Mandate 2014 – Gujarat: Alcohol, Indebtedness and an Avatar

We started the second phase of our “India Journey” from Gujarat. Our team travelled to 11 districts across South, Central and Saurashtra regions of Gujarat.

In our numerous interactions with people in past year or so, we found that mere mention of word “Gujarat” is enough to instigate a debate. Not surprisingly, most urbanites across the country have strong views on Gujarat. Though the opinion is divided on the candidature of Narendra Modi for PMship, majority of people outside Gujarat have a positive perception about the Gujarat growth model. We therefore kept our focus on the socio-economic conditions of Gujarat and what that could mean for India in coming years. Politics inevitably intruded in discussions.

The key findings of our Gujarat trip were as follows:

(a)   The most striking observation was the huge socio-economic disparities especially in semi-urban and rural areas.

People suggested that a large part of prosperity in past two decades has come primarily from two sources 

(a) economic boom and bust in developed world that has seen substantial rise in remittances from prosperous overseas Gujarati community; and (b) Narmada water that has resulted in higher agriculture growth and astronomical rise in land prices.

Consequently, it has not led to commensurate employment growth and therefore a large part of the population has not participated in the growth.

(b)   However, the real surprise was that the rising disparities in Gujarat are motivating the underprivileged people to do well, unlike Karnataka and Maharashtra where it is resulting in disillusionment and unrest. The key difference in our view is the leadership.

(c)   Due to enterprising spirit, the household leverage, especially amongst middle and lower middle class is high in Gujarat. “Cash lending” market is vibrant and exploitive.

(d)   Most in Rural areas, believed that their Chief Minister is blessed. More than two third believed that the change in weather pattern (more rains, less dust storms) is due to CM only. So much so for the “Gujarat Economic Model”! Exit of Modi from Gujarat may not be seen favorably by rural voters.

(e)   We discovered that alcohol business in the state is managed by one of the best supply chains in the country. Global universities which found Mumbai Dabba wala model interesting would be surprised by this, perhaps one of the largest undercover supply chains in the world. RBI trying to curb gold import may also take a lesson from this.

(f)     The communal divide is deep in almost all areas. Contrary to popular perception, people believe that but for Modi, the state would have had seen many more riots.

Next week we shall travel to Rajasthan and UP.

Read impressions of Phase I of the tour:

Anxiously Indifferent

Karnataka & Delhi

Goa, Punjab and Haryana

Corruption Matters, Alas! Not the way it should

Reforms ain’t mean the same for Delhi and Sangli

Also See

20 Program: Agenda for 2014 election

Modi Vs. Rahul

Mr. Governor you are not worried about CAD

As per the latest policy statement issued by RBI “By far the biggest risk to the economy stems from the CAD”. The central bank believes that “A large CAD, appreciably above the sustainable level year after year, will put pressure on servicing of external liabilities.” RBI finds that the large CAD is a risk by itself and “its financing exposes the economy to the risk of sudden stop and reversal of capital flows”.

Although the CAD could be financed last year because of easy liquidity conditions in the global system, RBI believes that the global liquidity situation could quickly alter for emerging and developing economies (EDEs), including India, for two reasons. First, the outlook for advanced economies (AE) remains uncertain, and even if there may be no event shocks, there could well be process shocks which could result in capital outflows from EDEs. Second, with quantitative easing (QE), AE central banks are in uncharted territory with considerable uncertainty about the trajectory of recovery and the calibration of QE. Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardising our macro-financial stability”.

In our view, RBI might be wrong on all counts here.

(a)   CAD arising from trade deficit is never a risk in itself. The excess of imports over exports essentially means that our economy is doing better than the other economies who import from us.

In fact, in the present instance RBI itself could be largely responsible for higher CAD. Higher imports theoretically suggest higher demand for goods and services and hence make a strong case for investment demand so that supply side could be augmented. RBI himself has admitted in the policy statement that the economy faces serious bottlenecks on supply side, resulting in sticky high inflation.

RBI by persisting with its “inflation over growth” policy has maintained interest rates at high levels – resulting in collapse of investment cycle and rise in demand for gold.

