Been there seen that

Thought for the day

"Properly speaking, history is nothing but the crimes and misfortunes of the human race."

—Pierre Bayle (French, 1647-1706)

Word for the day

Deontology (n)

Ethics, especially that branch dealing with duty, moral obligation, and right action.

Malice towards none

Some analysts are suggesting that Gujarat election outcome would be critical for stock market.

I would like to know how and why?

First random thought this morning

Fringes are playing some interesting roles in Indian politics.

The right wing fringes are distracting peoples' attention from core issues and indulging them in frivolities like Love Jihad, Beef, Padmavati, et. al.

The left wing itself is at the fringe. Nonetheless its fringes are busy in protecting the freedom of expression of Indians. They believe the only way to protect FoE is to make sure that only they are allowed to speak.

The centrist-socialist fringes are busy in cracking sickening jokes on social media so that they can make Rahul Gandhi look like a towering statesman.

Been there seen that

As mentioned yesterday, a seed of worry is sprouting somewhere back of my mind. The more I strive to find the drivers of current equity rally, the more I get confused.

The rally was driven initially by macro improvements. But now most of the macro improvement seems to have peaked, and FY19 may actually see some of the macros like twin deficit and inflation may actually deteriorate.

2QFY18 has shown lots of promise for earnings improvement. But even after factoring in the rather optimistic growth forecast for FY19, the current valuations look stretched, leaving no margin for error whatsoever.

As a broader benchmark, under the current interest rate and inflation expectation scenario, a conservative investor like me would be comfortable with a PER between 15-25 for non-cyclical businesses. For cyclical commodity businesses the comfort would end in 8-10 band.

I am still not be comfortable valuing asset heavy businesses with relatively longer and unpredictable revenue cycles on price to book (P/B) or replacement cost basis; because it goes against the principle of going concern. If at all these businesses might be valued at Net Realizable Value (NRV) for limited purposes of judging solvency conditions.

Evaluating financial stocks purely on the basis of net book value is also mostly not a good idea. It is important to consider the profitability and reliability of the book as such.

These days any query on corporate database would throw a long (ominously long) list of stocks trading at EV/EBIDTA ratio of over 20. (EV = Market capitalization plus Net Debt; and EBIDTA is earnings before interest, depreciation and tax). It is even more scary to read research reports early in the morning which find stocks with EV/EBIDTA ratio of 20+ as attractively valued.

In case you find this blabbering of mine too academic, I agree. Whenever I suffer from indecisiveness or I am confounded, I go back to text books in search of a solution.

In my view currently the following three are the primary drivers of equity prices in India:

(a)   Hope of material improvement in corporate earnings. Rise in public expenditure (both revenue and capital) and hope of revival in rural consumption are primary factors that are kindling this hope. Though not completely baseless, in my view hopes of 20%+ earnings growth in FY19 may not materialize. The prices may therefore have crossed over the line of reasonableness and heading towards the territory of bubbles.

(b)   Incessant flow of domestic funds. Still low equity exposure of domestic investors, even after a significant rise in recent months, is motivating many investors and traders.

This time the argument is that demonetization of currency and GST have lead to material contraction in the cash economy. A large part of the household and private sector savings that were out of the formal financial markets is bound to find its way into the financial market, mostly into publicly listed equities.

This trade I have seen in early 1989-1992, mid 1994-1996, 1998-2001, and then in 2004-2008.

Every time there was an argument of structural changes in the market that would sustain the households' interest in equity investment. In early 1990s it was opening of capital markets and beginning of private mutual fund industry. In mid 1990s it was bank recapitalization, restructuring of UTI, flood of new IPOs, in late 1990s it was ESOPs and our engineers returning with bagful of dollars, and a decade back it was cheap credit, FDI reforms, tax reforms and all that.

Unfortunately, on all previous occasions, it had been ferocious — on the way up and on the way down. The upswing we are witnessing and enjoying. Please keep your seatbelts fastened for the descent, even if you can't see it around the street corner yet.

(c)    The alternatives like gold, bonds, real estate are still looking worse.

On valuations there is another rather strange argument is being relied upon heavily.

Many analysts and fund managers have argued that the current PE ratio of Sensex is much below the peaks seen in previous bull markets, and therefore, the market is nowhere close to a bubble territory.

I have two comments to make on this.

1.    Since 1990, every subsequent bull market has peaked at a lower PE ratio as compared to the immediately preceding bull market.

