Do it yourself: Modi

Showing posts with label Modi. Show all posts

Thursday, January 23, 2025

New chapter in Indo-US relations

Mr. Donald Trump has chosen to take some time before speaking with his Indian counterpart Mr. Narendra Modi. Trump has chosen to call the Chinese premier Xi Jinping, even before his inauguration. Prime Minister Modi has apparently sent a written congratulatory message to Trump, instead of calling him. This small pause in the top-level communication has triggered a debate about the shape of Indo-US relations in the near future.

In my view, before drawing any conclusion from Trump’s pause, and writing obituaries of the Indo-US strategic partnership, we must study the evolution of Indo-US relationships. This relationship has evolved over the past 75 years. It is primarily based on mutual need and shared democratic values, and goes much beyond the personal equation of individual leaders.

Prologue

The foundation of Indo-US was laid during the 1949 visit of Prime Minister Nehru’s visit to the US and meeting with President Henry Truman. Nehru was welcomed by everyone he met during his multi week stay in the US. However, Not much was achieved in diplomatic and economic terms.

Ten years later, President Eisenhower visited India for five days, in 1959. He addressed the Parliament and expressed “deep satisfaction at the friendly and cordial relations existing between their two countries, and their firm belief that their common ideals and objectives and their quest for peace will ensure the maintenance and development of the strong ties of friendship between the two countries.” Again, the Indo-US relations did not move beyond exchanging pleasantries.

The first chapter

India co-founded the Non-Aligned Movement in 1961, taking a neutral stand in the cold-war between the USSR and the US. 1962 was an important year in the evolution of Indo-US relationship. This year, the U.S. Agency for International Development signed the Kanpur Indo-American Program to help in the establishment of the first IIT. The program included deployment of American faculty members to develop academic programs and research laboratories at the new university over the next decade. Later, President Kennedy supported India in the Indo-China conflict, recognizing McMahon Line and also providing air assistance and arms. Next year, in 1963 Norman Borlaug, a renowned US Agronomist, visited India and laid the foundation of the Green Revolution. India also benefited from wheat imports from the US under PL-480 “food for peace” program during the 1960s.

1965 saw a material deterioration in the US-Indo relationship as Washington sided with Islamabad in the second major Indo-Pak conflict. The situation worsened further in 1970’s when President Nixon sided with Islamabad during the 1971 Indo-Pak war. This was the time when India signed a 20 year “Treaty of Friendship and Cooperation” with the USSR. The relationship deteriorated further in 1974 when India became the first non UNSC permanent member to conduct a nuclear test.

A reproachment effort started in 1978, after Mrs. Gandhi was defeated in the 1977 general elections. President Carter visited India and Prime Minister Desai reciprocated with a 6-day visit to Washington. However, with the US enacting the Nuclear Nonproliferation Act in 1978, the process was derailed.

Prime Minister Gandhi made another attempt to revive Indo-US relations during her visit to Washington in 1982. She and President Regan largely agreed to increase cooperation and resolve a dispute over nuclear power. Vice president Bush (Sr.) led a high level visit to New Delhi to explore areas of cooperation. However, 1984 Bhopal Gas tragedy again derailed the process.

Post the end of the cold war (1989), for a few years, India and the US had a good working relationship. Prime Minister Rao unleashed substantial economic reforms and expanded economic ties with the US. However, things turned for the worse in the summer of 1998, when prime Minister Vajpayee surprised the US intelligence agencies with a nuclear test and announced India as a full-fledged nuclear power. President Clinton recalled his ambassador to India and imposed severe economic sanctions on India.

A year later in 1999, President Clinton called Pakistan Prime Minister Sharif and nudged him to end the Kargil conflict immediately. In the year 2000, Clinton became the first US President to Visit India since 1978. The visit marked the first step toward forming a durable Indo-US strategic relationship. Clinton agreed to not make signing of CTBT a precondition for Indo-US economic cooperation. The Indo-U.S. Science and Technology Forum was established during this trip, which also marked the beginning of the end of the Cold-War strategic US-Pak alliance. President Bush lifted all US sanctions on India in 2001.

Second chapter

In 2005 a new chapter in the Indo-US relations started. Both countries signed the New Framework for the U.S.-India Defense Relationship, which set priorities for defense cooperation in maritime security, humanitarian assistance/disaster relief, and counterterrorism. They also inked the Civil Nuclear Cooperation Initiative, a framework that lifts a three-decade U.S. moratorium on nuclear energy trade with India. Under the agreement, India agrees to separate its civil and military nuclear facilities and place all its civil resources under International Atomic Energy Agency (IAEA) safeguards. In exchange, the United States agrees to work toward full civil nuclear cooperation with India. (The US Congress and Indian Parliament ratified this deal in 2008.) In October 2005, both countries jointly conducted the largest naval exercise to date, followed by major air and land exercises.

In 2006, President Bush visited India and finalized, with Prime Minister Singh, Singh finalized the framework of the civil nuclear deal and boosted security and economic ties. The nuclear deal made India the only country outside of the Nonproliferation Treaty that has nuclear capabilities and is allowed to participate in nuclear commerce.