(b)   The uncertainty in advanced economies is an argument for the easy liquidity conditions and continuation of QE and not against it. Whereas return of growth to these economies will lead to higher export demand.

Instead of bothering about one or two quarters, RBI should, in our view, focus on exploiting the easy liquidity conditions and let the Indian corporates and banks borrow more at cheaper rates to augment supply.

(c)   The government has repeatedly increased the FII debt limit in past couple of years. These inflows, though not huge, could cause severe damage in case of a shock event, as panic selling inevitably would lead to sharp rise in spreads and yields.

A sharp cut in rates (100-150bps) and buying of US$100bn by RBI may help the economy more at this juncture than worrying about CAD and constricting investment initiatives. Inflation should come down with rise in supply and not by curtailing demand. After all we are not a communist country of 1970s.  (Also read Why this kolaveri over current account deficit)

Fill the bucket before tap dries

Last week we highlighted some global trends (see here) that could have substantial impact the Indian economy and markets in short to midterm.

One of the top global trends of present times is the “easy money”. It is widely believed that the liquidity conditions are likely to remain comfortable at least till end of 2014. Besides, the central bankers have effectively ensured that a systemic collapse like the one happened post Lehman in 2008 does not recur. Episodes of uncertainty and instability in Greece (2010-11), Italy, Spain (2012) and Cyprus recently have demonstrated that financial markets are much more stable and sanguine now, as compared to 2008-09.

Unilever Plc. has taken advantage of easy and cheap money to increase stake in its high yielding Indian subsidiary. US large corporations that had been sitting on hoards of cash are now aggressively looking for opportunities. U.S. deal activity surged 62 percent during the first quarter of 2013, bolstered by a series of deals valued at over $5 billion (see).

The Indian government, banks and corporates need to take cognizance of this stability and take some risk to benefit from the easy money. In our view, the political environment is holding back lots of initiatives. We might see “cash liquidation” and “leveraging” process accelerating post next general election.

The beneficiaries from the trend may include – (a) large cash owners; (b) good asset owners with stretched balance sheets and (c) strong balance sheets that can be leveraged further and (d) mid and small sized strong businesses which are scalable – especially where the promoters’’ stake is too high or too low.

The second trend that we need to watch closely is the re-emergence of Japan as an economic power. In our view, Indo-Japan ties should see substantial enhancement in coming years both at economic as well as strategic level. A revival of Japanese economy will most likely coincide with rise in geo-political tension especially with China and North Korea. Complete withdrawal of US forces from Afghanistan after Iraq would also mean higher instability at Indian borders. Indo-Japanese cooperation may become a key to stability in the region in coming decade.

We have seen some indicators of strengthening of ties in commitments from Daiichi, Toyota, Suzuki, Honda, Nomura, DoComo etc. We shall be watching closely for companies, sectors and businesses that may see higher Japanese interest in coming years.

A change in “austerity” mechanism in Europe might lead to a sudden spurt in export demand, which had been languishing since past five years. Watch out for some key exporters, especially in IT and pharma space.

A stronger Chinese Yuan would also create opportunities for some Indian competitors in export market.

Our suggested core portfolio for FY14 does recognize these trends; though we continue to maintain our view that the market may continue to selectively participate in global equity rally, while bothering about the domestic political conditions, we see a definite bottom being created in next 12months. 

How market reacts to a rate cut?

In past there is virtually no trend as to how market reacts to a rate cut or hike.

However, the only time the rate cut happened after a 5% or more market rally in the preceding month was in January 2009. The market fell 3% in the month following the rate cut.

Date	Repo cut	1Day Return	1M before	1M After
30-Apr-01	-0.25	3%	-4%	6%
7-Jun-01	-0.25	0%	-3%	-4%
28-Mar-02	-0.5	0%	-3%	-3%
12-Nov-02	-0.5	0%	-2%	12%
7-Mar-03	-0.4	-1%	-2%	0%
19-Mar-03	-0.1	1%	-7%	-4%
31-Mar-04	-1	1%	-5%	1%
20-Oct-08	-1	2%	-29%	-14%
3-Nov-08	-0.5	6%	-17%	-15%
8-Dec-08	-1	2%	-15%	5%
5-Jan-09	-1	0%	5%	-3%
5-Mar-09	-0.5	-3%	-12%	26%
21-Apr-09	-0.25	-1%	17%	29%
17-Apr-12	-0.5	1%	-1%	-8%
29-Jan-13	-0.25	-1%	3%	-6%
19-Mar-13	-0.25	-1%	-2%	0%
3-May-13	?	?	5%	?

Date	Repo hike	1Day Return	1M before	1M After
26-Oct-05	0.25	0%	-6%	11%
24-Jan-06	0.25	1%	4%	7%
8-Jun-06	0.25	-5%	-22%	13%
25-Jul-06	0.25	2%	2%	11%
31-Oct-06	0.25	0%	5%	6%
31-Jan-07	0.25	-1%	2%	-8%
31-Mar-07	0.25	0%	1%	6%
12-Jun-08	0.25	0%	-9%	-12%
25-Jun-08	0.5	1%	-14%	4%
30-Jul-08	0.5	4%	6%	2%
19-Mar-10	0.25	0%	8%	0%
20-Apr-10	0.25	0%	0%	-6%
2-Jul-10	0.25	4%	-2%	4%
27-Jul-10	0.25	0%	1%	1%
16-Sep-10	0.25	0%	8%	4%
2-Nov-10	0.25	0%	-1%	-2%
25-Jan-11	0.25	-1%	-4%	-7%
17-Mar-11	0.25	-1%	1%	7%
3-May-11	0.5	-2%	-4%	0%
16-Jun-11	0.25	-1%	0%	3%
26-Jul-11	0.5	-2%	2%	-13%
16-Sep-11	0.25	0%	0%	1%
25-Oct-11	0.25	2%	6%	-8%

2013#GLOBALMARKETS

The sharp equity rally in developed markets, though not completely surprising has surpassed the expectations of many. Indian markets have also shown resilience, despite serious political and economic concerns.

The following top 10 global trends in particular have implications for Indian markets in next few months:

1.       The central bankers’ “Put” is proving to be more effective than most thought previously. It passed the Cyprus test with commendable grades. As things stand today, we are likely to see more “easing” than “tightening” in next 12months.

2.       Contrary to some forecast, the deluge of liquidity caused by unprecedented monetary easing in past five years has failed to create inflation in the global commodity. To the contrary, the decade old bull market in commodities, including energy, seems have ended. Most industrial metals have already slipped into bear market with sharp price corrections in past 4months.

3.       The decade old bull market in precious metals has also ended. Though jury is still out on whether the gold has slipped into a secular bear market, the chances of a sharp up move beyond YTD 2013 highs appear slim.

4.       The developed equity markets have run up led from front by the big two - US and Japan. Many emerging markets have also followed into their footsteps. At the same time bond markets also continue to remains strong. The appetite for gilt has not diminished despite all the fiscal and credit concerns. The “Great Rotation” appears to have terminated prematurely – much like the way “Decoupling” did in 2008-09.

5.       Audacious “Abenomics” in Japan seems to be the defining trend for currency market for the year. A successful achievement of 2% inflation target may bring the global growth back to its pre Lehman trajectory.

6.       Chinese economy is likely stabilizing in lower orbit of 7-8% growth for the moment. The surplus manufacturing capacities created in past decade would continue to feed the additional demand emanating from emerging world for next decade or so.

7.       The argument against “Austerity” appears prevailing and all those anti-Keynesian voices appear to be fading.

8.       Political stability is gradually returning to Europe, with a working Italian government in place.

9.       Middle East continues to be the hot spot. Weaker oil economies may further frustrate the extremists. Complete US withdrawal from Afghanistan would be the first real test.

10.   Pakistan elections are critical. Failure of democratic process at this stage may plunge the state and the region into deep trouble. Though the early omen are good.

On Monday, 6^th May we shall outline our views about the key trends in Indian markets with special reference to the aforesaid global trends.

Four short stories

1.     Follow the leader

The number of India skeptics has grown sharply in past one year. Numerous reports have been written to establish that the last pillar of support, viz., consumption, is likely falling rather sharply and the economy will fail to break the vicious cycle. The optimists were in minority and lacked conviction. Very few of them actually walked their bullish talk.

Unilever Plc has enlightened the path for everyone. We believe that the FMCG giant with over 100yrs’ experience of working across the globe certainly knows more than the analysts who cannot tell difference between a shampoo and hair conditioner.

We shall go by Unilever’s assessment of India’s consumption story and stay overweight for next decade at the least.

2.     Do not follow the leader

The Supreme Court today indirectly hinted that the country’s leadership may be exercising undue influence on the national investigating agency CBI. It had been our consistent view that most of the problem currently afflicting the country may be stemming from a weaker leadership. SC’s censure today, in context of coal block allocation scam, confirms our belief.

Leadership is essentially about leading – assuming responsibility, showing the way. Leadership is not about making excuses. Following a weak leader will only hold you back and destroy your character.

3.     Austerity is a spring phenomenon

Since past couple of week the global economist and banking communities are intensely debating the relevance of austerity in a declining economy.

The consensus that is emerging appears, and rightly so, to be favoring postponement of austerity program to better times.

In our view, austerity works best when going is good. You maintain a balance between your earnings and expenditure and save some for the bad periods. If you have not saved enough for bad period and a medical emergency befalls upon you, you do not become austere at that point in time. You beg, borrow and steal to save your life. Once back on your feet, you can repay the debt and practice austerity for future. If you die, 

well….. you die.

Currently, the global economy is in ICU. Not a good time to save.

4.     Crisis of confidence for Oracles

In past three weeks most global banks have issued reports suggesting sudden demise of gold bull market.

The enthusiasm of gold consumers seen across the world however suggests that these Oracles no longer enjoy the confidence they used to prior to 2009.

One of the big 4 was however quick to retract its bearish call. Others are still to follow. But who cares!

Mandate 2014 – Reforms ain’t mean same for Delhi and Sangli

Scooty (e.g. Activa) and mobile phone have empowered women more than any policy initiative or legislation.

People were least sure as to how reform in power sector, insurance, banking, financial markets, FDI in retail trade, Direct Tax Code, sugar decontrol, highways development, disinvestment etc. would impact their lives. 

Most traders in all states except Goa were quite wary of the GST.

During our road trip to six states including the poll bound states of Karnataka and Delhi, we tried to assess the views of the common people about economic reforms – relevance, need, direction, perceived benefits etc.

We discussed with numerous people to find out (a) what has happened in past decade or so that has made difference to their lives (for good or worse); and (b) what would they want the government to do immediately to improve their lives.

Without leading them to any specific direction, we kept the discussions primarily centered around their day to day life and future of their children.

The key highlights of the feedback we received from people were quite reassuring, though not surprisingly.

Key highlights:

(a)   We found that the social sector schemes have impacted the people lives more than the economic reforms, especially in rural areas.

Despite frequent news of irregularities, people overwhelmingly suggested that schemes like mid day meal, girl child education, NRHM and MNREGA have positively impacted more lives in almost all the states.

Financial inclusion (SHG, MFI, Banking Correspondents) was the only economic initiative they could cite as having impacted their lives directly.

(b)   Most in Maharashtra, Karnataka, and Punjab believed that the infrastructure situation has worsened over past decade. People in Haryana, Delhi and Goa suggested that infrastructure has improved in past decade.

Delhites however felt that it is still inadequate. Public health and education was commonly suggested as the “Worst in the world”.

(c)   PMGSY (the flagship rural roads scheme) was widely suggested as the game changer in Maharashtra and Karnataka. (From our past experience we know that same is the case with a majority of the states.)

(d)   Mobile connectivity was expectedly cited as the best technological evolution that impacted the rural lives.

(e)   In Delhi most of the people we spoke to cited metro rail as the boon that has improved their life significantly.

(f)     In rural Maharashtra and Karnataka, obtaining drinking water consumes 6-8 man hours. Electricity is still inadequate. We estimate focusing on these two could enhance productivity and income potential in rural and semi-urban areas substantially.

(g)   We felt that strictly implemented prohibition legislation would bring more prosperity to Haryana and Punjab than any economic reform.

(h)   Most urban residents felt that education and health reforms are more critical than economic reforms.

In the next phase of our journey we shall be covering Gujarat, Rajasthan, UP, MP, Chhattisgarh, Bihar, Jharkhand and some parts of Maharashtra.

Mandate 2014 – Corruption matters. Alas! Not the way it should

Corruption does matter positively to us, as it helps in circumvent the law and get our way. Not the way crusader like Anna Hazare would like it to matter.

No one minds corruption if his child gets admission in a good school/college through backdoor; if he gets his passport without waiting in queue; if he can construct an additional room in his house without permission; if he could encroach upon the pavement in front of his house/shop; if he can dig a deeper borewell in his house or put a powerful motor in his water supply line when his neighbors’ taps go dry.

Most office goers in Delhi were happy with the flyovers constructed during the CWG. They have long forgotten and forgiven Kalmadi and other people responsible for putting the nation to shame.

Once the home minister of a state visited the Jail on the Independence Day. After finishing his speech, he asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and quality of food. Few wanted new blankets. Some daring one asked for a TV in the library. No convict asked for freedom. No under-trial requested that his/her trial may be speeded up, or he/she be released on bail as the trail proceedings had procrastinated beyond the maximum sentence they would face if convicted. The minister granted their wishes and won their adulation.

Last week two leading media channels broadcasted the findings of their respective opinion polls on Karnataka assembly elections. The finding of these polls prima facie do not match with the assessment we made while we toured across nine districts of the state a week ago, as part of our nationwide road trip to feel the socio-economic pulse of the nation.

Both the polls find that the corruption is the primary concern of people. Paradoxically, both the polls see large support for the former Chief Minister B. S. Yeddyruppa, widely considered as the epitome of corruption outside the state of Karnataka.

In our numerous informal interactions with people in past one month we found that at first instance people do express corruption as their primary concern. However, on scratching the surface a little bit, we found corruption has permeated deep in the DNA of people. The adaptation is so complete that very few (we found no one) would not want to use the means which are ethically or morally undesirable for their convenience.

For example, we found most would vote for a hard criminal, if the candidate is known to them personally, or if they feel that he would help them in getting their constitutional rights like license to work, school admission for kids, passport, BPL card etc. Everyone in a midsized town admitted that they would feel privileged if they “knew” local municipality clerk, SI at local police station or even a bus conductor who will give them free ride whenever they wanted to visit the city.

Last weekend, we happen to attend a meeting of a housing society’s members in posh Bengaluru location with the local candidate of a national party. The only request these educated upper middle class people made to this politician was to “provide a right turn in front of the society gate, as they have to go 500mtrs ahead to take a U turn”. No matter if this “right turn” would be very wrong as it would cause huge traffic disruptions.  No one asked him to give an undertaking that he would not encourage corruption, if elected.

In our trip to Delhi we visited a colony Patel Nagar in central Delhi. We were shocked to find that over 95% houses in the locality have hazardous illegal construction. Many studio apartments originally allotted to the refugees from Pakistan in 1947, have been converted into 4-5 bedroom apartments. All pavements have been appropriated by the residents and there was no room to walk even on the road due to illegal parking of vehicles. If someone suggests that corruption is a concern for these people – he is grossly mistaken in our view. 

Mandate 2014 – beyond white sand beaches and mustard fields

Besides Delhi and Karnataka, we covered the states of Goa, Maharashtra, Punjab and Haryana in the first phase of our nationwide survey.

Goa

The best part of the journey so far has been the trip to Goa. We mostly focused on rural Goa, away from white sand beaches and luxury resorts. After an extensive 3day trip covering over 1000kms, we discovered that the popular debate on sustainable development model might be completely misplaced. While we often hear about the Gujarat vs. Bihar model of development, in our view Goa indeed presents a good example of sustainable inclusive development. We found people generally happy; infrastructure excellent; education system exemplary; police surprisingly courteous, friendly, honest and firm on the compliance; communities in harmony; and growth inclusive.

Insofar as the political mood is concerned, for a change, most people were found satisfied with the establishment. BJP should be advised to showcase Goa more prominently in the national discourse, despite its tiny size.