2.    The average life expectancy in India is close to 70yrs. Does it mean that people below 60yrs of age need not take care of their health as they are not likely to die anytime soon!

What if markets peaked at 25x PE ratio last time. Does it mean that they cannot correct from 20x level this time?

There are other arguments like Market Capitalization to GDP Ratio.

I would be sharing my thoughts on that in subsequent posts.

Valuations - Starting from the end

Thought for the day

"It is pure illusion to think that an opinion that passes down from century to century, from generation to generation, may not be entirely false."

—Pierre Bayle (French, 1647-1706)

Word for the day

Macaronic (adj)

Composed of a mixture of languages.

Malice towards none

Has the government erred in not marking the birth centenary of former Prime Minister Mrs. Indira Gandhi?

First random thought this morning

LKA build BJP from almost zero to a force to reckon with. NaMo has strengthened this force materially. But one thing that has confounded many is why LKA could not achieve what NaMo has.

I think I have solve at least first stage of the puzzle.

LKA mobilized millions in the name of Ram temple, but never tried to channelize the mob into a positive force working for betterment of life. Whereas NaMo mobilized millions of youth the name of corruption and has shown intent to channelize them into a positive force to work for clean India, self reliant India, self employed India, etc. This positive intent has made all the difference.

Karni Sena might have a lesson to learn here.

Valuations - Starting from the end

In past bull markets I have seen many analysts reengineering their valuation arguments. Instead of arriving at the fair value of a stock through the conventional earnings, cash flows and replacement value arguments, they would seek to apply innovative and fancy valuation criteria like foot falls (for retail stores), eye balls (for ecommerce portals), price to growth or PEG (for IT start ups), NAV per share (for real estate developers) etc. to justify the current market price (CMP). In this case CMP becomes the starting point of analysis.

I can see a similar trend emerging in the current market environment also.

In conventional sense, the return on the investment in publically traded equity is a function of 3 factors (a) earnings growth; (b) changes in price earnings (PE) ratio and (c) dividend.

The earnings growth is a function of multiple factors, e.g., (a) capacity (production capability); (b) demand environment (market leadership); (c) competitive landscape (pricing power, cost advantage); (d) innovation and technology advantage; (e) resource availability (raw material, labor, capital, managerial bandwidth etc.), etc.

The price earnings ratio (PER), one of the most popular equity valuation criteria, is the ratio between the earnings of a company and its market value. It broadly signifies that at the current rate of earnings how many years it will take for the company to add the value which an investor is paying today. Principally, an acceptable PER for a company's stock is defined by (a) the return on equity (RoE) a company is able to generate on sustainable basis and (b) the growth rate of earnings that could be achieved on sustainable basis. A company that could generate higher RoE consistently and is likely to grow faster, should be assigned a higher PER as compared to the ones which generate lower RoE or has low or highly cyclical earnings growth.

A rise in PER, if not commensurate with the rise in earnings profile needs deeper scrutiny. Sometime the rise in PER occurs due to correction in anomalies (undervaluation) of the past. This is a welcome move. Sometime, PER changes (re-rates) due to relative forces, e.g., rise of PER in comparable foreign markets or change in return profile of alternative assets like bonds, gold, real estate etc. This is usually unsustainable and therefore a short term phenomenon. Many times, demand-supply mismatch in publically traded equities also drives re-rating of PER (excess liquidity chasing few stocks and vice versa). This is again usually a short term phenomenon.

Sustainable rise in dividend yield is generally a sign of stable profitability growth (P&L improvement) and strong financial position (B/S improvement) and stronger cash flows. In some cases however it could reflect stagnation in growth.....to continue tomorrow

Mood of markets - divergent views

Thought for the day

"Do you know because I tell you so, or do you know, do you know."

—Gertrude Stein (American, 1874-1946)

Word for the day

Attenuate (v)

To weaken or reduce in force, intensity, effect, quantity, or value, e.g., to attenuate desire.

Malice towards none

Those clamoring for Rajput pride and opposing #Padmavati may please do something to stop female infanticide and incest that plagues their society and makes life hell for millions of living Rajasthani women.

First random thought this morning

There is section of people who is accusing judiciary and regulators for over enthusiasm and activism. Their grouse is that judiciary is overstepping its jurisdiction and may even be infringing the legislative and executive territory.

