Vijay Kumar Gaba: September 2017

Wednesday, September 27, 2017

What could cause a bear market - 2

We are delighted to wish all our readers on the occassion of Durga Puja and Dussehra.

The next issue of Morning Trekk will be published on 4th October 2017.

Thought for the day

"Injustice in the end produces independence."

—Voltaire (French 1694-1778)

Word for the day

Monticule (n)

A small mountain, hill or mound

Malice towards none

The court says, "a feeble No does not mean No."

We may need a Pink 2.

#MahmoodFarooqui

First random thought this morning

After NITI Aayog, the government has constituted another unaccountable body to advise it on economic matters. This is a pure advisory body and cannot be held accountable for any of its advice given to the government.

The point is that why do we need such a body. PM could have called all these eminent economists, and many more, to meet over tea every month and give their suggestions regarding economic challenges being faced by the government. They would have been happy to offer their advice/suggestion without any charge to the exchequer. CEA and PEA could then process these suggestions and do the needful.

What could cause a bear market - 2

Most analysts and money managers apparently seem convinced that the market may not fall much from the current levels. In their view, though fully priced at this point in time may rise much higher as earnings are likely to grow much faster from FY19 onwards as the effect of demonetization and GST fade and benefits start to kick in.

Before I make any argument, I would like to state a few facts which are not disputed by many.

(a) Sensex earnings have hardly seen any growth in three years from FY15 to FY17. In this period Sensex earnings have grown just 5% from 1329 in FY14 to 1397 in FY17.

(b) The long term EPS growth (5yr CAGR) has been declined from 25% in FY08 to 5% in FY17. Even considering the consensus estimates, the long term EPS growth may remain around 5% level in FY 18 and FY19 also.

(c) One year forward PE of Sensex, based on consensus estimates, is close to 19, which compares well with 2008 peak of 20.

(d) Market capitalization to GDP ratio, a key macro matrix applied to assess the sustainable levels of equity market, of Indian markets is about to 90%, which is close to 100% level seen in 2010. The recent peak in this ratio was seen in 2008, when this ratio was close to 150%.

(e) Sensex price to book ratio is close to its long term average of 3x.

(f) In past one year domestic flows to equities have increased materially in comparison to period after GFC. However, Foreign investors have net sold position in Indian equities in 2017.

(g) The aggregate capacity utilization at economy level is below 75% consistently.

(h) Both private investment and private savings rates have declined in past three years.

Besides the above, the view is divided on the following issues:

(i) Earning recovery is imminent as GDP revives from FY19 onwards

(ii) The capacity utilization shall improve as the impact of demonetization & GST related slowdown fades and demand bottoms out.

(iii) Indian rates may ease further from here.

(iv) India's macro fundamentals are resilient to any global economic slowdown liquidity contraction as Central Banks wind up post GFC stimulus.

(v) US yields and USD may move higher from current levels, pressurizing flows to emerging markets, including India, and correction in global commodity prices.

In my view, the future course of Indian equity market would depend on these factors. We need to find what could take market up or down in 2018....to continue.

Tuesday, September 26, 2017

What could cause a bear market?

Thought for the day

"Weakness on both sides is, as we know, the motto of all quarrels."

—Voltaire (French 1694-1778)

Word for the day

Tittle (n)

A very small part or quantity; a particle, jot, or whit, e.g., He said he didn't care a tittle.

Malice towards none

Next 15 months will test the resolve of PM Modi. Any sign of weakness on any front, may be punished severally.

The feeling "anyone but Modi" is already sprouting in the dark forests. It needs to be nipped in the bud before it assumes ominous proportions and spreads to fertile lands.

First random thought this morning

The use of a wrong photo by Pakistan diplomat in UNGA has drawn attention of many. Most have ridiculed the endeavor as a botched attempt to malign India at global platform. It may be worth recalling that in the recent past there have been umpteen instances of similar goof ups by various political parties in India, including BJP and Congress.

The real point to my mind is that Google has become overwhelmingly powerful in defining our consciousness, awareness, knowledge, concerns, opinions and many a times actions also. And the irony is that no one can complain because it all comes "Free" and without any obligation to use or trust.

Like we debate good and bad nuclear assets, good and bad terrorism, a few years later, we may need to debate good and bad Google also.

