Vijay Kumar Gaba: PLI

Showing posts with label PLI. Show all posts

Wednesday, February 7, 2024

Shanghai to Ayodhya

Shri Ram Janmabhoomi Teerth Kshetra (SRJBTKshetra), a public trust, is building a grand temple dedicated to Lord Rama at his birthplace in Ayodhya of Uttar Pradesh. Recently, the consecration ceremony of Lord Rama’s idol at the temple was performed with great fervor. To facilitate the devotees visiting the temple, the Government of Uttar Pradesh and the Central Government are investing in developing civil infrastructure in and around the Ayodhya town. Reportedly, the Master Plan 2031 envisages the redevelopment of Ayodhya to be completed over 10 years with an investment of over Rs 85,000 crore.

This is expected to establish Ayodhya town prominently on the world tourist map. It is pertinent to note that just three years ago, Ayodhya was a small municipal town with a population of approximately 70000 with poor civil infrastructure. Impressed by the government’s investment in Ayodhya’s civil infrastructure, Global brokerage firm Jefferies commented in a report, “The grand opening of the Ram temple at Ayodhya by PM Modi on Jan 22nd, is a big religious event. It also comes with a large economic impact as India gets a new tourist spot which could attract over 50 million tourists per year. An Rs 85,000-crore makeover (new airport, revamped railway station, township, improved road connectivity, etc.) will likely drive a multiplier effect with new hotels & other economic activities. It can also set a template for infra-driven growth for tourism”.

Incidentally, it is not Ayodhya alone. This is, apparently, the template of development chosen by the government. In the past few years, the government’s emphasis has been on the development of infrastructure, especially logistic infrastructure, and encouraging private enterprises to build manufacturing capacities taking advantage of improved infrastructure and logistic facilities.

It is pertinent to note that the contribution of manufacturing to India’s economy peaked in the mid-1990s and has been on the decline since then. In the year 2022, manufacturing contributed 13.3% to India’s GDP, the lowest level since 1967.

Earlier some East Asian countries, and lately China, used this strategy to accelerate their economic growth with mixed outcomes. Though years of high growth ensured a decent quality of life for their citizens, none has been able to become a developed economy. The high growth phase could not be sustained even for two decades. The economies are now mostly growing below par. In recent years, Chinese economic growth has also been decelerating. The authorities have clearly shown a tendency to shift focus on domestic consumption to support the economy.

The Indian economy has mostly been dominated by services on the supply side and consumption on the demand side. Now there is a concerted effort to change the model to manufacturing and investment-led growth.

The questions that need to be examined in this context are:

· Given the fact that the Indian economy may probably be in its last decade of demographic dividend, is it desirable to cut spending on building social infrastructure, reduce the education and healthcare budget, and invest in long gestation infra projects?

· Agricultural sector contribution to India’s GDP has been stagnating around 16-17% for a long time. The proportion of the population directly dependent on this sector is close to 44%. Would it not be better to invest in developing agro-technology, infrastructure, and logistics than focusing on manufacturing (with much lower employment intensity now) to make growth sustainable, faster, and equitable?

· What is the probability that in one decade India can meaningfully increase its share in global manufactured trade? Curtailing domestic consumption to augment exports may be a high-risk strategy at this point in India’s economic growth journey. Of course, if it is successful, the rewards may be exciting. But the odds do not look great at this point.

· Self-reliance in defense production, full energy security, and net exporter status in manufactured electronics, are three key expected outcomes of the current policy direction. Healthcare, higher education, advanced technology, water, urban planning, etc. are some of the areas that are getting lower priority than required. Failure to achieve the outcomes could prove to be exponentially disastrous.

The point is that this midway diversion in the growth strategy could be fraught with significant risk. Our social, political, cultural, and economic structures are not the same as China’s. Adopting the Chinese strategy of economic growth and development may neither be desirable nor effective, in my view.

