Do it yourself

Wednesday, January 29, 2014

Rajan paints the twon red

Thought for the day

“Honesty is the cruelest game of all, because not only can you hurt someone - and hurt them to the bone - you can feel self-righteous about it at the same time.”

- Dave Van Rank (American, 1936-2002)

Word for the day

Squib (n)

A short and witty or sarcastic saying or writing

(Source: Dictionary.com)

Teaser for the day

Joke of the century

“The government of the day had no role in 1984 Delhi genocide.”

Rajan paints the town red

The RBI governor Raghuram Rajan appeared a much worried man as he made a statement on the RBI monetary policy yesterday. Contrary to the market expectations, and much to the chagrin of his political bosses and large borrowers, he not only raised the policy rates but also smashed all claims of economic revival having taken firm roots.

Despite reluctant euphemism and smart camouflaging, the picture he painted was distinctly red. I have been repeatedly (and irritatingly to many) highlighting the following concerns, many of which also found place the RBI’s policy statement.

(a) Global economic recovery at present is mostly an American phenomenon. EU, Japan and China are still struggling and appear fragile.

(b) US might have successfully exported sub-prime crisis & deflation, and embarked on the path to necessary monetary correction. But financial market contagion remains a clear potential risk, as financial systems in many emerging markets (especially those heavily dependent on commodities’ demand), EU, Japan and China remain vulnerable.

(c) Domestic economic conditions in India remain worrisome and more likely to worsen further before any improvement is seen. Most macro parameters e.g., investment, employment, savings, inflation, and consumption have deteriorated despite decent pick up in agriculture growth. Fiscal tightening in 2HFY14 is likely to make the slowdown even more pronounced. RBI expects FY14 growth to remain below 5% and a small pickup in FY15 to 5.5%.

(d) Despite bumper monsoon, consumer price inflation continues to remain in double digit. RBI expects it to moderate only slightly to 8.5% in next 15months. On the other hand core inflation has started to raise it head again. RBI finds that Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation.

(e) By saying that RBI may not tighten the policy further, the governor probably hinted that growth probably has reached the breaking point and it may not be able to take any further rate hike. This makes the task of achieving growth-inflation equilibrium even more complicated. Especially when the global interest rates are likely to firm up, pressure on INR is likely to accentuate, and new government is likely to assume office burdened with humongous expectations.

(f) The ad hoc measures taken to control CAD and stabilize INR since September 2013 might have to be reversed at some point in time. As the finance minister himself admitted to large scale gold smuggling in recent months, there is no evidence of any structural improvement in conditions and it continue to remain a cause of worry.

May be I am reading too much into the Governor’s body language. But I cannot help, as it fully corroborates what I am witnessing during my journey across the country and also my interaction with the corporate managers.

Tuesday, January 28, 2014

Nothing new to panic about

Thought for the day

“The power of accurate observation is commonly called cynicism by those who have not got it.”

- George Bernard Shaw (Irish, 1856-1950)

Word for the day

Boîte (n)

A nightclub; cabaret

(Source: Dictionary.com)

Teaser for the day

Who plays the game of anarchy better AAP or MNS?

Nothing new to panic about

The sky over global financial markets has suddenly turned overcast. There is little sign of sunshine that was bedazzling investors’ eyes till middle of last week. The problems which were always there for everyone to see and feel have captured headlines in perfect synchronized fashion. Consequently, here it is – the first risk off trading spell of the year 2014.

Since there is little evidence of any fresh catalyst for the synchronized global “risk off”, the only plausible reason I could think is the impending FOMC meet on 28-29 January and expectations of Fed further moderating the bond buying program.

With the benefit of hindsight, we know that in past there have been many occasions when synchronized market movements have been orchestrated to influence major policy decisions by Fed, ECB etc. If this is the case, the current weakness in the market may continue for another couple of days. However, if the current sell off is result of serious realization that the bullishness seen since second half of 2013 might be a case of undue optimism we might see a much deeper and prolonged correction over next couple of months.

