Times are changing - for good or bad, only time will tell

Thought for the day

"I was born not knowing, and have had only a little time to change that here and there."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Quaff (v)

To drink a beverage, especially an intoxicating one, copiously and with hearty enjoyment.

Malice towards none

Congress celebrating Delhi municipal by-polls victory (4 out of 13) as if they have destroyed AAP and BJP completely.

First random thought this morning

Shiela Dixit and Tarun Gogoi served three consecutive terms as CM of their respective states. Ms. Dixit is already out of power. Mr. Gogoi is indicated to be going out. Given the state of affairs in the Congress Party, these leaders may not come back to power anytime soon.

Others who are serving third term are Shivraj Singh Chouhan and Raman Singh. They need to be extremely careful. A win will bring them in the league of invincible Jyoti Basu, Manik Sarkar, Pawan Chamling, & Naveen Patnaik, whereas a loss might severely dent their political career.

Times are changing - for good or bad, only time will tell

As the incumbent government completes 2years in power, a debate is raging whether it had been able to deliver on its electoral promises. The negative argument sounds mostly rhetoric and politically motivated. The positive argument too suffers from seeing little further from the present.

In my view, normalized for the impact of adverse weather conditions (severe drought and surprise floods) in past 2yrs, legacy fiscal constraints, export demand contraction due to global slowdown, and benefits of lower energy prices - the government has performed reasonably well on the economic front. The failings could be counted mostly on social front.

The government has managed the fiscal conditions very well despite socio-political compulsions. Prudent and frequent hikes in duties on fuel, despite severe criticism and political reverses in Delhi & Bihar, is just one example.

Improving systemic efficiencies through better use of technology and close monitoring from the top is also showing result in project execution especially logistics, power and financial sector.

One of the best performance has been in the area of image building. PM himself has executed the task of improving India's global image as attractive investment destination. The marketing exercise has been duly backed by significant legislative, legal and administrative provisions. The rules for foreign investments have been modified keeping in view the long term goals of making India a preferred destination for long term productive investment and not just a trading & arbitrage centre.

The government led by BJP has been able to successfully keep their party's economic ideas (mostly based on nationalistic self reliance) at arm's length, and maintain consistency in economic policies. Belying all fears of major disruptions in economic policy under influence of right wing ideologues. At the same time it has encouraged domestic enterprise to become competitive enough to take on global leaders. Patanjali is just one case in point. The domestic defense manufacturing sector might see some global size players in next 10-15years.

Moving away from traditional populism like loan waiver and unproductive stipend to help rural economy, the government has for the first time introduced some structural changes like comprehensive crop insurance and soil health card etc. Better communication through DD Kisan channel is also being appreciated widely. Better water management is a work in progress, but progressing well in right direction.

The government has struck some decisive blows to the parallel economy, breaking the nexus between scrupulous businessmen and politicians. The immediate impact is slowdown in business, but the long term benefits will be immense.

Achhe din (good times) might be an election slogan. The government might seem working against the interest of middle class (BJP's traditional core vote bank) but that may not be true...........to continue

I'm not going anywhere, neither do markets

Thought for the day

"If I could explain it to the average person, I wouldn't have been worth the Nobel Prize."

— Richard P. Feynman (American, 1918-1988)

Word for the day

Cunctator (n)

A procrastinator; delayer.

Malice towards none

After all is said and done, India will not be Congress Mukt, as by the end BJP would have become more Congress than the GoP itself.

The skeptics should watch TMC which is more communist than the CPM.

First random thought this morning

The famous Mumbai Dabbawallahs have evoked global interest. The British Royalty is impressed and so are management czars at elite Harvard Business School. The alcohol supply chain in Gujarat also deserves a place in the hall of fame for management wonders.

Regardless of the bitter rivalary between CM Nitish Kumar and PM Narendra Modi, the bootleggers in Bihar must be learning a lot from their Gujarati counterparts.

