appreciate what the Radicals like Trump and Modi are doing or may try to do. I would like to wait what the time delivers.

In next few days, I would like to share my thoughts on the problems India is facing and today, and what could be the solutions to these problems.

Tuesday, November 29, 2016

I am done and over with

Thought for the day

" For years I wanted to be older, and now I am."

—Margaret Atwood (Canadian, 1939)

Word for the day

Soliloquize (v)

talk to oneself.

Malice towards none

Attended a marriage last night.

I am sure a lot of cash is being hoarded by the families who have marriage in family.

All this money will flock the markets as marriage season ends in December.

First random thought this morning

BJP, RSS et. al. want to impose their idea of good governance on the country, considering it to be inarguably the best alternative. Some may find it against the basic tenets of parliamentary democracy. But I have no problem with this. If it is good for the country, it is good. Regardless of everything and anything.

My problem is that they want to experiment with their ideas at my expense.

BJP & RSS canteens are neither Swach (clean) nor cashless. BJP and RSS have not issued any whip or request to its members and elected representatives to not to deal in cash any further; donate 2hrs a week for cleaning of public places; not to attend or arrange lavish marriages or birthday parties; I visited 7 Patanjli stores in Delhi yesterday. None accepts payment otherwise than cash.

I am done and over with

In past three weeks millions of reams of papers; millions of terabytes of data space; over a billions man-hours of productive time; about 100hrs of parliament time; and thousands of hours of administrative & banking time has been spent (some may want to call it "wasted") discussing, debating, protesting, managing and suffering the government's move to abolish old high denomination currency notes and replace these with new currency.

I have also spent at least 70hours, studying, analyzing, explaining, arguing, criticizing, defending and writing about the measure in past three weeks. I feel it's high time that I get past this whole issue and focus on the road ahead. I would therefore like to close the discussion with the following summary of my final understanding, view and opinion on the issue. I totally concede that there is huge scope for disagreement. But I am in no mood to take this discussion any further. All comments are totally unwelcome.

· I firmly believe that the latest exercise of the government and RBI does not qualify to be demonetization in any measure. It's simply replacement of currency notes. I am reasonably confident that by the times cows come home, Banks and RBI would have received more old currency notes than the RBI balance sheet showed as outstanding at 8:30PM on 8 November 2016. Other things remaining the same, the note printing press can rest for next 2-3yrs, after working overtime for two months.

· The exercise may lead to direct transfer of some INR50-70K crore to the lower strata in the socio-economic pyramid of the country. This combined with the additional cash flows to the middle of pyramid through 7th Pay commission and OROP payouts, and better Kharif realizations for farmers, there are sufficient reason to believe that the consumption slowdown due to disruptions since 9 November, may get fully neutralized by 1QFY18. No surprises if the consumption surprises on higher side as the propensity to consume is much higher in the "receiver" lower half of the pyramid as compared to the "transferor" upper half of the socio-economic pyramid. The positive sentiment amongst the common public shall also aid consumption. The GDP of FY17 may be lower by 30-40bps but with upside risk. FY18 likely +8%.

· Political rhetoric apart, the time spent in ATM/Bank Qs does not matter much in terms of productivity loss. Most people standing there are either employed in disguise or underemployed.

· This exercise will prepare a solid ground for smooth implementation of GST in FY18 or FY19. Most small businesses will get tech savvy and less resistant to "white" payments.

· The plastic money may grow at least by 50% in next 2-3 years, leading to higher velocity of money (sustainable higher liquidity) and lower cost for banks. Lending rates could fall on sustainable basis, adding materially to economic growth.

· This exercise and reactions thereafter have introduced significant unpredictability in the system. This shall logically lead to break in status quo and coax higher compliance. Property and gold businesses will change structurally and for the good.