The point is how did our system reach this stage. It is clearly the failure and corruption of the legislative and executive that is driving this trend.

For example, if executive and legislature were proactive in checking the menace of pollution, why would NGT be needed at first place, and even if constituted, why would it need to pass some seemingly ridiculous orders!

Mood of markets - divergent views

In past few weeks, I have read a number of research reports and market analysis. I have also heard the views of a number of fund managers and investment strategists. Unfortunately, I have not been able to decipher much from all this. Admittedly, my prejudices could be major culprit here. Therefore, I would not like to burden my readers with my conclusions based on the views and opinions of experts.

I would however like to share some guideposts that may help readers form their own judgment about the current mood of markets.

I find that there are two distinct camps of analysts and fund managers:

(a)   First camp comprises of those who have seen the exuberance that preceded the last global financial crisis (GFC) and also the melt down that followed it. Experts in this group have seen high growth, full employment, rising interest rates and double digit inflation, Lehman collapse, Merrill Lynch sale and General Motors at brink of bankruptcy. These experts were stress tested for 1930s type of global depression conditions. Many of these also completed the cycle of million dollar bonuses to no pay hike for 5-6yrs. Many of these navigated through GFC adroitly and manage to grow their stature. While others sank with the market but have staged a comeback, but with bruised egos and diminished stature. Most important, experts in this group have experienced asset price falling 50-80% in a matter of one year, from a all blue sky scenario.

(b)   The second camp comprises of young people in their late 20s or early 30s, who started their investment career post GFC. These bright guys have mostly worked in 'whatever it takes" and environment, characterized by abundant liquidity, near zero interest rate, very low inflation, low growth that is acceptable as "new normal". The people in this group have only seen asset prices rising steadily while energy prices declined by more than 50%. The belief seems to be that events like Greece default, Brexit, China slowing down from 9%+ growth trajectory to 6%+ growth trajectory, major emerging economies like Russia and Brazil struggling for growth, and India growing at much slower pace are minor aberrations and asset prices have only one direction to move and that is north.

The stance and arguments extended by both the groups are obviously contrasting. Though fund managers from both the groups might be fully invested, the asset allocation and sector preferences do vary materially. Emerging Markets Debt, Gold, US Treasury, Euro, Japan, Chinese mid and small caps, Bitcoins, Frontier Markets etc. are some of the major divergences among the these two groups of experts.

Another stark difference is seen in the valuation argument, especially for equities. While the first group mostly sticks to the conventional valuation matrix, the second group is innovating methods that would justify the current price....more on this next week.

Judging mood of market

Thought for the day

"The nineteenth century believed in science but the twentieth century does not."

—Gertrude Stein (American, 1874-1946)

Word for the day

Pneumatic (adj)

Of or relating to air, gases, or wind

Malice towards none

Rahul Gandhi - The Alchemist.

RaGa never fails to amaze us with revelation of his new side everyday!

First random thought this morning

Sometimes I find it very unfair. Price of a publicly traded equity share can rise infinitely. But it can fall only 100%.

The history of stock market therefore is dominated only by the winners. No one bothers to remember the stocks which lost 100% of their value. Even if these losers outnumber the winners by 100:1.

Judging mood of market

In the past 17 odd weeks, since Nifty first touched 10K level, the simple average traded value of Nifty has been 10064. The value will be lower if we take the volume weighted average. In this period market breadth has remained decisively negative. The net institutional flows (DII and FPI combined) have been mostly neutral in past 4months.

In period from July to October over Rs220bn have been invested in domestic equity mutual fund schemes through systematic investment plans (SIPs). The current monthly run rate for equity SIP flows is over Rs56bn/month.

This is the period when some significant economic events have taken place, the most notable being implementation of GST. The investors and businesses had been waiting eagerly for this event for past many years. Besides, implementation of new Bankruptcy code and announcement of a comprehensive plan to recapitalize beleaguered public sector lenders are being widely acclaimed as transformational events for Indian economy.

Two sets of quarterly results have been announced in this period. The general consensus amongst analysts and fund managers (at least going by their public utterances) appears to be that earnings for corporate India have bottomed out and a sharp recovery in imminent. Many reputable global fund managers and investment strategist who had turned their back on Indian equities have turned bullish on India in this period.

In the period between July and now, INR has weakened vs USD by almost 1.5%; benchmark yields have jumped up by almost 10%; RBI has cut policy rates once by 25bps and inflation has jumped higher by 200bps.

