Vijay Kumar Gaba

Yesterday (Tuesday, 12 July 2023) was apparently one of the usual days. The newspapers were full of disappointing news relating to accidents, crimes, disasters, and platitudes. However, I found five headlines which appeared particularly alarming. These headlines highlight apathy, inconsistency, and incompetence of policymakers. While it may not be a revelation to anyone; what amazes me is the steadfast refusal of a majority of newspaper readers to question the otherwise claims of the government.

As an investor, I find it critical to take note of these headlines, because these underline the risks to the India Story, which is gaining currency again.

Hill states devastated again

The hill states of Uttarakhand and Himachal Pradesh have suffered tremendously from rather frequent episodes of cloud bursts, floods, and landslides etc., in the past one decade. Despite several objections from the environmentalists, local residents, and geology experts the governments have continued with mindless deforestation and construction. The authorities have ignored strong warnings from Mother Nature on multiple occasions. The Kedarnath (2013) Uttarkashi (2019), Vishnu Prayag (2021), Joshimath (2023) flash floods/landslides being the most (in)famous ones.

I have also been frequently highlighting the unsustainability of the development efforts in hill states and apathy, and incompetence of the implementing agencies. (For example see Save the Dev Bhoomi, for God sake and Exploring India )

The destruction of the ecology of Himalayas could have a devastating impact on the Indian economy in the coming decades. The total failure of conducting a comprehensive impact analysis of the infrastructure projects in hill states and even poor execution of the ill-conceived projects highlights the incompetence of respective authorities.

We all need to appreciate that images and videos of these frequent disasters are not like usual Social Media reels. These will soon come to haunt every citizen of this country in the form of water scarcity, unusual hot and cold weathers, and erratic rainfall patterns.

Highways

A school bus, speeding on “wrong side” in “broad daylight” on “Delhi Merrut Expressway'' hit an SUV killing at least six passengers travelling in that car. The school bus was apparently taken off the school duty a while back and deployed to ferry staff of a garment factory; but it was still bearing school color (yellow) and carrying school name on it.

This is yet another episode that highlights the poor highway planning and management; total regard for traffic discipline; criminal apathy towards fellow co-travelers on highways; total lack of training and orientation for highway users and lack of oversight on highways.

I have been frequently highlighting the problems in the highway development program of India for the past many years. For example see This highway - my way and A road trip to Western UP and Uttaranchal and Highways Security and safety

Recently, the government claimed that India has surpassed China to become the second longest highway length in the world. What it did not mention was the sharp rise in the number of fatal accidents on our highways. The issue of poor quality of highways also did not find any mention.

The government also does not acknowledge that over 60k kilometers of highways need a dedicated highway police to ensure safety of travelers and prompt action on repairing needs.

28% GST on gaming

The GST council in its meeting on 11^h July 2023 recommended imposition of 28% GST on full value of online gaming, hors racing and casinos with no distinction between games of skill and chance.

Roland Landers, CEO of All India Gaming Federation (AIGF), termed this decision of the GST Council “unconstitutional, irrational, and egregious”. He said, “the decision ignores over 60 years of settled legal jurisprudence and lumps online gaming with gambling activities".

Without going into the morality issues concerning online gaming, casinos and other forms of betting and gambling, I would like to highlight the inconsistency and arrogance of policy making, especially the taxation policies.

In the past one decade, the government has knowingly allowed numerous gaming startups to flourish. All these startups have been eligible for various startup incentive schemes of the government. The government has also allowed casino licenses. Now when the industry has reached the take off stage, it has made this debilitating policy announcement.

I am not sure about the common narrative of the existential crisis for the industry that may imperil thousands of jobs and millions of dollars of investment. My concerns are two-fold:

1.    This sends a strong signal to the global investing community about the tentativeness and volatility of the policy environment in India, discouraging them to invest in India. Remember, it has come at a time when the foreign investors are already witnessing massive write-downs in their investments in entities like Byjus, Pharmeasy etc.

2.    The move is prima facie unsustainable legally. It may lead to avoidable litigation that could protract for years, keeping the entire industry on tenterhooks.

To a common man, chips in a casino are bearer instruments like currency notes. These could be converted into currency notes "on demand". Merely converting cash into chips does not constitute buying a "Good" or "Service". Taxing the conversion of cash into casino chips @28% is, as Roland Landers said, “unconstitutional, irrational, and egregious”, liable to be set aside by a court of law.

Corporate governance

The Taiwanese electronic giant Foxconn reportedly called off the joint venture to set up a US$20bn semiconductor fabrication (fab) unit in the state of Gujarat, announced a few months ago. The joint venture was widely hailed as a watershed in the manufacturing history of India. The JV was formed in pursuance of $10 billion government-backed financial incentive scheme (PLI).