What could cause a bear market?

In a recent article (see here) Noble Laureate Robert J. Shiller emphasized that " The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn't mean that a bear market is imminent, but it does amount to a stark warning against complacency."

Incidentally, he is not alone in his tribe. A number of other experts have sounded notes of caution in relation to the current stock rallies across the world.

The experts have listed a number of reasons that could cause a bear market in the equities in coming months. Some of the most popular triggers for correction could be listed as follows:

(a) Geopolitical concerns, especially tension in Korean peninsula, have been frequently causing rise in volatility in the market.

Though, the evidence of a geopolitical conflict causing a global bear market in equities in post WWII era are inadequate. Equity prices have in fact reacted positively to some major conflicts like Arab-Israel war (1948-1949), Vietnam war (1955-1975), Iran-Iraq conflict (1980-1988), Iraq War I (1990-1991), Iraq War (2003-2005) etc.

(b) Debt crisis in China is arguably one of the most favorite cause of global equity collapse.

This is a tangible concern, given the deeply intertwined trade and financial interests of Chinese businesses and financial institutions in the global economy. A disorderly correction in Chinese financial system may cause widespread disruption in the global trade and financial system. Though at this point in time there is little evidence to rely upon that Chinese authorities could lose control over its financial institutions or currency and let the global financial system collapse.

(c) Contraction of liquidity as Central Banks wind down monetary stimulus given in the wake of global financial crisis (2008 onwards), could cause cost of capital to rise and USD to strengthen causing a global correction in asset prices, including equities, bonds, commodities etc.

This presupposes that the Central Bankers which have vowed "whatever it takes" to protect stability of global financial system, would be blind to the collapse that any reversal of stimulus may cause. The argument that Central Banks have exhausted all the arrows in their quiver and hence would be helpless in the event of a collapse, completely ignores that the arrows being shot since 2009 have been manufactured in the war ground itself.

(d) Though their tribe has shrinked substantially, but few still believe that Brexit will cause large scale disruptions in the global economy and lead to serious correction in asset prices.

(e) The strongest argument for the bear market in equity prices is the high and seemingly unsustainable valuations. Though, the textbook measures for equity valuations are yet to be revised to factor in the "New Normal" in real growth, yields and inflation, the current valuations may be a matter of legitimate concern.....to continue tomorrow.

Friday, September 22, 2017

Enigma of inflation

Thought for the day

"It is difficult to free fools from the chains they revere."

—Voltaire (French 1694-1778)

Word for the day

Concatenation (n)

A series of interconnected or interdependent things or events.

Malice towards none

Do the TV channels daily broadcasting sponsored programs of quacks and suspicious preachers have any moral right to speak against superstitions and malpractices prevalent in the society? Also do the newspapers carrying prostitution advertisement under garb of friendship clubs, massage services etc., should be heard on the matter of women exploitation?

First random thought this morning

Is it a mere coincidence or the current administration (both at center and state level) is making serious attempts to correct a number of distortions in the Islamic practices especially relating to mexploitation of Muslim women, like Triple Talaq, NIkah Halala, Nikah Mutah, etc.?

Regardless of anything this is a welcome development and should be appreciated by all.

Making it clear that establishment will not seek to exploit the issue for electoral advantage, may minimize the resistance from Muslim male too.

Enigma of inflation

For a common man like me on the street, who is blissfully ignorant of the principles of economics and public finances, inflation is nothing but an enigma. The rising prices do hit him hard, but that also lead to rise in his nominal income and hence social stature. Higher nominal interest rate on his savings, higher notional value of his house & jewellery; and higher rental for the spare room on the top floor provides him some psychological comfort, at the least.

As I see it, for a common man, inflation is more of an income inequality issue than anything else. For example consider the following:

(a) A farmer should gain maximum from the food inflation. Given that over 60% population is engaged in the farming and related activities, theoretically consistently high food inflation should result in transfer of wealth from non-farm sector to the farm sector. But this has not been the case in any of the high food inflation episodes in past seven decades. The gap between rural and non-rural income and wealth has been consistently widening.

(b) The food inflation should also benefit the urban middle class. The expense on food for a typical Indian middle class family is not more than 40% and a typical middle class household saves 25% of his income. If food inflation is 10%, a 5% rise in nominal income should be sufficient to offset that.

