Thursday, January 10, 2019

Building UBI in investment strategy

Some food for thought
"Gods always behave like the people who make them."
—Zora Neale Hurston (American Dramatist, 1891-1960)
Word for the day
Malinger (v)
To pretend or exaggerate incapacity or illness (as to avoid duty or work)
 
First thought this morning
The controversy over constitution of five judge bench for hearing Ayodhya Sri Ram Mandir dispute is most unfortunate.
Mere thought that the religion of a Supreme Court judge might have a bearing on his judgment (whatever the matter be), is contemptuous and preposterous.
One can somehow understand the interested groups questioning the constitution of the SC Bench. But senior journalists and politicians taking the point of these groups forward is incomprehensible.
This is more important since no less than the prime Minister himself has already indicated that if SC decision goes against the cause of Sri Ram Mandir, the government may consider legislative action to undo the decision.
Putting so much pressure on judges in matters of national importance, will only further undermine the credibility of the judiciary.
In the instant case, no matter what the decision is, some are going to see communal colors in that.
Chart of the day
 
Building UBI in investment strategy
Telangana is the first State in India to implement a Universal Basic Income (UBI) Scheme for all the 6million farmers in the state. Under the Rythu Bandhu Scheme, the state government offers to pay Rs8000/year to the farmers of the state, irrespective of the size of landholding. The amount is given by bearer cheque through Village Panchayat.
Commendably, before implementing the scheme, the State has made all land titled good, by completely digitizing the land records and issuing new fully secured title deeds (Land Pass Books) to all the farmers. All land holdings records are transparent and could be digitally verified by anyone.
Arguably, this measure may not address any of the fundamentals issues plaguing Indian farm sector. Nonetheless, it may at least ensure that no one starves to death.
Telangana government's scheme for Universal Basic Income (UBI) for farmers has recently found favor with the governments of Odisha and West Bengal. It is only a matter of time when most other state governments follow this scheme to protect their vote share.
There would be absolutely no surprise, if we see a promise to implement such a scheme in the manifestoes of most parties contesting general elections in summer of 2019. The regional parties may promise to implement the same or similar scheme in their respective states. The national parties might promise a pan India roll out.
A MNREGA like mega pan India UBI scheme for ensuring a bare minimum standard of life for each farmer household can be clearly seen on the horizon, within next five years.
Soon, a strong demand would rise from the non-farmer poor for such basic income support.
As an investor I must evaluate whether my investment strategy accounts for such a major fiscal event!
I would imagine that a pan India roll out of some sort of UBI would entail merging or elimination of numerous schemes and subsidies. Nonetheless, it would certainly cast material additional burden on the already strained fiscal situation of the center and state governments. Given that most populated states in the country (e.g., UP, Bihar, MP, Rajasthan) are already fiscally challenged, this additional social spending would be at the expense of new capacity creation. It would therefore reasonable to account for a materially higher incidence of tax on corporate, discretionary spending, as well high income households.
The basic income would be sufficient to add some demand to consumer staples and things like Hawai Chappals. However, there may not be much impact on the discretionary spending. It would not be unreasonable to believe that the higher fiscal pressure might keep the rates at elevated level, further pressuring the demand for discretionary consumption.
I would therefore like to update my models for the following:
(a)   Higher overall tax rates, more so in case of luxury and sin category.
(b)   For companies with stretched finances, elevated finance cost may stay for much longer than earlier anticipated.
(c)    Volume growth for staples may sustain, but margins are unlikely to improve.
(d)   Foreign flows would be watchful, and may not rush to India anytime soon.
(e)    Domestic flows into market may suffer marginally due to higher incidence of taxation, both direct and indirect.

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