You may also like to read the following:

· Cashless in Great Mall of India

· Be careful in what you wish for

· Worrisome & encouraging

· Mistrust & Unpredictability

· Sir, I beg to differ

· Don't underestimate the power of a common man

· Cash is colorless, it takes color of the hand that is holding it

· Cash and Real Estate

· Good times for realty market around the corner

Friday, November 25, 2016

Good times for realty market around the corner

Thought for the day

"Gardening is not a rational act."

—Margaret Atwood (Canadian, 1939)

Word for the day

Savoir-faire (n)

Knowledge of just what to do in any situation; tact.

Malice towards none

PM Modi has played the trump card, which AK played in last Delhi election - "Anyone who does not support me is corrupt!"

If this card works - expect 280-290 seats for BJP in forthcoming UP elections, and a majority in Goa and Uttrakhand.

Punjab is tough and Manipur unpredictable.

First random thought this morning

The move to abolish the extant currency notes has seemingly brought the opposition parties together for the time being. However, it appears more as a floor management strategy than a political game plan.

Imputing any larger motive to this or expecting any substantial outcome from this may be political naiveté.

Except for few jokers, most of the opposition leaders have seen the Emergency in 1975 and the subsequent events. They know very well that two and a half year period (to the 2019 elections) is too long a period in politics. A majority of the voters would not remember the hardship they suffered due to this move.

Good times for realty market around the corner

Commenting on my yesterday's post (see here) Many readers have highlighted that one major source of land for real estate development is the surplus land with the civic administration. The civic agencies sell these land parcels to users or developers at a relatively lower rate, who in turn are able to sell these at the market determined rates, accepting the "gain" part of the compensation in cash. This cash adds to the stock of black money in the system and perpetuates the cash element in the real estate dealings.

In my view, this was true till a few years ago. Now a days, most of the sale by civic authorities, except housing for economically weaker section, is at near market price; and the sale is also through a mostly transparent process of computerized draw or auction. In Delhi, for example, many flats offered by DDA have remained unsold vs. 100x demand two decade back. Many commercial sites sold by DDA in past decade have also remained unviable for the buyers.

Now coming back to the main topic - I firmly believe that the expectations of a major correction in real estate prices in short term may not come true. To the contrary, after a short period of subdued activity, we may actually see prices firming up.

Top five reasons for my positive view on real estate are as follows:

(a) The real estate prices have been correcting in most micro markets since past 5years. In many markets, like NCR, Punjab, Haryana, UP, Gujarat, Rajasthan, West Bengal, MP, Punjab, etc. the prices have seen material correction. In many other markets, we have witnessed time correction. The commercial real estate prices have reacted fast to the interest rate cycle and have already started to firm up in past few quarters. The housing demand may have bottomed out. With rise in affordability, lower rates, and better tax incentives, this segment may also see better days soon.

(b) In many micro markets, the current market prices are not very far away from the cost of construction and government prescribed floor rates (circle rate or stamp duty rates). The scope for prices to fall further therefore is limited. The cost may actually rise in the short term.

(c) The stress in real estate market in past few years, new regulatory regime, new land acquisition laws and now currency abolition has ensured that the smaller, unorganized, inefficient developers go out of the market and the markets get consolidated with 4-5 large player in each micro market. This consolidation will bring the pricing power back to developers.

(d) More money in bank accounts, and better tax compliance will enable lot many more people for bank credit and demand for residential and commercial estate shall begin to firm up.

(e) There could be supply constraints in short term as the holders may be reluctant to sell for various reasons.

Thursday, November 24, 2016

Cash and Real Estate

Thought for the day

"Heroes need monsters to establish their heroic credentials. You need something scary to overcome."

—Margaret Atwood (Canadian, 1939)

Word for the day

Duende (n)

Charm; magnetism.

A goblin; demon; spirit.

Malice towards none

Who has created this illusion that the government has demonetize 86% of Indian currency?

The current effort is just an exercise to replace the old high denomination notes (HDNs) with the new HDNs.

The assumption that some of the existing HDNs may not be presented for replacement is just that - an ASSUMPTION.

