Some random thoughts

Thought for the day

”Without doubt, machinery has greatly increased the number of well-to-do idlers.”

-          Karl Marx (German, 1818-1883)

Word for the day

Polaris (n)

The North Star

(Source: Dictionary.com)

Teaser for the day

Ved Pratap Vaidik...Digvijay Singh...Arvind Kejriwal....Rakhi Sawant....Veena Malik....Poonam Pandey!

Some random thoughts

Since its formation Modi government has advocated the use of private public partnership (PPP) model of development rather aggressively. Both railway as well general budgets respective ministers have laid strong emphasis on use of PPP for developing infrastructure of national importance.

However, recently the Surface Transport Minister Nitin Gadkari suggested that "the government has decided to put all public-private partnerships (PPPs) in the road sector on hold for two to three years as just a few infrastructure firms have any capacity to put all public-private partnerships (PPPs) in the road sector on hold for two to three years as just a few infrastructure firms have any capacity to invest in new projects". (read here)

The suspicion here is whether there is some discord within the government as regard to aggressive use of PPP model?

I view these two apparently divergent stance are part of the same script. The capital starved government would certainly be keen on private participation in the development of key infrastructure projects. However, learning from the past experience, the balance sheet strength of the private partner must be the foremost concern to ensure smooth and timely execution.

Insofar as existing stalled PPP projects are concerned where the private partners are in default, the government should consider selling these projects on as is where is basis for faster execution rather than buying these on its own book. This will only add to the pressure on bank's asset quality and fiscal health of the economy.

In an interview earlier this week, the Finance Minister Arun Jaitely stressed that "for utilities the user will pay for what they use. Unless users pay, utilities can't survive." This could mean higher electricity charges as well as a cut in subsidies. This essentially means that the government intend to materially cut subsidies on energy and transport.

As an analyst I would tend to  believe that it is a step in right direction to ensure (a) energy efficiency, (b) proper capital allocation, (c) effective and targeted subsidy programs and (d) structurally improved fiscal health of the government.

However, as a consumer I have some serious doubts. For example,

(a)   On paying "Fair fare" for rail travel will I get full service?

What is "Fair Fare" is also a matter of debate. To me the fare calculated based on the bloated and highly inefficient cost structure is not fair for me. I would like the employee costs (pensions, perquisites, bungalows etc.) to be recalculated as per current competitive pay structures.

(b)   I am happy to pay full price for transport fuel and cooking gas, provided an even playing field is given to all potential suppliers and I am given an option to buy from whatever seller I wish to. I should not be forced to pay for the PSU inefficiencies of OMCs.

After all no one is complaining for full and fare telecom tariff or even air tickets.

A new star is born

Thought for the day

” History does nothing; it does not possess immense riches, it does not fight battles. It is men, real, living, who do all this.”

-          Karl Marx (German, 1818-1883)

Word for the day

Writhen (adj)

Twisted

(Source: Dictionary.com)

Teaser for the day

BRICS Bank - Delhi gets the corner office, Shanghai all other jobs!

A new star is born

This is part of "a system of measures that would help prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies." - Russian president Vladimir Putin

“The BRICS are gaining political weight and demonstrating their role in the international arena.” - Brazilian President Dilma Rousseff.

"We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures." Official BRICS summit statement

Establishment of a new multilateral development bank on the lines of International Monetary Fund (IMF) by leading emerging economies nations is potentially a watershed development in global financial markets.

Viewing this development just as an effort by five BRICS nations (Brazil, Russia, INDIA, China, and South Africa) would be myopic. It would also be inappropriate, in my view, to view this event as just a protest response against delay in implementing IMF reforms as promised in 2010 in the wake of global financial crisis. or assertion of their collective dominance by BRICS leadership in the international arena.

I view this as yet another development in the process of multi-polarization of the world. With a tinge of the memories of pre-cold war era, I feel a financial alliances like BRICS could provide a much better balance to the world against strategic alliances like NATO.