In 2007, an 18year old ban on import of Indian mangoes to the US was lifted, marking the beginning of an effort to double the Indo-US trade within three years. Bilateral trade in goods and services totaled around $45 billion in 2006 and rose to more than $70 billion in 2010.

In 2008, Chandrayaan-1 became the first Indian spacecraft to land on the moon. It carried two scientific instruments designed by NASA scientists, marking a significant progress in Indo-US space cooperation (an agreement that existed since 1963).

Third chapter

In 2010, India and the US convened the first U.S.-India Strategic Dialogue. Secretary Clinton lauds India as “an indispensable partner” and President Obama claimed the relationship “will be a defining partnership in the twenty-first century.” President Obama visited India in November. He addressed the Parliament and backed the country’s long-held bid for a permanent seat on the United Nations Security Council. He announced $14.9 billion in trade deals.

In 2012, Secretary of Defense Leon Panetta visited India to bolster military ties. Next year (2013), Prime Minister Singh visited Washington to meet President Obama for the third time in four years to discuss important issues such as security, trade, immigration reform, and the civilian nuclear deal.

In 2014, President Obama invited Prime Minister Modi to the White House. President Obama made his second visit to India in 2015 as Chief Guest at Republic Day celebrations. Ten-year U.S.-India Defense Framework Agreement was renewed for another ten years.

In 2016, the US elevated India to a “major defense partner”, a status no other country holds. This enabled India to enjoy some of the benefits of being a U.S. treaty ally, such as access to defense technology.

In 2017, Prime Minister Modi visited the US to meet President Trump, who raised sharp disagreements with India over trade, climate change, and H-1B visas. Regardless, their joint statement emphasizes strengthening their defense partnership, cooperating on counterterrorism efforts, and boosting economic ties.

In 2018, during a “two-plus-two” dialogue in New Delhi an the Communications Compatibility and Security Agreement (COMCASA) was signed allowing India access to advanced communication technology used in U.S. defense equipment and allows real-time information sharing between the two countries’ militaries.

Fourth chapter

In 2018, the Indo-US relations took a turn towards the south. President Trump terminated India’s preferential trade status, part of a 50yr old program that allows products from developing countries to enter the U.S. market duty free. Trump claimed India has not provided “equitable and reasonable access” to its own market. In retaliation, India slapped tariffs on twenty-eight U.S. products.

In 2020, President Trump made his first official visit to India. India agreed to purchase US$3bn worth of military equipment. However, the two countries could not resolve pending trade issues. Opinions remained divided over agricultural products, tariffs, and other areas.

In 2020 the first in-person meeting of Quad was held, and President Biden hosted Prime Minister Modi for the first time.

In 2023, the Initiative on Critical and Emerging Technologies (iCET), an agreement that aims to expand bilateral technology and defense cooperation is announced. As part of the deal, U.S. officials seek to reduce India's purchase of Russian arms.

Fifth Chapter

I guess, President Trump might look to begin a fresh chapter in the Indo-US relations. Early indicators are pointing that he may look to base the mutual relationship on equality. So far, the US has played the role of a dominant partner helping India to grow faster. President Trump may now seek to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues.

The Indo-US relationship henceforth may become purely transactional, shedding the pretense of strategic partnership. The Trump 2.0 administration would negotiate hard on tariff concessions; preference in defense and energy procurement; resolution of contentious issues like agriculture tariffs. The US negotiators might use the façade of freedom of speech & religion, persecution of minorities etc. as key negotiating tools.

It will obviously be a tough & volatile transition; especially when the domestic economy is passing through a challenging downcycle. During the previous transitory phases (1970s and Late 1990s), India managed well. Hope this time will not be different. Till then keeping fingers crossed, seat belt tightened, and store filled with emergency supplies.

Tuesday, December 31, 2024

Two roads diverging in the yellow wood…

The 2025^th year of the Christ is beginning on a very tentative note, particularly for investors in financial markets. The past four years have been relatively smooth for investors. With the benefit of hindsight, we can confidently claim that the markets were mostly driven by macro factors. Unprecedented liquidity infusion by the central banks and fiscal support to consumers across the world helped most asset classes to perform well.

Despite massive global disruptions due to the pandemic and geopolitical, the volatility in markets was largely contained. Since most asset classes yielded decent returns for investors, they were not really pushed hard to make choices.

However, the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make.

Choose your path carefully

Making right choices, in my view, would be the central investment challenge for the year 2025. The following situations, for example, would challenge investors to make a choice.

Promise vs. delivery

In the past few years, the Indian markets have been largely driven by the political and corporate promises, ignoring the actual delivery, especially in the matters of investments, infrastructure development, growth, and profitability. In the past few months corporate promises have started to moderate, albeit very gradually; but the government promises continue to remain rather exaggerated.

The themes like manufacturing for import substitution/export promotion, defense production, railways modernization and expansion, development of tourism ecosystem, clean energy, etc., which were mostly based on the government promise, have been popular with the investors in the recent years. The stocks associated with these themes have yielded extraordinary returns for investors.

Many businesses, especially those associated with these macro themes, also promised sustainable growth and profitability. So far, only a few have delivered on their promise. Very soon, investors would need to choose whether to continue relying on promises or shift the focus on businesses that have been delivering consistently.