Post the announcement of termination of JV, Rajeev Chandrasekhar, minister of state for electronics and information technology, tweeted that it was well-known that both companies had no prior experience or technology and were expected to source fab technology from a technology partner.

Reportedly, Foxconn has separately announced that it will pursue the plan to set up five Fabs in India, on its own or with other partners.

On 7 July 2023, Vedanta Limited had informed the stock exchanges in a filing that “that the Board of Directors at their meeting held today, July 7, 2023, have considered and approved the acquisition of 100% of Vedanta Foxconn Semiconductors Private Limited (“VFSPL”) and Vedanta Displays Limited (“VDL”), wholly owned subsidiaries of Twin Star Technologies Limited (“TSTL”) via share transfer at face value. TSTL is a wholly owned subsidiary of Volcan Investments Limited, the ultimate holding company of Vedanta Limited.”

On 11 July 2023, the stock exchanges sought clarification from Vedanta Limited about the newspaper item titled "Foxconn Withdraws from Rs 1.5 Lakh Crore Vedanta Chip Plan In India". The company had not replied to the BSE communication till evening of 12 July 2023.

This development raises three serious questions:

1.    How did the government approve and celebrate the US$20bn proposal of two totally inexperienced players in a highly advanced and mission critical technology project? This raises questions on the entire PLI scheme, which has seen a much below par execution so far.

2.    Why did Vedanta not inform stock exchanges and shareholders about termination of plans a week ago?

3.    Why Foxconn and Vedanta are not obliged to inform the government and public what led to the termination of their JV? Was it some corporate governance issues at Vedanta or Foxconn?

7^th Cheetah dies at Kuno national park

Not long ago eight Cheetah, imported from Namibia, were introduced in the Kuno national park, Madhya Pradesh, with much fanfare. The event led by the prime minister himself was made into a national celebration, with the entire union cabinet joining in congratulatory messages. Yesterday, seventh of the eight imported Cheetahs has reportedly died. Earlier, four Cheetah imported from Singapore in Gujarat, had also met the same fate. Apparently, nothing was learnt from the past experience.

The point is that the government has been repeatedly using frivolous issues to distract the citizens. Absolutely mundane events like introduction of an animal to a zoo; starting a new train or boat cruise etc., are turned into a massive show of nationalism and celebrated as a massive achievement with no follow up or consequence. 

FY23 sales highest ever, PVs lead, 2W lag

In FY23, the sales of passenger vehicles in India seems to have reached an all-time high of 3.9mn units, recovering fully from the Covid induced slow down in the previous two financial years. In the next three years the sale of passenger vehicles in India is estimated to cross half a million mark. Two-wheeler and commercial vehicle sales have been slow to recover. These are expected to reach their all-time high levels in FY24e.

Overall, 21.4million units of automobiles are expected to have been sold in FY23. The number is expected to increase to 24.7mn in FY24e and 28.7mn in FY25, registering an annual growth rate of over 15%.

Besides local sales, Indian manufacturers exported about 3.7mn units of two wheelers and about one million units of other vehicles to other countries in FY23.

Government pushing for faster adoption of EVs

The government has identified automobile carbon emission as one of the primary sources of air pollution in India. Decarbonization of the transport industry is therefore emphasized as a key focus area in our commitment towards climate change goals. Besides, to enhance energy security and stabilize the trade account, it is considered important to reduce reliance on imported fossil fuel for consumption by vehicles with traditional internal combustion engines.

To meet these multiple goals, the government has been pushing for faster adoption of electric vehicles. As per a recent report by KPMG, “The government, in its 2023-24 Budget, allocated INR5,172 crore to Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME-2) subsidy outlay, a 78 per cent jump than the amount earmarked in the previous Budget. The FAME-2 subsidy accounts for 85 per cent of the total Budget allocation of INR6,145 crore for the Ministry of Heavy Industries.” The incentives have resulted in decent growth in sales of electric 2Ws and 3Ws. In other segments the growth is picking up slowly. In FY22, India sold 326,000 electric 2Ws; 178,000 electric 3Ws; 18,000 electric cars and 2,000 electric buses. KPMG estimates the growth has accelerated from FY24e may see acceleration in adoption of EVs in cars, buses and LCVs.

New highways, better roads to encourage road transport

The government has approved a total of 34,800kms of highways to be constructed  

Over 12000kms of expressways have been completed under Bharatmala (phase 1) and various balance work NHDP projects till December 2022. Out of this over 25,000kms have been awarded and over 12,000kms have been completed. The remaining 9500 is expected to be awarded in FY24-25. NHAI has also started the process of awarding 8000kms under Bharatmala phase 2A.