Wednesday, January 17, 2024

Decoupling from China

Yesterday’s post (China+1...rhetoric apart) evoked a rather aggressive response from some readers. They strongly disagree with my skepticism about China+1 strategy, at least in the short term (5-7yrs). Some of them claim to have already witnessed the stupendous results of this strategy for many Indian corporations.

Since my posts are mostly my personal views and observations, criticism does not affect me. I usually politely agree to disagree. I would thus avoid responding to criticism or the views to the contrary. Nonetheless, I may reemphasize my views as follows:

· In the short-term (5-7 yrs) any business or investment strategy that assumes substantial decoupling of China from India’s trade specifically, and Western countries in general, may not be successful.

· Presently, China+1 trade is confined to a few businesses (not sectors), where (i) China has explicitly implemented capacity shutdown, (ii) there are serious IPR violations or data security threats, (iii) Innovators have developed new markets and find it profitable to produce a part of overall production close to the new market, (iv) local government has offered meaningful incentives for building local capacities, and/or (v) a local partner has offered better terms/infrastructure as compared to the Chinese counterpart. All these situations are very normal business propositions and have little to do with geopolitics.

· Increase in tariffs by the US post 2017 on the imports from China has reduced the US imports from China by ~5% (from 21.6% in 2017 to 16.3% in 2022). However, it has not changed the US dependence on China, as the new import partners have meaningfully increased their trade with China. (Read more)

· In fact, China’s trade surplus with proxy countries (countries used by many countries to indirectly import from China) has increased meaningfully, implying some rerouting of trade.

· Insofar as geopolitics is concerned, it is important to note that China’s trade surplus with India and Western countries has not shown any meaningful change post Covid. Overall, China’s goods trade surplus has more than doubled since the pandemic, going from $400 billion a year to $900 billion (read more).

Wednesday, June 14, 2023

Staying put on the straight road

“No one was ever lost on a straight road.”

Last time I wrote this was about 13 months ago when the Nifty was around 16000. The benchmark has gained over 17% since then. PSU Banks, FMCG, and Automobile sectors, which were not exactly favorites of market participants at that point in time, have been the top performers since then. The favorites of that time, e.g., Metals, Infrastructure, manufacturing, and digital have mostly performed in line with the benchmark or underperformed. I find it appropriate to reiterate and reemphasize it, to motivate me to stay true to my investment strategy and not get distracted by the market noise, buoyant arguments and gravity defying moves in a number of stocks.

The conventional wisdom guides that roads are meant for moving forward and trampolines are meant to get momentary high without going anywhere. Usually, the chances of reaching the planned destination are highest if the traveler takes a straight road. The chances are the least if they ride a trampoline. Walking on ropes may sometimes give you limited success.

Investors who jump up and down with every bit of news are only likely to lose their vital energy and time without moving an inch forward. Reacting instantaneously to every monthly or quarterly data, every policy proposal, corporate announcement, market rumor are some examples of circuitous roads or short cuts that usually lead us nowhere.

Interacting with numerous market participants, I discovered that presently very few people are interested in taking the straight road; which is an unfortunate situation.

Taking the straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability); generating strong cash flows; maintaining sustainable gearing; timely adapting to the emerging technology and market trends; and most important consistently enhancing the shareholders’ value. These businesses need necessarily not be fashionable or be in the “hot sectors”.

In the Indian context, finding a straight road is rather easy for investors. Of course, there are different viewpoints and strategies; having their own merits and inadequacies. It is possible that the outcome is different for various investors who adopt different strategies or take a different approach to invest in India.

For example, consider the case of investment in the infrastructure sector in India. Prima facie, it looks like a rather simple strategy. In an infrastructure deficient country like India, the case for investment in this sector should be rather simple and straightforward. But it has not been the case in the past 20 years. In fact, Infrastructure has made money only for few in the past couple of decades; excluding of course the unscrupulous politicians.

