Vijay Kumar Gaba: May 2017

Wednesday, May 31, 2017

Democracy, Demography and Demand

Thought for the day

"Much that passes as idealism is disguised hatred or disguised love of power."

—Bertrand Russel (British, 1872-1970)

Word for the day

True-Blue (adj)

unwaveringly loyal or faithful; staunch; unchangingly true.

Malice towards none

For a second assume Pakistan executes the death sentence awarded to Kulbhushan Jadhav.

What will be our reaction:

(a) Will we declare war on Pakistan and invade Lahore?

(b) Will we terminate all diplomatic and trade relations with Pakistan, declaring it to be an enemy?

(c) Will we at least execute couple of Pakistani prisoners in our jails, without fait trial?

If the answer to all the above if "No"; then what's the deal with all this TV drama?

First random thought this morning

As per media reports, the government has 'asked' central public sector enterprises (CPSEs) to bear the cost of 543 "Sabka Saath, Sabka Vikas Sammelan" being held to propagate the achievement so the government in first three years of its five year term.

It raises many questions in my mind. For example—

(a) If the government has done good work for people, shouldn't the people (the beneficiaries) know it? Why would they need to attend a government function to know, what the government has done for them?

(b) What about the rights of minority shareholders of listed CPSEs. Why should they bear the costs of government publicity?

Democracy, Demography and Demand

Many people often speaks about 3Ds, viz., Democracy, Demography and Demand, as key strengths of Indian economy. Even our prime minister has highlighted these as key factors in economic development and growth of the country.

From the view point of Indian equity markets also these 3Ds form the basis of a many investment strategies. Global investors also find young demography, large upwardly mobile middle class, political stability with near unanimity on core economic and fiscal policies, attractive for investing risk capital.

In my view, these 3Ds remain the key challenge for faster, higher and sustainable economic growth of India. To capitalize on 3Ds we need to maintain a balance between these; which is a delicate task.

Firstly, the pseudo socialist and quasi feudal nature of our democracy often leads to wasteful expenditure, policies and plans focused on winning a elections rather than achieving sustainable economic growth and development, serious misallocation of capital and sub-optimal of resources.

We have seen politicians creating undue demand for color televisions, smart phones, laptop computers etc. by manipulating the process of democracy.

In rural and semi-urban areas, motor cycle has replaced bicycle as a mandatory dowry item. These days, it is almost impossible to marry your daughter if you cannot afford a motorcycle in dowry. Smart phones also find place in most ‘demand lists’. Many old aged villagers argue that it is a collateral damage of better road and telecommunication connectivity.

It is clear that our society is defying the classic McGregor's evolutionary pyramid and moving directly from sustenance to aspirational consumption. The demand thus created is neither desirable nor sustainable, in my view.

Secondly, the youngest demography in the world is like a vast reservoir of unexploited energy. If not channelized properly, it can destroy the very core of our social fabric. The rising number of poorly educated, inadequately skilled underemployed, unemployed and employed in disguise youth is no strength for the economy. It is indeed a serious weakness.

On one hand, India is failing in her duties towards the international community (see here); on the other hand we seems to be fast running out of ideas for managing this vast and invaluable resource for our economic good.

Rise in petty crimes, instances of civil unrest, deterioration in general compliance standards are just few prominent consequences.

Misled by aspirational consumption and tall political promises, our businesses and middle class consumers have advanced their investment demand. Consequently, we are witnessing severe stress in many sectors of the economy. While more than 40% of households still live without proper electricity, our power plants are running at 50% PLF. Most toll roads are reporting losses. Besides, telecom companies are reporting losses and FMCG companies are witnessing sustained margin erosions.

Tomorrow I will discuss about the fourth D, viz., Disintermediation, that is challenging our economy, investors and businesses.

Tuesday, May 30, 2017

3rd Market Participant Survey

Thought for the day

"Men who are unhappy, like men who sleep badly, are always proud of the fact."