Besides this some large projects at state government levels may also soon kick started. As per a recent Kotak Securities report, “Large bids from states are also under evaluation phase such as Hyderabad outer ring road project (Rs70-80 bn upfront payment), city ring road project in Bangalore (Rs100 bn greenfield project), Pune ring road greenfield project (Rs394 bn in packages), Jalna Nanded expressway (Rs190 bn), multi modal corridor (Rs520 bn) and another stretch of Mumbai coastal road (Rs100 bn). Bidding for these projects can be finalized in the next 6-12 months.”

This of course over and above the accelerated road development and improvement. These projects involve several economic corridors, national corridors and expressways. These will ensure accelerated industrial development and faster connectivity.

Obviously, this will lead to much higher demand for automobiles – both personal and commercial in the coming years.

Some observations

Higher demand for commercial vehicles is definitely a direct reflection of the overall economic growth of the economy. But the sharp rise in sales of personal vehicles needs to be evaluated from various viewpoints.

·         There could be a strong argument that India still has very low per capita personal vehicle ownership as compared to peer economies. But this argument needs to be tested in the light of the affordability quotient of an average Indian household. Given that over 800mn Indians are dependent on subsidized food, the denominator used for calculating per capita ownership may need some adjustments.

·         The mix of personal vehicle sales in recent years has shifted notably in favor of luxury and premium vehicles, while base models, 3Ws and LCVs have witnessed marked slowdown. This could be a sign of rising inequalities and stress in the SME segments.

·         In the past couple of decades, cars and 2Ws have seen a sharp rise in commercial use. App based taxis and e-commerce delivery have been two notable segments of demand for vehicles.

·         Internal city roads and parking infrastructure has not improved in tandem with the rise in vehicle population. Most Indian cities are crumbling due to overwhelming traffic.

·         Metro rail networks in some cities have improved the overall public transport infrastructure. However, poor last mile connectivity has led to much higher demand for 3Ws, especially e-rickshaw, increasing chaos and traffic delays. City bus infrastructure has not shown much improvement beyond a few metro cities.

·         The driver training has been mostly ignored. Most drivers and even driving instructors appear to be mistaking “knowledge to operate the vehicle” for “driving skills”. This is leading to a material rise in the cases of road accidents and road rage.

·         The management of highways and expressways is extremely poor. Most expressways lack basic facilities. Rescue operations take a long time in cases of breakdown and accidents. The equipment and personnel to regulate errant drivers are grossly inadequate.

·         Vehicle ownership is also becoming a serious vanity issue in society. In numerous cases the decision to buy a vehicle is driven by “status” consideration rather than a “need” consideration. Motorcycles and SUVs are becoming basic “dowry demands” in traditional marriages. It is observed that in many cases these demands are made despite poor affordability of the bridegroom to operate, maintain and park the vehicle.

The point is that the rise in personal vehicle ownership may not necessarily be an encouraging sign for the economy and society in all cases. The government needs to do a comprehensive impact analysis and if required consider an appropriate regulatory framework.

The incumbent BJP is projecting that the Indian National Congress, which has been at the helm for a substantial part of these 75years, is primarily responsible for slower, unequal and misdirected growth and development of the country. It is also assuring the country that the incumbent government is not only undoing the mistakes of commission and omissions committed by the earlier governments and taking impactful corrective action; but also laying the foundation for a stronger, faster, equitable and well directed growth & development of the country.

The party in opposition, Indian National Congress (INC), on the other hand is refuting these claims. INC is insisting that it was their leadership that built a strong institutional framework that laid the foundation for a stronger, egalitarian and harmonious India.

I am sure both the parties would have strong arguments to support their respective contentions and this game of political grandstanding may continue forever. Nonetheless, I find it pertinent to take note of the present strengths of Indian economy and society that could really lead the transformation of Indian economy into a middle class economy over the course of next couple of decades; and also the weaknesses that could thwart the process of process of faster and sustainable growth and development of the country.

In particular, I would like to highlight the following five factors that now form the core of India’s strategy to achieve the ambitious growth and development goals.

Digital identity for all the citizens (Aadhar enabled by UIDAI)

UIDAI (Aadhar) is widely acknowledged as one of the most sophisticated and pervasive digital identification programs in the world. The program provided a digital identity to more than 1.31 billion citizens of India. This identity now forms the core of the financial inclusion and social security system in India, eliminating the leakages, middlemen and inefficiencies of the system. Aadhar also forms the core of the financial services, telecom and social sector services like health  and education.

The UIDAI model has also been adopted to provide digital identity to all corporate entities, corporate directors, taxable properties, to facilitate faster identification & transactions; and minimize the probability of frauds.

The services like DigiLocker - a free digital storage space for documents available to all citizens – are also primarily based on Aadhar authentication services.

UIDAI was conceived and set up in 2009 by the then UPA government under the ages of the Planning Commission. It was given a statutory status by the incumbent NDA government in 2016.

Digital payment ecosystem (UPI enabled by NPCI)

The RBI founded the National Payments Corporation of India (as a not for profit company) in 2008 to operate retail payments and settlement systems in India. The NPCI developed a Unified Payments Interface (UPI) to facilitate instant digital settlement of interbank peer to peer (P2P) and Person to Merchant (P2M) payments. UPI is an Aadhar enabled mobile based interface, available for free to all the citizens and merchants in India. NPCI also developed the BHIM mobile App and Bharat Bill payment system.

This makes the Indian digital payment infrastructure, one of the best in the world. Millions of small and marginal merchants make billions of UPI transactions, to transform the Indian economy from a cash driven economy to a digital banking society.

NPCI established the National Automated Clearing House (NACH) to integrate all regional electronic clearing services into one national payment system.

NPCI has also enabled a national electronic toll collection through FASTag; National Financial Switch (Network of shared ATMs); RuPay Card, IMPS and Bharat QR etc.,

NPCI was conceived and established in 2008 during the UPA government. However it has taken a lot of new initiatives under the incumbent NDA government.

Expansion and modernization of highways

The Congress government led by P. V. Narasimha Rao, operationalized National Highways Authority of India (NHAI) as an autonomous agency in 1995 to build and manage the network of national highways in India.

The NDA-1 government led by A. B. Vajpayee assigned the task of implementing the National Highways Development Project (NHDP) to NHAI in 2000. NHAI has undertaken and executed several key projects to remarkably improve the interstate surface transport ecosystem in the country. Golden Quadrilateral (20012012), an ambitious project of NHAI under NHDP has become the backbone of national trade & commerce. Besides, NHAI has commissioned North South and East West corridor projects to connect major Indian cities.

NHAI model has inspired most state governments to undertake major highway and express projects in public and private sector to improve road infrastructure and intra state and interstate connectivity.

Best standards in defense and space technology

Indian Space Research Organization (ISRO, established 1969) and Defense Research and Development Organization (DRDO, established 1958) have been two core institutions to make India a major player in the global space and defense technology arena.

ISRO has placed India in the top 5 countries in terms of space capabilities. The commercial satellite launch capabilities of ISRO are now recognized world over. The indigenous GPS tracking system GAGAN, developed by ISRO, has put India in the global elite club.

DRDO has developed a potent nuclear deterrent to safeguard geopolitical interests of India, which is surrounded by rather hostile neighbors. DRDO is a key functionary in the plan to make India self-reliant in defense production and technology. DRDO has also done remarkable development work in the field of chemical engineering and medical science.

BrahMos, developed jointly by DRDO and Mashinostroyeniya of Russia, is the fastest supersonic cruise missile in the world. A hypersonic version of the missile is also under development.

BrahMos Aerospace, the JV between DRDO and Mashinostroyeniya, was formed in 1998. It tested an Air-launched variant of BrahMos in 2012; which was inducted in service in 2019. In 2016 India became a member of the Missile Technology Control Regime(MTCR), enabling India to develop missiles jointly with other members.

We may see India becoming a notable exporter of missiles and missile technology in future.

Democratization of digital commerce (ONDC)

The Department for Promotion of Industry and Internal Trade (DPIIT), of Government of India has recently formed a Not for Profit company named Open Network for Digital Commerce (ONDC).

ONDC shall be developing an open network for e-commerce in India. It is expected to be an UPI equivalent for digital commerce. The idea is to end the monopoly and manipulative practices of some large ecommerce players and democratize the ecommerce market by providing an equal access to all the participants. Like what UPI did with the payments, ONDC could revolutionize the digital commerce market in India, providing huge impetus to growth.

ONDC shall lead to democratization, decentralization, digitalization and standardization of the entire digital commerce value chain, increasing the efficiency and access manifold.

MNREGA (started in 2009) also deserves special mention in this context. The rural employment scheme has provided one of the best templates for implementing social security and uniform basic income (UBI) in the country. It is widely recognized that this program has saved millions of families in distress, especially during the periods of crisis such as drought, pandemic, cyclone etc. In the past one decade, the program has been admirably used to build rural assets like roads, water bodies, schools, health centers, etc.

About the constraints, I shall discuss in a later post.