Do it yourself

Monday, November 18, 2013

Can we?

Thought for the day

“Most people are other people. Their thoughts are someone else's opinions, their lives a mimicry, their passions a quotation.”

- Oscar Wilde (Irish, 1854-1900)

Word of the day

Serotinal (adj)

Pertaining to or occurring in late summer.

(Source: Dictionary.com)

Shri Nārada Uvāca

Could the “vegetable loot” incident of West Bengal become a trend?

Can we?

Hum ko maloom hai jannat ki haqeeqat lekin, Dil ke khush rakhane ko Ghalib ye khayal achha hai (I am aware heaven is an illusion; but I do not mind striving for it) – Mirza Ghalib

Since long Taj Mahal has been used to symbolize the India’s history, tradition and culture. In recent time, Yamuna Expressway, a highway connecting the National Capital Region (NCR) to Agra, the city of Taj Mahal, has become a popular metaphor for economic development and growth of India.

In our recent trip of some north Indian states we took this less traveled road to assess the state of India’s glorious past and promising future. What we observed though not surprising but was certainly disconcerting.

We found the administration and people in general are (a) unaware and unproud of our history, culture & tradition and (b) mostly unprepared for faster economic growth. Gurudev Rabindranath Tagore would have been a sad person today to see that after 66years of political independence - neither the minds are without fear nor the heads are held high.

On the much acclaimed world class Yamuna express way, we observed that it is almost impossible to drive fearlessly as-

· villagers freely cross the expressway with fuel wood, animal feed etc. on their head;

· youth on motorcycles are frequently seen driving in wrong direction that too without helmet;

· some revelers were seen doing beer party with their vehicles parked dangerously on the road;

· even state transport busses were stopping illegally to pick and drop passengers;

· almost every motor vehicle was seen speeding over the permissible limit.

After exiting the expressway, the next 10kms to Taj Mahal is a torturous journey, passing through some narrow lanes and bridges that might take upto 75-100mins on a bad day. On reaching Taj you are welcomed by a strong stench of horse and camel dung as over two hundred camel carts and horse carts are used to ferry visitors from the parking lot to main entrance of the monument. You find serpentine queues at ticket window and security checkpoints. It usually takes more than 1hour to enter this modern wonder.

The visitors are chased by a mob of tourist guides who promise to save you from this 1hour wait period for a fee of Rs300-500. All these touts work closely with the security personnel posted at the monument entrance.

Inside this symbol of Indian spirit shoes and shoe covers were indulgently littered all around. Overall, the sight appeared a classical example of complete condescension for history and culture.

Given the contempt for history, culture & tradition, civic disobedience and obstructions to speed the faster and stronger economic growth that FM and planning commission deputy chairman are frequently talking about appears not only infeasible but undesirable too.

Wednesday, November 13, 2013

Food inflation conundrum - Case Study

Thought for the day

“Who seeks shall find.”

- Sophocles (Greek, 496-406BC)

Word of the day

Roger (Interjection)

All right; Ok; message received and understood

(Source: Dictionary.com)

Shri Nārada Uvāca

Is it a good strategy for BJP to invoke history in all their election rallies?

Food inflation conundrum III

After discussing with many farmers, agriculture scientists, government officials, bankers & social workers working in rural areas and agriculture related departments we discovered that small initiatives at village and panchayat level could enhance agriculture productivity substantially. The more complex reforms (land, labor, administrative, legal etc.) though highly desirable are not necessary to achieve the initial productivity gains.

We witnessed one such initiative in Shahjahanpur district of western UP, named after the Mughal emperor Shah Jahan.

Case Study

Shahjahanpur is primarily an agriculture district. The district has a population of over 3million with a literacy rate of over 60%. Over 70% population is engaged in agriculture related activity. Sugarcane, potato and mentha are main crops. Industrial landscape consist of Reliance power Rosa thermal power plant, KRIBHCO fertilizer plant, Defence clothing factory, a paper mill, some small sugar mills, couple of distilleries & some small menthol mills.

A large majority of farmers are small, having land holding of less than two hectare. Many marginal farmers have holding size of less than 10bigha (0.5 hectare). Electricity supply is restricted to 3-4hours a day. Land is fertile and ground water level good at 15-20feet. Most large farmers have leased out their land to landless farmers.

Most farmers rely on traditional agriculture techniques and manual labor. The average cane productivity is 150-175qtl/acre and potato yield is 1000qtl/ acre. The average net earnings for a small to medium size farmer is Rs35000. The official land price (circle rate for stamp duty purpose) is Rs7,50,000/acre.