Nonetheless, as I have been highlighting since past many months, it is important to note that while the “whatever it takes” attitude of world’s largest central banks (Fed, ECB, BoJ, BoE and PoBC) has prevented the global financial system from collapsing giving a semblance of stabilization, the objective of sustainable and faster economic growth is far from met. The repression of “savers” across the globe has brought the global economy at the verge of deep deflationary abyss.

I, like most others, hope that this will the “point of return” and all will be well by the end of this decade. However, you may call me cynical for I do not expect a miracle to happen in next couple of quarters.

In the particular context of India, I have consistently maintained that any sustainable equity rally will occur only due to domestic factors – growth stabilizing close to 6%; substantial balance sheet corrections – corporate balance sheet correction by distress sale of assets and financial institutions assuming a large share of stress (like mid 1990’s) and government balance sheet correction through stronger financial repression (higher negative real rates and weaker currency); sale of public assets, fiscal prudence (higher taxes – lower subsidies) etc.

I believe that nothing of this sort happening in next couple of quarters at the least (Modi or no Modi). The Indian economy should continue to struggle with stagflation like conditions for at least 4-6 more quarters. High inflation and rates should keep growth below potential and financial stress relatively elevated. Investment and credit as investment theme may therefore not perform in short to medium term.

The substantial downside in Indian equities may come from the global factors, primarily negative flows due to whatever reasons.

A sharp shallow bubble building rally similar to 1999-2000, will not surprise me. I am though not too inclined to participate in such a rally. Rather whenever such rally occurs, I’ll be busy in the side show preparing for the next boom.

Friday, January 24, 2014

Modi in a Chakravyuh

Thought for the day

“Every positive value has its price in negative terms... the genius of Einstein leads to Hiroshima.”

- Pablo Picasso (Spanish, 1881-1973)

Word for the day

Idem (pronoun)

The same as previously given or mentioned.

(Source: Dictionary.com)

Teaser for the day

Degeneration of a movement:

2012: Our struggle is only to make the life of common man better.

2013: Only AAP can make common man’s life better.

2014: Whatever AAP does is the only thing that is good for common man.

Modi in a Chakravyuh

From business confidence and financial market view point a large majority of participants feel that Narendra Modi’s elevation to PM office would be a good thing. Even rating agencies like Moody & S&P and many global research firms have also echoed similar sentiments. Besides, many have also expressed concerns that the continuation of current regime could be detrimental to the interests of Indian businesses and markets.

In my view, there is little substantive evidence in support of this thesis. Nevertheless, inarguably a change would be good for boosting the sagging morale and hence desirable.

Insofar as Modi becoming PM is concerned – it is an extremely complicated proposition. For one, Modi’s strengths are becoming his major problems, much like the brave prince Abhimanyu in Mahabharata.

Modi sure does know how to govern and lead the nation, but winning 272 seats is something he cannot do on his own. (Abhimanyu knew how to enter the Chkravyuh but did not know how to break the fulcrum and exit)

In my view, Narendra Modi is playing his part well enough. He has created a wave and penetrated deep in the opposition bastions, but he has a weak army which is not keeping pace with him; often leaving him alone in the battle hence imperiling his chances of victory.

Apparently Modi faces the following three major obstacles in his march towards 7RCR:

(a) Limited reach of BJP – geographically and communal. BJP’s presence is mostly confined to 250-275 Lok Sabha seats. In 2009 it contested 433, won 116, was runner up in 110 and lost deposit in 170. In its best show in 1999, with widest possible alliance it won 182/339 and was runner up in another 112. The best show this time with present alliances could take BJP to 200-210 odd seats (Exhibit 2), with pre-poll allies contributing another 15-20.

(b) Modi’s perception of a good and non-corruptible administrator. In past decade a trend has emerged whereby the people have mostly voted for continuity if the image of the leader is good. 13 chief ministers from 8 different parties are currently serving 2^nd to 5^th term. Incumbent PM is also serving second term (though he has made himself unavailable for 3^rd term). (Exhibit 1)

This trend might be worrying many potential allies and even BJP leaders. If Modi become PM and performs as per expectations, evicting him from 7RCR could be difficult in next 10-15years. This may (a) help BJP expanding to its traditionally weak areas like South India or North East; and (b) impede the personal ambitions of many senior leaders (within BJP and outside) of getting a chance to occupy PM’s chair. These leaders may therefore not want a strong leader as PM.

