Do it yourself

Wednesday, February 5, 2014

Economics, accounting and morality - III

Thought for the day

“As a rule, anything that is pretty you avoid when on an expedition in the polar extremes. Normally anything other than white means a hazard such as a crevasse.”

- Ranulph Fiennes (British, 1944 -)

Word for the day

Crevasse (n)

A fissure, or deep cleft, in glacial ice, the earth's surface, etc.

(Source: Dictionary.com)

Teaser for the day

Is poverty really a function of nominal monthly earnings?

Economics, accounting and morality - III

The reversal of previous government’s policy stance on FDI in multi brand retail trade (MBRT) by new governments in the states of Delhi and Rajasthan has evoked sharp criticism from many quarters.

Investors have criticized it as a negative for investment climate. Analysts have termed it as retrograde. The union commerce minister has termed it as irresponsible act that would present India in bad light amongst global investor community. He even thought that it could be unconstitutional as under the enabling law passed by the Parliament, states were only given the power to permit FDI in MBRT. However, once permitted, the states have no power to withdraw such permission.

I find nothing new in the decision of Delhi and Rajasthan governments. There have been numerous instances of various governments not sticking to policy decisions. In fact, if we consider some policy flip flops of the incumbent UPA government, the latest episode would look totally innocuous.

For example, when NDA government dismantled the administered pricing mechanism for transportation fuel, many investors had invested in the sector. Private sectors and foreign companies invested in setting up retail fuel distribution network (Petrol Pumps); E&P assets and even in stock of public sector OMCs and upstream companies. UPA government reversed the policy causing huge losses to investors. UPA government followed a particular policy on telecom spectrum auction. When the Supreme Court held the policy inappropriate and canceled the 22 telecom licenses, the government decided not to defend its policy by enacting appropriate legislation. Similar outcome is likely in coal block allocation policy also. Remember, in political sensitive instances of Delhi unauthorized business establishment ceiling, and ban on convicted politicians for contesting elections by the apex court, the UPA government had sought to reverse the court rulings through legislative means. Seeking to retroactively implement GAAR was also an instance of investor unfriendliness. In fact since the infamous Vodafone penalty case, India has not seen any big ticket FDI, except for MNCs raising stakes in their local ventures.

Whereas thankfully neither investment has actually taken place in pursuance of the policy to allow FDI in MBRT, nor many people seem interested.

In my view, it is not a simple issue of political morality or protection of free market economy. It goes much beyond that. It involves the question of:

(a) legitimizing private lobbying with legislators;

(b) evolving a code of conduct for all politicians with regard to exploiting the work done (or not done) in performance of their constitutional duties for electoral purposes; for example, it is not uncommon to see politicians claiming credit (through big and ugly banners) for building pavements, drains, etc.;

(c) evolving a consensus that no political party should claim credit for b-partisan legislations; UPA could not have passed any bill without the support of “constructive opposition” or “CBI friendly outside supporters”.

Remember, in accounting every “credit” need to have an equal “debit”; bad politics can never be good economics; why bother about “Morality”.

Tuesday, February 4, 2014

Economics, accounting and morality - II

Thought for the day

“Morality is simply the attitude we adopt towards people whom we personally dislike.”

- Oscar Wilde (Irish, 1854-1900)

Word for the day

Slake (v)

To allay (thirst, desire, wrath, etc.) by satisfying.

(Source: Dictionary.com)

Teaser for the day

In AAP wherein lies the problem – the Idea itself; implementation; or the current leadership?

If it is the Idea, scrap it. If it is implementation fix it. If it is leadership change it.

Economics, accounting and morality - II

Continuing from yesterday (see here), I would like to humbly submit to the finance minister that even small investment in a tiny business usually takes 3-5years to show results. The higher growth during FY04-FY08 was certainly the outcome of reforms and investments that took place in the preceding decade. The credit therefore does not belong exclusively to Congress (or UPA for that matter). Similarly, the downtrend seen since FY08 may not be entirely a folly of UPA government.

However, if you want to take credit for higher growth, for which you did nothing to achieve, you cannot escape the blame for the current disastrous state of the economy.

The fact of the matter is that the long term growth is trending down since FY08 and UPA–II has done little to stem the fall till recently. Few concrete steps have been finally taken during FY14 which will yield results in next 4-5years.

If you claim credit for NDA initiated projects like Delhi Metro, highway projects, etc. you should be prepared to see someone else claiming credit for nuclear power, GST, DTC and FDI in retail trade.

This is the feudal brand of democracy, where the ruling party claims credit for all good that takes place during its tenure. Congress claiming credit for Delhi Metro is a classic example. It’s like a landlord claiming credit for a good crop, even though he has not even seen the field from which that crop was harvested.

As I said yesterday, it is the accounting of economics, not the economics itself. And morality does not have even a remote connection to it.

Monday, February 3, 2014

Economics, accounting and morality

Thought for the day

“Where there is politics or economics, there is no morality.”

- Karl Wilhelm Friedrich Schlegel (German, 1772-1829)

Word for the day

Tittup (v)

To move, especially to walk, in an exaggerated prancing or bouncing way, as a spirited horse.

(Source: Dictionary.com)

Teaser for the day

Nitish Kumar believes that he could be the beneficiary of Congress benevolence, post election á la AAP in Delhi, should NDA fail to cross the 272 mark!

Are you ready for PM sitting on Dharna in front of Parliament for special status to Bihar?

Economics, accounting and morality

The finance minister P. Chidambaram has raised serious doubts about competence of the aspiring PM Narendra Modi in the field of economics.

This criticism coming on the back of universally acknowledged disastrous performance of his “economist” prime minister naturally raises some issues of morality.

I appreciate that given the “do or die” nature of 2014 general election for both Congress and BJP, and most other parties on the fringes, morality is something which may not prominently figure on lists of priorities (including the self proclaimed flag bearer of morality AAP).

Nonetheless, it may not be completely out of place to highlight the following points to Mr. Chidambaram:

(a) The macro economic conditions could be improved by anything but accounting. Managing fiscal deficit by accounting jugglery, e.g., by holding income tax refunds, deferring payment of subsidies and other payments to next fiscal year, effecting disinvestment by accounting entries (cross sale of equities between PSUs); extracting special dividend from PSUs even at the cost of their future growth plans; harassing government vendors and contractors by unusually delaying payments due to them; and cutting vital plan expenditure is something which only an account think of. Even a thoroughly incompetent economist would not like to do indulge in this trivial gimmickry that could only worsen the conditions.

(b) Managing current account and currency deficit by effectively transferring a large part of gold trade to parallel market; borrowing short term Fx at exorbitant rate of 9.5% from NRIs; force oil companies out of currency market; and distorting the debt profile of the economy in favor of short term instable source of funds is also not sound economics. At best it is immoral trafficking.

(c) Basing your consumer price management strategy on the vagaries of monsoon is also not economics. A common FM radio listener will tell you that American companies are advertising not Facebook or Twitter. They are propagating California apples, almonds, walnuts, and peers amongst Indian masses. That should be cause of serious worry for those responsible for managing trade balance and consumer prices. Please understand doing Yagna for good monsoon every year will not bring food prices down.

(d) Good politics is quintessentially good economics. Politics for immediate electoral gains is not economics it is immorality. It is robbing future generation to get few votes. If LPG subsidy was bad two years back, it is criminal today.

(e) Accelerated environmental clearance to US$40bn worth of projects may also not be good economics, if it makes growth unsustainable and inequitable. I feel Niyamgiri will not remain an exception. It will become a rule if the government fails to protect people’s interest.

…to continue tomorrow

Friday, January 31, 2014

Cognitive dissonance

Thought for the day

“Give thy thoughts no tongue.”

- William Shakespeare (English, 1564-1616)

Word for the day

Ugsome (adj)

Horrid; loathsome.

(Source: Dictionary.com)

Teaser for the day

From “Solid BRIC” to “Fragile Five” – India has traveled long distance (to south) in last one decade.

Cognitive dissonance

In past one week, I dialed 30 numbers selected randomly from my professional phone book. Given the conflicting signals coming out of markets, I just wanted to assess the mood of the market. The people I called were a boring mix of investment managers, credit managers, corporate bankers, equity analysts, economist, wealth managers, insurance brokers, some seasoned investors and couple of corporate treasury managers. Each conversation lasted 10-25minutes.

I asked one simple question to all the people I had called – “what are you most excited about and what is bothering you most at this point in time?”

The responses were varied, mostly unclear, and reflected the cognitive dissonance in the state of mind. May be my sample was faulty, but not one soul appeared confident about the direction of markets and economy even for next six months.

The key highlights of my impromptu conversation with market experts could be listed follows:

(a) Considering that the markets have been turbulent for most of this week, all the people I called appeared surprisingly free and interested in talking to me,. However, none was inclined to discuss financial markets and investments. All sounded indifferent towards investments.

This in my experience usually occurs close to bottom of a deep bear market. Sensex at all time high does not corroborate this.

(b) There is an old saying in context of financial markets – “in good times few market participants have time for gaining knowledge; and in bad times few are inclined”. From my discussion it appeared that not many people are bothering to go below headlines and beyond front pages. Yet another sign of bad times.

(c) An overwhelming 70% were most concerned about political developments in the country and 80% were most excited about the prospects of Narendra Modi becoming next prime minister.

This partially explains the higher Sensex levels. Probably 17% single day rally of 18^th May 2009 is still haunting people. At the same time this also highlights the risk should for some reason Modi not reach 7RCR.

(d) When specifically asked, opinion was vertically divided on the threat of China hard landing. However, everyone agreed that should this happen, Indian markets will sink into a deep bear phase.

(e) 14/30 were optimistic about the economic growth recovering to 6% in 2HFY15. But conversely, 12 of these 14 believe that interest rates may not come down in next 12months!.

(f) “Exporters” was a consensus favorite theme. But only 3 of 30 were concerned about the impact of slowdown in Latin America, China, Russia, Australia, East and South East Asia on Indian exports.

(g) 17 of 30 believe that the USA will lead the next global economic upturn. But 12 of these 17 believe that INR will appreciate to 55-57 range by March 2015.

Thursday, January 30, 2014

For a few Yen more

Thought for the day

“Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.”

- Leonardo DI Vinci (Italian, 1452-1519)

Word for the day

Riposte (n)

A quick and effective reply by word or act.

(Source: Dictionary.com)

Teaser for the day

A UNESCO report reveals that in India 90% of poor children remain illiterate even after 4yrs of education.

AK and AY propose to reward the teachers responsible for achieving this amazing feat by making their jobs permanent!

For a few Yen more

India’s largest car manufacturer, Maruti Suzuki Limited (MSL) announced some significant changes to its India strategy on Tuesday. The company stated that the plans to set up a new manufacturing plant in the state of Gujarat are being shelved in favor of its parent company Suzuki Motors. The Gujarat manufacturing facility will now be set under a 100% subsidiary of Suzuki Motors.

It has been projected to the investors that this plant will manufacture vehicles exclusively for MSL. Accordingly, the entire capex, besides land cost, will be done by the parent company. MSL will only lease the land to the new 100% subsidiary.

The traders in a knee jerk reaction heavily shorted MSL stock. However, post clarification by the MSL management there was a scramble to cover the shorts. Traders perhaps realized that it was 3year too early to short the stock.

To me however the management’s explanation and logic behind such move does not appear convincing enough. In my view there could be much more behind this deal than what is being told to investors.

I find it important to highlight because this instance reinforces the trend seen in case of ACC-Ambuja deal last year (see here).

The following probabilities make the MSL unsuitable for my model portfolio:

(a) The change in strategy could be an effect of labor unrest seen in recent years at MSL Gurgaon manufacturing facilities. Through this deal, the company will be able to offer better deal to the employees at new plant, while the struggle with older employees continues.

(b) It is not clear whether all further expansions will happen under the new arrangement? If so, what will happen if MSL decides to shut down Haryana facilities in long term due to continued labor unrest and logistic issues? Moreover, it is not clear whether the new 100% subsidiary will honor the commitments made to various component ancillaries, vendors and suppliers. If not, how will it affect their relationship with MSL?

(c) The process of indigenization of technology could abruptly halt, as most new models could be manufactured at new plant post 2017. R&D activities of MSL may also be hampered.

(d) There will be almost no transparency about payments for royalty and technology transfer, as account of the new 100% subsidiary will not be open to public scrutiny.

(e) The Gujarat plant, being closer to port, will certainly be a better source for exports. I would like to see what the arrangement between MSL and the parent says about this. From the details available so far, it appears that the new 100% subsidiary will not engage in marketing and distribution activities which will be exclusively carried on by MSL only. However, assumption that this arrangement will apply or continue to apply to export activities in long term also does not seem logical.

(f) In any case, going forward the company shall face increased competition in its core small and midsized car constituency, as most competitors are now focusing on that.

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.