Many are seeing this as an effort to set up a final currency war to displace USD from world's sole reserve currency position.

Last month, Putin's security advisor, Sergey Glaziev, in a hard hitting article had stressed on the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves. The objective, according to her, should be to break the Washington's money printing machine that is feeding its military-industrial complex and giving the US ample possibilities to spread chaos across the globe, fueling the civil wars in Libya, Iraq, Syria and Ukraine.

I hope the BRICS leaders are not working with this design in mind. Indubitably, it is important to have counter balance in the global financial markets overwhelmingly dominated by US and EU. However, if the primary objective is to teach US a lesson, it will not work, in my view.

It would be interesting to see how fast and how big this institution grows in next decade or so. In my view, we shall see many more emerging economies especially from South East Asia and Latin America joining this new development bank in next few year, giving it a wider acceptance and stronger base.

One only wishes that this does not meet the fate of non-aligned movement (NAM.! Amen!

Match stricter compliance with good governance

Thought for the day

” If anything is certain, it is that I myself am not a Marxist.”

-          Karl Marx (German, 1818-1883)

Word for the day

Hypocorism (n)

The practice of using a pet name.

(Source: Dictionary.com)

Teaser for the day

Acche Din (Good days) means - more compliance and less corruption; less controls and more supplies.

Match stricter compliance with good governance

Participating in a couple of discussions on Union Budget for FY15 yesterday, disillusioned me a little further. I could see a rather stark expectation mismatch amongst participants from various fields.

Nonetheless the national agenda was on no one's mind. While everyone tried reading and interpreting the budget proposal from their myopic vested interest view points, none appeared concerned about the impact on the large section of the population that suffers most from inadequate social and economic infrastructure and higher price levels.

I could decipher the following key reasons for displeasure and disappointment amongst participants from financial markets:

(a)   Failure of the Finance Minister in proposing anything that will induce a bubble in the asset prices, especially listed equities and real estate.

(b)   Tax proposals indicating that the tax department is closely examining all investment schemes and other transactions that are primarily designed for tax avoidance purposes and do not serve any other useful purpose, e.g., Fixed Maturity Plans (FMP) of mutual funds that have bank CDs as only underlying; forfeiture of advance against property that has been rampantly used as money laundering; clarification on inclusion of 35AD deduction in calculations of MAT; grossing up of the dividend amount for the purposes of calculating DDT and exclusion of CSR in calculating PBT, etc.,

(c)   Refusal of the finance minister in engaging into avoidable controversies through unprepared and ill-considered stand on contentious issues like GAAR, GST, DTC, MAT on units located in SEZs etc.

(d)   Disregard of expert opinions, in particular global economists and columnists.

I found most of this criticism frivolous and misplaced.

I believe inducing asset price bubble at this stage of economic cycle (domestic and global) could be disastrous. The global economy looks more fragile today than it was in 2008.

Multiple rounds of monetary injections have not been successful in reviving the economic activity even to pre 2008 sub optimal levels. The public debt levels have also risen sharply in past couple of years as yields in many European countries have fallen to pre Lehman levels. The conventional monetary policy tools stand exhausted and unconventional means are yet to pass the test of stemming a collapse (though these have been very successful in protecting the bottom).

Insofar as higher utility prices and stricter compliance are concerned, in view these are conspicuous signs of Achhe Din (good days). The only thing we need to wait and see is that it is matched in equal proportion by good governance!

Union budget FY15: Customary praise and misdirected criticism

Thought for the day

” The production of too many useful things results in too many useless people.”

-          Karl Marx (German, 1818-1883)

Word for the day

Tumultuary (adj)

Confused; disorderly; haphazard

(Source: Dictionary.com)

Teaser for the day

FIFA World Cup over. Let's catch up some sleep, markets permitting!

Union budget FY15: Customary praise and misdirected criticism

The first budget of Modi government has evoked mixed response from various quarters.

The views supporting the budget are customary and sound rather obliged to praise it. These voices have come mostly from large industrialists. Their views are mostly driven by hope. "It's only a beginning", "they had little time", "It is a trailer, big picture will emerge only in February" etc. are common refrains. I believe no one taking these views seriously; not even those expressing these views.

On the other hand the criticism has mostly come economists, analysts, political observers and political opponents. Their arguments are even more bizarre. "No big bang", "continuation of UPA policies", "straight from Chidambaram's book", "too ambitious" are the common headlines in this camp.

I have supported the budget statement because for the first time in couple of decades, I saw a government focusing on the intrinsic strengths of Indian economy rather than overemphasizing on the weaknesses. I have reasons to believe that this trend will continue till 2019 at the least. To me the taxation structure appears skewed in favor of the rich and might need correction to improve purchasing power of middle and lower middle class consumer.

Given the fragile state of Indian as well global economy, it is prudent to maintain status quo and not make too many experiments. I do not see anything wrong in this.

The UPA had shifted its stance towards fiscal prudence and monetary corrections in summer of 2013 with PC and Rajan both taking some serious measures. Almost everyone, including financial markets, recognized, lauded and supported the effort. I do not understand why people expected a material departure from this set course.

I have reiterated my views on "big bang reforms" rather frequently. I strongly believe that PMGSY (rural road program) has and will continue to bring more benefits to large corporate than multibillion dollar mega projects. These roads bring food and labor to them and take their produce back to the 60% of Indian populace. Trust me the quintessential "India Story" is all about rise in consumption at the bottom of the pyramid.

Insofar as the fiscal targets are concerned, I see little justification for the skepticism. I think 4.1% fiscal deficit is certainly achievable, if the government just maintains its current pace of fiscal tightening and moves ahead with long stalled sale of assets like Hindustan Zinc, Balco, and ONGC etc.

GAAR has been a contentious issue for couple of years now. While the retroactive implementation of these provisions (or any substantive tax provision) is not desirable, the ongoing litigation has queered the pitch for the government. I think the last word on this matter is still not out and a rational decision will be taken soon.

Inflation is a concern not just this parched summer but for next many years till the supply augmentation efforts of the government yield result. I guess a review would be in order only after the government completes half the term.

The third dimension

Thought for the day

”From each according to his abilities, to each according to his needs.”

-          Karl Marx (German, 1818-1883)

Word for the day

Shoat (n)

A young pig.

(Source: Dictionary.com)

Teaser for the day

We have heard numerous voices raising concern about money laundered out of India.

Has anybody spoken about the money laundered into India yet?

The third dimension

An annexure attached to the Union Budget outlines the Revenue foregone under the Central Tax System during Financial Years 2012-13 and 2013-14. I find this often ignored part of the budget document quite interesting and to an extent intriguing.

The statement highlights the extent of concentration of financial power in the hands of few top corporate and the tax disparities between smaller and larger tax payers. This also raises some doubts about potential misuse of corporate veil for wrongful purposes.

As the following table shows, about 46% of the sample 6.18.806 companies did not show any profit and therefore did not any tax. The bottom 95% companies' share in total income was a meager 7.35%. Top 272 companies accounted for 57% share in total income.

I appreciate that lot of these companies will be shell companies or holding companies which normally do not have any recurring income. Nonetheless, the disparities are so stark that it raises many doubts.

On the other hand the effective tax rate for large corporate is 20.97% where as smaller companies pay in excess of 26%. The average for unincorporated assesses (partnerships, AOP and BOIs) is also over 25%. This to my mind a reason for examining whether the tax concessions are promoting disparities or it is just incidental.

 

Dear FM ride a scooty on PMGSY road, bullet trains can wait

Thought for the day

”People who think they know everything are a great annoyance to those of us who do.”

-          Isaac Asimov (American, 1920-1992)

Word for the day

Foofaraw (v)

A great fuss or disturbance about something very insignificant.

(Source: Dictionary.com)

Teaser for the day

PM's first overseas business visit may be fruitless. Germans would be too elated to talk business (Merkel may even not meet Modi) and Brazilians would be too depressed to talk business!

Dear FM ride a scooty on PMGSY road, bullet trains can wait

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

The recent statements made by some ministers, including the finance minister & prime minister himself, the rail budget, and the economic survey, have adequately hinted that -

(a)   The new government is willing to take the straight road to the economic revival. This road is long and exacting but the success is guaranteed. Along the way the resolve and grit of the government will be tested rather frequently. A ma breakdown will set BJP and economy back by another decade.

(b)   Administrative efficiency and ease of doing business will be initial fruits. The flowering should be visible within six months.

(c)   Enablement rather than provisioning will be the mantra for growth and development. Those accustomed to government patronage and largesse will certainly face an existential threat in next five year.

(d)   The governance and compliance deficit will be targeted on top priority basis to make a strong foundation for bridging other deficits like capital, fiscal, and trust.

In this backdrop I do not expect the finance minister to deliver any major concessions in today's speech. Though token concessions like hike in 80C, 80D or basic exemption is ok. It would be totally in order to increase taxes by way of specific cess (like road and higher education) to mobilize resources for specific purposes.

Insofar as reforms are concerned, I believe that the objective should be enablement of common people rather than benefit of few select.

Spending on social sector is not socialism in Indian context. It is hardcore capitalism. It is like the money spend on developing a coal mine that will fuel our power plants for many decades.

I would like to highlight some key reforms made in past that have made substantial difference to common man's life:

(a)   The social sector schemes have impacted the people lives more than the economic reforms, especially in rural areas. Despite frequent news of irregularities, schemes like mid day meal, girl child education, NRHM and MNREGA have positively impacted more lives. Financial inclusion (SHG, MFI, Banking Correspondents) has also impacted their lives directly.

(b)   PMGSY (the flagship rural roads scheme) has been a game changer.

(c)   Mobile connectivity has been the best technological evolution impacting the rural lives.

(d)   Metro rail has improved people's life significantly.

(e)   In rural areas of most states obtaining drinking water consumes 6-8 man hours. Electricity is still inadequate. Focusing on these two could enhance productivity and income potential in rural and semi-urban areas substantially.

(f)     We felt that strictly implemented prohibition legislation would bring more prosperity to states like Haryana, Uttrakhand and Punjab than any economic reform.

(g)   Education and health reforms are more critical than economic reforms for most citizens of India.

Rose day, Chocolate day, Kiss day... Budget day

Thought for the day

”Never let your sense of morals get in the way of doing what's right.”

-          Isaac Asimov (American, 1920-1992)

Word for the day

Previse (v)

To foresee; To forewarn

(Source: Dictionary.com)

Teaser for the day

By resolving to obstruct Parliament, Congress Party has only justified and legitimized all the misconduct of opposition parties in the Parliament during past 10years!

Rose day, Chocolate day, Kiss day... Budget day

I have never been in agreement with the convention of combining the announcement of government's socio-economic policies and programs with the announcement of annual budget speech. Especially, when this practice has often led to avoidable delay in implementation of critical programs and policy issues. There are many instances where some obvious mistakes in tax laws have to wait for next year's Finance Bill for necessary amendment, causing absolutely avoidable harassment to tax payers.

Moreover, more often than not budget speeches are used to make political statements and advance the political interests of the ruling party, usually at common man's expense.

I believe that the legislative work, including tax laws should be an ongoing business and not a discreet event. The annual budget should be just that  - "a budget", where the government presents its accounts and seeks parliamentary approval for the expenditure it wishes to incur on various heads.

The spread of satellite televisions reach has also led to "commercialization" of the budget event, just like various "days" that have secretly entered our social calendars. TV channels usually build a hype around it and sell to investors as "make or break" event.

I would like to seek the counsel of wise men (businessmen, fund managers, investors, analysts, economists and policy makers) who are seen regularly participating in this mega event in past decade - what strategic investment or business decision they have taken or advised others to take based on a particular Finance Bill provision? And whether such legislative provision could have been made in regular course of parliamentary business other than Finance Bill?

To my ignorant mind, there is nothing that created or changed the business or investment opportunities in past one decade that could not have been done outside Finance Bill or Budget Speech.

Having recorded my dissent, now I would like play the sport and outline my expectations from the budget as sought by many readers.

Reading from yesterday's rail budget speech of rail minister and statement of the finance minister in Rajya Sabha on fiscal health of the country, three things are very clear:

(a)   This government is laying much greater emphasis on capital markets for resource mobilization. Asset sale and equity dilution of PSE will be a focus. I would however like to first see a policy framework for protection of minority shareholders in PSE before making any investment decision.

(b)   Revenue augmentation rather than expenditure curtailment may be the approach to fiscal discipline. Stricter tax compliance  and higher taxes would be the order of the day.

(c)   Administrative efficiency through e-governance which is one hallmark of Gujarat model, will be a priority.

...to be continued

Raise the bar

Thought for the day

”For rarely are sons similar to their fathers: most are worse, and a few are better than their fathers.”

-          Homer (Greek, time uncertain, most believe between 7^th and 8^th century BC)

Word for the day

Blithesome (adj)

Lighthearted; merry; cheerful.

(Source: Dictionary.com)

Teaser for the day

Should poverty line be absolute or relative?

Would it be appropriate to say anyone earning less than 2% of the average income of top 10% Indian tax payers is poor?

Or you think notwithstanding the state of broader economy the poor should be happy and content with their 2000kcl?

Raise the bar

Traversing through remote hills and forests of Kumaun region of Uttrakhand during past 8days was quite revealing. For the first time, in my numerous visits to the region over past three decades, I experienced a colossal surge in expectations; and it is not the youth alone. Everyone is conspicuously carrying enormous expectations - not only from the government, but in general too. The common people there who are generally poor and live a sub-standard life on all parameters, seriously believe that their life needs to improve substantially.

Back home and listening to the media debates, it occurs to me that the tiny part of population which is vociferously (in some cases rather ludicrously) "demanding" concessions and seeking provisions for themselves in the Union budget might perhaps be completely cut from the broader realties of Indian economy.

The debate over validity or otherwise of official poverty line also sounds hollow and unfractuous. Having lived with a family who earns less than Rs5000/month for a night, I can understand that Rs. 32 (per capita/day or Rs5000/month for a family of five) lets you survive, given health, education, and one meal for children are provided by the government; and you do not have to pay any taxes. Water is provided free by nature and electricity they have nothing to use for. The staple meal (rather obligingly) offered to me by the family was healthy and nutritious.

The basic needs of food, clothes and shelter apart, the life of our fellow countrymen, whom we prefer to call BPL, is far from dignified, which is their constitutional right. They lack basic civil amenities like sanitation and safe drinking water close to their homes. The healthcare available to them is really primitive and insufficient. The standard of education afforded to their children is far from satisfactory and abysmally inadequate for their children to break the vicious cycle of ignorance and poverty.

I am confident that the NDA government led by an erstwhile tea seller Narendra Modi is well aware of the ground realties. I therefore expect that the socio-economic policies of the government would be suited to uplift the bottom half of the population on priority basis. The middle class populism can wait for few more years.

To this end, I feel that the conventional paradigm of poverty alleviation needs to be radically redefined. I believe that the extant absolute measure of poverty in terms of minimum monthly per capita expenditure to obtain sufficient calories to survive is inappropriate, inequitable and in a way unconstitutional. Instead, the poverty line needs to be drawn on relative basis. In my estimates, defined as mere 2% of the average income of top 10% tax payers, will push over half the country below poverty line. This realistic assessment shall allow the government to redefine priorities and redraw the social welfare programs.

Over next three days I shall outline my views on the budget, which I sincerely believe is accorded undue importance by the community.