However, after scaling the mount 10K in last week of July 2017, Nifty has literally gone nowhere, despite much excitement and enthusiasm.

 

The moot point is weather the markets are still assimilating the changes and may make a move up after consolidating for few months; or market has already assimilated the changes and decided that rally since February 2016 is overdone and a correction would be in order....to continue

 

 

 

 

Assimilating the change

Thought for the day

"What is the answer? In that case, what is the question?"

—Gertrude Stein (American, 1874-1946)

Word for the day

Razzle-Dazzle (n)

Showiness, brilliance, or virtuosity in technique or effect, often without concomitant substance or worth; flashy theatricality, e.g., The razzle-dazzle of the essay's metaphors cannot disguise its shallowness of thought.

Malice towards none

In childhood we had summer vacation and Christmas break.

My children now have (a) Heat wave vacation in May; (b) Cold wave vacation in January; and (c) Smog break in November.

First random thought this morning

In last one month two criminal cases have shaken everyone's confidence in Indian legal and judicial system. In infamous Aryushi murder case and Pradhyumn murder case, police, administration and lower judiciary seems to have acted purely under influence of perceptions created in media (electronic, print and social).

In knee jerk reaction steps are taken ruining innocent lives. Police arrests people based on media hype. Judges deny bail on ground of morality rather than legality of the case. State administration announces relief and mitigation measures based on TRP of the issue.

It's scary scenario. If you are not scared, pray you do not become the victim one day.

Assimilating the change

As mentioned yesterday, a number of changes are taking place in the global order that shall certainly have far reaching impact on our lives. Even though many of these changes may not look like so profound at this point in time.

It is important to note that we perhaps have seen the longest period of peace in Christian era with no major armed conflict since Vietnam war ended in 1975. The conflicts in Iraq, Kuwait, Afghanistan, Somalia, Bosnia, Syria etc. have been localized and never threatened the stability of world order. This non-violence and peaceful co-existence is not the basic human instinct in my view. It is critical to see that the beast that has been sleeping for 50years does not raise his head.

The three changes that are worth taking note are listed below. In my view, these changes are profound and will have far reaching implications for the global order.

1.       Elevation of Xi Jinping

The amendment of the party constitution effectively confirms Xi Jinping’s as the Mao Zedong of the 21st century – a top leader with no constraints on tenure or retirement age.

As the Independent puts it "The inclusion of Xi’s name in the party’s document makes him only the third Chinese leader to be so honored, with his ideology joining Marxism-Leninism, Mao Zedong Thought and Deng Xiaoping Theory as a “guide to action”. It will now become compulsory learning for Chinese students, from primary schools through to universities."

After Mao, Communist Party ruled through a system of collective leadership. Now the party moves backward, again betting on a man who aims to restore the party’s central role in society, and nation’s central role in global affairs.

Xi Jinping thought embodies two important principles (a) the Party is in control of every aspect of life in China, from the economy to the internet, politics, culture and religion; and (b) China is on a path to become a true global superpower on its own terms. This puts to rest the expectations of China opening up and becoming more democratic as it became wealthier, converging its interests and political system with those of the West. The idea of political reform in a Western sense is now firmly ruled out.

Xi’s wants a nationalist, assertive China that will not threaten the world but will resolutely defend its interests.

Mao’s era was marked by revolution, Deng’s reformed and opened up China putting it on the path to become a global economic power. Xi’s era is likely to be characterized by full control and nationalism. To me it effectively seems like end of the unipolar world that emerged post collapse of USSR. I see Xi's OBOR endeavor as nothing but an attempt to erect the second pole in global geo-politics.

2.       Right wing swing of global politics

If someone is thinking that Macron's victory in France has put breaks on the meteoric rise of right wing nationalism in global politics, he/she may be terribly wrong, in my view.

The swing that was widely recognized post Brexit vote last summer, has only gained strength since then. Political developments from US, UK, Spain, Czech Republic, New Zealand, India, et. al. all provide strong evidence to this trend.

Such rise in right wing nationalism historically has invariably worked against the notion of globalization and threatened the global peace.

3.       Arab spring 2.0

The recent developments in Saudi Arab are most significant. It would be a mistake to see these developments as localized intra family struggle for power.