Haryana & Punjab

We avoided NH1 in our visit to Punjab and Haryana covering 9districts besides Chandigarh. The key highlights of the trip were as follows:

(a)   In Haryana most people were critical of the political establishment, but would not do anything to bring a change. Alcoholism is a major concern both in urban as well as rural areas.

Sex ratio and Khap dictates were not found to be a real concern. The gender discrimination was absolute in rural areas and substantial in urban areas.

Traders, SME and real estate developers/investors were found to be financially stressed. Farmers in general were buoyant.

Corruption was not found to be a real concern. Congress continues to be the most preferred party in the current circumstance.

(b)    Punjab appeared most impacted by the global slowdown. The cases of reverse immigration from Europe have increased in past year or so; though the youth still aspire to migrate to West.

Alcoholism is a major concern both in urban as well as rural areas. The gender discrimination remains high in rural areas, urban areas are seeing remarkable improvement.

Corruption is not a real concern in Punjab also. Unemployment is high and rising. Paradoxically labor availability is a major concern with all three sectors – farm, construction and manufacturing. SMEs, traders are financially stressed. Investment in farm sector is decelerating fast.

Middle classes and workers are mostly indifferent to political establishment. This might be a bad news for Congress and BJP both.

..…to be continued on 29^th April

Mandate 2014 – Karnataka and Delhi

• BJP appears losing in Karnataka, but there is no Congress wave. BSY appears headed towards political oblivion ala Kalyan Singh in UP.
• Delhi will be a close contest between BJP and Congress. BSP could surprise with 3-5 seats in 70member assembly.
• Drinking water is main problem in both states.
• Rise in unemployment and crime due to mining ban and draught are real concern in Karnataka.
• CWG scam/shame appears mostly forgotten/ forgiven.
• Women security, inflation and corruption are not real concerns for the people in Delhi despite media blitzkrieg.

In past four weeks our team travelled extensively in the poll bound states of Karnataka and Delhi. While these two states have a little in common, the indifference of common people towards political establishment was too stark. The corruption, contrary to popular perception, was not a real concern though in Delhi it was major topic of discussion. The key points noted during these interactions and general observations were as follows:

Karnataka

We travelled to eight districts in north and central Karnataka viz. Belgaum, Uttar Kannad, Dharwar, Bagalkot, Bijapr, Gulbarga, Gadag and Bellary and spoke to over 300 individuals and few groups of people from different walks.

(a)   The festive look usually associated with election was completely missing. People were totally indifferent to political parties and establishment. Corruption is an issue that does not bother many people.

(b)   Mining ban and draught has caused substantial rise in unemployment, especially in rural areas, and crime in urban areas. The economic stress was too conspicuous to ignore even in remotest of places. 28km stretch of NH4A from Ramnagar towards Belgaum city which had only potholes and virtually no road aptly reflected the mood of the people. Electricity and drinking water are two major concerns for women.

(c)   The consumer and business confidence remains low and may not improve substantially post elections.

(d)   Insofar as political preference is concerned, BJP appeared losing but there was no wave for Congress. Former CM B. S. Yeddyurappa appear headed towards political oblivion, ala Kalyan Singh in UP.

Delhi

(a)   Though elections are few months away, Delhi is already buzzing. People are discussing only politics and little else.

(b)   Arvind Kejariwal is a topic of discussion but hardly considered a political force to reckon with. Large scams like 2G, Coalgate etc. do not excite people. People are mostly satisfied with the infrastructure created during CWG and largely appear to have forgiven the scam/shame part.

(c)   BJP leadership is highly charged up but workers on the ground are completely disenchanted. Absence of strong local leadership is impacting the morale. Congress also remains a divided house. BSP is making further inroads into East, North East and South Delhi. In our view, it will be a close contest and BSP with 3-5 seats could be a critical force in 70member assembly. Announcing Modi a PM candidate may help BJP massively in Delhi election at least, as Gujarat CM is found to be extremely popular amongst youth and middle classes of Urban Delhi.

(d)   Drinking water is a major concern in many pockets. Women safety, corruption etc. were not found to be real concerns.

(e)   Real estate developers, auto dealers, commodity traders and SMEs are under tremendous financial stress. Inflation has impacted consumption patterns though it may not be an election issue..…to be continued on 26^th April