I'm not going anywhere, neither do markets

"Sell in May and go away", theme is playing well in global equity markets. Global investors are on a frantic selling spree, as not seen in past five years. Even though India, along with a couple of other emerging market have not witnessed much selling from global investors, the market is evidently worried.

In principle I dislike to be a contrarian. In my view, the natural tendency of people is to be conformist. In financial markets' context, being contrarian is mostly counterintuitive. In some cases it could be opportunistic, but mostly it is found to be egotistic waywardness. Sometime people, usually those who have recently made some exceptional gains, use this as indulgence at the cost of a small pie of such gains.

I have studied many contrarian views and ideas and also examined the success of these views and ideas in anteriority. There have been many isolated cases of large gains being made through contrarian ideas/view. But most contrarian investors who did not convert to conformism, soon after, have usually perished.

Most successful legendary investors have conformed to the classical investment theory. They have made money and left a rich legacy. The contrarians have made and lost money, enjoyed ephemeral glory, and live only in folklores.

In this backdrop, I would now like to answer the worries of my readers.

(a)   In past eight years since the global financial crisis (GFC), research spanning millions of reams has been published, analyzing the global debt, fiscal constraints, limitations of non-conventional monetary policies, Chinese slowdown, Japanese stagnation, Commodity meltdown and American economy's frequent flirting with recession.

       Contrarians have been predicting demise of USD as reserve currency, a widespread armed conflict, disintegration of common Euro area.

       Everything is entered in spreadsheets and factored in forecasts. There is nothing left to imagination. I believe events like Brexit, China hard landing (CNY drastic devaluation), massive Oil defaults in USA, and prolonged slowdown in commodity economies may not led global financial markets to "crash".

       If something could lead to crash, that is unknown and therefore people are not worried about that.

(b)   The endgame of ongoing abnormalities - negative rates, ever expanding central bank balance sheet, and commodities glut is also well documented and known. No one has any doubts about that. I therefore believe endgame is more likely to be orderly than chaotic.

(c)    It's may not be TINA alone that is driving foreign investors towards Indian markets. For a larger part, it could be the realization that Indian economy has gathered the required escape velocity to enter into a higher orbit and there is some exceptional profit to be made. TINA will not be able to protect us if the take off fails. But we still have two years.

Accounting is never a real problem

Thought for the day

"If you can't do it, give up!"

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Snuggery (n)

A comfortable or cozy room.

Malice towards none

The Uttrakhand misadventure of BJP will be forgotten soon.

But the price Congress would need to pay to Mayawati, may continue to reflect on UP elections.

First random thought this morning

Historically all developed markets have grown exploiting 3Ms of underdeveloped economies - Money, Materials and Manpower. What has made the difference are the other 3Ms, viz., Military power, Management and Marketing skills.

Logically therefore, a developing economy which is aiming to join the ranks of developed economy needs to develop the later 3Ms and reverse the flow of first set of 3Ms.

None in the BRICs seems to fit the jacket so far.

Accounting is never a real problem

Since Tuesday evening, I've got numerous calls from the readers, worried about the impact of the reported amendment in the Indo-Mauritian double tax avoidance treaty. Regardless of the market reaction in near term, I believe that most of the fears are unfounded and mostly stem from piecemeal thinking.

Firstly, from what I hear, I find that people believe that with the proposed changes, all the other things will remain the same. Which fortunately will not certainly be the case. Secondly, this amendment in the treaty is not a standalone event. It must be seen as just another measure in the series of globally coordinated efforts to make global financial system and cross border investments more stable and transparent, in the wake of the global financial crisis in 2008-09.

We have already seen changes in Swiss secrecy norms; deeper information sharing on tax evasion and money laundering; stringent norms for black money; and proposal to implement GAAR. This amendment therefore must be seen as a "reform" measure, that market is always craving for.

Coming specifically to this particular event, it is important to understand the implications, direct & indirect.

The proposed amendment "enables" the government to tax capital gains arising from sale of moveable assets in the hands of the entities resident in Mauritius. So far these entities could only be taxed only in Mauritius.

In this context, the following must be noted:

(i)    The amendment, if ratified by the parliament and duly notified, shall apply only to the assets acquired after March 2017. All assets acquired prior to that shall continue to be treated as per the extant provisions.

(ii)   Long term capital gains (holding period 12 months for listed equities and 24 months for unlisted equities) in India are taxed at zero rate. Hence, the amendment will have virtually no impact on FDI, which is normally long term investment.

(iii)  Short term capital gains is taxed @ 15% in India. Assets acquired by genuine Mauritius residents post 31 March 2017 will attract this tax, subject to 50% tax rebate in two year period of FY18 and FY19. The key is that you pay tax only if you make "Profit" in short term.

This amendment thus removes the long pending anomaly of differential tax treatment of domestic and foreign investors. This measure may also discourage short term hot money flowing into domestic market and causing avoidable volatility. Moreover, it must be understood that FPI investment is no charity. FPIs invest if they see prospects of making profits, not to save taxes. So, our markets will continue to get flows if they offer relatively better tax adjusted returns to the investors.

I do not believe that likely accounting problem for P-Note holders is a valid argument against this amendment. I believe that proposal of disclosure of ultimate beneficiaries' details mandatorily was getting implemented in next 3yrs, and GAAR would have overridden this treaty anyways.

 

Dotcom 2.0

Thought for the day

"Children are completely egoistic; they feel their needs intensely and strive ruthlessly to satisfy them."

— Sigmund Freud (Austrian, 1956-1939)

Word for the day

Jeremiad (n)

A prolonged lamentation or mournful complaint.

Malice towards none

The Congress President made an emotional speech while campaigning in Kerala.

The speech had some parallels to the last speech of Mrs. Indira Gandhi in Odisha.

In the meantime the Congress Vice President has reported threats to his life.

What's happening?

First random thought this morning

My all time favorite Saratchandra once wrote "There is no eternal truth. The truth we consider eternal are mostly contemporary and lose their relevance and acceptance with change in time, place and circumstances."

For ages people believed Earth to be flat & stationary and Sun rotating around it. The venom which is medicine for snakebite is deadly poison for a healthy person. Once British Empire, USSR and German wall all looked like lasting till eternity. Only a few years back, INC appeared like the only party competent to rule India.

Dotcom 2.0

From my recent interaction with some e-commerce entrepreneurs, PE fund managers, angle investors and VCs who have invested in these ventures, I could get little insight into this business model.

By all means, the ecommerce business in India is still in infancy stage. Regardless of few Unicorns, the space is replete with half baked & ill conceived ideas, most of which may be commercially and financially unviable.

There is absolutely no doubt that e-commerce and m-commerce business will grow exponentially in next one decade. As a consumer I will definitely benefit from the economies of scale and convenience.

But as an investor, I am not sure. In fact, I am worried about the collateral damage that will inevitably be caused due to very high failure rate in this space.

I would like to share some random thoughts on the sector with my readers.

(a)   In my view, the B to C (business to consumer) product sales and delivery business in India will be dominated by 3-4 large market places and manufacturers themselves. The business may get highly localized in terms of warehousing and delivery once clarity on taxes emerges and GST is implemented. Small and medium sized businesses will increasingly want to sell through large market places rather than selling directly. The logistic matrix for the business, as it exists today, may undergo serious changes in next three years.

(b)   The 3 D's of the B to C model, i.e., Discounting, Discomfort (lingerie, sexual health products etc.) and cash on Delivery may diminish in relevance as the market and audience get mature.

(c)    The services will grow faster than product. But the revenue model will have to change. No one is willing to pay for the services, arguing that even Google, Facebook and Whats App do not charge us.

(d)   The largest opportunity is in financial services, health advisory and education & training.

(e)    The services such as market place for used articles, matrimonial services, job search etc. be in demand but not financially viable.

       The positioning of the market place for used article is particularly poor. One, the business lacks and entry barrier or innovation. Two, no one stops, Amazon to add another icon on its home page to provide this service. Three, the marketing tactics used by these entities ("Sell your useless and old stuff") is inappropriate. No one is interested in buying "useless" stuff.

 

(f)           There is a serious lack of innovation in India. Most ideas are borrowed and may not be suitable to Indian markets and consumers at large. Targeted at a select class of customers, these ideas are not scalable and hence not financially viable - just as sustenance farming....to continue

State of Emergency

Thought for the day

"If we are ever in doubt about what to do, it is a good rule to ask ourselves what we shall wish on the morrow that we had done."

—John Lubbock (British, 1834-1913)

Word for the day

Amanuensis (n)

A person employed to write what another dictates or to copy what has been written by another; secretary.

Malice towards none

Want to get into IIT - preserve virginity and believe in God!

A survey finds that 95% new entrant in IIT-B are virgins and only 18% are atheist.

First random thought this morning

Reports suggest that many residents of the State of Bihar are crossing borders to Uttar Pradesh just to consume alcohol. A similar practice is seen in Gujarat, where people cross borders to Maharashtra, Daman and Diu just to drink.

I do not subscribe to the idea of legal prohibition at all. But since some states have already implemented, I feel the prohibition should be on people and not the place - all residents domiciled in that state should be completely prohibited from consuming, producing, buying, selling or storing liquor, irrespective of their present location.

State of Emergency

The response of the central government and many state governments towards two natural disasters, viz., massive forest fire in northern India, and acute water crisis in central India, is inadequate, in my view.

In particular, the economic ministries of the central government have either been underestimating the colossal economic impact of these disasters, or they have been misguiding the nation by claiming stable economic conditions and projecting 8%+ GDP growth in the current year.

A visit to railway stations in Mumbai, Kolkata and Delhi and/or a drive on NH-3 (Agra - Mumbai) is sufficient to assimilate large scale migration of people from parched fields to large cities in search of employment and food.

A casual discussion with cement manufacturers and dealers is sufficient to know that water shortages are hurting construction activities in many parts of the country. There are therefore even lesser employment opportunities for the migrant labor.

Besides construction, many other water intensive industries like textile, paper, chemicals etc. are also fearing serious production disruption should situation worsen further from the current level.

The hospitality sector in the hill stations of north India fears a washout season if the forest fire is not doused soon.

It is common knowledge that stale water starts stinking. This equally applies to ideologies, beliefs, traditions, conventions, relations and everything else.

If there is any argument on this, I am willing to hear. But if it goes uncontested, I will take a step further - why the Constitution of India should be beyond this rule.

The founding father of the Constitution of India envisaged three situations that may warrant declaration of a state of emergency, viz., under Article 352 (National emergency due to external threat or war); Article 356 (State emergency due to failure of constitutional machinery); and Article 360 (National/State emergency due to financial crisis).

Major natural disasters (Tsunami, Earth Quake, Flood, Drought etc.) are not specified as potential cause for declaring National/State emergency.

Article 356 has arguably been misused on many occasions. Mrs. Gandhi misused Article 352 once in 1975.  But the larger point is that mere potential for misuse, cannot be an argument against the importance, need, rationality and utility of a legal or constitutional provision.

Just because Article 352 was once misused 40yrs ago, we cannot ignore the critical importance of this provision. And unless we accept its critical importance, we cannot sit and consider amending the constitution to provide for a national/state emergency due to major natural disaster.

In my strong view, the acute water crisis in the country calls for declaration of National Emergency - making water a central subject, enforcing strict norms for usage, and ensuring an equitable distribution amongst states.

Tomorrow - impact of water crisis on investment strategy and markets.

Problem of plenty

Thought for the day

"A day of worry is more exhausting than a week of work."

—John Lubbock (British, 1834-1913)

Word for the day

Woodnote (n)

A wild or natural musical tone, as that of a forest bird.

Malice towards none

Someone advised a PM aspirant that India has already had prime ministers from north, west and south. Only eastern India is so far unrepresented.

Did other leaders in eastern states also eavesdrop to the conversation?

First random thought this morning

Arvind Kejriwal led AAP has been successful in capturing some mind space of urban populace in the country, at public expense. In many areas, AAP might have an edge, whenever a need for an alternative to the established parties is felt by the citizens.

Paradoxically, the party has not been able to make much inroads in rural mind space where the quintessential Aam Aadmi lives.

Punjab villages, which are arguably most urbanized in the country, may show the way forward, to all - NDA, Congress, Socialists and of course AAP.

Problem of plenty

The summer this year is forecast to be longer and hotter than usual. Lower moisture level in soil due to two consecutive drought years and widespread forest fire in north Indian hills, is making the matter worse.

The consolation however is significantly better availability of electricity. Unlike past years, so far the availability of electricity is much better, both in terms of quality and quantity. This is despite much higher energy intensity of water, lower hydro power generation, and higher household demand due to hotter than usual weather.

The worst deficit states like Maharashtra, Tamil Nadu, UP & MP are reportedly not faring much better this year, despite high farm sector demand. As per government data FY16 saw power deficit shrinking to 2.1%, the lowest ever.

The improvement in power situation could be attributed to a variety of factors; for example-

(a)   Completion of many power projects adding to the generation capacity, including renewable projects.

(b)   Higher availability of fuel - cheaper global coal prices, higher local coal production, higher availability of LNG - augmenting plant load factor of conventional power producers.

(c)    Lower industrial demand due to - lower capacity utilization, better energy efficiency standards and cheaper diesel; and slow down in real estate sector growth.

(d)   Higher energy efficiency at household level due to rising use of LED based appliances and solar energy.

(e)    Improvement if health of SEBs, due to financial restructuring under UDAY scheme.

The market has rightly taken fancy for the electrical appliance manufacturers, assuming better power availability will boost demand for appliance. A visit to nearby electronics shop will confirm this.

While the consumers have a reason to be happy, investors, banks and entities engaged in power supply chain are a worried lot. Impending completion of 80GW of power generation capacity under construction is just adding to the jitters.

Coal India had to cut production and shipments of the fuel as sluggish demand caused stockpiles to swell.

Merchant power producers are struggling to sell their generation as despite peak summer, demand is benign and rates hovering around Rs2.7-2.9/kWh. A normal monsoon might further hit the demand.

While my bias against Coal India is well known, I am not too worried about the others. I believe this period of plenty is an opportunity to accumulate efficient power producers and distributors. In less than 5yrs, these could be easily expected to turn into a regular decent dividend paying utilities in true sense.

Some random thoughts

Thought for the day

"Our duty is to believe that for which we have sufficient evidence, and to suspend our judgment when we have not."

—John Lubbock (British, 1834-1913)

Word for the day

Puckish (Adj)

Mischievous; impish.

Malice towards none

The massive forest fire in Uttrakhand proves three things:

(a) Nero still does not care if Rome is burning.

(b) Our disaster management has not improved much after 2013 Uttrakhand floods.

(c) Environment is not a priority for anyone, till it becomes a prime time news.

 

First random thought this morning

BJP has nominated Subramaniam Swamy to the Rajya Sabha, like a cat amongst pigeons. He seems to be taking the principal opposition Congress Party head on since the day one.

BJP might score some quixotic points here. But is it only about BJP and Congress or the people of this country also matter to someone?

Some random thoughts

In past couple of years, the non-performing loans (NPLs) of Indian banks have been a matter of deep concern. The subject has been a subject of intense debate amongst all market participants, regulators and other government authorities.

The debate has recently assumed a socio-political character after Mr. Vijay Mallya decided to leave the country without settling his debts. With this morality has become the primary issue in the debate. The points like "Risk", "Business Cycle", "Collaterals", "Force Majeure", "Process of Law" and "Intent to repay" etc., have taken a back seat.

Lenders are suffering for both (a) poor judgment of credit risk and (b) fraudulent diversion of funds by borrowers

Consequently, there is an environment of fear amongst borrowers who are going through a rough patch in their respective business cycles, prospective borrowers, and the credit managers of banks.

It is common knowledge that political pressures and social concerns have been an integral part of the lending mechanism of various public sector banks. They have thus not been observing very high standards insofar as the credit evaluation and risk assessment is concerned. Corruption and connivance with unscrupulous promoters has also not been uncommon.

But it also worth noting that NPL problem has been quite pronounced in case of banks like ICICI, AXIS, Federal. Even foreign banks like Standard Chartered, CITI and ING Vysaya have also suffered hugely on this count.

In my view, the debate needs to divert from the issue of morality to focus on the issue of rebuilding a sound financial system.

The suggestions like creation of a bad bank, naming and shaming all creditors in default, banks taking over businesses on TMS (take over - manage - sell) basis etc. are good to discuss over a cup of coffee, but may not be practical and/or sustainable.

In my view, banks, government (as majority owner of PSBs) and regulator need to take a holistic view of the situation, rather than just fire fighting.

As a first step, an independent assessment may be carried out of all bank loans to identify what loans have been used in building real capacities (roads, power plants, houses, shops, offices, bridges, etc.) and what loans have just been expensed in paying usual business expenses and interest. Different approaches may be required for managing risk in these two types of credit. As against a standard provisioning, a differentiated provisioning may be needed for a power producer and an e-commerce market place.

By enforcing mindless asset sales, banks may actually be exacerbating the NPL situation further. For example, one of the largest borrower is reportedly selling all his cash generating assets to pay about 50% of his loans. He would no cash flows to service the balance 50%.

These are some random thoughts. I will try to add more sense to these soon.

Nifty: Closer to potential inflection point

Thought for the day

"Rest is not idleness, and to lie sometimes on the grass under trees on a summer's day, listening to the murmur of the water, or watching the clouds float across the sky, is by no means a waste of time."

—John Lubbock (British, 1834-1913)

Word for the day

Gonzo (Adj)

(of journalism, reportage, etc.) filled with bizarre or subjective ideas, commentary, or the like.

(Source: Dictionary.com)

Malice towards none

For the sake of argument assume PM Modi is a school dropout and Rahul Gandhi's foreign degrees are all genuine and hard earned..

So what's the point?

First random thought this morning

A report suggests that only 4% Indian file income tax return. This number may be low but is not ridiculous. If all those liable to pay income tax under current law, do actually file their IT return, the number may actually not go up materially. Over 90% Indians may still be earning less than the IT thresh hold.

In his last Mann ki Baat, PM suggested experimenting with no ticket checkers in trains. Why not also experiment with no IT return? Citizens earning less than Rs10lacs per annum may just be required to visit IT department website once in 12 months to press a confirmation button that they have duly paid the tax due on their income!

Nifty: Closer to potential inflection point

Both Nifty and Bank Nifty ended the month of April, closer to their inflation points. A breakout from here will establish a new bull market that may last well over three years. However, a failure at this point may lead to a 5-7% correction in both the major indices.

As I stated earlier, in a case of a breakout, the up move will likely be led by non-financials, whereas in case of a breakdown the down move will be led by financials.

For now I shall be watching the following points closely over next 3weeks to take a call on the market direction during June -October period.

Nifty: Weekly close below 7730 for a break down and 8013 for break out.

Bank Nifty: Weekly close below 16270 for a break down and 17270 for a breakout.