Infrastructure inadequacy of India has been one of the most common investment themes for the past few decades. However, more people may have destroyed their wealth by investing in infrastructure businesses or stocks of infrastructure companies than anything else. Especially in the past two decades, that have seen phenomenal development in infrastructure capacity building, the value destruction for investors in this sector has been equally remarkable.

There is no dearth of infrastructure builders who have become bankrupt with near total erosion of investors’ wealth who invested in their businesses. JPA Group, ADAG Group, Lanco, IL&FS, GVK, IVRCL, Gammon etc. are just a few examples. Their lenders, and the investors in their lenders, have also seen colossal collateral damage too.

The fallacy in this case lies in the fact that while everyone focused on the “need” for infrastructure, few cared about the “demand”.

Indubitably, the “need” for infrastructure, both social and physical, in India is tremendous. However, despite significant growth effort in the past two decades, and manifold rise in government support for the society, especially poor and farmers who happen to constitute over two third of India’s population, the “demand” for infrastructure may not have grown at equal pace.

The affordability and accessibility to basic amenities like roads, power, sanitation, education, health, transportation, housing etc., has improved a lot, but it still remains low. Frequent crisis in state electricity boards and other power utilities is a classic example of “need” and “demand” mismatch. As per a recent government admission almost one half of the population cannot afford to buy basic cereals at market price and therefore need to be subsidized. Less than one third of the adult population has access to some formal source of financing. Ever rising losses of state electricity boards and free electricity as one of the primary election promises, highlight incapacity or unwillingness of the people to pay for their power bills. The losses incurred by some of the most famous highway projects, e.g., Yamuna Expressway, highlights the low affordability to pay toll tax for using roads.

The optimism on the infrastructure sector in the decade of 2001-2010 might have been a consequence of overconfidence and indulgence of administration and corporates who sought to advance the demand for civic amenities to make abnormal profits. This was not only a classic case of capital misallocation, but also misgovernance by allowing a select few to take advantage of policy arbitrage. This had resulted in huge losses for investors, lenders, local bodies and eventually the central government also.

The investment in infrastructure companies’ stocks for a small investor is therefore a tight rope walk. They may achieve some success after a stressful balancing act to normalize the forces of greed and fear.

With over two third of the population struggling to meet two ends, all those statistics claiming “low per capita consumption or ownership” of metals, power, housing, personal vehicles, air travel etc. is nothing but a blind man holding the tail of the elephant. If we find per capita consumption of electricity of the population that has access to 24X7 electricity and can afford to pay full bill for this at the market rates, we may be in the top quartile of per capita electricity consumption. Similarly, if we take the income tax paying population as the denominator for air travel, India might figure in the top quartile of air travelers’ density globally.

The politics of “competitive majoritism” has also led to irrevocable government commitments towards profligate welfare spending. This has certainly provided some sustainable spending capability to the expansive bottom of the Indian population pyramid. This clearly indicates that the government finances are likely to remain under pressure for a protracted period. Therefore, in my view, capex and infrastructure themes may work sustainably in Indian markets only when necessary, corrections are carried out. Till then it is the trampoline ride that will continue to give investors momentary highs, without taking them much distance over the next decade.

The investors and traders, who jumped on this trampoline after listening to the enthusiastic budget speeches in 2022 and 2023 and read some really colorful presentations and research reports published by the government agencies and some private brokerages promising trillions of rupees in infrastructure spending, would understand the best, what I am trying to suggest here.

I am not planning any detour or adventure in my investment journey, enthused by the barrage of commentaries and reports about infrastructure spending and manufacturing boom (PLI, China+1 etc.). I shall stay put on the straight road that I took years ago.

Also read

Stay calm, avoid FOMO

Thursday, December 1, 2022

Need to think beyond obvious

I had a chance to meet a small group of seasoned market participants yesterday. The group included a couple of brokers, some investors, a banker and a few analysts and advisors. After exchanging pleasantries and going through the mundanity of “kya lagta hai?” (what’s happening in the market?), the discussion veered around “what could go wrong to make Nifty fall 20% from the present level”.