—Bertrand Russel (British, 1872-1970)

Word for the day

Hedonism (n)

Devotion to pleasure as a way of life, e.g., The later Roman emperors were notorious for their hedonism.

The doctrine that pleasure or happiness is the highest good.

Malice towards none

Will a uniform GST of 28% on movies mean no "tax free" movies post July 2017?

First random thought this morning

So many students appear to have scored near perfect scores in subjects like Political Science, History, Literature, Psychology in recently announced CBSE 12th class results.

To me this means that the system encourages only those students who are conformist. The examiners are trained to punish the students who like to differ and offer alternate views on history and political issues. This cannot be a good sign for a progressive society.

If I am HRD minister, I would assign 75% marks to debates, group discussions, and presentations in humanities, economics and business studies and 25% to written examination that tests writing skills, and basic understanding of broad principles. Pure science subjects, accounting, maths could remain as they are.

3rd Market Participant Survey

Last weekend, I repeated my annual survey of market participants, randomly selected from my phone contact list. This time I selected a larger sample (49) against 30odd on past occasions.

The objective was simple, viz., to assess the mood of the market. as usual, the people I called were a boring mix of investment managers, credit managers, corporate bankers, equity analysts, economist, wealth managers, insurance brokers, some seasoned investors and few corporate treasury managers. Each conversation lasted 10-25minutes.

As usual, I asked one simple question to all the people I had called – “what are you most excited about and what is bothering you most at this point in time?” Unlike the last time, the responses this time were more in unison. People mostly appeared hopeful but could not cite any concrete reasons for their optimism. Macro data was the only thing they could cite with conviction.

Admittedly, my sample suffers from inadequacies, but only 8 out of 49 people appeared confident about the direction of markets and economy even for next six months.

The key highlights of my impromptu conversation with market experts could be listed follows:

(a) Considering that the markets have been turbulent for most of last week, all the people I called appeared surprisingly free and interested in talking to me. Most were interested in discussing politics, GST and a variety of individual stocks from midcap and small cap arena. It seemed that everyone is very much into the markets and invested to the capacity.

This, in my experience, usually occurs close to the market top of a market cycle.

(b) There is an old saying in context of financial markets – “in good times few market participants have time for gaining knowledge; and in bad times few are inclined”. From my discussion it appeared that not many people are bothering to go below headlines and beyond front pages. Yet another sign of market topping.

(d) When specifically asked, opinion was vertically divided on the threat of China slow down. However, everyone agreed that should this exacerbate, Indian markets will sink into a deep bear phase. Surprisingly, most appeared bullish on INR.

(e) 32/49 felt that rates have already bottomed and may not fall from here in couple of years. No one was therefore bullish on recovery real estate. Though as a cautious footnote people exuded optimism over affordable housing.

(f) Rural consumption and public investments are consensus favorite themes. No one is willing to care about the contrary data on these.

Friday, May 26, 2017

Is it a case of Cognitive dissonance?

Thought for the day

"Patriotism is the willingness to kill and be killed for trivial reasons."

—Bertrand Russel (British, 1872-1970)

Word for the day

Cantankerous (adj)

Disagreeable to deal with; contentious; peevish, e.g., A cantankerous, argumentative man.

Malice towards none

Where would you place the dignity of a human being, in your order of priority?

Would you like "if" and "but" to be used when it comes to your dignity?

First random thought this morning

According to various legends related to the medieval king Vikramaditya, his throne, studded with 32 statues of fairies, had two qualities: (a) the throne would allow only such people to sit on it who would possess qualities of a noble and strong human being; and (b) anyone who would sit on the throne would automatically acquire the qualities of a great king, e.g., valor, justice, magnanimity, foresight etc.

We the people of India continue to believe that the thrones of CM and PM etc possess similar qualities. We sincerely believe that any crook, anarchist, bigot, or criminal will become a noble king as soon as he/she sits on the throne!

Is it a case of Cognitive dissonance?

Under normal circumstances the economic behavior of a person should be a subset of his general behavior.

For example, the outlook about socio-political and geopolitical environment shall normally reflect in the business strategy.