First random thought this morning

Till May 2014 many termed PM Modi as divine intervention that will cure India of all its ills. The detractors termed him as Taliban, who will destroy the core fabric of the Indian society by communalizing it.

Both the extreme views have proven to be mostly wrong.

The history is repeating itself with Donald Trump.

Will history repeat again with Donald Trump?

Cash and Real Estate

Continuing from tomorrow (see here), I would like to share my understanding of the real estate market dynamics in India with the readers. Admittedly, my views do suffer from limited knowledge of the real estate markets, as I know about the practices only in 10 states. I assume the practices are similar in most states.

To estimate the impact of the abolition of old high denomination notes on real estate market in the country, it is important to understand the role of cash in the market dynamics.

· A large part of the land parcels for development of real estate projects, originate from the farmers or sick industrial units that have closed operations. In recent times, the government has also announced release of land parcels owned by CPSEs etc. for redevelopment.

In case of farmers, there is no capital gains tax on sale of agriculture land, hence no tax motivation to receive payment in cash. The farmers receive cash in consideration of land sale either out of habit of dealing in cash, or buyer willing to pay little extra so that he could save on stamp duty and registration fee etc. In some cases buyers are willing to pay little extra as they do not have sufficient white (accounted and legal) money to pay as consideration.

However, in case of sick industrial units, great motivation to receive cash is present due to (a) first right of lenders on any sale consideration received; (b) huge tax liability on capital gains; (c) unwillingness of promoters to share the sales consideration with minority shareholders; (d) corruption of the nominees of financial institutions on the board of such companies.

In case of redevelopment of government/CPSE properties, the role of cash is mostly limited to the corruption in the award of contracts.

· It is not necessary that the involvement of cash always leads to inflated value of the underlying deal. In many cases cash involvement leads to both parties agreeing to lower sales consideration as they save on taxes and duties.

· In many cases, the buyer has to convert his white money into black, as the buyer insist that a part of the sales consideration be paid in black money. In a large number of cases, buyers are black & white agnostic.

· The stock of black money perpetuates the role of cash in real estate deals as the seller insists on cash because he has to pay cash in the subsequent deal he is negotiating.

· The smaller developers accept cash from buyers, as they sell cheaper and try to save cost by saving on VAT, Service Tax, etc. payable on the construction material and construction related services

· The sources of cash that is used in the real estate deals are primarily (a) bribes received by public officials; (b) money earned through illegal means like smuggling, drugs, ransom, extortion; (c) tax evasion by not accounting the full revenue or accounting fake expenses...to continue

Wednesday, November 23, 2016

Cash is colorless, it takes color of the hand that is holding it

Thought for the day

"In the spring, at the end of the day, you should smell like dirt."

—Margaret Atwood (Canadian, 1939)

Word for the day

Ripsnorter (n)

Something or someone exceedingly strong or violent, e.g., a ripsnorter of a gale.

Malice towards none

From "Har Har Modi" to "Et tu Modi"; from "Great Expectations" to "Great Betrayal"; from "Divine Intervention" to "Ruthless Tuglaq" - the spring to autumn cycle is complete in two and half year.

Where do we go from here?

First random thought this morning

Economic reforms often mean transformational changes that may 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, stricter compliance standards and larger accountability for businesses.

If you do not want to pay taxes, cost of compliance and market linked compensation for exploitation of natural resources and labor, clamoring for economic reforms would not yield much.

Cash is colorless, it takes color of the hand that is holding it

As I mentioned last Friday (see here), I totally disagree with the prognosis that the demonetization of HDNs by the government will severely hurt the real estate sector in the country.

I feel the sector that has been undergoing an overhaul since past few year will get a great impetus from the demonetization drive.

The arguments suggesting a collapse in the real estate market suffer from a multitude of wrong assumptions. For example, it appears to assume that—

(a) The pricing of real estate in India is predominantly a function of "cash component" involved in the deal.

(b) The demand for housing, commercial complexes (malls etc.) and office space is mostly discretionary and could be deferred/suppressed for a considerable period of time.

(d) A large part of the real estate stock is in the hands of financial investors who are all leveraged and stressed.

In my view, these assumption may not be completely fair. Property prices are usually a function of cost of land & construction, affordability (income and saving rate of the target buyer group) rental yields vs. mortgage rates. Black cash is only a top up and deterrent to fair price discovery.

In my view, the latest developments like (a) changes in laws relating to land acquisition; (b) regulation of real estate sector; (c) rising trend in urbanization; (d) rising demand for urban commercial real estate as self-enterprise accelerating; (e) rising growth in organized retailing; (f) need for development of logistic infrastructure (warehousing etc.) to reap the benefits of GST; (g) changes in regulation relating to foreign investment in real estate sector and institutionalization of real estate ownership (through REIT etc.) - are majorly positive for the real estate sector in India.

A significant impetus should be provided to the real estate demand by (a) rising affordability through higher income (e.g., pay commission, rise in minimum wages); (b) falling trajectory of mortgage rates; (c) consolidation of real estate development business through elimination of smaller, inefficient and weaker developers from the market; (d) better town planning under smart city initiative.

All cash component in real estate deals in not black (illegal or unaccounted money). Many a times home buyers are forced to withdraw cash from bank accounts to pay to the seller as seller does not want to pay tax on gains or he needs to pay cash to seller of the property he is buying in lieu of the property he is selling.

In the worst case, assuming 50% average cash component in the deal, it would be 18% higher cost for the buyer (15% tax on 50% cash component @30% and 3% higher stamp duty @6%) and 10% higher tax for the seller (@20%). If both buyer and seller have to share the cost equally, a 5% price correction should be sufficient....to continue

Tuesday, November 22, 2016

Don't underestimate the power of a common man

Thought for the day

"Once you publish a book, it is out of your control. You cannot dictate how people read it."

—Margaret Atwood (Canadian, 1939)

Word for the day

Incipient (adj)

Beginning to exist or appear; in an initial stage, e.g., an incipient cold.

Malice towards none

In twelve days of demonetization drive, the government must have found that it's not all Black & White. There are more than fifty shades of grey in Indian economy!

First random thought this morning

The execution of demonetization process since 8th November, and the rail accident near Kanpur last Sunday have made one thing amply clear - 'Planning' is something we are still not used to. The following five simple steps could have made the demonetization a relatively painless step:

1. Print new notes equivalent to at least 50% of old currency in advance. Double credit limit of all Kisan Credit Cards for three months.

2. Announce demonetization on the night of 28th of October or Nov. Provide enough cash to all bank Branches on 29th with instructions to all employers to withdraw enough cash to pay salaries on 30th in cash.

3. Announce one week holiday for schools. Deploy all teachers, Aadhar enumerators, and Banking Correspondents to go door to door with biometric devices and exchange 2k-4k cash. Each person covering 100 households every day. (Pulse polio volunteers have done this often)

4. Open 24*7 cash exchange counters at all police stations, & other civic offices; besides the facilities at bank branches and ATMs.

5. Engage all market associations for exchanging valid cash of their members with appropriate disclosures and undertakings.

Don't underestimate the power of a common man

Many highly learned fund managers, analysts, strategists, economists, and market observers have commented adversely about the demonetization of HDNs by the government. One famous fund manager has likened it to a running car (Indian economy) crashing into a wall. A very popular strategist with a brokerage house sees FY17 GDP growth rate falling to 3.5%. One popular economists and a regular weekend columnist finds it an exercise in futility. A global analyst of Indian origin finds it unprecedented in annals of global economic history; counterproductive and hence completely undesirable.

I have no issues with none of these experts. But my faith in the adaptability of fellow Indians to the change remains unflinching. I see no chance of trade disruptions due to demonetization lasting beyond 2-3months. There is no denying that the GDP of FY17 could be somewhat impacted. But I do not see any impact of this beyond this.