Globally, the promises of the Trump 2.0 regime are becoming a major investment theme. The investors would also need to make an assessment of how much of Trump’s promises are deliverable and invest accordingly.

Short stories vs. epics

For ages, collections of short stories like Panchatantra, Jataka Tales, Aesop’s Fables, etc. have been key influencers of the value system, morality and consciousness of human beings. Very few of us would have bothered to read the full text of epics like Ramayana, Mahabharata. We know the broader plots and teachings of these epics through brief narrations by elders, TV shows and movies.

Similarly, most of the successful investors would have created their wealth by investing in some small ‘stories’. Investing in a broader macro trend (epics) requires a lot of patience, deep understanding of economics and deep pockets to weather through the macro cycles. For the impatient, small investors with low understanding of economic cycles, macro trends intermittently provide a lot of excitement. Extraordinary profits made riding popular waves, if not encashed in time and preserved, often perish in no time.

Anecdotal evidence suggests that a lot of investors are presently invested in “the epic India story”. It is important to note that this story has been unfolding since the early 1990s, and might take many more decades to fully unfold. In the past 34 years there have been many periods of rejection of this story as a valid investment theme. 2025-2026 could be another phase when a large section of investors, especially foreign investors, reject this story as bogus.

Small investors thus need to make a choice whether to stay invested in ‘the epic India story’ (macro themes like infra development, demographic dividend, rise in income & consumption etc.) or focus on finding some small stories that may yield results in the short period of time.

"MAGA" and "BRICS as a unified market with common currency" are some examples of global epics, which investors might need to accept or reject.

Jingoistic defiance vs. pragmatic escape

The year 2025 might bring many investors face to face with ground realities – social, political, and economic. Many of them may discover that their current portfolios of investment are not actually in sync with the current ground realities. Investors would need to make a choice whether to stay committed to their current asset allocation and investment portfolios; or make a strategic change and bring the portfolios in sync with the latest ground reality.

This may, for example, require rationalization of tactical debt allocations made to take advantage of sharp fall in bond yields; evaluation of gold allocation made in anticipation of easing bond yields & rising geopolitical tensions; and investment in traditional FMCG businesses which are facing margin & growth challenges.

Absolute vs relative return

With a material rise in the investments made through professional investment managers (MF, PMS, AIF etc.) in the past four years, investors have become used to assessing the performance of their investment portfolios relative to the benchmarks set by these professional investment managers. The relative return argument (or “strategy” if you prefer to use this jargon), functions well only if the benchmark continues to provide positive returns consistently. For those investors who are depending on their portfolio of financial investments to meet key goals of their life, e.g., financial freedom and retirement planning etc., a couple of years of negative return could spoil the entire math.

The investors whose investment objective involves any one or more of the following ought to prefer an absolute return strategy, instead of a relative return argument. For their investment objective would invariably involve a defined cash flow over a definite period of time. Their investment strategy must therefore focus on making a reasonable rate of absolute return over the “defined” period of time. Beating the benchmark index should be the least of their concerns.

· Retirement planning – regular income to supplement the loss of salary/wages.

· Goal based investment, e.g., buying a house, children education expense.

· Financial freedom - assured minimum income to allow

2025-2026 could be one such period where non-institutional investors might have to make a choice between relative return and absolute return strategy.

Tuesday, November 12, 2024

Wait & Watch

The year 2024 is proving to be one of the worst years for political soothsayers. After a debacle in the Indian general elections last summer, psephologists have failed in the US presidential elections. The challenger Donald Trump emerged a winner, gaining popular votes to occupy the White House for four years with a clear majority in the US Congress and Senate. This kind of decisive mandate has been a rarity in US politics in the past four decades. Most of the media, political commentators, psephologists, and other experts completely failed to read the peoples’ mind and anticipated a victory for Kamala Harris.

Post the election results, thousands of experts – research analysts, economists, strategists, geopolitical experts, money managers, etc. – have written reports running into millions of terabytes, forecasting the likely impact of Trump's victory on financial markets, currencies, commodities, geopolitics, and trade etc. Most of this analysis is based on Trump's election promises, speeches and policy measures initiated during his previous tenure (2017-2021).

Most Indian brokerages have also published reports on the impact of Trump’s victory on the Indian markets and businesses. The most common view of the Indian analysts appears to be that Trump regime may benefit Indian businesses, especially those competing with China.

Speedy implementation of BioSecure Act may benefit Indian CDMO services providers. Higher duties on Chinese imports may make Indian merchandise exporters to the US more competitive. Continued tax concessions may lead to higher discretionary budgets of the US businesses, resulting in more deals for the Indian IT services companies. The conflict in the middle east Asia will likely intensify further leading to higher budgetary allocation for defense in most countries. This may benefit the defense related manufacturing and services. Besides, a weaker USDINR may also boost local currency revenue for them. There may be pressure on the current account. Inflation may become stickier due to higher imported inflation. Interest rates may, therefore, remain elevated for longer than previously estimated.

I do not possess any competence to comment on international affairs and the impact of the regime change on the global markets, trade and geopolitics. However, I would like to share my views about the impact on India.

First of all, I would like to draw the attention of the readers to two points.

