Set the priorities right

Thought for the day

"Commend a fool for his wit, or a rogue for his honesty and he will receive you into his favor."

—Henry Fielding (English, 1707-1754)

Word for the day

Janus-faced (adj)

Having two contrasting aspects.

Having two faces, one looking forward, one looking backward, as the Roman deity Janus.

Malice towards none

The Rebellious TV news anchor wants a full-fledged direct war with Pakistan. He would not mind a war with China too.

What da ya say?

First random thought this morning

At a time when the country is facing serious economic challenges, internal security threats and external threats - we are working with part-time (and not so healthy) finance and defence ministers, a home minister with fractured foot, and an external affairs minister who is also not keeping very good health.

What could be the reason? Is it the dearth of capable people? Is it the trust deficit on part of BJP leadership? Is it the desire of top leadership to totally centralize the command of the nation? or is it all of these?

Set the priorities right

A large part of the population in Eastern and North Eastern parts of India suffers from floods almost every year. Millions of people suffer tremendous hardship every year due to inundation of their houses and fields.

For many of these people life begins afresh every year, as they lose their shelters, belongings, old parents, infants, and jobs to floods or to the disease and starvation that invariably follows the flood.

This cycle has been going on since past many decades. States like Assam and Bihar have a regular flood control department. Every year they go through the same routine. The most unfortunate part is that this misery of people has been accepted by the administration and the politicians as fait accompli. So much so that political parties even do not consider it important to promise effective measures for flood control in their manifestos.

For example, consider the following:

1.    In Assam, where millions of people suffer from floods almost every year, the Vision Document 2016-2025 issued by the ruling BJP, mentions the word flood only twice, once under the heading "Housing" and the second time under the heading "Guwahati Development":

Housing

"Designing and developing world class infrastructure with due consideration to natural disasters like floods and earthquakes."

Guwahati Development

"Using state-of-the-art technologies to prevent flash floods."

2.    Bihar CM Nitish Kumar's agenda for Bihar did not mention the word flood even once.

3.    The largest party in Bihar assembly, RJD, also did not consider flood to be a problem worth according any priority.

Now consider the following basic data points to comprehend the extent of the problem:

(a)   In Assam about 87% rural households live in a Katcha or semi-pucca structure. (NSSO 70^th round survey report – Dec’14)

(b)   40% area of the state of Assam is flood prone.

(c)   Between 1-3million Assamese are affected by floods every year

 

 

Take on GST

Thought for the day

"Never bend your head. Always hold it high. Look the world straight in the eye."

—Helen Keller (American, 1880-1968)

Word for the day

Exurb (n)

A small, usually prosperous, community situated beyond the suburbs of a city.

Malice towards none

Will PM Modi go to Palestine in next 6months on a state visit?

(a) Yes

(b) No

(c) No need

(d) Does not matter

(e) He should but he won't

(f) He will, but he should not.

(g) How do I care

 

First random thought this morning

Bihar Chief Minister has raised a very valid point. The opposition parties in India are completely directionless. They are merely reacting negatively to whatever the government (especially the PM) says or does. They have completely failed in presenting any alternative agenda before the people of the country.

The socio-political narrative in India therefore has become spiteful. If some opinions expressed in recent foreign media reports are any indication, some of this negativity is spilling beyond borders also. This is unfortunate.

This needs to change; rather urgently.

Take on GST

It's been four days since the much talked about, debated, praised, cursed, cheered, resented anticipated and feared tax reform - Goods and Services Tax (GST) has been implemented in the country.

There are reports from various cities that some markets have remained shut in protest. But nothing dramatic has been reported so far. The appearance of fear mongers on TV screens is diminishing. Despite authoring this historic change, the Congress Party finds itself standing on the losing side alongside Mamata Banerjee and Communist parties. Some insignificant parties like Shiv Sena and AAP are talking gibberish, which perhaps no one understands. The rest of the opposition seems to have quietly slipped to the government's side.

Frankly, in past four days, I have not found any change in my Kitchen expense due to GST or otherwise. The so called pre GST sales are continuing in many shopping malls. All the petty shopkeepers have quickly learned the changes in billing system and book-keeping. They expect some glitches in filing returns in August (when first return filing in GST is due), but nothing alarming.