If one believes that the disharmony, strife and stress is likely to rise in the society and politicians do not have an appropriate strategy to deal with social strife and unrest, then such person should normally—

(a) not be investing in fresh capital in business;

(b) should be looking to minimize leverage;

(d) should be seeking to geographically diversify his assets by investing or hoarding in foreign assets; and

(e) certainly look to minimize his exposure to the state.

Similarly, if an investor or businessman believes that geopolitical risks are rising to a specific jurisdiction, he should be diversifying his economic assets away from such jurisdiction.

Now applying this thought to the current Indian context, we get a mixed picture.

If we accept the trends in media, social media and popular political discourse at their par value - our country is facing heightened degree of social stress and unrest; and elevated level of geopolitical threats.

Politically, our country not stands vertically divided, with about 45% voters supporting the incumbent government and the parties supported by over 35% trying to stitch together a united opposition. Such polarization has occurred in Indian politics almost after 4 decades.

Total dominance of an individual (PM Modi) over the day to day executive functions in states comprising more than 65% of India's population shall also alarm an investor or businessman. While this dominance brings many positives, it also raises the specter of (a) erratic policy changes, e.g., abolition of currency; (b) probability of a full scale war (I would say from 0% under MMS to 5% under Modi, is a 5x jump in risk perception), etc.

Regardless of these trends and circumstances, we have seen that—

(a) domestic investors have increased their stakes in risky assets (small and midcap securities) materially, while investment in gold has fallen;

(b) the growth in insurance is not commensurate with the risk perception;

(c) The exposure to government (deposits in PSU banks, participation in government projects, gold bonds etc.) has increased materially;

(d) outward FDI has fallen dramatically and outward remittances have not shown any acceleration;

(e) corporate debt stays at elevated level, and the ownership has moved away from banks to public......to continue next week

Wednesday, May 24, 2017

Political paradigm needs to change

Thought for the day

"It has been said that man is a rational animal. All my life I have been searching for evidence which could support this."

—Bertrand Russel (British, 1872-1970)

Word for the day

Ultracrepidarian (n/adj)

An ultracrepidarian person.

Noting or pertaining to a person who criticizes, judges, or gives advice outside the area of his or her expertise

Malice towards none

Regardless of the recent severe correction in broader markets, it appears that we shall see a huge wealth effect in Indian middle class as investment in equity grows and markets do well over next five years.

Real Estate and Travel will be two notable beneficiaries of this effect.

First random thought this morning

The market participants have this tendency to discover a trade from every event that is discussed on TV. From state elections to unrest in Kashmir. GST is a popular discussion these days, and there are thousands of "Research Reports" suggesting a trade on GST. Many of these reports have already declared the winners and losers from GST; much like the way it is done within hours of FM reading his budget speech every year.

In my view, market will adjust to GST in 3-4months. The readjustment will happen in a manner that it becomes even for most. Middle class will pay a little more and government will take home a little more. The disruption in unorganized businesses may happen in long term only.

No business might gain directly from GST. All tax savings may have to be passed to consumers. The gain could come from higher demand in future as prices stabilize and yearly tax fluctuation is controlled.

Political paradigm needs to change

Over past six weeks, I have discussed my ideas about the factors that could provide necessary escape velocity to the Indian Economic for transcending to a higher orbit.

We have seen some serious developments in some of these areas in past decade or so. In fact, the progress has accelerated materially in recent years. However, a lot of work still remains to be done; especially on qualitative front. The areas where we have seen material progress in quantitative terms, the quality seems to have remained mostly ignored.

For me it remains a matter of debate whether we want to develop economically on the mostly western parameters, or we should focus on our ethos and measure the economic development & growth in terms of dignity of human life, peace of mind, social harmony, motivation for scientific enquiry & spiritual pursuit, and commitment to universal brotherhood.

Nonetheless, even in terms of popular parameters, we have a long distance to cover before we think of transcending to a higher economic orbit. In particular, social equity and sustainability are two critical and popular concerns that have remained mostly unaddressed despite all the political rhetoric and shenanigans.