This must be analyzed in the context of (a) declining oil economy and rise of electric mobility; (b) strengthening of global alliance against Islamic fundamentalism, especially in view of the rise in terror attacks in Europe, that (c) forced isolation of terror sanctuaries like Qatar, Syria, Yemen, Lebanon, and Pakistan.

The elevation of crown prince of Saudi Arab Mohammad Bin Salman, who vows to transform SA economy beyond oil, implement radical politico-religious reforms, curb terror funding and end hostilities towards Israel to work together for a larger objective is an encouraging sign.

Nonetheless, these developments raise the specter of an armed conflict in the region, with China (and its ally Pakistan) and Russia taking sides with Iran, Syria, Lebanon and Qatar.

Besides long term geo-political implications, a sharp spike in energy prices could create imbalance in global markets. The positive would be a strong push to electric mobility (advancing peak oil demand forecasts from late 2030s to mid 2020s).

I believe that the world is certainly moving fast towards the new dawn.

The transition, like any previous episode, will obviously be tumultuous. But the opportunities will also be tremendous, as always.

I am definitely not eligible to analyze the full spectrum of the change and its wider implications. The idea of this writing is just to make readers aware and to motivate them to undertake intensive study of the patterns.

Nonetheless, I find it important to assess the implications for India and evaluate my investment strategy in that light.

...to continue tomorrow

In search of black swans

Thought for the day

"The earth is the earth as a peasant sees it, the world is the world as a duchess sees it, and anyway a duchess would be nothing if the earth was not there as the peasant sees it."

—Gertrude Stein (American, 1874-1946)

Word for the day

Logrolling (n)

Cronyism or mutual favoritism among writers, editors, or critics, as in the form of reciprocal flattering reviews; back scratching.

Malice towards none

0.00011% of 1.3bn is 1430. 33% of demonetized currency is Rs4.50trn.

If with all restrictions, 1430 people could deposit Rs4.5trn in banks in 50days, then our system is totally dysfunctional and I don't trust anyone.

First random thought this morning

The entire political establishment in the country seems divided in two camps - those supporting DeMo and those opposing it.

Both camps are using their full might (supporters issuing multiple full page advertisements in newspapers and hours of TV advertisements and those opposing holding protest rallies and public meetings) to highlight their viewpoints.

I have three questions - (1) How many common people are still bogged down by Demo? (2) Why does BJP still want to keep the DeMo alive? (3) Why Dr. Manmohan Singh is not retiring from active politics?

In search of black swans

Couple of weeks ago, I received a message in my mail box from a friend who has keen interest in astrology. I read the message with some passing interest and also forwarded (almost mechanically) to few contacts who I thought might be interested in astrology.

The message read like this:

"Saturn is ready to move its house once again from 26th October 2017. This is the last but the most significant change of 2017, as Saturn moves from Scorpio to Sagittarius, where it will be transiting for about 2 years & 3 months (till 24th January 2020) bringing major changes in our life that are currently not imagined, planned or on the anvil. Sagittarius is a strange sign for Saturn as it is an aggressive sign full of fire, openness & impatience. All these traits are just the opposite of the true nature of Saturn, which would ensure that changes in life would come in due to changed circumstances and mostly out of reactions rather than planned or pleasant coincidences of life!

Saturn in Sagittarius has a strange history in our lives as well as the history of the world. If we review the last time Saturn visited Sagittarius during 1987 to 1990, we had experienced a sea of changes in our world. History is witness to the foundation of the European Union in July 1987, end of Iran-Iraq war after 8 years, World Wide Web (internet) invented by Tim Berners-Lee, Unification of Germany & fall of the Berlin wall; Mikhail Gorbachov was given the Nobel peace prize & Boris Yeltsin became the president of Russia & last but not the least, Nelson Mandela was released. These developments initially during that time seemed small & innocuous but have changed the shape of our lives over the last 30 years.

The same cycle is seen again as our life is ready to change once more. It’s time when we should keep an eye on the modifications in our surroundings and be ready to accept and adapt."

I am no expert in astrology or international affairs. No part of my formal education included study of geo-politics, strategic affairs and international relations. I may therefore not be competent enough to comment on these events. Nonetheless, as a out and out commoner, I can feel that the extant Global Order is witnessing some material changes and these are likely to impact my economic life at least. I therefore need o

Some of these changes when seen in isolation may look like local in nature. But if juxtaposed to the other events that are taking place simultaneously in the other parts of the world, it is difficult to deny their potentially larger impact.