Last year, a couple of enterprising youth took initiative to improve the farm productivity. They pursued around 70 farmers in 4 villages to engage in collective farming and successfully aggregated a 450acres. They engaged with the scientists of the Shahjahanpur Sugarcane Research Institute and Indian Agriculture Research Institute, New Delhi and obtained know how for improving productivity.

Improved potato seeds and cane saplings, solar power operated pump sets (at 50% subsidy) and cooperation from banks for financing 5 tractors, and 3 planters, and fencing of the farm to safeguard against wild animal raids (primarily boars and neelgai) helped the yields to rise by 40-50% 300/qtl for sugar cane and 1500qtl for potato.

A contract with a large processed food manufacturer meant 30% better realization for potato crop. With all infrastructure in place, they could take three crops in a year, along with mustard sown in between.

Since electricity supply usually comes for 3-4hours around midnight, the group has created 3 artificial ponds to store water, with the help of government subsidy. These ponds will also be also used as fish farms and efficient channel for deploying fertilizer and fungicides.

The average yield for the farmers came to Rs75000/acre despite damage due to excess rains. This may improve further as a part of the income is invested back in further mechanization.

Tuesday, November 12, 2013

Food inflation conundrum II

Thought for the day

“If the facts don't fit the theory, change the facts.”

- Albert Einstein (German, 1879-1955)

Word of the day

Lam (v)

To beay; thrash

(Source: Dictionary.com)

Shri Nārada Uvāca

A large majority of Delhites indulge in a variety of corrupt acts in their daily routine –squatting on public land being the most popular act of corruption.

No political party has spoken about this so far.

Food inflation conundrum II

…continuing from yesterday

As we suggested yesterday, to bring down food inflation on a sustainable basis, it is critical to make agriculture a viable business.

In our view it would take a combination of administrative, legal, social, economic and financial sector reforms to achieve the objective.

In short the following three things need to happen, viz., (a) Substantial rise in productivity; (b) Substantial rise in price of agriculture produce; and/or (c) fall in price of agriculture land.

Rise in productivity

Our discussion with many farmers, agriculture scientists and rural activists across states in North India, suggests that a substantial rise in productivity is possible without cumbersome land, marketing and labor reforms or building expensive infrastructure.

Some aggressively promotion of collective farming, institutionalization of farm equipment rental business, creating more awareness about intensive farming and moving the farmers away from traditional cereal crops towards cash crops could enhance yields by 50-100% in most cases.

In our view, the Food Security Bill, if implemented in right earnest could transform Indian agriculture from a mere self sustenance activity into a truly commercial activity.

Financial inclusion is another tool that could enhance productivity by making affordable institutional credit to small and marginal farmers.

Substantial rise in prices of agriculture produce

A substantial rise (2 to 3x) in most agriculture produce could potentially bring back interest in agriculture sector and incentivize substantial investment leading to higher productivity and eventually lower food inflation.

This one time measure could help making taxation of this sector politically and finically feasible thus improving the fiscal balance of the country.

The negative could be substantial rise in food inflation in the short term leading to higher rates and thus lower industrial growth and lower overall household savings.

Substantial fall in land prices

Substantial fall in prices of agriculture land could also help in improving yields and therefore attract fresh investments in the sector.

Such a fall, however could have serious impact on the consumer discretionary spend, as a large part of the growth in discretionary spending has been contributed by the wealth effect created through higher land prices.

The best solution therefore would come only from a mix of the above three. Any solution on these lines would take 3-5years to implement and another 3-5years to have a meaningful impact on structure of food inflation.

Tomorrow we shall discuss a real life case study to illustrate our point.

Monday, November 11, 2013

Food inflation conundrum

Thought for the day

“If you can't explain it simply, you don't understand it well enough.”

- Albert Einstein (German, 1879-1955)

Word of the day

Novitiate (n)

The state or period of being a beginner in anything, especially religion.

(Source: Dictionary.com)

Shri Nārada Uvāca

Do you find any similarity in the most popular prime time English News show and popular TV show Big Boss?

Food inflation conundrum

The economic and political commentary in past few months has emphasized a lot on positive impact of above average monsoon on the Indian economy, especially food inflation. Most have hoped that bumper crop would help bring down the persistent food inflation that would eventually lead to much needed monetary easing.

In past one week, we made an effort to assess the validity of this argument and found it thoroughly invalid in the current circumstances. After examining the economics of Indian agriculture, we concluded that food inflation will only accelerate in next many years, even if things start changing at fast pace from today.