To conclude my monologue, I suggest that the present political structure of the country is not very conducive for a higher trajectory of economic growth and development either in terms of popular parameters or in terms of quintessential Indian ethos.

A study of the history of Indian politics would suggest that unlike western democracies only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology.

The political discourse in India is usually dominated by contemporary issues and personalities. The economic issues raised during elections are mostly confined to the slogan of poverty alleviation. In recent times corruption has also become a popular electioneering slogan.

Perhaps, no political party seems to have taken issues of poverty alleviation or corruption seriously. Therefore no one has bothered even to outline a conceptual or ideological framework for solving these problems.

Ideologically, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism that was a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal).

The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in 1990s it adopted Gandhian Socialism (which is not too far moved from the Integral Humanism) as the principal doctrine.

The present leadership has presented a concoction of Integral Humanism and Laissez-faire model used by some developed economies principally USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business", "Markets" and "Macroeconomics" as central themes. The conflict is for everyone to see. The consequence is that we seem to be moving in no direction.

The people at the left end of the spectrum exercised significant sway on the bottom of the pyramid in Indian society since independence. They controlled most of labor unions. Though divided between Marx, Lenin and Mao they still were the preferred choice of landless, oppressed and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet) or rebellious meant being communist.

The things however began to change in late 1980s post dismantling of USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated in China under Deng Xiaoping's supremacy, further pushed back the traditional Marxists.

Insofar as the Lohiaites (socialist parties occupying the left of the center space in Indian politics) are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudals, they mostly have no commitment to any economic idea and mostly follow the Congress Party's status quoits agenda.

The rise of Aam Aadmi Party (AAP) from a massively popular anti-corruption civil society movement 4years back had given hope and raised expectations of people. This party had no ideological baggage and promised to address the problems as they exist, without any legacy concerns.

This party has also degenerated into a motley group of egotists, having no commitment to their raison d'être.

In my view, a continuation of the current state of quandary with respect to economic growth model is a major hindrance in our path to higher growth orbit.

I strongly believe that the inherent austerity, industriousness and enterprising skills of the Indian populace are sufficient to provide escape velocity for moving the Indian economy into higher orbit.

Limiting the role of government to developing and maintaining the institutional framework relating to law & order, sovereignty, external security & relations, municipal functions, inter-state relations and facilitating trade & commerce, may improve economic conditions much faster than otherwise.

PS: I have received a lot of comments and queries on this series of notes. I am preparing a consolidated response to all these comments and queries. If you have any more comments or queries, please mail me at investrekk@gmail.com.

Read with the following

The 10 Propellers

Growth is a collective, consistent and continuous effort

First piece in place

Non Compliance - impediment to growth

Well begun, but little done

Water & Electricity

Make growth sustainable and equitable

Save Ganga & Yamuna first, Saraswati can wait

Taxing farmers may yield nothing

Take factories to farms

Improving farm income

Shed the colonial past

Failure is not an option here

This one also falling in place

Moving away from roots

Let our children grow as Indian

Believe what you know

Skill India for global economy

Be with times

Means are equally important

Salvation lies in the temple

Tuesday, May 23, 2017

Salvation lies in the temple

Salvation lies in the temple

I had written this earlier also. I am reiterating it, as I strongly believe that the roots of Indian economy shall remain weak if not reinforced and guided by our ethos - religion, traditions and culture.

Many years ago someone told me "believe in your strengths and weakness". I emphatically said, "I do!" He paused for a while and said calmly, "my son, knowing is different from believing. For example, you know that you will die someday. But do you really believe it?"

Years later, mingling with the crowd at the Haridwar Kumbh, I understood the meaning of what that person was trying to tell me many years ago.

We all, especially our politicians and social media activists, know the strengths and glorious past of our country. But do we really believe in that? In my firm opinion, no, we do not!

