There will be life beyond 16th May, no matter what

Thought for the day

“In every author let us distinguish the man from his works.”

—Voltaire (French, 1694-1778)

Word for the day

Wayfarer (n)

A traveler, especially on foot.

(Source: Dictionary.com)

Teaser for the day

For God sake, please do not believe “India is doomed without Modi”.

There will be life beyond 16th May, no matter what

After completion of poling on more than three fourth of the total Lok Sabha seats, the situation is as cloudy as it was couple of months back.

BJP and its PM candidate appear to have failed in winning over sizable minority votes, especially in the eastern parts of the country. Consequently, it appears that it might need support of more parties (inside or outside) to form a working government. A majority government purely on the basis of pre-poll alliance looks slightly difficult today; though not ruled out.

The Modi Euphoria in market is taking a breather, and correctly so. In my view, it was an undue credit to Mr. Modi. I feel the market rally in past few months is mostly a consequence of (a) global emerging market wave that lifted most risk assets globally including peripheral Europe bonds and not in demand commodities; and (b) some tough decisions taken by RBI and the incumbent government that make the fiscal and current account picture look pleasant. Hope of a stable government (sic. Modi led majority NDA government) has only alerted the fence sitters and checked the selling pressure from domestic investors.

Many market participants are trying to invoke the memories of crazy market move seen post election results in May 2009. I believe a similar result this time is unlikely for two reasons:

(a)   In 2009 Indian market had underperformed the global emerging markets in four months preceding the elections and most investors were underweight India due to political uncertainty. The entire underperformance was erased in just one trading session. But in 2014 Indian markets are performing in line with the global emerging markets and there is not much underperformance to recoup and global investors are mostly overweight India; and

(b)   In 2009 Indian government in coordination with global governments provided massive fiscal and monetary stimuli to support the economy adding almost 2% to GDP growth, whereas in 2014 we are witnessing a reverse trend – withdrawal of stimulus and fiscal tightening.

In my view therefore the best case post 16^th May is not as good as 2009. However, an outcome contrary to the expectation could lead to a material correction in near term as some fringe players stage a retreat and punters try to make some quick bucks.

I would reiterate that my strategy is completely independent of the poll outcome. I will be happy if we a majority government that can take some risk. However, I will not be disappointed if we get a working government that enjoys support of at least one of the key national party.

I strongly believe that our economy is at a stage where it cannot afford to stay dormant. Action has to start. And it will. The point is who we believe will be the driver. I firmly believe that it will be the Indian entrepreneurs with the help provided by better global demand environment. Many disagree. They feel it will be the new government. You decide for yourself.

Reconnecting with “the India story”

Thought for the day

“To insult someone we call him 'bestial. For deliberate cruelty and nature, 'human' might be the greater insult.”

— Isaac Asimov (American, 1920-1992

Word for the day

Bestial (adj)

Without reason or intelligence; brutal; inhuman.

(Source: Dictionary.com)

Teaser for the day

What’s this talk about first personality driven election in India.

Besides 2009, which was not a personality driven election?

Reconnecting with “the India story”

In India, post independence, major business cycles, and therefore market cycles, have been quintessentially led by important socio-political transitions. The present landscape of the country suggests that another socio-political transition is underway that could potentially lead to an economic transition in next few years.

In my view, the India story is primarily about ‘demographics’ and ‘sociopolitical transformation’. The economic growth is just a by-product.

I strongly believe that the disenchantment with “The India story” seen in past few years is primarily the consequence of omitting the socio-political transformation factor from the financial and economic analysis. Unfortunately, the “re-connect” of global investors that we are witnessing in the hope of a decisive leadership emerging post election also suffers from this oversight.

I am also convinced that the transition we that we may witness post 2014 elections will lead India’s metamorphosis into a more participative and globally competitive economy with a sustainable growth trajectory. A more transparent, accountable, inclusive and objective governance structure should change the socio-economic context, leading to significant changes in the business and market landscape.