Three decades back when the world was ushering the big changes, India was still mostly a closed society (and therefore a closed market & economy) which was just beginning to open up to the world. The impact of global events was therefore mostly felt positively, as those developments made it easier for us to enter the global mainstream and integrate with the world economy. It no longer is the case. This time we shall feel the tremors in full intensity and reap the fruits too....to continue tomorrow

People over Markets

Thought for the day

"Communists are people who fancied that they had an unhappy childhood."

—Gertrude Stein (American, 1874-1946)

Word for the day

Netiquette (n)

The rules of etiquette that apply when communicating over computer networks, especially the internet.

Malice towards none

The question after all is "Will the Lotus finally bloom in TN?"

First random thought this morning

As per the latest Global Nutrition Report, more than half (51%) of all women of reproductive age in India are anemic. Not a medical expert, but I do believe that an anemic women is less likely to give birth to a healthy child.

One wishes, the government would accord the same priority to the quality of life index as it does assign to the ease of doing business index. After all, finding adequate number of healthy workers is also an ease of doing business matrix.

The thought came to my mind because our health minister, like all other ministers, had promptly commented on the recent jump in India's ease of doing business ranking, though no mention of this poor position on Nutrition index has been made.

For record, in past a BJP leader from Gujarat had attributed these anemic conditions to women's dieting habits adopted for vanity purposes.

People over Markets

Many readers have commented on my yesterday's post . The most popular view is that I should not delve too much into technical jargon or background material; rather I should present my own views and suggestions based on my own assessment of the situation based on my personal experiences.

I bow to my readers' wishes and promise to keep posts simple and straight.

Now coming to the issue of finding suitable policy choices, determining the most appropriate amongst these choices, evolving a robust policy framework and establishing strong institutions to manage the policy framework so evolved - I have following to offer.

In my view, since independence the core of Indian economic policy framework has been Feudal; regardless of the fact that it is has been disguised as Socialist, Semi Socialist, and Largely Free Market at various points in time. Our political class has always taken pride in positioning themselves as the "Provider", rather than working as an "Enabler" of enterprise and "Trustee" of resources.

It is critical to note that after three decades we have a political establishment with overwhelming dominance. The overriding influence of the central leadership over the vast area of dominance (BJP ruled states now encompass ~60% of Indian population) allows near seamless economic integration of many large states like UP, MP, Maharashtra, etc.). At the same time the strong aspiration of BJP leadership to rule over the rest of the country (especially Bihar, West Bengal, Odisha and Karnataka) motivates them to focus on economic development of these regions as well.

The urgency and commitment shown in implementation of GST is more popular indication of the economic integration efforts of the incumbent government.

The even more relevant efforts include pan-Indian approach for railways and highways expansion, an apolitical approach for power sector reforms, efforts to establish a nationwide agriculture market, gradually phasing out tax incentives on area specific investments, amendment in mining laws that allows the mine holding states to draw a larger share in royalties and incentivizes putting manufacturing facilities closure to raw material, etc.

Replacing the legacy Planning Commission, which was empowered to make development plans in consultation with states, with a more advisory body NITI Aayog. While both the bodies came into existence through executive orders and depend on the government's will, the planning commission had assumed an important role in the 5yr plan based development model adopted by India since independence.

The new design however appears to suggest that we no longer want to follow the central planning model that was loosely based on the Soviet command based economic development model.

But at the same time, it nowhere suggests that we are ready and willing to adopt the laissez-faire model of USA, where markets are free and federal states are materially powerful.

Reconstitution of PMEAC also highlights the intent to accord more importance to the market economists over the development economists who have so far dominated the Indian policy making arena.

Though the intent and effort of the incumbent government to bring about changes in policy framework are commendable, in my view the Incrementalism may not be an appropriate strategy in current circumstances.

What we need is a revolutionary change, in the real sense of the term.

In my view, the feudal or quasi colonial model of development, that our successive governments have adopted, is not desirable. Considering the diversity of our country, and character of our democracy, we need to follow a participative model of development, where the local communities are made equal partner in the process of development. The focus of development should be people and not markets, which unfortunately has been the case in past three decades of economic reforms.

In pursuit of appropriate policies

Thought for the day

"The thing that differentiates man from animals is money."