1. During the election campaign the Prime Minister Narendra Modi had extensively spoken about the 100 days plan of his third term. He promised that he has directed all his cabinet colleagues to prepare a detailed development plan for execution in the first 100 days of his third term. Its more than 150 days since his re-election and we do not hear any mention of that 100 days plan now.

2. President Putin, in an interview to LeFigaro in May 2017, had shared his impressions about the US Presidents. In my view, he was not far from reality. He mentioned—

“I have already spoken to three US presidents. They come and go, but politics stay the same at all times. Do you know why? Because of the powerful bureaucracy. When a person is elected, they may have some ideas. Then people with briefcases arrive, well dressed, wearing dark suits, just like mine, except for the red tie, since they wear black or dark blue ones. These people start explaining how things are done. And instantly, everything changes. This is what happens with every administration. Changing this is not easy, and I say this without any irony. It is not that someone does not want to, but because it is a hard thing to do.”

In my view, it is too early to make any intelligent forecast about the likely policy direction of the Trump administration. It would be in the interest of investors to wait till the 20^th January 2025, when Mr. Trump moves to the White House and makes his first moves. I would not be surprised if Mr. Trump takes a few months before alluding his thoughts on the policy changes.

Hazarding a guess, I would say that the direction of the US policies is unlikely to change in any material measures under the Trump administration. If at all, the jingoistic rhetoric may rise and we may see acceleration (or deceleration) in the execution speed of certain measures to suit the political expediency of Mr. Trump.

Insofar as India is concerned, I anticipate the following in the next 24 months:

· The surface tension between the expanded BRICS and the US may intensify; though underneath a wider reconciliation may emerge with the US granting several concessions to China, Russia, Iran, India etc. Several multilateral institutions like the UN and IMF may continue to weaken.

· The USD may continue to remain a dominant currency for the next four years, but its share in the global trade may continue to decline at a pace seen in the past decade.

· There may not be any adverse change in the H1-B VISA policy towards skilled workers. There could be changes in the automatic US citizenship rule for the children born to the non-permanent resident parents in the next four years. This may not have any impact on the Indian economy or markets.

· The Trump administration may engage with President Putin to de-escalate the situation in Ukraine. A successful de-escalation may ease sanctions on Russia, normalize energy and food trade in Europe. This could have a positive impact on Indian inflation and exports.

· In the past 4 years, Russia and China have come much closer as compared to the previous presidential term of Mr. Trump. The recent peace in the Sino-India relation has also been likely brokered by Mr. Putin. The US trade policies are taking cognizance of this and are already less aggressive towards China. This de-escalation of trade and currency war may continue, although at a gradual pace, in the next four years. The US may not impose as aggressive tariffs on Chinese imports as currently estimated. Though, the Trump administration may seek measures to reduce the trade deficit with China. This policy of reducing trade deficit might also apply to India, as we also run over a US$40bn trade surplus with the US.

· The BioSecure Act may see accelerated implementation, helping the Indian CDMO/CRAMS players.

· The neutral rates for the US economy are presently estimated at 3.0-3.25%. This level has been rising for the past six months. We may see a further rise in this level, implying the Fed rates bottoming at a much higher level than previously estimated. This will reflect on the emerging market currencies and rates. The Indian currency may witness more depreciation and bond yields may not correct much below 6% in the next four years.

For now, I do not see any need for a change in my investment strategy due to the regime change in the US. I continue to expect more challenging times for the Indian equities in the short term (6-9 months). The stocks in the popular categories (clean energy, EV, defense, railways, PSE, etc.) have corrected sharply, but still trade at elevated valuations. The consumption remains in the slow lane and sectors like media and realty (consequently building materials) are also showing conspicuous signs of slowdown. Credit growth has also shown some signs of slowdown in September-October. I therefore continue to remain in a “wait & watch” mode, looking for better opportunities.

Thursday, June 13, 2024

Raising the guards

The year 2024 started with the fervor of Ram Bhakti. The stock market made a new high in mid-January. Investors felt that the grand opening of Ram temple in Ayodhya will stimulate economic activity and provide a material impetus to economic growth. However, the stock market could not hold gains and ended the month of January almost unchanged.

The interim budget in February was mostly a non-event, and markets ended the month only with marginal gains. Announcement of elections and early indications of a larger majority for the incumbent BJP took the markets to new highs in March. However, the markets remained circumspect about the election outcome. Below expectation results for 4QFY24 also did not help the markets. For three months (March-May), the Nifty50 gained ~2.5%. After the announcement of the election results, the Nifty50 has gained another ~3.5% from April closing level. Overall, the Nifty50 is up by ~7.5% YTD2024. The Bank Nifty has underperformed the benchmark Nifty50 and is higher by ~3.4% YTD2024.

The broader markets have performed much better. Nifty500 (+13%), Nifty Smallcap 100 (+16.5%), Nifty Midcap100 (+16.6%) have beaten the Nifty50 returns by a wide margin. Most professional analysts are forecasting a high-single-digit to low-double-digit return from the Nifty50 this year. This implies that the upside for Nifty might be limited from the current levels.

However, the momentum in the market is strong and domestic flows continue to remain buoyant. The progress of the monsoon so far is encouraging. The formation of a new government augurs well for continuity and stability. A combination of all these factors might take the markets much higher in the next few weeks.

I certainly do not want to be a party pooper. After all, who does not like to make some quick bucks!! Nonetheless, it would not be completely undesirable to raise the guards a little higher.

I agree that on an aggregate basis, the market does not appear anywhere closer to the bubble territory. However, there are numerous stocks that may have already crossed over to the red zone. Controlling the urge to run after fast running trains and avoiding FOMO is critical under these circumstances. It may sound cliché, but stock selection indeed is very important.

There are some scattered dark clouds on the horizon that may spoil the party. It is important to keep a watch and take out umbrellas in time, should the clouds gather and advance towards Indian markets. In particular the following six events could potentially impact the market sentiments in the next six months.

· The final Union Budget for FY25 not meeting investors’ expectations.

· FY25 earnings failing to meet the elevated expectations.

· The temporal and Spatial distribution monsoon becomes erratic causing floods in many areas and drought in some areas.

· Key state assembly elections later this year going against BJP and destabilizing the central government.

· Xi Jin ping trying a misadventure in Taiwan, as the home situation continues to improve.

· RW hardliners gaining full control of Europe after significant victory in the EU Parliament.

· Triumph of Trump in November presidential elections threatening large scale geopolitical and economic disruptions.

Tuesday, June 11, 2024

What now?

The stock price of Heritage Foods Limited, a milk processing company based in Andhra Pradesh, promoted by the family of N. Chandrababu Naidu (leader of Telugu Desham Party and CM of Andhra Pradesh) rose ~65% in the last week. The rise in stock price is apparently in response to the victory of Mr. Naidu’s party in Andhra Pradesh Assembly elections and the likelihood of it getting a pivotal role in the central government.

Stock prices of many PSEs and companies perceived to be close to victorious NDA partners witnessed heightened volatility and lost 8-15% value after election results.

What does this market behavior tell us?

Does it show that the market participants seriously believe that the elected Chief Minister of an Indian State, will “unduly” favor his family business? Or the working of a PSE depends on the number of MPs a ruling party (or coalition) has in the Parliament? Or the fate of a business in India materially depends on the closeness with the ruling party enjoyed by its promoters?

If any of this is even partially true, does it make sense to even consider investment in such a business? How the fund managers and advisors who swear in the names of Peter Lynch, Warren Buffet, Charlie Munger, could even think of investing (or advising investment) in such businesses?

Anyways, I would leave this debate for the market experts. As a tiny investor, my concern is limited to the point, whether I need to change my investment strategy or stay on my course, in light of the change in government at the center and two states (Andhra Pradesh and Odisha) since the elections are now over and a new government is taking shape.

Changed circumstance

Three notable political changes have occurred in India in the past week.

First, the NDA alliance has won the mandate to form the central government in India. The BJP, which had a strong majority in the outgoing parliament, has secured 240 (out of 543) seats in the 18^th Lok Sabha. After ten years, the BJP has fallen short of a simple majority in the Lok Sabha. It has now formed a government dependent on support of its NDA allies. Two key allies Janata Dal (United) led by the Bihar CM Nitish Kumar, and Telugu Desham Party (TDP), led by N. Chandrababu Naidu, the new CM of Andhra Pradesh.

Second, TDP led by Mr. Naidu has secured an absolute majority in the Andhra Pradesh Legislative Assembly, ousting the ruling YSRCP, led by Jaganmohan Reddy who was CM of the state for 10 years. This marks return of Mr. Naidu to power after two decades.

Third, Biju Janta Dal (BJD, led by Naveen Patnaik, lost power in Odisha state after 25years. The BJP secured a simple majority in the recently concluded assembly elections and is forming first ever government in the state on its own.

Market reaction

After an initial knee jerk reaction on the election result day, the markets have scaled new highs and look even more exuberant. On Friday, the Monetary Policy Committee of RBI decided to hold the policy rates unchanged with a 4:2 vote. Two members voted for rate cut and a change of policy stance from “withdrawal of accommodation” to “neutral”. This is also adding to the market buoyancy.

Investment strategy implication

I do not see any reason to change my investment strategy in light of the evolving political scenario. As stated earlier (see here), “I believe that in India economic policies, and therefore financial markets, are politics agnostic. I do not see the outcome of general elections impacting the Indian economy in any significant manner. The economic policy of India is still a work in progress. all governments in India in the past 40 years have made incremental improvements in the policy framework to make it congruent with the scale of economic development and changes in India's position in the global economic and strategic order.”

However, I do expect some positive developments for the economy, and therefore markets. In my view, for example—

· The decision making at the central government level may improve materially with a stronger consultative and the decision-making process. Decisions like demonetization, abrogation of article 370 and CAA etc. had added elements of unpredictability and disruptiveness to the policy making paradigm in the past ten years. The need for a wider consultation for important decisions could eliminate these elements. On the flip side there could be some delays in decision making and market volatility may increase in cases where there is no agreement between the alliance partners.

· In Andhra Pradesh, the work on the abandoned new Capital (Amravati) might start again. This may provide significant impetus to investment in the state.

· The government may focus on affording more cash in the hands of the poor, especially rural poor. This may provide good support to the rural consumption, which is showing some green shoots.