In my view, the transition will largely be visible through emergence of strong federal governance structure leading to diminishing regional imbalances and abridged rural-urban divide (urbanization).

The burgeoning local aspirations; elimination of administrative discretions and consequentially undue arbitrary political patronage to businesses; better delivery mechanism through higher transparency and e-governance; larger and broader consumer base with better affordability and changes in global socio-economic order would largely catalyze the transition.

However, it is critical to understand that the transition to a more transparent, accountable, participative, globally competitive and sustainable growth environment could be painful in the short to medium term – for businesses and investors alike. Businesses, especially which do not have viable scale in a globally competitive scenario, or businessmen who are not competent enough to grow without administrative privileges or political patronage, shall stand to face extinction.

One big opportunity lies in identifying such businesses which have good quality unencumbered assets but would not be viable in the emerging globally competitive scenario. These businesses, in my view, should not be valued on a going concern basis. Many of these businesses would have invaluable resources (surplus land, access to water, rights to exploit natural resources for raw material purposes etc.) and rights like environmental clearance, technology licenses or market access.

The biggest opportunity however lies in the businesses that have attained global scales and adequately demonstrated the ability to grow in a globally competitive environment.

Gandhian Anna would do much better than expert Bhagwati

Thought for the day

“What is the primary purpose of a political leader? To build a majority. If voters care about parking lots, then talk about parking lots.”

—Newt Gingrich (American, 1943 - )

Word for the day

Pluvial (adj)

Of or pertaining to rain; rainy.

(Source: Dictionary.com)

Teaser for the day

UP, West Bengal, Odisha, J&K, Karnataka, TN, Kerala, Bihar, Assam – BJP has antagonized the state government representing over half the Indian population.

Modi will definitely find it difficult to build consensus on key reforms involving states for at least initial one year.

Gandhian Anna would do much better than expert Bhagwati

Yesterday I expressed my opinion about the ideal construct of new government. I may reiterate that in my view the key portfolios should be given to serious politicians and statesmen, who have the ability to think beyond current conditions and into the realm of impossibilities. To further illustrate the point, I would like to cite the following example.

In past one decade the market for online retail in India has grown multifold. However, still the coverage area has not expanded beyond metropolitan areas and other top 100 cities. My interactions with some e-retailers suggest that the lack of access to market for people living in tier II and III town, and semi urban and rural areas where internet telecom connectivity has reached is the biggest opportunity for e-retailers. The logistics and lack of banking access are the major road blocks.

On the other hand India Post is a great network with reach to every household in the country. Unfortunately, it has been left to die on its own.

An IT and telecom minister (which includes postal department also) should think about marrying these two. India post can provide excellent last mile connectivity and payment gateway for entire e-retailing industry at little incremental cost; given that most of the cost for India Post is fixed anyways (salaries and pension). The incremental revenue could have helped reviving this great institution and also helped the nascent e-retailing industry.

Similarly, a 200kms drive away from any metropolitan area would tell you which business is the largest unskilled and semi-skilled employment generator in the country – yes it is mobile telecom. While textile industry traditionally believed to be largest employment generator has historically received humongous, often undeserved, support from the government, the telecom sector has remained at the receiving end! Have you heard anyone talking about subsidizing telecom industry for generating more employment?

The IT and ITeS services sector has grown multifold in past one decade. But unfortunately, still the wage arbitrage remains the primary driver for the industry. Same telecom minister in UPA, who also held the portfolio of HRD minister for sometime besides being simultaneously at the helm of Science and Technology ministry, did almost nothing to promote R&D activities in the IT sector so that Indian IT industry could move up the value chain. For record, the Facebook, Inc which was founded in February 2004 just 3months ahead of UPA-1, is today worth 1.5x more than the revenue of India’s entire IT industry.

We need a Raman Singh who could think of Food Security for all so that children could go to school, marginal farmers could leave unviable sustenance farming and take up more rewarding construction jobs; a Atal Bihari who could think of a massive road development program despite severe fiscal constraints to counter global economic sanctions and generate massive employment; give away key government monopolies like hydrocarbons, coal, power etc.

A Gandhian Anna could do much more for the Indian economy, than all foreign trained economists.

(Note: Names mentioned herein are purely for illustrative purpose and do not reflect any bias or prejudice on part of the author.)

Let politicians rule the country

Thought for the day

“While I thought that I was learning how to live, I have been learning how to die.”

—Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Rile (v)

To irritate or vex

(Source: Dictionary.com)

Teaser for the day

Notwithstanding the TV debates on frivolous issues, on ground this election is firmly about serious economic and governance issues.

Let politicians rule the country

Once a group of people comprising statesman, entrepreneurs, economists, bureaucrats, business managers, and financial analysts were asked a question – “What would you do if you get a US$100mn lottery?

The replies were as follows:

Economist: “The proposition is purely hypothetical. I cannot answer this.”

Bureaucrat: “Will take early retirement, buy a bungalow on a hill station and enjoy”.

Business Manager: “Will put 75% in fixed deposit and start a business with the rest.”

Financial analyst: “Buy a good house, make a world tour, put 75% of money in fixed deposit and take a high risk bet with the balance.”

Entrepreneur: “Will leverage the money 3x and begin a new business venture.”

Statesman: “Will investment money in projects that makes at least 1mn people capable of earning US$10k every year.”

You decide who from this group is fit to govern the country like India.

Elections for 16^th Lok Sabha are hardly half way past and many people have already started discussing the likely construct of Union Council of Ministers. This is something I have not seen at least in past three decades. Of course all this discussion assumes a Narendra Modi led government in place by the time cows come home on 16^th May 2014.

As per various media reports, some popular economists are running for a key role in the new government. The leader of Rajya Sabha Mr. Arun Jaitley is being tipped as next FM of the country.

My discussion with some businessmen, corporate managers, economists and market analysts gives me a sense that most people are not only comfortable with the suggestion but are rather looking forward to such a construct.

I seriously beg to differ.

I believe that induction of non-politicians in key executive posts, including appointment of Manmohan Singh as PM and Kapil Sibal as union minister for HRD, IT and communication has done a tremendous harm to the country.

In my view, economists are trained to be myopic – to constrict their vision to realm of easily possible; bureaucrats are trained to protract decision making, manage the day to day chaos without being accountable or assuming responsibility for indirect impact of their actions; lawyers are trained to be obdurate about their viewpoint; whereas politicians are trained to think about impossibilities, to take decisions and be accountable for the consequences.

…to continue tomorrow

Have you joined the battle yet?

 

Thought for the day

“The hottest place in Hell is reserved for those who remain neutral in times of great moral conflict.”

— Martin Luther King Jr. (American, 1929-1968)

Word for the day

Contiguous (adj)

In close proximity without actually touching; near.

(Source: Dictionary.com)

Teaser for the day

Do you know ‘Modi’?

Have you joined the battle yet?

Early this year I had written (see here) that 2014 general elections in India are no ordinary elections. It is decidedly a referendum on the desire and commitment of people for change in the popular political discourse of the country.

It is a two layered contest. On the surface the contest is between continuity of feudalistic politics dominated by vested interests & parochial considerations on one side and the aspirations of common people on the side. At the subterranean level however the contest is more interesting. It is a fight within various political organizations. On one side are the status quoits who owe their political careers primarily to the social and religious divide within Indian society; and on the other side are the progressive elements within each party who politics to be more concerned about economic issue leaving the social & religious concerns to individuals and non-political groups.

I like to draw a parallel with the epic war of Mahabharata. In this contest no one can afford to remain neutral. All need to take a side – right or wrong only time will tell. This is in fact what we are witnessing. After 1977, this is first election where all sections of the society are openly taking sides. For example consider the following.

(a)   Corporates are openly taking sides in these elections.

(b)   Never after 1977 academician and intelligentsia have come out so openly in favor of or against a political party.

(c)   The entertainment world is seen vertically divided. Never before we have seen such a deep divide in Bollywood.