Besides, they would need sufficient rise in nominal income and asset prices and interest rates to offset the erosion in real value of their savings. This perhaps has not happened in past many decades, implying that nominal rise in asset prices and interest rates has not been consistent with the general rise in price levels. The wealth is thus consistently getting transferred from savers to borrowers.

(c) One could argue that transfer of wealth from farmer and urban middle classes to trader and indebted industrialist is a function of risk they take.

But if we consider the history of NPA cycles, and exploits by moneylenders this argument gets weaker. Large borrowers have been consistently transferring the risk to public sector banks, and hence the common public, through frequent defaults. The money lenders in informal sector have been fairly successful in exploiting the household and farmer borrowers, not allowing any benefit of inflation to them.

The equation in energy inflation (mostly imported or arising due to state inefficiency) and core inflation is different, but impact is mostly the same.

In my view, therefore inflation has been a medium of wealth transfer from common man to the rich. The current raging debate over rise in prices of food therefore has to be seem from this angle also.

I have been highlighting that at the current productivity level farming in India is mostly an unremunerative business. A multifold rise in either farm productivity or prices can only correct this situation.

I would seek readers' view on this problem, before I take up it in some detail.

Thursday, September 21, 2017

Whose history is it anyways - 4

Thought for the day

"The art of medicine consists in amusing the patient while nature cures the disease."

—Voltaire (French 1694-1778)

Word for the day

Oceanicity (n)

The degree to which the climate of a place is influenced by the sea.

Malice towards none

Could Trump do to Kim what Bush Jr. did to Saddam?

First random thought this morning

It is surprising to see that investors who were bullish on Indian equities due to "strong macro" fundamentals, seem even more bullish at the prospects of fiscal profligacy in the form of fiscal stimulus (now that government has finally admitted to the deterioration in economic health of the country). The current account has already joined the weak spots of the economy category.

Despite a "no show" for four long years (FY13-FY17), there are many who still feel earnings will present a gala show this year and the next. May the wolf come soon, while villagers are still listening to the shepherd boy!

Whose history is it anyways - 4

I have received a large amount of hate mail for my views expressed in past three days. I am grateful to all those who took pain to write. This fully corroborates what I have been observing during my travels and trying to highlight here.

I do not want to engage in any political debate. I am certainly not concerned about the knowledge of our politicians about history and economics of India. I also do not wish to sermonize anyone or judge any party or organization by their recent activities, iterations, and ideologies, or lack of it for that matter.

I would like to limit myself to my economic interests and in my view, the rising insolence and cynicism in a society can never be a good news for its economy.

Many people would agree with me on my assessment that the incumbent government has introduced a fair degree of unpredictability in policy making in the country. The policy paralysis that was widely believed to be the hallmark mark of the previous government has been replaced by the elements of unpredictability and radicalism. Though not worrisome per se, this tendency has unwittingly put the administration and the people impacted by the fiscal policies on path of confrontation. Consequently—

(a) Suspicious of future policy direction; unconvinced of government promises, and uncertain about the stability of current policy regime - people are deferring both investment and discretionary consumption decisions. One may argue that the growth in sales of automobile and white goods is not indicating much slowdown in discretionary consumption demand. To this I must reply that the growth trajectory of it has certainly moved down and lower return on recent capex (and any incremental capex) may make it conspicuous.

(b) Confidence in broader India growth story supported well by global enthusiasm, juxtaposed to skepticism raised by unpredictability & instability of policy and general social distress, is creating a deal of cognitive dissonance impacting the decision making as well as disposition of businesses.

(c) The economy faces a potential threat of getting pushed into a vicious cycle of lower growth-lower employment-lower income-lower consumption-lower investment-lower growth, if immediate steps are not taken to improve business and consumer confidence.

The dilemma however would be that it may challenge the fiscal discipline, which had been one of the most important rallying point for investors' confidence. An unmindful fiscal stimulus at this stage could disturb the inflation-growth equilibrium by pushing prices and rates higher.

I shall therefore continue to maintain an extremely cautious stance on Indian equities for next 12-18months. At the risk of facing ridicule from my peers, I would go underweight on NBFCs, capital goods, and lower middle class consumption, in particular.