Not surprisingly, only one broker participant outrightly rejected the idea of a potential 20% correction in Nifty. He felt that the worst is over and it is going to be a blue sky scenario in 2023, with India continuing to lead the charge. None of the other participants was so sanguine, though.

The surprising part however was to note the participants’ arguments to support their “expectation” of a major correction in Nifty, sometime in the next 6 months. The usual suspects like global slowdown, inflation, geopolitics, valuation and technically overbought were cited by everyone. In fact I have also cited these obvious reasons in a few of my recent posts.

Some who are more active on social media reiterated the complicated Armageddon jargon; the doomsayers are spitting on their timelines. However, no participant appeared to be having their “own view” about the current market conditions and the direction it may take in the next 12 months.

To be honest, I was more focused on the snacks being served than the discussions. I did not want to be rude to the host by telling them that discussing media reports and sensational headlines does not make much sense. I would rather like to hear the personal views and opinions of the participants based on their experience, research, observations or their interactions with their other participants.

It is a common saying in the market parlance that the outcomes which are widely expected or spoken about, do seldom occur. I however did not want to use this maxim this time, since I also feel that we may see a material correction in the market in early part of 2023; even though I am not sure if the correction will happen because of the reasons most obvious to everyone. Since everyone is expecting fall of Swiss bank Credit Suisse, an actual failure may not bother the market beyond a few hours, I guess.

In my view, the correction in Indian markets may be triggered by the disappointment and accentuated by global problems. The disappoint may be driven by the factors like (i) the wide divergence in promise vs performance of the government; (ii) much less than expected gains from trends like China+1, Production Linked Incentives (PLI), capex; (iii) worsening of external account; and (iv) poor earnings growth; etc.

It is pertinent to note that Russian and Canadian oils are selling at US$52/bbl. Reportedly, in the current year we have bought huge quantities of crude oil from Russia at a steep discount to market rates. So far the savings have not reflected anywhere – current account, fiscal deficit, profitability of OMCs, pump price of fuel, or LPG price. Don’t you find it disappointing?

The most worrisome thing for markets (domestic as well as global) presently, in my view, is that the policymakers’ appear clueless about the solutions to the pressing problems of mistrust in political & financial systems; worsening demographics; and worsening climatic conditions.

Tuesday, May 18, 2021

Self-reliance is not limited to managing the current account

Self-Reliance (Atamnirbharta) has been one of the key policy objective of Indian government, especially during the second term of the incumbent prime minister. It is clarified that self-reliance does not connotes self-centred systems; rather it encompasses a concern for the whole world’s happiness, cooperation and peace.

The stated aim is to make the country and its citizens independent and self-reliant in all senses. The five primary focus area identified to achieve the objective of self-reliance are —

Economy — Quantum jumps in various growth parameters, not just incremental changes.

Infrastructure — Building infrastructure that represents modern India.

Systems — Making systems technology driven.

Demography — Making the population vibrant.

Demand — Realizing full potential of the power of demand.

A number of programs, schemes and incentives have been announced in past one year under the umbrella of Self-Reliant India, encompassing support to a variety of sectors like agriculture, MSME, manufacturing, housing, infrastructure building, and exports, etc.

From various documents and public speeches by the prime minister and his cabinet colleagues, it appears that the idea of self-reliance is still at the stage of developing a conceptual framework; even though a slew of schemes and incentives have already been placed under this umbrella. Defining this idea in terms of a robust conceptual framework may actually take few more years, given the extraordinary circumstances presented by the Covid19 pandemic, which may result in result in reprioritization of fiscal and monetary policy objectives.

There is little debate on the point that digitalization has to be at the core of any economic development and modernization plan for future. In this context, I find it pertinent to highlight some of the data from ‘Digital Economy Compass 2020”, published by statista group. The report, inter alia, highlights some of the key global markets and consumption trends that may sustain in post Covid19 world. It also mentions the key players in each evolving market segment.

The services like healthcare, fitness, learning, entertainment, gaming, 3D printing, contact tracing (bio metrics, travel, GPS, demographics, talent hunt, etc.), communication, financial services (payment gateway, money transfer, transactions), collaborative software development, cloud hosting, cybersecurity, business and manufacturing process automation have acquired larger part of the markets (consumption, investment, and development etc.)

Manufacturing processes are being increasingly dominated by artificial intelligence, robotics, internet of things, etc. Development of 5G ecosystem is another major area of growth in global economy. Blockchain technology has made a prominent place in global commerce ecosystem.

Global trade is overwhelmingly dominated by ecommerce. Last year Chinese ecoomerce giant Alibaba alone logged a total merchandise trade that exceeded GDP of all but 14 top nations in the world.

Work from home trend is likely to sustain for longer than presently expected. This is leading to higher demand for products and services like home automation, food delivery, gaming, streaming of music and video, home management services, fitness, e-dating, shared mobility etc.

All these trends are essentially leading to materially higher demand for electronic devices (phones, tablets, laptops, servers etc.) and semiconductor chips to be embedded in various appliances (washing machines, cars, alarm systems, automatic machines, smart TV, refrigerators etc.)

Software is essentially the fulcrum that supports this entire global digital ecosystem. There is a variety of software development services like enterprise software, system infrastructure software, application development, and productivity enhancement software, etc.

The point to note is that presently Indian capabilities in these spheres are limited. Only 4-5 Indian companies appear on global podium, but their participation is mostly limited to software services. In most other areas our capabilities and size are limited in global context. The government programs and schemes (e.g., production linked incentive for mobile manufacturing) are presently focusing on low end value addition (mostly component assembly and contract manufacturing). If India has to become self-reliant in the modern world, the focus has to be on joining the top league in global digital ecosystem. Manufacturing mobile phones and chemicals may help in little more than managing the current account.

Friday, January 29, 2021

Headlines need to be managed well

Besides other things one thing that the year 2020 has established is the need for global manufacturing to rebalance its over reliance on China. This need was being felt for past many years, but the following factored appeared to have reinforced this need in 2020:

(a) Major global economies like US, Japan and India took some aggressive tariffs and non-tariff measures to correct the imbalances in their trade with China.

(b) Pandemic induced mobility restrictions exposed the vulnerabilities in the global supply chain and prompted businesses to diversify their manufacturing more widely.

(c) Geopolitical aggression shown by Chinese establishment is now increasingly perceived as potent risk for global supply chain. Political unrest in Hong Kong has may have also embellished this perception.

A recent survey conducted by UBS highlighted that “70% in the China CFO survey and 86% in the US CFO survey said they had moved or plan to move a part of their production out.”

Amongst Asian countries, besides Vietnam, Taiwan, Japan, Korea and Thailand, India is seen one of the preferred country for relocation of manufacturing facilities. India is seen o have lowest manufacturing costs amongst peer, but some skepticism remains about the ecosystem and administrative hurdles. Despite a strong commitment of the top leadership to encourage manufacturing base in India, the progress on the administrative level is perceived rather slow. It is important to note that low labor cost does not necessarily lad to overall lower cost structure, if the overall ecosystem (regulation, taxes, logistics, infrastructure etc.) is not favorable for manufacturing.

The events of Winstron, Narsupura (Bengaluru, December 2020) and Delhi (Violent protests by farmers, January 2021) are not good omen for this though. Rejecting these events as mere local politically motivated events might be mistake best avoided; because we are already in the midst of transition. The decisions are being already taken in board meetings. No one can deny that sometimes a newspaper headlines on decision day might impact a 30-40yr plan.