I firmly believe that religion is at the core of our society. The Indian political and economic paradigms therefore must be constructed around religion. (Anyone who has doubts, must carefully notice the thick red threads tied on the wrists of all the secular, socialist politicians and read the matrimonial advertisements of IT professionals.)

Even a cursory study of Indian history, whether critically proven or mythological, would suggest that the best economic and political periods in the history of the sub-continent were when a righteous king was at the helm and he protected and promoted the Religion. Conversely, the worst periods, economic and political, were those when some tyrant attempted to destroy the religious beliefs and knowledge.

Traditionally in India, education, research, arts, architecture, science, and the State itself, have all developed and prospered around religion. Religion is also intertwined with agriculture, which has been the primary profession.

By adopting secularism as a major social construct, especially since 1970s, the Indian State has unfortunately equated religion with bigotry. This has not only made religion a divisive (instead of bonding) force, but has also led to the degeneration of strong traditions of pursuing spiritual, scientific and material knowledge for the larger welfare of human kind.

In past four decades we have reached a stage where religion is used to evoke fear & violent passion in people's mind and manipulate them. Money & power, and not the knowledge & evolution, seem to have become the primary aim of religion. Ignorance and superstitions are destroying people's life. It is commonly seen that the gullible people borrow money to feed illiterate and dirty persons, whose only quality is their surname.

Intelligentsia and academics are scared to explore and propagate the tremendous wealth of knowledge stored in traditional scriptures for the fear of being labeled "communal and bigot". Politicians are scared to promote the traditions of knowledge seeking, scientific enquiry and spiritual evolution.

The consequences are that the entire nation bothers about winning one medal in any global supporting event but does never bother about winning a Nobel in mathematics, physics or medicine.

Start ups are good. But we need to believe that Apple, Facebook, Twitter and Amzon et. al. are outcome of a Society that promotes and cherishes knowledge seeking and freedom of thought. It is not the other way round.

In a country where most Magistrates and senior Judges seriously believe that God can be disparaged and insulted, something urgently needs to be done.

I have been hearing the phrase "21st century belongs to India" for past two decades. Many politicians and analysts have used this cliché to emphasize the tremendous economic opportunities that India could offer in next few decades, given its young demography. The list of investors and global States seeking strategic partnerships who have been excited by the potential is long and impressive. The list of investors and Statesmen who have been disappointed in past two decades is also not small.

The point to evaluate critically is whether India sans its core ethos is viable as an economic and strategic power house! In my view, it is definitely not.

Religion has been a major force in core Indian ethos. Traditionally it has been the influence of religion that has brought the concepts of scientific inquisition, righteousness, moral rectitude, social responsibility, environmental sustainability, debt management, HR management, and just & fair taxation, etc. in the trade and commerce.

Post Independence the State has been over focusing on micromanaging businesses and ignoring key social issues. This has weakened the core fabric of Indian society, inasmuch as that taking pride in our rich heritage has become synonym with bigotry for all - the so called "nationalist" who takes pride, the so called "secularist" who is too scared to take pride, and the so called "rationalist" who find nothing to take pride in Indian heritage.

Consequently, places of worship have degenerated from being center of learning & spiritual evolution to shelters for hatemongers, fearmongers, power seekers, and wealth hoarders. Many of these promote superstitions and block scientific inquiry to the detriment of society at large.

In my view, if we want to make this century belong to India, then Indian State—

(a) should leave business completely to private enterprise;

(b) play a much larger role in social awakening and create an enabling environment of mutual trust, self motivation, and compassion;

(c) make the Temple (of course including Mosques, Churches, Monasteries, Gurudwaras, Mutts, Agiyaris, Derasars and others) play a larger evolutionary role in progress of the society, rather than continuing to de-generate further and stay a stumbling block in the path to socio-economic progress; (Taking their gold for managing current account deficit is not sufficient!)

The State must realize and accept that politicians and bureaucrats are naturally and seriously handicapped insofar as their understanding of business is concerned. They should just secure borders, maintain law & order and promote social harmony. So far they have focused on the former at the expense of the latter for the disastrous consequences.