· The policy support to private capex (e.g., through PLI scheme) may continue and even get enhanced.

· Overall, the growth may become more inclusive.

My strategy is premised on the assumption that after the final budget (July 2024) the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections. For now, I do not see any reason to change that premise.

Tuesday, May 14, 2024

What if?

Polling for the fourth phase of the 18^th general elections ended yesterday. Electorate from 380 Lok Sabha constituencies have exercised franchise to elect their national representatives. Over the next three weeks, eight states (full or partial), NCT of Delhi, and four union territories will vote in three phases. With 70% voting already over, a fair estimate of the national trends could be made by the experts.

Since the Election Commission of India (ECI) does not permit the publication or communication of the results in any other form of Exit Polls conducted by various agencies until the completion of voting for all seats, we do not have any expert opinion available about the likely outcome of the ongoing elections. However, a variety of guesstimates are available on social media and other platforms. Most of these guesstimates are speculative. These are either based on a small and localized sample; or gambling trends.

Many stock market experts have also presented their scenario analysis for the market performance depending upon the outcome of the general elections. Most experts have projected a sharp correction in the markets in case the incumbent BJP and its allies fail to secure the requisite majority in the Lok Sabha. As a keen political observer and a tiny investor, I am interested in these forecasts.

Unfortunately, I find that the discussions available in the public domain are not based on available empirical evidence; they lack credible analysis, and are highly speculative. These discussions deeply suffer from personal biases, political prejudices, and misplaced presumptions. One of the illustrative scenario analyses available in the public domain is reproduced below. In my view, nothing could be more baseless and more speculative than this analysis.

In the outgoing 17^th Lok Sabha, the incumbent BJP has 303 members, a strong majority. In the preceding 16^th Lok Sabha, the BJP had 281 members with its NDA allies having another 71 seats.

The preceding UPA government was arguably much weaker with no single party having a majority of its own. Regardless, the performance of USDINR and Nifty was better during 2004-2014 compared to the 2014-2024 period.

· Sensex yielded a return of 15.5% CAGR during the UPA regime (2004-2014), while the Sensex return has been ~12.2% CAGR during the NDA regime (2014-2024).

· USDINR had weakened at a pace of 2.7% CAGR during 2004-2014; while it has weakened at a pace of 3.5% CAGR during 2014-2024.

On the social and economic reforms front also there is no empirical evidence of weaker governments doing worse than the stronger governments in the past four decades.

In my view, the market does witness heightened volatility during general elections, but there is no empirical evidence to establish a direct correlation between market performance and the form and constitution of the ruling political dispensation in India.

…to continue tomorrow

Thursday, February 29, 2024

Cognitive dissonance- 3

Continuing from yesterday.

If the job crisis is so severe, why is the incumbent government so popular, especially among the youth?

The incumbent prime minister, reportedly, enjoys the highest rating amongst the popular leaders of the world. In particular, he is very popular amongst the youth and women in India.

India faces one of the worst youth unemployment rates globally. Indian homemakers are facing serious challenges in managing their household budgets due to inflation. According to the World Bank, the youth unemployment rate in India could be comparable to war-torn economies like Syria, Yemen, Lebanon etc. The unemployment rate and household inflation have worsened or failed to improve in the past 10 years.

The question thus arises, why is the incumbent government still popular amongst youth and women?

I have discussed this aspect with numerous common people, like myself, nationwide over the past couple of years. My conclusion is as follows:

(a) Contrary to common perception, the incumbent government is not very popular with the people. It is the Prime Minister who is popular, not his team or the administration. A majority of people defend the prime minister, arguing that he sincerely wants to make life of the people better, but the administration is corrupt and not supporting him fully.

(b) A majority of the prime minister’s supporters believe that he is a divine incarnation and he could only salvage them from their misery and distress.

(c) The popularity of the incumbent government and the prime minister is significantly higher in West and North India, as compared to South and East India. He is also relatively less popular in the states where there are strong local leaders.

(d) The lower middle-class youth is increasingly becoming kind of masochist. They appear to be comfortable with their pain and misery, so long as their neighbors are more miserable and are in deeper pain.

(e) Above all, the welfare schemes of the government have benefitted poor households. The campaign to promote these schemes is very strong and effective, strengthening the connection between beneficiaries and the prime Minister.

(f) Overindulgence with social media is making youth delusional.

(g) Partisan reporting by electronic media has affected the judgment of gullible households to a material extent.

(h) The lack of a visible opposition leader with a pan-India appeal, and the lack of any competition from within the BJP to the prime minister’s supremacy, are helping the prime

Tuesday, February 13, 2024

My takeaway from Putin’s interview

Recently, an interview (watch here or read here) with Russian President Vladimir Putin has been trending in the media worldwide. In this two-hour seventeen minute long interview, President Putin touched upon many important issues concerning global economics and geopolitics. Experts from the world over are analyzing the interview from multiple angles, e.g., strategic, political, geopolitics, economics, etc. Most analysis I have come across is deeply biased. The starting point of most comments is the trustworthiness of President Putin. Most Western analysts seem to be rejecting Putin’s assertions as mere propaganda; while the analysts from Eastern and Southern analysts are using the contents of the interview to justify their opinions about the US agencies (deep state) and NATO.