(c) Secularism as fulcrum of opportunistic politics. A Modi victory will likely make the political debate over secularism redundant. This will break the very fulcrum of the politics of convenience used by various opposing parties to join hands to form governments. Many politicians and parties like TMC, JDU, SP, BSP, RJD, TDP, BJD, ADMK, LJP, NC, JMM etc., would not like to lose this significant tool to gain/retain power.

Thursday, January 23, 2014

In this Mahabharata no one shall remain neutral

Thought for the day

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

- Karl Marx (German, 1818-1883)

Word for the day

Misoneism (n)

Hatred or dislike of what is new or represents change.

(Source: Dictionary.com)

Teaser for the day

I do not know why there is so much excitement over AAP’s sarkari dharna in Delhi.

Communists ran West Bengal for 35yrs in this manner only. Kolkata used to be choked almost every week for 35yrs. The only difference was that Jyoti Babu did not sit on dharna. They had cadre who zealously believes in them.

In this Mahabharata no one shall remain neutral

2014 general elections in India are no ordinary elections. It is decidedly a referendum on the desire and commitment of people for change in the popular political discourse of the country. It is a two layered contest (a) between continuity of feudalistic politics dominated by vested interests & parochial considerations and aspirations of common people and (b) within various political organizations, between status quoits and progressive elements.

In this Mahabharata nobody can afford to remain neutral. All need to take a side – right or wrong only time will tell. I personally have decided to side with the aspirations of the people.

Speaking for the political parties, their public posturing suggests that most of them are rooting for the aspirations of people; though their actions conspicuously indicate their indelible attachment to feudalistic tendencies.

Given that apparently there is no consensus within parties on the need for and direction of the change – it is inevitably going to be contest about personalities rather than parties and ideologies.

Narendra Modi from BJP & associates has already established himself as the most vocal proponent of the change. His overwhelming persona has successfully obfuscated the traditional agenda of BJP. Many popular voices from business, commerce, finance and civil society have accepted his credentials. A number of opinion polls have projected him as most popular choice for leading the country.

Congress has reluctantly presented Rahul Gandhi as its choice for leadership. The allies are not fully convinced. The popular opinion is least convinced.

AAP is a new entrant in the game. In short span of time they have admirably captured substantial mind-space, especially in e-literate India. Its leader Arvind Kejriwal has emerged as second popular choice, after Modi, for leading the change. His rebellious demeanor, Marxist orientation and unpretentious disposition has attracted many youth, social activists, and oppressed people towards AAP. Current poor economic conditions and growing inequalities, usually a fertile ground for spread of left influence, have also helped a great deal.

Unfortunately, most regional parties who would actually decide who forms the government in May 2014 are however maintaining their status quoits stance. Many regional leaders like Mulayam Singh, Nitish Kumar, Mayawati, J. Jayalalitha, Sharad Pawar etc. sensing a 1996 like opportunity to become Prime Minister – an impossibility should India vote for a change rather than continuity; and therein lies the complexity of this election.

This election is becoming not so much about winning but about making others lose. The candidate with highest popular ratings in various opinion polls, viz., Narendra Modi, is obviously the prime target of each and everyone.

A Narendra Modi win in this election, most likely in my view, will change lot of things, this time perhaps forever…to continue tomorrow

Wednesday, January 22, 2014

An election about personalities and egos

Thought for the day

“Do not be anxious about tomorrow, for tomorrow will be anxious for itself. Let the day's own trouble be sufficient for the day.”

- Jesus Christ

Word for the day

Perspicuous (n)

Clearly expressed or presented; lucid; perspicacious

(Source: Dictionary.com)

Teaser for the day

AK on many occasions has publically pretended his absolute faith in God, especially when asked about his security.

The question is if God is there to secure everyone, why Delhi government needs police to secure the life of its citizens?

Or AK believes that God is exclusively on AAP duty these days!