I would like to cite the following five examples in support of my view:

(a) Till 1994, the stock trading in India was done on the floor of stock 20 odd exchanges. The stock brokers were usually not professionally qualified & trained. OTCEI experiment had mostly failed. The clearing & settlement process of stocks was cumbersome, constricting, unsecured and totally non-transparent. NSE took off as BSE closed for two days due to MS Shoe fiasco. In next 3yrs India was the first country in the world to have 100% electronic trading. All dhotiwalla brokers were well trained in computers. Professionals were inducted as new members by the elite club called BSE. All floor boys (jobbers, market makers, traders, etc.) and many more got better employment.

(b) The doubts were cast on viability of Indian stock markets after trading in dematerialized stocks was introduced in late 1990s. All experts opined that since a majority of stocks are held as black money, no one would want it to be dematerialized and open up for scrutiny. Within 3years India became the first country to have 100% dematerialized trading. Everyone knows the story of capital market growth after that.

(c) With Rs18/min for incoming call in 1995, many wrote the epitaph of Indian mobile telephony industry even before it opened its eyes. Even in 2003, most optimistic investors were estimating two decades for full penetration. People were skeptic how the illiterate villagers will adopt to the technology and English. India achieved near full penetration in no time. I need not say anything further on this.

(d) Alarmed by the air pollution, in 2002 the Supreme Court ordered all public transport vehicles in Delhi to be run on CNG. There was utter chaos. The State Government tried it best to subvert the SC order. Bus, auto and taxi operators struck work. There were maddening queues in front of CNG pumps. But within one year the city was proud to win the US Department of Energy’s first ‘Clean Cities International Partner of the Year’ award in 2003 for ‘‘bold efforts to curb air pollution and support alternative fuel initiatives.’

(e) In 2003, the then home minister L. K Advani announced launch of a pilot project to issue Multi-purpose National Identity Card Project (MNIC) in a few selected sub-districts in various districts of 13 States namely Jammu & Kashmir, Gujarat, Uttranchal, Rajasthan, Uttar Pradesh, Assam, Andhra Pradesh, West Bengal, Tripura, Goa, Tamil Nadu, Pondicherry and Delhi.

Many (including the one economist mentioned at the begining of this post) saw this as a communal agenda aimed against Muslim and illegal Bangladeshi immigrants. The project was promptly abandoned by the UPA government as unfeasible. But six years later in 2009, the UPA government launched the UIDAI, which started issuing Aadhar ID cards in 2011. In less than 5years, over 85% population has an multipurpose ID card that is being efficiently used for opening bank accounts, taking mobile telephone connections, direct transfer of subsidies etc.

All the above five cited developments that sought to change the status quo were seen as financially unviable and causing avoidable inconvenience. The success and benefits are there for everyone to see.

I do not see any reason, why the demonetization shall not result in a revolutionary change in the ways of doing business in India.

One, adoption of electronic payment methods will not only accelerate the efficiency of smaller businesses and trade; it will also enhance security, scalability and their compatibility with larger businesses.

Two, with materially higher money multiplier in place, the economy may get the big push it has been looking for.

Three, everyone had been expecting better compliance standards with implementation of GST. This move may only prepare people in advance for whole hearted adoption of GST.

Four, those ruing the inconvenience to the people may please note that in past 30years, Mamta Banerjee and CPM have organized thousands of Bandhs in West Bengal. These Bandhs caused irreparable loss to the daily wage earners for three decades. The likes of JDU, AAP and Shiv Sena have also caused similar disruptions on many occasions.

Five, insofar as rural economy is concerned, (a) the media reports about rural distress due to demonetization are highly exaggerated; (b) Two years of drought did not impact GDP by more than 50bps. Real estate is down for past three years at least. How come demonetarization will cause 4% dent in the economic growth?

I am actually worried about the worsening global economy. Rising US yields and USD, collapsing CNY and trade are indicating towards a season of deflation - irrespective of Trump, Demonetization or Brexit.

These three in fact, I see as saviors for the global and Indian economy. Amen!