In India, pro-establishment media and experts have mostly refrained from commenting on the interview; whereas the critics of the establishment have used this opportunity to emphasize that President Putin has answered many tough questions while Prime Minister Modi chooses not to answer media questions. I have not seen much discussion in Indian media on the assertions made by President Putin.

As a tiny fish in the pond, I am incapable of making any intelligent comments on matters of global or even national importance. Nonetheless, I found the following three things in the interview that interested me as a small investor.

· “China's economy has become the first economy in the world in purchasing power parity; in terms of volume, it overtook the US a long time ago. The USA comes second, then India - one and a half billion people, and then Japan, with Russia in the fifth place.”

This is the only mention of India in this 2:17:19 hrs. interview. Indonesia got much more prominent mentions. China was repeatedly mentioned as a formidable global power. The recent trade trends are suggesting that near-shoring, friend-shoring, and China-proxy-shoring are emerging as more popular trends. Indonesia, Mexico, Vietnam, etc. are emerging as much stronger gainers of the China+1 strategy as compared to India.

· President Putin made it clear, in no uncertain terms, that the era of global peace that prevailed particularly in the post-Cold War period is mostly over. We are entering an era of mutual mistrust; frequent disruptions; persistent and potent threats of a larger war; and redistribution of global power.

This implies that (i) defense spending will increase for most nations; (ii) given the current state of the stretched fiscal position of most developed nations, the collateral damage of higher defense spending will be humanitarian aid; (iii) Rising mistrust may also result in tightly closed borders, adversely impacting immigration; (iv) Volatility in markets will rise materially; and (v) USD will face persistent pressures.

It appears too early for India to claim self-reliance in defense production. It is also early to anticipate that India could become the fulcrum of any major global alliance in the next few years. This means we could face serious trade and foreign policy challenges soon. The recent performance of the government in this regard is not very inspiring.

· President Putin hinted that Artificial Intelligence (AI) needs to be regulated and there must be a global understanding on this subject.

Failure to reach a wider understanding may pose a similar (if not greater) risk to the global peace and stability as the stockpile of nuclear weapons did in 20^th century. Misuse of AI could be devastating. The US and China are miles ahead of India in the development and deployment of AI in most areas, especially defense technology.

The implications for my investment strategy are as follows:

· The sentiment of nationalism apart, for small investors like me it may not make much sense to place significant bets on the China+1 theme. To global investors markets like Indonesia and Mexico may offer better opportunities.

· We should embrace higher volatility. The post global financial crisis (GFC) era of low volatility may be over in the next few quarters.

· Overstretched fiscal positions and the specter of war may keep rates elevated for longer than presently anticipated, even if China accelerates the export of deflation. The cost of global capital could rise for Indian entrepreneurs.

· It may not be a great idea to buy USD-denominated assets for small investors.

· Defense production and AI will remain relevant themes for many years. But buying these at any price may not be a good idea. (more on this tomorrow.

Friday, February 9, 2024

A summer of discontent

Earlier this week, Prime Minister Narendra Modi claimed that the incumbent ruling dispensation (NDA) shall return to power in 100 days with a much larger majority. The popular political debate is now getting narrowed to the question “whether NDA will return to power with 300/545 seats or 400/545 seats”.

On the other side of the globe, the political debate in the US is also fast reaching the point where the most relevant question would be “Who will Donald trump defeat in the November presidential elections?”

The ever-forward-looking financial markets are not oblivious to these more likely political outcomes. It is therefore safe to assume that the current prices have factored in the election victories of Modi and Trump. Thus, from a political viewpoint, one should not anticipate a significant upside to the financial markets. An unexpected election outcome may though result in a material downside.

In the latest episode of Greed & Fear, Christopher Wood (of Jefferies), said about the US markets, “The stock market is priced for an idealized soft landing while the money markets are priced for a degree of monetary easing which only seems likely in the event of a recession. The fed fund futures are now discounting 144bps of rate cuts this year. On the US stock market, the Nasdaq 100 is now trading at 24.4x one-year forward earnings and the Russell 2000 is trading at 22.6x, compared with 19.6x for the S&P500, according to Bloomberg.”

The summer in the US is therefore going to be full of discontent. A soft landing (further earnings downgrades, slower consumption, and rising financial stress) may limit the upside in stocks while the Fed pushing the rate cut beyond May’24 may cause restlessness in the bond markets.

Back in India, the chances of any further re-rating of equities are getting slim.

· Private consumption slowdown is now well accepted. The interim budget has made it clear that even public consumption is not likely to improve anytime soon.

· The budgetary allocation for capital expenditure in the sunrise sectors Defense, Railways, Utilities, etc. has seen meager growth in FY25BE. The valuations of the stocks of these sectors may not see any further PER re-rating. The returns from here logically should be similar to the earnings growth in these businesses. Any disappointment in execution may however see a sharp sell-off.

· Decelerating global growth shall keep export growth under check. The downward shift in growth trajectories of the US and China could also spill over to India through several transmission channels, such as trade in goods and services, commodity prices, and investment.