(d)   A record number of candidates are from public life – artists, writers, ex-bureaucrats, police officers, army officers have joined the election battle.

(e)   Most media houses have also made their preferences clear.

(f)     The religious and spiritual leaders of most sects and communities have openly taken sides. Unlike ever before, the revered artists from the holy town of Kashi have openly taken sides.

(g)   The media campaigns of a large number of corporate houses (again a first) have acquired a conspicuous election hue.

(h)   The constituents of financial markets for the first time have come out so openly in favor of a political party of leader. Most financial brokerages have published reports on election analysis.

(i)      Foreign governments, brokerages, businesses and media have openly taken sides. Publications like The Economist, The Week, The Wall Street Journal, TIME etc. have openly taken sides.

(j)      Most importantly people – women, farmers, backward classes, who have traditionally voted on family/community lines are volubly taking sides.

For those criticizing the Principal of St. Xavier’s, I would like to remind that in the epic war of Mahabharta - Bhishama, Dronacharya, Kripacharya all took a side. They are no less revered today. I have decided to side with the aspirations of the people. Have you joined the battle yet?

India Story in Short

Nothing secular or fundamental about it

Thought for the day

“The human being is in the most literal sense a political animal, not merely a gregarious animal, but an animal which can individuate itself only in the midst of society.”

—Karl Marx (German, 1818-1883)

Word for the day

Gregarious (adj)

Fond of the company of others; sociable.

(Source: Dictionary.com)

Teaser for the day

If BJP takes UP and Bihar as some polls are suggesting, will National politics revert to pre 1980 era of great North-South divide with North dominating and south sulking?

Or will it be different this time?

Nothing secular or fundamental about it

The recent report of CRISIL on Indian economy is a good realty check for the market participants who are placing their bets on basis of improving macroeconomic fundamentals. The report broadly confirms our hypothesis that the growth potential of Indian economy has shifted down structurally towards 6% GDP growth level and it is extremely difficult to sustain a 7%+ growth without material structural reforms that would lead to substantially higher private saving and investment.

In Crisil’s view “there is a natural limit to any upside beyond 6.5%”. And all of this, Crisil points out, assumes there is a stable and decisive government in place — else, “our bets on growth are off”.

As we have been highlighting that the rather optimistic growth scenario of 5.5-6.5% would only increase the structural imbalances of the economy especially income inequalities, food inflation, poor infrastructure and regional imbalances. This growth will primarily come from better capacity utilization and higher resource arbitrage opportunities; would not create many new jobs; will not help private savings and consumption and would be concentrated in few regions.

In CRISIL’s words “the real problem is that the various factors that caused an upsurge in India’s growth in the FY04-11 period are no longer present, and getting them back will take time, and a lot of effort. In the high-growth phase, the contribution of capital stock rose from 2.1% in FY05-03 to 3.2% in FY04-11, but this is projected to grow by just 2.5% in FY15-19.

Productivity, or what economists call incremental capital output ratio (ICOR), improved the most in the high-growth years, and though this is projected to grow — ICOR will fall from 7.4 right now to 5.5 over the next five years — this will still not be as good as it was during FY04-11.

CISIL believes that “The other driver of growth, exports, are also not looking as good as they did a few months ago despite global growth picking up. One reason, of course, is that the rupee is not looking as weak as it was before. The larger structural issue, though, is of India’s failure to address the fundamental flaws in its economic model — that means rising wage costs, poor economies of scale and high domestic inflation.”

Substantially high leverage on corporate balance sheet as compared to 2003-04 or even 2008-09; much lower capacity utilization; and deeply stressed financial system where banks are in no position to grow their loan assets (to the contrary we might see material unwinding); are some major blocks in the way of high growth path.

The improvement in CAD and fiscal account could prove to be short lived, as the suppressed import demand is restored and accounting practices are corrected.

To the chagrin of some of my readers and many of those who believe “all is well”, I would reiterate for the N+1^st time that we are in the midst of a massive trading up move, nothing secular or fundamental about it.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

Follow @VIJAYGABA