Also read the following:

Whose history is it anyways - 1

Whose history is it anyways - 2

Whose history is it anyways - 3

Wednesday, September 20, 2017

Whose history is it anyways - 3

Thought for the day

"History should be written as philosophy."

—Voltaire (French 1694-1778)

Word for the day

Clandestine (adj)

Characterized by, done in, or executed with secrecy or concealment, especially for purposes of subversion or deception; private or surreptitious:

Malice towards none

Should we assume that Jadeja is now a "test only" player!!

First random thought this morning

It is commonly said that if you want to understand the immediate concerns of a society, you should watch most popular cinema and TV news. Going by this adage, I find the following as most pressing problems of Indian society this morning:

Rohingya refugees; Honeypreet Singh; Safety of school kids; ceasefire violation by Pak; Petrol prices; erectile dysfunction; open defecation.

Whose history is it anyways - 3

When a politician in power says that Mughals were plunderers who looted India, it is not just the misplaced perception manifesting itself under the garb of nationalism. It is much more than that.

It is frustration over steep degeneration of traditional Indian culture and values.

Any politician or social worker who has at least one of his feet on ground fully realizes that the data revolution created through advancements in the telecommunication sector is being used significantly for frivolities (mostly gossip and pornography) besides of course enhancing productivity.

It is a deep running desire to restore ancient Vedic culture in order to establish India as global superpower - economic, cultural, and strategic.

The unfortunate part is that those desiring restoration of Vedic culture suffer from ignorance and deep prejudices. They desire to downsize local Muslim populace, while keeping all the discrepancies (for lack of a proper word) that crept in the Vedic traditions during past 1200years of Islamic influence. Unequal place for women is widely noted as one such discrepancy.

The CM and Deputy CM of the largest state in the country, which has benefitted the most from the Mughal rule, saying that Mughals plundered India, raises serious questions. These assertions diminish our faith in the capability of the government to implement a sustainable development agenda. These also make us skeptical about law and order conditions.

For records, as per my understanding of history, all Mughal rulers after Humayun, were born and brought up in India. They lived, married, ruled and died in India. Almost all of them were of mixed race (Mughal and Rajput). After Maurayans, Akbar was the first ruler to unify India as a political entity. During 1500-1700AD, when Mughals ruled India, India's share of global GDP rose from 22% to over 24%. The first industrial revolution in India happened during Mughal rule, when Indian textile, leather and shipping industry flourished to become the leader in the world. Mughals invested heavily in infrastructure especially roads and unbranization. Our traders (mostly Hindus), riding on Mughal ships and horses travelled to the global markets, sold their produce for gold. That is how India became the Bird of Gold, given that we were never a significant producer of gold.

Influenced by the dialogues of 1960 Hindi movie Mughal-E-Azam, some leaders have tried to connect Mughal rulers of India with Turco-Mongol invaders Ghenghis Khan and Timur. I can guarantee it would take them at least 6months, if not more, to establish connection between Ghenghis Khan and Babur (who laid the foundation of Mughal rule in India), without using the internet. (see here and here)

My travels across the country in past three decades have told me that India is changing fast, but not necessarily in the direction many of us would desire. Not focusing on the direction of change could nullify the impact of the change itself, in my view......to continue

Also read the following:

Whose history is it anyways - 1

Whose history is it anyways - 2

Tuesday, September 19, 2017

Whose history is it anyways - 2

Thought for the day

"Who serves his country well has no need of ancestors."

—Voltaire (French 1694-1778)

Word for the day

Masscult (n)

The forms of culture, as music, drama, and literature, as selected, interpreted, and popularized by the mass media for dissemination to the widest possible audience.

Malice towards none

Legendary Khushwant Singh loved to use the word Ch****a in his literary works.

Anyone coming from Cow belt would wonder what's in it to get offended about!

First random thought this morning

Mother Narmada had been particularly kind to our prime minister Shri Narendra Modi.

Her waters played a large role in acceleration of Gujarat growth in past decade or so. The double digit agriculture growth was not possible without her water.

The wealth effect created by the appreciation in land value and consequent construction boom also added materially to the world famous Gujarat story.