Many of my readers have asked me why I have not written on GST, when all sundry seems to be writing and/or talking about it. I may inform them there are two reasons: (a) I was busy writing about what I believe would be substantive structural reforms; and (b) I find the popular narrative on GST totally hypocritical.

The supporters are claiming virtues that cannot be part of a tax system. The new tax system is being presented as master stroke of PM Modi, just like the way DeMo was marketed. It is being termed the biggest tax reform since independence. Whereas the reality may be that it is an enormous administrative correction in the tax system of the country. But terming it a structural reform is subject to debate, in my view.

Those opposing GST sound ridiculously naive. For example, the argument that a 5% tax on textile will finish the entire textile trade is preposterous. The basic principle of indirect taxation is that the incidence of tax is always on the ultimate consumer of the goods and services. In principle, the manufacturer of goods or service provider or anyone else in the whole supply chain bear no part of the indirect tax.

For the benefit of readers who have sought my views, my take on GST as follows:

(a)   GST is an enormous administrative correction in the tax system of India. The amount of administrative effort that has been put in making this correction is remarkable. The political will shown by the current leadership in bringing GST to life is also commendable. Be it expediting completion of GST Network, evolving political consensus at GST council level, and sticking to 1 July 2017 timeline despite intense lobbying from various pressure groups - the government showed tremendous determination and resolve.

However, the GST as it has been implemented, does not changes the basic structure or taxation principles followed in the country.

There are multiple tax rates, purportedly determined on the basis of socio-economic strata of the ultimate consumer. The classification of goods apparently lacks connect with the ground realities. It is clear that the effort has been to stay close to the status quo, insofar as the incidence of tax is concerned.

(b)   GST will certainly bring about material systemic efficiencies and savings by eliminating redundancies. The benefits will mostly be shared by the government, business and consumers, with the government taking the largest pie. My guess is that the sharing of benefits will occur in the ratio of 60% (Government) 30% (Businesses) and 10% (Consumers).

(c)    The argument of organized sector gaining at the expense of unorganized sector because of GST is mostly unsubstantiated. I feel, this process started couple of decades back and became conspicuous a decade back. GST at best may push the accelerator little harder.

(d)   The primary concern of unorganized sector seems to be income tax not the GST. A large number of small businessmen have so far managed to stay out of tax net. Even a larger number has been paying only a fraction of the tax due on their income. With GST coming into effect, they fear, that concealing income will be an onerous and extremely risky task. The thought of paying full tax on income is agitating their minds. To make matter worse, there are fears that payment of full tax henceforth may also subject their past years transactions to tax scrutiny.

This again to my mind is part of the process that started few years ago. GST may have just set a deadline on blatant tax avoidance.

(e)    GST, like any major change, would throw up many new business opportunities also. On a smaller scale accounting and audit services may gain traction. Business automation products and services may also see significant acceleration.

But the material opportunity (and for some threat) may come from the relocation and consolidation of businesses. The businesses that chose their location purely because of tax arbitrage or established to take advantage of tax concessions, may shift to better locations and consolidate. I believe cities and towns closer to ports, major railway junctions, major manufacturing hubs may see businesses relocating from tax havens like Baddi (HP), Kashipur (UK) etc.

The regional imbalances and inequalities may thus rise further. The real estate prices may also rebalance accordingly. The labor migration may increase. Unfortunately, I have not seen anyone discussing this as a collateral of GST.

PS: I have been asked by a friend, who happens to be office bearer of a trade association, to draft a representation seeking some concession under GST for the Association members. The primary objective is to make representation and assure the members that the Association is functional, rather than actually seeking any concession!

Give them a dignified life; and death

Thought for the day

"Keep your face to the sunshine and you cannot see a shadow."

—Helen Keller (American, 1880-1968)

Word for the day

Smorgasbord (n)

A buffet meal of various hot and cold hors d'oeuvres, salads, casserole dishes, meats, cheeses, etc.

Malice towards none

What is real problem for those who are opposing GST?

(a) They might have to pay income tax due on their full income.

(b) Higher GST rates may impact demand for their product.

(c) GST compliance is very expensive.

First random thought this morning

To promote cashless payments, the government should introduce a card that can be charged maximum of Rs2500 per day. The card could be a debit card, credit card or prepaid card. The PoS for this card should work on show card basis (no swipe, no PIN). For fixed charges like Toll, Parking Fee, Entrance Fee, Platform Ticket, Filing Fee etc., PoS could be pre-programmed so that on showing the card it charges the fixed amount to the card. For variable charges, the PoS operator may be required to punch in the amount to be charged. Toll booth may work on Red/Green light basis rather than barrier basis which is energy intensive and causes delays at Toll Booths.

This can make the transactions really fast and hassle free. A low per day limit, will minimize the chances of misuse of card through theft etc.

Give them a dignified life; and death

As I highlighted in one of my earlier post the notion of "farm loan" is materially different from "farmers' debt" in today's context.

The rise in aspirational consumption; distortion of social customs (especially marriage, death, birth) for the sake of vanity, ignorance, and misguidance; rise in crime and litigation expenses; rise in cases of chronic diseases and hence prohibitive healthcare expenses form an overwhelming part of "farmers' debt". This debt usually has nothing to do with farming activity.

This is in fact may true for a large majority of urban poor and lower middle class people also.

To solve this conundrum, it is important that economic reforms are implemented with social reforms.

The social initiatives like focus on cleanliness, cooking gas connection to BPL families are commendable. But what we need is a social renaissance. Small correction and incremental improvement might not be enough given the serious nature of the problem, in my view.

I am not a social scientist. I may therefore not be an appropriate person to suggest the steps that could be taken within the Indian sociological framework. But this does leaves me at freedom to throw some thoughts that may not belong to the box. For example, consider the following:

(a)   The government should take strong affirmative steps to eradicate social distortions that have crept in over a period time in our social, religious and cultural events.

To begin with the government should totally nationalize the religious part of the birth, death and marriage ceremonies.

The government should appoint qualified religious persons (QRP) who can perform these ceremonies at the designated venues established by government in every Block of the country . All the expenses like salary of QRP, cost of performing the rituals, food offered to QRP, cost of feeding upto 25 close relatives of the person performing for whom the rituals being done, etc. should be borne by the government.

The designated officer at Block level may be appointed to supervise all such ceremonies and issue certificate (Birth, Death, Marriage) on the spot.

The government should actively discourage profligate spending on the social part of these events.

All expenses on marriage & birth related parties and social functions relating to death, shall be taxed @100%. Meaning, if anyone wanting to spend Rs10,00,000 on marriage party of his/her child, shall be required to pay an equivalent amount as tax. This money may be used exclusively for performing the religious ceremonies stated above.

(b)   A dignified birth and death shall be made fundamental right of every citizen.

In case of birth, the government should assume responsibility of the child from the conception stage, for upto two children for each parent. This includes good diet for mother, medical tests, medicine, delivery expenses and immunization of the child. This should be done on a global standard basis not the way typical government medical facility is run by the government.

In case of death, the final rights of the deceased should be performed in a dignified manner, as per his/her religious traditions.

This should apply to all unclaimed and unidentified bodies also.

The insurance companies may be directed to make the claim payments on the spot when the final rituals are done on 13th, 17th or 40th day as the case may be, in cases where the deceased's life was insured, either individually or under some government group scheme.

The corporates may be required to fund this initiative under their CSR obligation.

(c)    A separate assembly of religious leaders, holy men for each religion may formed. This assembly may be given the task to reevaluate all holy scripture, and find if there is any need to reinterpreted the scriptures in the light of modern day circumstances and realities. The religious leaders should be requested to weed out the redundancies and misinterpretations, so that no one manipulate the religious sentiments of the people in the name of scriptures and divine mandate.

The assembly should also frame a code of conduct for all people responsible for helping people with their religious ceremonies and duties.

For example, the Hindu assembly may want to ban flowing the last remains of dead people in holy rivers to save them from dying. The ashes may be used for making bricks that can be used to build places of worships and houses for the poor.

It may also encourage people to use electronic or gas based cremation, instead of wood pyres. Alternatively, each family member of the deceased may be required to plant two trees each and take care of it till it grows to become self-sufficient.

(d)   Distinguish between "education" and "learning". Nationalize and standardize all education. Learning may be imparted by private citizens volunteering in nation building. (Will write in detail on this in a later post)

These steps if taken, may make the life of poor (both rural and urban) materially comfortable and substantially increase the happiness quotient of the country.

Time to do it is Now

Thought for the day

"Nothing happens to any person but what was in his power to go through with."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Beatinest (adj)

Most remarkable or unusual.

Malice towards none

My friend came! He charmed everyone! I sold him drones!

 

First random thought this morning

While the people remain busy with movies and cricket, the country is silently becoming a relevant global force in space technology, automobile, tennis (doubles) and badminton.

Wrestling, archery, shooting etc. are much talked about, but results have not been any spectacular.

Which category you want me to put political ?

Time to do it is Now

Prime Minister Modi has proudly promised Indian Diaspora in US that his government will strive to make India a developed country like US. In past also many political leaders have aspired to make India like China. One former chief minister of Maharashtra promised to make Mumbai like Shanghai. Congress party leader Rahul Gandhi wanted to emulate the manufacturing model of China and manufacture toys and watches in India.

If we eliminate the political rhetoric out of these assertions made in the heat of the moment, what we get is a constricted vision of the future of India. Regardless of the posturing, our political establishment appears mostly lacking in innovation, self-belief, and faith in rich cultural & economic legacy.

The right wing politicians claim to have pride in India's glorious past. Their sole ambition is to restore India's stature as world leader (Vishwa Guru). However, when it comes to implementation, they suffer from cognitive dissonance.

They seem unable to think beyond highly exploitive and authoritarian Chinese model of development. The tragedy is that they want India to become like US by following Chinese model and enforcing parochial social agenda that has no Vedic sanctity!

There is no meaningful left party in the country. The left wing politics is now limited to violent and exploits of handful Naxals and Maoist.

The academics and elite that subscribe to left ideologies appear mostly too pliable and dependent on state favors to make any difference.

The traditionally strong center and left of center parties have mostly degenerated to become feudal lordships. Their vision of India appears to begin and end with their vested political and economic interests.

The tokens like secularism, socialism, equality and justice are blatantly used to camouflage the vicissitude of their ideologies.

Under these circumstances, finding a sustainable solution for farmers' plight seems like a impossibility.

Given that over two third of the population is directly or indirectly dependent on the farming and allied activities, their political importance can hardly be overemphasized. It is not surprising that the structure of policy framework is such that farming should continue to remain an unviable activity, so that the farmers always remain dependent on political establishment and submit to their exploits in lieu of petty concessions.

In my view, imagining India as a developed (or even a middle income) country is meaningless unless some radical structural reforms are implemented in the rural sector. The incremental changes would never be sufficient to cure the deformities developed over past two centuries in the sector.

The recent farmers' agitations across many states are a reminder that things needs to be done immediately, before it is too late. In next couple of days, I would be sharing my somewhat utopian (but not impossible) solutions for initiating a wider discussion on the topic.

Silent truth

Thought for the day

"A man should be upright, not be kept upright."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Estival (adj)

Pertaining or appropriate to summer.

Malice towards none

After western music, Korean Pop Bands are becoming increasingly popular with Indian youth and children.

This is one Make in India battle we are certainly losing.

 

First random thought this morning

In this post truth world dominated by social media, Google and Wikipedia, politicians should be extra careful while making claims and hurling accusations, especially when they rely on these very tools to say what they are saying.

The effort should be minimize one's digital footprints; cross verify whatever sensational material is available online; and learn to distinguish between "truth" and "post truth".

 

Silent truth

"The water in a vessel is sparkling; the water in the sea is dark. The small truth has words which are clear; the great truth has great silence."
—Rabindranath Tagore

To understand the politics of farm loan waiver, it is important to first understand the economics of farming in India.

(a)   As per 2013 NSSO survey about 83% (80% in 2003) of the total farming households in India are either landless or marginal (holding less than 1 hectare or 2.47 acres cultivable land).

The total cultivable land in India shrank to 92mn hectare in 2013 (average 0.6hectare per farmer household) from 107mn hectare in 2003 (0.72hectare per farmer household).

In 2013 the landless and marginal farmers owned 30% of the total cultivable land in the country up from 23% in 2003. This is due to further fragmentation of the land, or lower conversion of their land holdings.

(b)   On the contrary, percentage of medium and large farmer household (owning more than 4 hectares) shrank from 3.5% in 2003 to 2.17% in 2003. The cultivable land owned by these medium and large farmer households shrank from ~35% in 2003 to 24% 2013. Many of these farmers actually do not cultivate land themselves. They lease the land to landless or small farmers.

(c)    From political perspective, 130mn farming households are marginal or landless against just 3mn farmer households are medium to large land owners.

(d)   The average cultivable land price in 50-100km radius of a city or large industrial project is about Rs5lac/acre, It may though vary between Rs. 1 lac to Rs. 5crore/acre depending upon the location.

The crop on the land yields less than Rs75000/year for a medium and large farmer. Assuming minimum 2 crops every year, for a small and marginal farmer the yield is Rs25000 to Rs50000 per acre/year, excluding the cost of self labor.

Pertinent to note here is that a typical landless, marginal or small farmer household deploys 3-4 adults for 6 months in the farm. At ~Rs7000/month minimum wage rate the cost of self labor itself comes over Rs1,50,000.

If we adjust the yield for one crop loss every three year, lease rent and 18-24% interest that small and marginal farmer pays, agriculture is mostly an unviable business.

If we factor in rising labor cost, lower subsidy in input prices (fertilizer, electricity, diesel and water) and slower rise in MSP, the viability gap will likely only increase going forward.

(e)    A large majority of farmer households in India are landless or marginal. Many of these farmers take land on lease. The rent varies from Rs5000/acre to 50% of produce. A lost crop puts such farmers in a debt trap that may take minimum 3years to get out.

Many of these farmers do agriculture for sustenance. They grow wheat or rice for self consumption only.

Remember, the Gen X of these farmers is no longer enamored by the feeling of Dharti Meri Mata Hai (my land is my mother). The next generation of landless, marginal and small farmers is therefore least likely to prefer agriculture over construction or industrial labor. (Availability of agriculture labor is likely to shrink even further from the current alarming levels).

(f)    Given the low returns, the current generation of medium and large farmers is also not much interested in taking up farming as occupation. Many would want to sell the land if they get right price.

The problem however is that an overwhelming proportion of land holdings have unclear or disputed titles. Besides, finding a buyer for fragmented and scattered land parcels is tough. To make the matter worst, in many areas the revenue rate (circle rate or ready reckner rate) of land is much higher than the actual market price, making it really tough to sell the land.

...to continue next week

Farm loan vs. farmers' debt

Thought for the day

"Forward, as occasion offers. Never look round to see whether any shall note it."

—Marcus Aurelius (Roman, 121-180)                                                    

Word for the day

Confusticate (v)

To confuse or perplex; bewilder.

Malice towards none

At the end of the day, both Kumble and Kohli seem to have moved to a little lower pedestal.

First random thought this morning

A few months back, BJP MP from Mumbai had criticized the cryptocurrency Bitcoin a Ponzi scheme.

Notwithstanding, the ill-informed but aggressively judgmental views of some of its own MPs, the government reportedly has decided to regularize the trading in Bitcoin.

It is commendable. As per some estimates, the Indian Bitcoin exchange market is responsible for processing around 11% of Bitcoin-to-USD trades. It will be not long when Bitcoin will give serious competition to gold, at least in Indian urban markets.

Farm loan vs. farmers' debt

Farm loan waiver has been a contentious issues in India's socio-economic milieu for past many decades. It would not be entirely wrong to say that most governments and political parties have used this as a tool to exploit voters' sentiments rather than solving the problem of farmers' stress or structural inadequacies in the Indian agriculture sector. Consequently, every episode of loan waiver has yielded almost nothing more than a temporary relief for the farmers.

My colleagues visited Madhya Pradesh and Maharashtra to assess the ground level situation in the wake of recent violence involving farmers'.

In our assessment, the recent episode of loan waiver, which started with the newly elected BJP government in the state of Uttar Pradesh waiving farm loans to fulfill its election promise, seems materially different from the earlier episodes. This episode manifests some seriously disturbing trends emerging in Indian socio-economic sphere.

First of all, we found that the farmers are demanding loan waiver as matter of "Right" and not as a matter of "Relief", as used to be the case in earlier episodes of loan waivers. This change in attitude can potentially alter the dynamics of state-farmer relationship in future.

Secondly, for the first time we realized the change in the ethos of the farming community. Traditionally, Indian farmers considered defaulting on loans and other financial and social obligations an unpardonable sin. The popular belief was that if you fail to discharge your debt in this life, you will have to take another birth to discharge such obligations. This seems the case no longer. A significant number of young farmers are more than willing to default on their loans. With morality out of financial dealings, this can potentially change the whole paradigm of non-corporate lending in the country.

Third, in past many episodes of farm loan waiver were preceded by protests, blockades and some spontaneous violence. But this time the violence appeared more organized. There is nothing to suggest that this will end with one time waiver of loans. This appears to be a natural corollary of the first point. Not waiving loan would be considered violation of a legitimate "Right" and hence violent protests would be considered "in order".

Forth, the construct of "farm loans" is diverging wide from "farmers' debt".

The rise in aspirational consumption; distortion of social customs (especially marriage, death, birth) for the sake of vanity, ignorance, and misguidance; rise in crime and litigation expenses; rise in cases of chronic diseases and hence prohibitive healthcare expenses form an overwhelming part of "farmers' debt". This debt usually has nothing to do with farming activity.

Moreover, "farm loans" are also becoming riskier as the cost of input (seeds, agro chemical, equipment rental, wages etc.) is rising along with the output prices. However, in case of crop failure the quantum of loss is much higher as compared to, let's say, 10years ago.

In my view, farm loan waiver is just like first aid. It cures no problem.

...to continue tomorrow

Strategy 2H2017

Thought for the day

"Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present."

—Marcus Aurelius (Roman, 121-180)

Word for the day

Sundog (n)

A small or incomplete rainbow.

Malice towards none

PM Modi loves to surprise people. Great!

What if people surprise him?

First random thought this morning

I don't keep more than Rs500 currency in my wallet, because I fear government may scrap currency notes anytime. My faith in the examination system and meritocracy is seriously diminished. I seriously doubt any data published by the government. I am being told not to trust the story of Ramayana that my grandmother used to raise me as a good human being. I am sure my tax liabilities are going to be rise materially. To make the matter worst, Indian cricket team has lost to Pakistan. I must buy some hope.

Strategy 2H2017

As discussed in past few posts, I believe that—

(a)   Indian macro environment seems stable at present, however there is not much visibility for further improvement in near future;

(b)   Consumer inflation may ease further due to excessive supply. Manufacturing inflation may also stay low due to lower commodity prices, poor pricing power and stronger INR. However, rates may not fall much due to a variety of reasons, like rate trajectory in developed economies, fiscal pressures due to political reasons, falling private savings rates and capital constraints at banks. The real rates may therefore continue to be higher.

(c)    There is little visibility for improvement in private investment demand. The government investment demand visibility is limited to a few sectors (mainly roads and irrigation).

(d)   The consumption demand may remain stable. However, there is little visibility of any marked improvement in consumption demand.

(e)    The corporate earnings may not grow at the rate of 20% CAGR over FY18-FY19. The growth is more likely to be 12-16%, depending upon (i) how fast situation normalizes post GST implementation; and (ii) how effectively NPA resolution efforts yield results. However, given cost efficiencies, better capital allocation, financial restructuring etc., the quality of corporate earnings has improved. There is therefore justification for some premium valuation over long term average of ~15x PE ratio.

(f)    There is virtually no case for further re-rating of Indian equities. Post 1QFY18 results, we may in fact could see slight de-rating to 16-17x from the current 18-19x.

(g)    The upside in equities in next 12-15months seems limited, insofar as the benchmark indices are concerned. The investment opportunities therefore would mostly exist beyond the benchmark indices.

My strategy for 2H2017 would be as follows:

·         Continue to remain overweight in equities. Prefer long term debt.

·         Focus on globally competitive businesses, preferably with significant IPR assets, market leadership and high quality of earnings.

·         Underweight capital goods manufacturers.

·         Prefer road and water project contractors and asset owners with stronger balance sheets.

·         Prefer consumption proxies, e.g., packaging, supply chain, financing etc., versus expensive final good producers; auto OEMs.

·         In financial space prefer consumer NBFCs and select MFIs.

·         Continue to own large real estate developers, especially those with sizable land bank and lower dependence of pre-sales.

·         Lowering overall 2017 return expectations to 12%, including 1% dividend yield.