Read with the following

The 10 Propellers

Growth is a collective, consistent and continuous effort

First piece in place

Non Compliance - impediment to growth

Well begun, but little done

Water & Electricity

Make growth sustainable and equitable

Save Ganga & Yamuna first, Saraswati can wait

Taxing farmers may yield nothing

Take factories to farms

Improving farm income

Shed the colonial past

Failure is not an option here

This one also falling in place

Moving away from roots

Let our children grow as Indian

Believe what you know

Skill India for global economy

Be with times

Means are equally important

Friday, May 19, 2017

Means are equally important

Thought for the day

"We are shaped by our thoughts; we become what we think."

—Buddha (Indian, 563-483BC)

Word for the day

Zugzwang (n)

A situation in chess where a player is limited to moves that cost pieces or have a damaging positional effect.

Malice towards none

Reema Lagoo: Millions of Indians secretly wanted a mother like her.

Will be missed for long.

First random thought this morning

The super success of Bahubali: the Conclusion may not be as good a news for Indian cinema industry, as it may sound at first instance.

One, a majority of movie watchers may have defined budget for entertainment. Spending more on Bahubali may mean cutting expense on other movie (s). Consequently, we might see many otherwise good movies may not doing that well on Box Office. So in net effect, we may be at par at the end of the day.

Secondly, It may trigger a race for making very high budget movies, many of which may actually not do as good, inflicting huge losses to the industry.

The positive is that we may certainly see some really world class movies being made in India.

Means are equally important

Economic growth which is not sustainable and equitable has little meaning, in my view. Such growth, whatever statistic shows, brings only misery and dissipation.

A harmonious and peaceful society enjoying a decent lifestyle should be the ultimate goal of economic growth and development. Otherwise, it has little meaning, regardless of the statistical achievements.

Swami Jagadatmananda in his famous work “Learn to Live” extolled the readers - the sincerity and honesty of the means to achieve a goal is equally important as the goal itself.

Mahatama Gandhi succinctly explained — “Independence begins at the bottom. A society must be built in which every village has to be self sustained and capable of managing its own affairs. It will be trained and prepared to perish in the attempt to defend itself against any onslaught from without. This does not exclude dependence on and willing help from neighbours or from the world. It will be a free and voluntary play of mutual forces. In this structure composed of innumerable villages, there will be ever widening, never ascending circles.

Growth will not be a pyramid with the apex sustained by the bottom. But it will be an oceanic circle whose center will be the individual. Therefore the outermost circumference will not wield power to crush the inner circle but will give strength to all within and derive its own strength from it.”

More popularly, in blockbuster Hindi movie DDLJ the hero Shahrukh Khan articulated this thought in a conversation with the mother of his beloved. When for the fear of her husband’s retribution, the mother advises the two lovers to elope – the hero tells her that the path suggested by her appears easy but it would lead to nowhere. He would rather prefer the path of courage, honesty and integrity which though arduous definitely leads to the desired goal.

Many may want to argue that it sounds utterly utopian in the current context. Some may yield that it is desirable but argue that we have traveled too far down the road we took post independence from British rule; and it is too late to go back and begin again.

In my view, this defeatist and fatigued attitude is unwarranted. What we need is a zero base discussion on the subject and solutions will emerge that would lead us to the desired goal of making 1.3bn people free, fearless and happy. An incremental approach howsoever sincere might not yield the desired results.

Even statistically, to propel the economic growth to much higher orbits, we need a socio-political organization for the country that is free, fearless and fair.

Social sector reforms, in my view, should be given top most priority in the economic growth and development agenda, rather than making it an aftereffect of the economic development.

Read with the following

The 10 Propellers

Growth is a collective, consistent and continuous effort

First piece in place

Non Compliance - impediment to growth

Well begun, but little done

Water & Electricity

Make growth sustainable and equitable

Save Ganga & Yamuna first, Saraswati can wait

Taxing farmers may yield nothing

Take factories to farms

Improving farm income