· RBI has also made it clear that going forward it is not an all-blue-sky scenario for the Indian economy this summer. The risks to inflation and growth are at best balanced. The bond markets may not be fully pricing in the downside risks.

I do not want to sound like a party pooper. Nonetheless, I am happy to use this spring for repairing my roof, servicing my air-conditioner, and oiling my vehicle. Just in case, there is a cloud burst, sudden heat wave, or flood warnings needing immediate re-location.

Wednesday, October 18, 2023

Policy paralysis – UPA vs NDA-2

Continuing from yesterday…(see here)

In the enterprise world, new ideas or innovations are usually valued much higher than the ability to execute such ideas. I believe for a successful enterprise both ideation as well as execution are equally important. The question of execution would not arise if there is no idea to execute. Similarly, an idea, howsoever innovative and brilliant it is, would remain just a thought or piece of paper unless it is executed well. Nonetheless, since the idea is the starting point of any enterprise, the innovator deserves to get a relatively higher valuation.

Taking this further, in the realm of politics and governance, the two key components of good governance are:

(i) Conceiving, formulating, and instituting policies that would ensure inequitable, sustainable, and accelerated socio-economic development and growth.

(ii) Execution of instituted policies through a set of structured programs, efficient delivery modules, and effective & prompt review and corrective mechanisms.

I believe that the performance of any government must be evaluated on these two parameters.

As I mentioned yesterday (see here), I find that the previous UPA government under the leadership of Dr. Manmohan Singh scored excellently on the issue of conceiving, formulating, and instituting policies that would aid in achieving accelerated, sustainable, and equitable growth. A high rate of GDP growth, especially in light of the global financial crisis, and the challenges of running a government with the support of a large coalition comprising parties with divergent ideologies and agenda underlines the efficiency of execution. The policies not only helped the Indian economy navigate safely through the global financial crisis and a subsequent current account crisis; but also helped bring a record number of people out of poverty.

Now, if we were to assess the performance of the incumbent government under the leadership of Prime Minister Narendra Modi on these two parameters, I strongly believe that the current government has performed very well on the execution front. This government has definitely—

(i) Executed policies instituted by the preceding government like MNREGA, UIDAI, RTE, Food Security, DBT, financial inclusion, FDI in retail trade, infrastructure development etc. rather efficiently;

(ii) Devised good programs and delivery modules for the policies formulated during the last years of the UPA government like digitization payments, GST, Direct Tax Code, implementation of 14^th finance commission recommendations, etc.

(iii) Augmented many policies like Unique identity and digital payments brilliantly to exploit maximum benefits out of these policies.

This strong execution helped the Indian economy navigate through the Covid-19 pandemic and subsequent global slowdown very well. Despite all challenges, India remains the fastest-growing major economy in the world. The programs like Unified Payment Interface (UPI) have become extremely popular globally. Road network development is happening at an accelerated pace. Many large infrastructure projects that were stuck due to a variety of reasons are getting completed.

However, insofar as conceiving new ideas and policies is concerned the performance of the incumbent government is ordinary. In the past nine years hardly any new idea has been conceived and/or converted into policy and programs.

NITI Aayog – the Think Tank

One of the earliest policy decisions taken by Prime Minister Narendra Modi led government at the center was to disband the planning commission and constitute a new Commission to provide directional and policy inputs to the government.

The commission, named NITI Aayog, was formed through a resolution of the Union Cabinet on 1 January 2015. NITI Aayog is “the premier policy think tank of the Government of India, providing directional and policy inputs. Apart from designing long-term policies and programmes for the Government of India, NITI Aayog also provides relevant strategic and technical advice to the Centre, States, and Union Territories. NITI Aayog acts as the quintessential platform for the Government of India to bring States to act together in national interest and thereby foster cooperative federalism.”

A careful reading of the latest Annual Report (2022-23v) of the NITI Aayog suggests that the Aayog has focused more on the review and assessment function and less on thinking and policymaking function.

As per the report, the government has implemented only one noteworthy development policy namely Aspirational District Program (including Aspirational Block Program).

In the first five years of this program (2017-2022) “the programme has acted as a successful template of good and effective governance, Under this programme India’s 112 backward districts have shown remarkable progress across key sectors that matter to the people. The core strength of the programme is its focus on data driven governance that drives evidence-based policy interventions at the district-level. NITI Aayog monitors the 112 Aspirational districts on Key Performance Indicators (KPI) on a monthly basis. The KPIs are designed in a way that the input and process indicators are being evaluated so as to achieve desirable outputs and outcomes across major socio-economic themes such as health & nutrition, education, agriculture & water resources, financial inclusion & skill development, and basic infrastructure. The robust monitoring strategy has enabled the district administration to engage in cross-departmental reviews and thus drive convergence. The competition through the monthly release of delta ranks keeps the districts constantly motivated to improve the KPIs.”

The achievements under the National Monetization Pipeline programs and Production Linked Initiatives (which are restructured models of old policy initiatives) are below par.

Besides this, New Education Policy is under implementation and Integrated Health Policy is under consideration.

Mission LiFE – Lifestyle for Environment is mostly at the conception stage.

In my assessment, the incumbent government has in fact performed less than ordinary on the policymaking front, while scoring well on execution.

I shall be happy to receive views of the readers on this aspect.