An election about personalities and egos

The 3QFY14 results have so far been a continuation of 2QFY14. There is nothing to suggest any break in the continuity – slowly improving US demand, poor domestic infrastructure & capex demand and slowly contracting consumption demand. Besides, a few large IT companies, most companies have highlighted margin pressure, demand slowdown and cut in capex plans. Broadly, most large cap results are in line with the expectations whereas mid cap and small cap companies appear struggling. There seems nothing that warrants a change in investment strategy or near term market outlook.

Given the status quo in market, naturally everyone is more interested in politics these days. With AAP throwing an interesting X factor in the arena, the discussions have become more exciting and participative.

In previous elections (except perhaps 1977), many people would just want to listen to various opinions about the likely political scenario post election without being actually concerned. This time however it’s definitely different. Most people have strong opinions and are concerned about the outcome of impending election.

This, in my view, is an encouraging sign for the strength and vibrancy of our democracy. However, this could result in some unintended election outcome in near term. In my view, many of the electorate could cast their vote just to assert their newly found political expression, without actually intending to usher a change or bothering about the consequences.

Wife of one dear friend, a third generation Congress supporter, has committed to vote AAP candidate (whosoever it is), just to prove some domestic points to her husband and father-in-law! Captain Gopinath has admittedly joined AAP without reading its manifesto (now investors would know why both his business adventures failed!). Mr. Kamal Farooqui wanted to join AAP just to prove a point to Mulayam Singh Yadav. Ms. Sarabhai perhaps joined AAP, not because she subscribed to its methods, ideology or programs, but because she wants to avenge her defeat in last elections, which she contested as an independent.

I spoke to many young enthusiasts who recently joined AAP in past couple of weeks. No one, yes not even one, was clear about the basic tenets of the Party, e.g., (a) who is an Aam Aadmi which AAP claims to represent? (b) What are issues, besides corruption, which AAP stands for? (c) What is the definition of corruption in AAP’s lexicon?

Anyways, as I said it has become interesting and exciting. The wanderer in me, who has travelled across India just last summer, does not let me believe that any revolutionary socio-political change is in the offing. We may though certainly witness some evolutionary changes.

Notwithstanding, the aversion of Congress Party to a personality based presidential style contest in the present context, the political discourse is centered around personalities – primarily Modi, Rahul, and Arvind Kejriwal.

In my view, Rahul and Kejriwal have nothing much to lose in this election. It is Narendra Modi who has everything at stake. Tomorrow I highlight how the universe is conspiring to keep him out of power.

Tuesday, January 21, 2014

India needs a true coalition, even if it means a third front

Thought for the day

“Once you make a decision, the universe conspires to make it happen.”

- R. W. Emerson (American, 1803-1882)

Word for the day

Bosky (adj)

Covered with bushes, shrubs, and small trees; woody; shady

(Source: Dictionary.com)

Teaser for the day

Does Congress understand the meaning of bipartisan legislations?

When you pass a law because the opposition agreed to your request for a bipartisan legislation, you do not claim sole credit for that law (Food Security, Lokpal, Land Acquisition etc.).

India needs a true coalition, even if it means a third front

Prior to 2009 elections, the scare of ‘insidious’ communists and Mayawati coming to power was so pervasive that nobody was willing to even reason why the communists were bad and why it was not preposterous for Dr. Manmohan Singh (MMS) to destabilize the government and nation in the extremely tough global conditions, just for civil nuclear deal whose benefits, if at all, would be seen only beyond 2020.

In hindsight many would be regretting market euphoria post the Congress victory in 2009 general elections. Investors, businessmen, traders all celebrated the election results as beginning of new era in Indian politics and economics. 56 months of UPA II have largely undone all the optimism seen in May 2009.

It’s poll time again; and investors are positioning themselves as per their estimates of the May 2014 election results. So far the majority seems to be betting on a Narendra Modi led NDA government. However, opinion polls that may come out in next 4-10weeks may upset many calculations.

The polls conducted in past few months indicate that the Congress led UPA constituents should lose ground in the election due to various governance related and economic issues; but BJP led NDA is also not likely to improve its tally dramatically. So there are chances that we have 1989 or 1996 like situation where so called third front could have a shot at forming government with or without support of Congress or BJP. Some are even seeing a AAP (50+) government with Congress (~120) and other Mr. Cleans (Nitish, Navin, Mamta) supporting it to keep BJP out.