Whose history is it anyways - 2

Not long ago, history used to be mostly an academic subject. The educated elite wrote, study, discussed, debated, formed, and altered history as per their perception and affiliations. Their perceptions were perhaps deeply influenced by the political narrative and economic concerns of the times.

The common people were however mostly concerned with their cultural traditions. These traditions passed through generations and generally regarded as history. Popular art forms, like films, theater, drama etc. also had significant influence on the common peoples' perception about history.

For example, 1960 Hindi Movie Mughal-e-Azam is an indelible impression of Mughal history in common peoples' imagination. Anarkali, which historian still debate to be a totally fictitious character, lives in peoples' memory as a historical symbol of love and sacrifice.

As such, the history as taught or studied in schools and universities had little meaning for common people.

In past couple of decades, I have observed a gradual change in this paradigm. An intense struggle is taking place between the history and the cultural traditions as practiced by the common people in the country.

There is a conspicuous political endeavor to overwrite academic history books with traditional and cultural beliefs. The argument is that these history books are deeply influenced (read distorted) by the imperialist British academia who had interest in destroying rich Indian legacy; and in post independence era by left leaning elite who find traditional cultural beliefs regressive and unfounded.

On the other hand the cultural traditions have also shown a tendency of loosening roots with rising urbanization, labor migration and dissipation of cultural ambience (rivers, animals, trees, temple, priest, forest, time, faith, folklores passed orally, family, austerity, etc.) The younger people who are not rooted properly in their cultural traditions are commonly seen adhering to frivolities, ignoring the core ideas deliberately (for practical reasons) or ignorantly (for the lack of proper guidance and inheritance of culture).

This dissipation of traditional Indian cultures is allowing the politicians to manipulate people into believing that alteration of history books would restore their dissipating traditional cultures and thus reinforce their loosening roots.

I do not know, if this is the right approach. May be it is. Or maybe it is not. Only time could tell this. I am also skeptical about giving this political endeavor the garb of nationalism and patriotism.

But what I am sure about is that the process is introducing some serious discrepancies in the Indian society. The generally affable and compassionate populace appears somewhat condescending.

The friction in the society is rising as the grease of traditional beliefs (tolerance, hospitality, acceptance) dries up. ...to continue

Friday, September 15, 2017

Whose history is it anyways!

Thought for the day

"The wise man does not rest by the roadside inns."

—Swami Sivananda (Indian, 1887-1963)

Word for the day

Gramarye (n)

Occult learning; magic

Malice towards none

PM Modi invited his friend Shinzo Abe directly to Ahmedabad, to keep him away from RaGa's charm!!

First random thought this morning

"Human nature will not change. In any future great national trial, compared with the men of this, we shall have as weak and as strong, as silly and as wise, as bad and as good. Let us therefore study the incidents in this as philosophy to learn wisdom from and none of them as wrongs to be avenged."

Abraham Lincoln (in the context of The American Civil War of 1861-1865)

Whose history is it anyways!

A couple of days ago, the deputy CM of UP Shri Dinesh Sharma reportedly emphasized that Mughal emperors were not our ancestors but looters and the Uttar Pradesh government would change the syllabus accordingly to reflect this fact.

"Mughal rulers were not our ancestors but looters. We consider Mughal rulers who did wrong acts as looters. Those who have done good work, we praise. Babar and Aurangzeb were looters. We do not oppose Bahadur Shah Zafar as he extended support to Mangal Pandey," Sharma told reporters here.

He reportedly said the government planned to bring "necessary changes" in the school syllabus. "If Akbar had done any good work, it will remain in pages of history. It will be historians who will decide what place Akbar gets," he said.

"A culture where a son kills his father for the throne or the hands of Taj Mahal builder are chopped off cannot be our culture. Our culture honours artistes and scientists. Dr APJ Abdul Kalam is credited for the successful nuclear test, and we honored him."

As per media reports, the UP CM Yogi Adityanath had also stated in May that Akbar, Aurangzeb and Babar were invaders and that the problems of the country would disappear after the truth is accepted. He had in the same event also called Maharana Pratap, Guru Gobind Singh and Chhatrapati Shivaji role models.

Recently, Maharashtra state board had removed a chapter on the Mughals from its class VII history books.

These recent assertions of BJP leaders have been mostly seen from the prisms of secularism vs. communalism, bigotry vs. nationalism, majoritism vs. inclusiveness.