We interacted with a number of farmers in Delhi, Haryana, MP, Punjab, UP and Rajasthan to understand the economics of Indian agriculture. The key highlights of our findings are as follows:

(a) In past one decade, the rise in the price of agriculture produce has lagged the rise in land prices significantly. Consequently, the yield on agriculture land has collapsed in most areas. For example, in Delhi, Haryana, Himachal, Punjab, Rajasthan, Western & central UP and many of parts of MP the yield in now even less than fixed deposit rates.

Land priced at Rs5-10lac an acre yields less than Rs75000/year for a medium and large farmer. For a small and marginal farmer the yield is Rs25000 to Rs50000 per acre/year, excluding the cost of self labor. If we adjust the yield for one crop loss every three year, lease rent and 24-30% interest that small and marginal farmer pays, agriculture is completely unviable business.

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

(b) A large majority of farmers in India are landless. 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 up to 5years to get out.

The next generation of landless farmer 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.

(c) Given the low returns, the current generation of medium and large farmers is also not much interested in taking farming as occupation. Most would want to sell the land or convert it into non-agriculture land.

Given the uneconomical holding size, low yields, unavailability of formal credit, and lack of interest in large farmers, mechanization of agriculture is not happening at desired pace.

In our view, to make agriculture a viable business and control food inflation on sustainable basis one or more of the three things need to happen, viz., (a) Substantial rise in productivity; (b) Substantial rise in price of agriculture produce; and/or (c) fall in price of agriculture land.

…to continue tomorrow

Friday, November 1, 2013

Congress has much more to worry than mere losing power

Thought for the day

“A pessimist is correct oftener than an optimist, but an optimist has more fun, and neither can stop the march of events.”

- Robert A. Heinlein (American, 1907-1988)

Word of the day

Obsequy (n)

A funeral rite or ceremony.

(Source: Dictionary.com)

Shri Nārada Uvāca

Is Arvind Kejariwal new Kanshi Ram?

Congress has much more to worry than mere losing power

The opinion polls conducted so far have predicted substantial losses for Congress Party in the coming election, both at the state and center level. If the current mood of people prevails till 2014 elections, there is strong possibility that Narendra Modi might lead the next government with Congress getting reduced to its lowest strength in the Parliament.

The popular debate presently is focused on (a) who will emerge winner Modi or Rahul in this contest of personalities; Modi seems to have clear initial advantage; and (b) whether Modi will be able to stitch together a larger enough alliance to be able to form a comfortable government to carry out his economic reform and development agenda; the jury is still out on this issue.

In our view, a win for Narendra Modi may not mean a mere loss of power for the Congress Party. It could have much more serious repercussions for the Party in general and many of its leaders in particular. We feel the Congress Party needs to take Modi challenge much more seriously rather than being dismissive of it. For example consider the following:

(a) The chasm between old feudal lordship within Congress Party and young turks has been widening since past few years. Loss in 2014 election will embolden the old guards. With Mrs. Sonia Gandhi not in best of her health, and Rahul being rejected by the people of India, we might see some Kamraj, Morarji Desai, Jagjiwan Ram, Biju Patnaik, Mamata Banerjee, Jagan Reddy Mohammed Alimuddin and Bhajan Lal sort of rebellion against the family. Nonetheless there could certainly be more episodes of Kamalapati Tripathi, Sharad Pawar and Sitaram Kesari sort of misadventures.

Priayanka Gandhi has not been tested yet, but in our view, faced with such a situation she may not be as successful as Mrs. Indira Gandhi was in overcoming the threat from Syndicate in late 1960’s.

(b) Absence of any recognized national level leader outside Gandhi family will encourage more secession on lines of Sharad Pawar, Mamata Banerjee, Jagan Reddy, et al. This could be especially true in case of states where Congress enjoys reasonably higher vote share but is doing poorly in terms of electoral wins, e.g., UP and Gujarat.

(c) With Narendra Modi at the helm, the secularism vs. communalism debate will become almost irrelevant breaking the very fulcrum of opportunist alliances that have kept Congress in contention since mid 1990’s. In a communally neutral political environment the regional parties would be more amenable to BJP which does not compete with many of these at state level and has demonstrated better track record in center – state relations.

(d) With Congress likely out of power for 5years, much reduced strength in Rajya Sabha and only a few states under its rule (forecasts suggest it losing Andhra Pradesh too, leaving it with just one big state under its rule, i.e., Maharashtra) the already meager cadre may further splinter away, making a comeback even more unlikely.

Thursday, October 31, 2013

Some said, some unsaid - II

Thought for the day

“The person who doesn't scatter the morning dew will not comb gray hairs.”

- Hunter S. Thompson (American, 1937-2005)

Word of the day

Crepuscule (n)

Twilight, Dusk

(Source: Dictionary.com)

Shri Nārada Uvāca

Ain’t “Legacy” a dynastic word?

Would Congress also claim the legacy of Subhash Chandra Bose, B. R. Ambedkar, Acharya Kriplani, Purushottam Das Tandon, Jai Prakash, Ram Manohar Lohia, Morarjj Desai, Jagjiwan Ram, V. P. Singh, and P. V. Narasimha Rao among others.

What about Pheroz Gandhi and Sanjay Gandhi?

Some said, some unsaid - II

…continuing from Yesterday (see here)

Said: “it is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth. It is in this context that the LAF repo rate has been increased by 25 basis points.”

Unsaid: The negative real rates persisting for long have eroded financial savings and weakened the foundations of growth. Expect rates to remain high or even go higher, till the time real rates become positive so as to incentivize higher financial savings.

Said: “With the reduction of the MSF rate and the increase in the repo rate in this review, the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete.”

Unsaid: The normalization of monetary policy means that the short term rates have bottomed at elevated level and the repo rate may not become the effective rate in near term. Moreover, it would not be reasonable to expect further easing of liquidity and/or foreign currency deposit/borrowing rules.

Said: “On the external sector, a perceptible narrowing of the trade deficit coupled with policy interventions have brought some calm to the foreign exchange market, but normalcy will be restored only when the demand for dollars from public sector oil marketing companies is fully returned to the market.”

Unsaid: The calm in currency market may not endure for long. Expect closure of swap window for OMCs in near future.

RBI calendar

· Mid-Quarter Review of Monetary Policy for 2013-14 on Wednesday, December 18, 2013.

· Third Quarter Review of Monetary Policy for 2013-14 on , January 28, 2014.

Tasks to be completed by end November

· Place the draft report of the group on Basel III Regulation on Countercyclical Capital Buffer on the RBI’s website for inviting comments/suggestions from various stakeholders.

· Place a draft of the proposed framework for Domestic Systemically Important Banks (D-SIBs) on the RBI’s website.

· Issue updated guidelines on stress testing of banks.

· To issue the Scheme of Subsidiarisation of foreign banks

· Revised restructuring guidelines for NBFCs

Tasks to be completed by end 2013

· Issue final guidelines on unhedged foreign currency exposures.

· Launch Inflation Indexed National Saving Securities for retail investors.

· Launch cash settled 10-year interest rate futures contracts.

Wednesday, October 30, 2013

Some said, some unsaid

Thought for the day

“If you ask me anything I don't know, I'm not going to answer.”

- Yogi Berra(American, 1925 - )

Word of the day

Somnambulism (n)

Sleepwalking

(Source: Dictionary.com)

Shri Nārada Uvāca

Should the election commission direct that during coming election:

(a) All lotus ponds should be covered.

(b) All people should keep their hands covered at all times.

(c) All bicycles should be kept under cover.

(d) All elephants should be kept under cover.

(e) All brooms be kept under cover and Delhi roads may not be swept.

Some said, some unsaid

RBI governor released the second quarterly review of monetary policy for FY14. Apparently there were no surprises in the statement made by the governor and the changes in monetary policy stance. We highlight some key points that might have remained unsaid in the policy statement.

Said: “Domestically, while industrial activity has weakened, strengthening export growth, signs of revival in some services along with the expected pick-up in agriculture could increase the real GDP growth from 4.4 per cent in Q1 to a central estimate of 5.0 per cent for the year as a whole. The revival of large stalled projects and the pipeline cleared by the Cabinet Committee on Investment may buoy investment and overall activity towards the close of the year.”

Unsaid: The modest economic recovery in 2HFY14 would totally depend on improvement in external sector and revival of large stalled projects. Reversals in global recovery and/or a dysfunctional government prior to elections would mean growth could end up at lower end of the projected 4.2% - 6.2% range.

Said: “In the meantime, with many large entities holding back on payments, liquidity pressures are building up on small and medium enterprises. A number (of SMEs) are facing conditions of financial distress. Remedies partly lie in the speed-up of government and public sector payments, and on measures to channel credit to small and medium enterprises.”

Unsaid: The financial stress in the system is mostly due to inefficiencies, inaction and corruption at the government and PSU level. Excessive risk aversion at Bank level may also be responsible for this to some extent.

Said: “Both wholesale and consumer price inflation are likely to remain elevated in the months ahead, warranting an appropriate policy response.”

Unsaid: Good monsoon outcome may not bring down food inflation. We need more effective policy measures (read supply side augmentation) to bring consumer inflation under control. In the meantime expect rates to remain higher.

Said: “We have calibrated liquidity management to the system’s requirements. We are providing liquidity through overnight LAF repos, through export credit refinance and through 7-day and 14-day term repos. We have also given greater flexibility in managing reserve requirements. Going forward, however, the more durable strategy for mitigating mismatches between the supply of, and demand for, funds is for banks to step up efforts to mobilise deposits.”

Unsaid: RBI does not have more leverage for providing additional liquidity. Banks should raise deposit rates to mobilize additional deposits. Real rates need to be positive to achieve equilibrium between credit demand and deposits.

…to continue tomorrow

Tuesday, October 29, 2013

25bps or 50bps does not matter much

The RBI’s macroeconomic review released yesterday has unleashed a debate over how much the Governor will tighten today.

In our view, the debate over 25bps vs 50bps is futile.

The concoction of 10yr yields 8.25-8.50%, WPI inflation 6.5-7%, CPI inflation at 8-9%; at a time when GDP growth below 5% is intoxicating enough to stop any major advances in the economy. It would not matter much even if Rajan maintains status quo today, or cuts MSF 25-50bps without touching the rates.

Prima facie it appears that RBI is fuelling fears of larger rate hike to deliver 25bps hike and still make the markets happy. Welcome Fed style policy making to RBI.

Syndicate Bank yesterday highlighted what to expect from most PSUs on asset quality in coming days.

Reality check @Nifty 6200 - V

Thought for the day

“October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”

- Mark Twain (American, 1835-1910)

Word of the day

Dither (v)

To act irresolutely; vacillate.

(Source: Dictionary.com)

Shri Nārada Uvāca

Why Rahul Gandhi is helping Narendra Modi’s cause?

Reality check @Nifty 6200 - V

Market internals

In past five years the capital market in India has mostly failed in its primary function, viz., facilitating entrepreneurs in raising risk capital from investors. The character of the market has thus got constricted to a trading platform.

In that also, the liquidity has remained extremely thin. Over 95% of daily volume has got concentrated in top 50 stocks. The average daily cash turnover is almost half of 2007.

More importantly, the household investors who historically supplied long term stable money to the capital markets have been gradually losing interest. The direct retail participation in equity market, both secondary and primary is at lowest level in more than a decade. Even in mutual funds and equity linked insurance schemes they have been in gradually exiting.

In a survey conducted in March 2013 we discovered that the shift of household investors away from listed equity is rather structural and not likely to reverse in next 5-7years at the least. (See “Retail Conundrum” Part 1, Part II, Part III, Part IV).

Further, the constitution of market turnover has dramatically changed in past five years.

Till 2007, most activity was concentrated in individual stocks and stock futures. Average volatility was high and therefore arbitrage premiums were good. The market manipulation at Index level was difficult and less rewarding.

However, presently, over 80% of average daily reported turnover is in Nifty options only. The top 15 liquid Nifty stocks account for over 95% of Nifty movement. The Index level manipulation is therefore easy and rewarding, whereas arbitrage premiums are unattractive as volatility is persistently low.

The equity investing is thus virtually degenerating into trading and gambling.

Building a case for secular bull market thus is unfathomable and futile.

Market technicals

We have witnessed a strong bear market rally in past 8weeks. This rally though not as big, ferocious and wide spread as July 2007 – January 2008 bear market rally, but is similar in structure and design.

There are early indications that the rally might be losing momentum already. On daily charts MACD, RSI and Oscillators are all about to turn bearish.

Whereas on monthly and quarterly charts Nifty is not showing any sign of breaking out of its long term 5year range of 5200 – 6300 on regular basis. We may though continue to see occasional violations of both the side. For example, the reverse head and shoulder pattern on weekly chart suggests that in next 15months we might even test 6700 on the upside.

In immediate term, Nifty has small support at 5910 (50days EMA). A break below this level shall take Nifty back to 5480-5790 range in no time.

Also read:

Reality Check Part I

Reality Check Part II

Reality Check Part III

Reality Check Part IV

Case for Nifty 6700

Case for Nifty 4700

Retail Conundrum I

Retail Conundrum II

Retail Conundrum III

Retail Conundrum IV