The mute question is should investors be worried about this probability of a non-BJP non-Congress government that may have left leaning AAP, Mamta or Communists as its constituents?

In my view - absolutely not. The investors should rather be happy with the prospects of a true coalition coming to power.

In my view, post independence the best periods for the Indian economy have been those when a “coalition” government was in power.

I do not consider UPA II a coalition. TMC, NCP, DMK all have same socio-economic agenda as the Congress.

By “coalition” we do not mean multi party governments. In our view, coalition government means where people with different and many a time completely diverging socio-economic policies jointly participate in a government. They arrive at the common minimum agenda of agreement and focus on executing the same, hence avoiding conflicts and logjams.

The first cabinet of India post independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we still got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajeev Gandhi (1984) are not really known for good governance or socio-economic reforms.

In my view equal credit for MNREGA and RTI, two major reforms done during UPA I should be given to the communists, who ensured that the Congress Party stays focused on the promise of inclusive growth and accountable administration.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, MNREGA) were all coalition governments supported by socialists/communists. These governments are all remembered for socio-economic reforms causing fundamental positive changes in the economy. None of these governments is remembered for non-governance, anti market policies or anti business stance.

Monday, January 20, 2014

‘The great India story’ – revisiting the fable

Thought for the day

“To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment.”

- R. W. Emerson (American, 1803-1882)

Word for the day

Litigious (adj)

Inclined to dispute or disagree; argumentative.

(Source: Dictionary.com)

Teaser for the day

After publically saying that no sitting MLA will be given Lok Sabha ticket, Arvind Kejriwal says he will contest Lok Sabha election if Party tells him to do so!

Does someone recall Idi Amin?

‘The great India story’ – revisiting the fable

Conventional economists have long argued that monetary and the real economies interact in a limited way through the determination of nominal quantities such as prices, wages, exchange rates and so forth. Therefore although a change in the quantity of money may create short term disruptions, the real economy would eventually settle at the same long term equilibrium as before. Implying that at 'normal' levels of money, a change in the money supply will not alter the long term economic equilibrium.

In short, additional money made available to people, without any additional productive capacities made available, makes no difference to real economy. It just increases the price of existing goods in the same proportion as the additional money available.

The problem however occurs when the supply of additional money becomes a constant and that too in an abnormal proportion. This not only disrupts the short term equilibrium but alters the structure of long-term equilibrium too. This is precisely what is happening in the case of economies that have followed excessively loose monetary policies for an extended period of time. In fact, this has impacted the emerging economies which fell prey to this slush of excess money and let their medium to long term equilibrium altered, believing that this excess money is ‘normal’ and would remain a constant.

India unfortunately is one such economy that has allowed the structure of its real economy tempered, though still not irretrievably, by easy money in past 15years. For example, consider the following:

The excess money or credit that got created out of thin air has not flown equally to all. It rather has got concentrated in few hands. However, the illusion of growth and prosperity has engulfed all. The aggregate numbers have become gigantic; and it has led to ballooning of the aspirations of the underprivileged to unsustainable levels.

Given that we are democracy that works on “relative majoritism” feeding these aspirations has become a central subject of competitive politics. The state finances are therefore in a structural long term pressure with no exit in sight.

The rush to accumulate cheap credit has lead to excessive debt both at government as well as corporate level in past 7years. This has brought a lot of unmanageable demand forward in time. For example, over 50GW power projects were initiated and fertilizer policy was made when the feed stock supply chain to fuel the power and fertilizer plants was far from ready. The capacity to pay unaffordable toll was not there when over 5000km of toll roads were commissioned. Many of these power plants are lying idle and so are numerous industrial projects conceived based on supply assumptions from these plants. Many toll roads have become unviable or are lying uncompleted.

If we believe that this misallocated capital and unmanageable changes in consumption patterns are short term phenomenon, the correction is sure going to be extremely painful- prepare for it.

And if we think that these are long term changes – there is no “great India story” as essayed by numerous analysts and strategists.