—Gertrude Stein (American, 1874-1946)

Word for the day

Atemporal (adj)

Free from limitations of time

Malice towards none

Is one of the finest Indian actors of current times, Nawazuddin Siddiqui, following the path taken by the likes of Om Puri, Raghuvir Yadav, and more recently by Kapil Sharma.

First random thought this morning

There are many Indian youth in their 20s and early 30s actively participating in financial markets in various capacities, e.g., analyst, advisor, investor, trader and even money manager.

Most of these youth may not have real life experience of rising inflation and rates, a bear market in equities and bonds, financial crisis of global scale, high volatility, etc.

It may be appropriate time for them to take a break and study the past carefully and skill themselves in strategies for a market that may not be too benevolent.

In pursuit of appropriate policies

I have cited this example, in one of my earlier posts. I would like to reiterate it before I offer my views on the reforms in Institutions of Economic Governance, that has been identified as one key area by PMEAC for fostering economic growth.

Most of us would have encountered traffic cops hiding behind trees, electric poles, etc., waiting for someone to commit a traffic crime like jumping a signal or violating the prescribed speed limit.

It is usually annoying on an isolated road with scant traffic. Some of us would have little motivation to obey traffic rules under such circumstances. Many a times we even would not notice the traffic signal as there is no traffic on either side of the signal. You leisurely cross the signal and suddenly two cops spring up from nowhere waiving at you to pull over. Thereafter usually some negotiations are pursued and a suitable deal is arrived at.

But have you noticed that these traffic cops are usually not seen where serious traffic jams take place every day morning and evening. Have you ever seen a traffic cop filling a small two feet wide pit in the middle of the road, that is causing traffic jam of several kilometers. At least I have not.

So where is the disconnect?

In my view, the disconnect lies in the orientation of the personnel assigned the duty to manage the traffic on roads.

I did speak to some of them, asking "what is your primary duty?" A majority of them said "to enforce traffic rules". No one said "to ensure safety & security of people using the roads; maintain smooth flow of traffic; and/or properly guide the road users". None of them was aware of the bird named "right of way" on the road.

Prevention does not appear high in our priority of things. Punishment is what we pursue vigorously.

This perhaps applies to the whole spectrum of the public compliance management system - be it police, taxation, civic administration or anything else.

One may argue that it's not only the public compliance system, but the personal management also; as reflected in disease management at household level (including overwhelming use of self medication).

Our schools teachers are also mostly focused on the "marks obtained" by the students rather than focusing on the overall learnings and personality development of the students, including inculcation of traits like patriotism, nationalism and compliance.

Consequence is that we are popularly regarded as a society which is cynical; argumentative; performs only when whipped; complies only for the fear of punishment; and usually puts personal interest before the common interest. The trust abyss between police/security forces and citizens is also a consequence of this orientation.

Now coming to our main topic, it is pertinent to note what Joachim Ahrens highlighted in his 2002 book titled "Governance and Economic Development".

As per Ahrens, in the decades of 1980s and 1990s, the developing world has experienced two events of lasting significance.

First, external shocks, particularly the debt crisis at the beginning of the 1980s, hit the less developed countries (LDCs) and contributed (along with underlying policy weaknesses) to economic stagnation, a decline in real per capita income, and macroeconomic instabilities.

Secondly, a number of countries moved away from authoritarian rule towards democratization.

Numerous countries in Latin America, Asia and Africa responded to these shocks by abandoning their state-led development strategies mainly based on import-substitution policies and embarking on market-oriented economic policies emphasizing privatization and external liberalization, as the challenge of economic policy reform became more complicated.

The coincidence of these historical processes raised the question about the interaction between political and economic changes and the political economy of policy reforms.

Since, the political, social and economic changes are obviously strongly correlated, it is important to understand what kind of political institutions are conducive to formulating, implementing and enforcing appropriate economic reforms.

Moreover, since economists have usually treated politics and institutions as exogenous, they have been observing the effects of policies on economic development, but have generally no analyzed the determinants of policy choices.

Meier (1995) identified a low level of savings, a foreign exchange constraint, the lack of human resource development, and neglecting the agriculture sector as significant constraints that limit the achievable rate of economic development. Meier argued that an economy's ultimate success in narrowing the gap between its actual and potential rate of development critically depends on the political leadership's commitment and ability to implement and enforce appropriate policies.

As Ahrens highlighted, these days it is widely accepted that the stability of a government, the pursuit of appropriate policies and capacity for sound public management are at the core of sustained development.

...to continue tomorrow