The critics have highlighted this as a dangerous trend and attack on the very core of the pluralistic and diverse Indian society. In their view, this could damage the social fabric of the country beyond repair thus endangering the integrity of the country itself.

The supporters are terming it as renaissance of sorts, whereby all malefic distortions, digressions and misconception created by the left leaning elite about great Indian history would be corrected, ending the whole debate over secular vs. communal divide and great Aryan invasion theory. In their view, these corrections should pave the way for holistic progress of the country.

In my view, the debate suffers from myopia aggravated by deep prejudices, insecurities and complexes. Hence, I find this debate at political level totally frivolous and avoidable.

Usually, I would not bother about issues which in my view are rather frivolous to the present day socio-economic context. But given the intensity of the debate and potential economic fall outs that it could have, I need to review my investment strategy in this light....to continue

Wednesday, September 13, 2017

Red flags - 6

Thought for the day

"Desire is poverty."

—Swami Sivananda (Indian, 1887-1963)

Word for the day

Antinome (n)

A logical contradiction. Something that is contradictory or opposite to another.

Malice towards none

Our TV journalist are certainly far superior investigators than any of the government agencies. They can solve most of the crimes within hours.

Sir Sherlock Holmes would be truly proud of them!

So are we!

First random thought this morning

This we all know that most Socialist leaders in the country have come from very humble socio-economic background. For example, MSY was apparently a school teacher and Lalu Yadav was a clerk in Bihar Veterinary College.

What business did these socialist do, besides full time politics, to amass such tremendous wealth in past 3 decades?

Why should it take 10-15yr for enforcement agencies to find the source of their wealth? I guess a trainee accountant can work backward 30yr from the IT returns and bank accounts and tell you the whole story in less than two months.

Red flags - 6

Political stability, or otherwise, has been one of the most regular argument for investing or not investing in Indian equities over past three decades. Though there is not even an iota of evidence to suggest that the form (minority or majority), constitution (single party or multi party coalition) or ideology (left, right or center) of the government has any profound impact of the direction of economic policies or market returns.

The market in fact performed best during the periods when there were minority governments at the center, that is, 1989-1991, 1991-1996, 1998-1999. Most radical reforms were done during minority government rules (in case you have forgotten all the dream budgets of 1990s.

VP Singh with socialists like Madhu Dandwate, Janeshwar Mishra, George Fernandes in his cabinet, pursued basic reforms like free trade, a floating exchange rate, deregulation and macroeconomic stability started by preceding Congress Governments, before Mandir & Mandal undid him.

With less than 150 Lok Sabha seats, the socialist Chandershekhar government in 1991 originated the idea of disinvestment in PSE with the stated objective to “broad based the equity, improve management and enhance the availability of resources for these enterprises”.

NF government (1996-1998) led by Deve Gowda had Communist Party of India as one of the constituents, and 1996 dream budget of P. Chidambaram is still celebrated as a watershed in market history of India.

The NDA-II government led by A. B. Vajpayee with 182 Lok Sabha seats and minuscule representation in the Rajya Sabha added the term privatization to disinvestment policy in 1999. This government bravely and rightly focused more on "Divestment of Monopolies" as against mere "Disinvestment of Minority stake in PSEs". The government sought to divest its monopoly over core businesses like ports, airports, coal, power, oil and gas exploration and production, roads, mobile telephony, data transmission, etc.

UPA-1 government that was supported by communists opened up Indian economy like never before.

Whereas the Rajiv Gandhi government with unprecedented majority brought the economy to the brink of default while people were kept busy with Bharat Mahotsavs.

The point in brief is that I would give no weightage to political stability in my investment strategy for Indian equities.

Tuesday, September 12, 2017

Red flags - 5

Thought for the day

"Thinking of disease constantly will intensify it."

—Swami Sivananda (Indian, 1887-1963)

Word for the day

Vamoose (v)

To leave hurriedly or quickly; decamp

Malice towards none

Will nature's fury and fire make Trump rethink his stance of Paris deal?

First random thought this morning

People arguing for TINA favoring Shri Narendra Modi in 2019, appear totally convinced about the inability of Shri Rahul Gandhi and other Congress leaders to lead an effective government. Incidentally, most of these people also strongly believe that the UPA government was controlled and directed by the Gandhi family from behind the curtains.

Keeping the errors of omission & commission and multiple acts of corruption committed by various individuals aside for a minute, I would like to know what Policy Disaster was committed by the UPA government controlled and directed by the Gandhi family.

If you can't cite any meaningful policy mistake, then logically you should be afraid of the ability of Gandhi family rather than celebrating their inability!

Red flags - 5

I had perhaps quoted this before also. Regardless, I find it extremely pertinent to draw notice of my readers to the following discourse from Unlearning Economics.

"First, something which is expected to do a certain job - whether it's an economic system or the economists who study it - is expected to do this job all the time. If an engineer designs a bridge, you don't expect it to stand up most of the time. If your partner promises to be faithful, you don't expect them to do so most of the time. If your stock broker promises to make money but loses it after an asset bubble bursts, you won't be comforted by the fact that they were making money before the bubble burst. And if an economic system, or set of policies, promise to deliver stability, employment and growth, then the fact that it fails to do so every 7 years means that it is not achieving its stated objectives. In other words, the "invisible hand" cannot be acquitted of the charge of failing to do its job by arguing it only fails to do its job every so often.

Second, the argument implies there was no causal link between the boom and the bust, so the stable period can be understood as separate from the unstable period. Yet if the boom and the bust are caused by the same process, then understanding one entails understanding the other. In this case, the same webs of credit which fuelled the boom created enormous problems once the bubble burst and people found their incomes scarce relative to their accumulated debts. Models which failed to spot this process in its first phase inevitably missed (and misdiagnosed) the second phase. As above, the job of macroeconomic models is to understand the economy, which entails understanding it at all times, not just when nothing is going wrong - which is when we need them least.

As a final note, I can't help but wonder if this argument, even in its general political form, has roots in economic theory. Economic models (such as the Solow Growth Model) often treat the boom as the 'underlying' trend, buffeted only by exogenous shocks or slowed/stopped by frictions. A lot of the major macroeconomic frameworks (such as Infinite Horizons or Overlapping Generations models) have two main possibilities: a steady-state equilibrium path, or complete breakdown. In other words, either things are going well or they aren't - and if they aren't, it's usually because of an easily identifiable mechanism, one which constitutes a "notably rare exception" to the underlying mechanics of the model. Such a mentality implies problems, including recessions, are not of major analytical interest, or are at least easily diagnosed and remedied by a well-targeted policy. Subsequently, those versed in economic theory may have trouble envisaging a more complex process, whereby a seemingly tranquil period can contain the seeds of its own demise. This causes a mental separation of the boom and the bust periods, resulting in a failure to deal with either.”

Now let's examine the current Indian economic narrative in this context.

First, it is an undeniable fact that the long term growth trend of Indian economy has been on the decline since the global financial crisis. We have seen a marginal recovery since FY13 (some of it could be contributed to the change in data series), but the trajectory of long term growth trend is now plateauing.

There is one strong argument that the current stagnation in growth trajectory is due to a number of economic reform that would result in accelerated growth in not very distant future.

In particular, reforms like GST, RERA, Bankruptcy Code, greater Financial Inclusion, and Digitization of Payments, are cited as watershed in Indian economic history.

I have no doubts whatsoever about the importance of these reforms. These reforms were indubitably necessary for supporting a higher growth trajectory. But I find the argument that these reforms per se would accelerate the growth somewhat fallacious. For example, consider the following:

(a) GST is conceptually designed to improve "ease of doing business", enhance scalability of businesses through uniformity and standardization, and enforce compliance. There is nothing to suggest that GST will lead to higher demand (consumption or investment), better physical or social infrastructure, more jobs, or even better profitability of businesses. If at all, it may result in higher net incidence of taxation on businesses and people. How does GST per se causes higher growth?

(b) RERA per se cannot generate demand for housing.

(c) Bankruptcy Code may accelerate NPA resolution. But how would it improve banks' capital adequacy or prevent accretion of future NPAs!

(d) Similarly, Financial Inclusion and Digitization Payments are enabling conditions, not necessarily growth accelerators.

For my investment strategy, I would therefore overlook the argument that "these reforms slowed down the growth and these reforms will only accelerate it in future".

Also read the following: