Have you joined the battle yet?

 

Thought for the day

“The hottest place in Hell is reserved for those who remain neutral in times of great moral conflict.”

— Martin Luther King Jr. (American, 1929-1968)

Word for the day

Contiguous (adj)

In close proximity without actually touching; near.

(Source: Dictionary.com)

Teaser for the day

Do you know ‘Modi’?

Have you joined the battle yet?

Early this year I had written (see here) that 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. On the surface the contest is between continuity of feudalistic politics dominated by vested interests & parochial considerations on one side and the aspirations of common people on the side. At the subterranean level however the contest is more interesting. It is a fight within various political organizations. On one side are the status quoits who owe their political careers primarily to the social and religious divide within Indian society; and on the other side are the progressive elements within each party who politics to be more concerned about economic issue leaving the social & religious concerns to individuals and non-political groups.

I like to draw a parallel with the epic war of Mahabharata. In this contest no one can afford to remain neutral. All need to take a side – right or wrong only time will tell. This is in fact what we are witnessing. After 1977, this is first election where all sections of the society are openly taking sides. For example consider the following.

(a)   Corporates are openly taking sides in these elections.

(b)   Never after 1977 academician and intelligentsia have come out so openly in favor of or against a political party.

(c)   The entertainment world is seen vertically divided. Never before we have seen such a deep divide in Bollywood.

(d)   A record number of candidates are from public life – artists, writers, ex-bureaucrats, police officers, army officers have joined the election battle.

(e)   Most media houses have also made their preferences clear.

(f)     The religious and spiritual leaders of most sects and communities have openly taken sides. Unlike ever before, the revered artists from the holy town of Kashi have openly taken sides.

(g)   The media campaigns of a large number of corporate houses (again a first) have acquired a conspicuous election hue.

(h)   The constituents of financial markets for the first time have come out so openly in favor of a political party of leader. Most financial brokerages have published reports on election analysis.

(i)      Foreign governments, brokerages, businesses and media have openly taken sides. Publications like The Economist, The Week, The Wall Street Journal, TIME etc. have openly taken sides.

(j)      Most importantly people – women, farmers, backward classes, who have traditionally voted on family/community lines are volubly taking sides.

For those criticizing the Principal of St. Xavier’s, I would like to remind that in the epic war of Mahabharta - Bhishama, Dronacharya, Kripacharya all took a side. They are no less revered today. I have decided to side with the aspirations of the people. Have you joined the battle yet?

India Story in Short

Nothing secular or fundamental about it

Thought for the day

“The human being is in the most literal sense a political animal, not merely a gregarious animal, but an animal which can individuate itself only in the midst of society.”

—Karl Marx (German, 1818-1883)

Word for the day

Gregarious (adj)

Fond of the company of others; sociable.

(Source: Dictionary.com)

Teaser for the day

If BJP takes UP and Bihar as some polls are suggesting, will National politics revert to pre 1980 era of great North-South divide with North dominating and south sulking?

Or will it be different this time?

Nothing secular or fundamental about it

The recent report of CRISIL on Indian economy is a good realty check for the market participants who are placing their bets on basis of improving macroeconomic fundamentals. The report broadly confirms our hypothesis that the growth potential of Indian economy has shifted down structurally towards 6% GDP growth level and it is extremely difficult to sustain a 7%+ growth without material structural reforms that would lead to substantially higher private saving and investment.

In Crisil’s view “there is a natural limit to any upside beyond 6.5%”. And all of this, Crisil points out, assumes there is a stable and decisive government in place — else, “our bets on growth are off”.

As we have been highlighting that the rather optimistic growth scenario of 5.5-6.5% would only increase the structural imbalances of the economy especially income inequalities, food inflation, poor infrastructure and regional imbalances. This growth will primarily come from better capacity utilization and higher resource arbitrage opportunities; would not create many new jobs; will not help private savings and consumption and would be concentrated in few regions.

In CRISIL’s words “the real problem is that the various factors that caused an upsurge in India’s growth in the FY04-11 period are no longer present, and getting them back will take time, and a lot of effort. In the high-growth phase, the contribution of capital stock rose from 2.1% in FY05-03 to 3.2% in FY04-11, but this is projected to grow by just 2.5% in FY15-19.

Productivity, or what economists call incremental capital output ratio (ICOR), improved the most in the high-growth years, and though this is projected to grow — ICOR will fall from 7.4 right now to 5.5 over the next five years — this will still not be as good as it was during FY04-11.

CISIL believes that “The other driver of growth, exports, are also not looking as good as they did a few months ago despite global growth picking up. One reason, of course, is that the rupee is not looking as weak as it was before. The larger structural issue, though, is of India’s failure to address the fundamental flaws in its economic model — that means rising wage costs, poor economies of scale and high domestic inflation.”

Substantially high leverage on corporate balance sheet as compared to 2003-04 or even 2008-09; much lower capacity utilization; and deeply stressed financial system where banks are in no position to grow their loan assets (to the contrary we might see material unwinding); are some major blocks in the way of high growth path.

The improvement in CAD and fiscal account could prove to be short lived, as the suppressed import demand is restored and accounting practices are corrected.

To the chagrin of some of my readers and many of those who believe “all is well”, I would reiterate for the N+1^st time that we are in the midst of a massive trading up move, nothing secular or fundamental about it.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Economics of Jugaad - good for survival, not so for growth

Thought for the day

“I dislike feeling at home when I am abroad.”

— George Bernard Shaw (Irish, 1856-1950)

Word for the day

Dyad (n)

Group of two; couple; pair.

(Source: Dictionary.com)

Teaser for the day

Does Bhartiyata (Indianness) involve atonement, forgiveness, evolution, faith, devotion, tolerance, mutual respect, and belief in divinity?

Economics of Jugaad - good for survival, not so for growth

‘Jugaad’ in economic field is as dangerous as in personal (like self medication) and political (caste and religion based politics, adhocism in key socio-economic policies etc.)

After BJP issued its 2014 election manifesto early this month, the media debate for once appeared focusing on issues like economic growth and development, employment, inflation etc. I was gratified to note the diversion from redundant issues like communalism and dynastic politics towards more relevant issues. But my state of gratification did not last beyond two days. The media debate has blatantly reverted back to conventional adrenaline enhancing subjects.

In past few days, both the leading PMship contenders have mostly focused on criticizing each other; in between offering some glimpses of their economic thoughts. Unfortunately, except for communists, no other party offers any material economic solutions. The communists’ solution naturally suffers from antiquity and dogmatism.

A close study of the economic part of their manifestos and their subsequent public utterances would suggest that they intend to continue pursuing the economics of jugaad that in my view has done tremendous harm to the country and her people in past six decades.

The ‘jugaad’ mindset has perennially pushed back India and Indians tenaciously into survival mode, preventing development of a strong foundation for economic growth and prosperity.

The ‘jugaad’ mindset reflects poorly on almost every aspect of the socio-economic life in India. This has severely impacted the pursuit of excellence, a hall mark of Indian art, culture, engineering, architecture, industry till 19^th century, at least. Today, “Quality” is something India and Indians are not particularly known for globally.

The ‘jugaad’ mindset has also doggedly constricted the vision of an average Indian entrepreneur. Except for a handful of Indians, most of whom have the benefit of studying and/or working overseas, not many have thought about scalable business models. Consequently:

·         Despite having a rich culinary tradition for centuries, millions of connoisseurs, and thousands of great eateries – why we could not create a McDonald, Dominos or Pizza Hut in India?

·         Despite having over 2000yrs of rich tradition of fashion, fabric manufacturing, dress designing and abundant raw material availability why no Indian textile or fashion brands figures prominently in global fashion and textile industry?

·         Coke quit India in 1977-78, leaving behind all manufacturing facilities, customers with taste for soda based drinks, distribution and marketing channel and sales infrastructure. For 14yrs Indian manufacturers had no competition whatsoever, till Pepsi and Coke re-entered India. Why did Campa cola, Parle and Duke not survive the competition from Pepsi and Coke even for a decade?

·         Despite being one of the oldest civilization, tradition of living and networking in communities, spending considerable time in chaupals and doing Adda till late night, availability of tremendous IT skills – no Indian thought of creating Facebook – an e-chaupal with over US$150bn in market cap.

·         Despite claiming ourselves to be the world leaders in the field of religion, spirituality, culture etc. we could not create Mecca, Vatican, Jerusalam out of Vrindavan, Kashi, Tirupati, Ajmer, Haridwar, etc. Most of these places are filthy and criminally inadequate in basic tourist infrastructure.

·         Despite slavery of many centuries, why we still depend on those very foreigners for supply of equipment, arms and ammunition for our armed forces?

·         Why failing to win an Olympic gold medal is a subject of national shame; failing to get nomination in Oscars is subject of national disappointment, but not getting a single Nobel for mathematics, science or literature post independence does not evoke any regrets or discussion? Remember, we always proudly claim ourselves to be pioneers in the fields of mathematics, physics, astrophysics, metallurgical and medical sciences etc.

·         Why we derive pride from the success of emigrated Indians who have taken foreign citizenship?

·         Despite being the largest producer of milk, and huge surplus food grain stock, why India is bracketed with some poorest third world countries in terms of child malnutrition?

·         Why an average Indian male feels proud in being sexist when our religion, culture, and traditions propound supremacy of feminine power (The Mother Supreme)?

·         Why an average Indian feels proud in being racist when our religion, culture, and traditions preach universality of human (Vasudeva Kutumbakam)?

These are not but just a few of the illustrations that explain the harmful effects of the ‘jugaad’ mindset. ‘Jugaad’ in economic field is as dangerous as in personal life (like self medication) and political (caste and religion based politics, adhocism in key socio-economic policies etc.)

Rahul Gandhi says that his priority would be to get petty low skill mass manufacturing industrial jobs back from China. This is ‘jugaad’ at its worst. Why on earth you want those low paying low skill jobs and highly polluting industries back. The focus should rather be on skilling the work force and creating high paying skilled jobs in advanced technology industry and services sector.

Narendra Modi says that he will brand Indian cities by occasionally holding international conventions, summit meeting and high level dignitaries’ visits to various places of tourist interests. I would like to bring to his notice that Rajiv Gandhi used this tactic by organizing “Bharat Mahotsav” in a ’jugaad’ fashion. The most recent example is organization of CWG games in 2010.

Another example is much touted solar power plant over Narmada Canal in Gujarat. Studies suggest that this ‘jugaad’ model may be at least 25-30% more expensive and inefficient than conventional models.

A few years ago popular economist and columnist Swaminathan S. Anklesaria Aiyar wrote in vehement support of ‘jugaad’. I strongly beg to differ. I believe we need a strong conceptual framework for quality, sustainability, and scalability to grow faster. Jugaad may be good for 5%.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

The good part of it

Thought for the day

“I am so clever that sometimes I don't understand a single word of what I am saying.”

—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

Sensex is 23K, Narendra Modi is married, Priyanka is politically active, and AK is Gandhian. Has India changed enough or do we want more?

The good part of it

I strongly endorse the traditional belief that “whatever happens, happens for our good only”.

An analysis of the social, political, and economic events of past five years in light of this belief provides reasons for optimism; raises hope; stimulates positive thinking; and slakes much of the pessimism over current state of the nation.

The canvass of the country in past five years has been marked by public revelation of multiple instances of irregularities in allocation of natural resources to private entities (coalgate, 2G etc.); vociferous agitation for strong deterrent against corruption in public offices (Jan Lokpal); public outrage against crime against women (infamous Delhi and Mumbai rape cases); worsening of macroeconomic fundamentals (GDP growth falling to below 5% level, high consumer inflation, weakening currency, fiscal and trade deficit, etc.) and decimation of Congress party in state elections.

In the interim all these developments have caused anguish, dismay, frustration, pessimism and catalyzed a negative feedback loop in socio-economic sphere. However, the mid-term impact of these developments appears materially positive.

For example, consider the following:

(a)   All major parties in the country have committed a transparent, sustainable, judicious and equitable policy for allocation and use of natural resources.

(b)   All major parties have committed to more decentralization and federalization of the political structure of the country.

(c)   Almost all parties have committed to optimum use of water resources of the country. Interlinking of rivers is a common theme running through most manifestos.

(d)   Most parties have pledged strong support for women safety.

(e)   Issues like development of physical and social infrastructure, youth, education, healthcare and employment through industrialization top agenda of almost all political parties.

(f)     Except for few exceptions like FDI in retail, most contentious issues have been avoided. (CPM is exception here, but it is so otherwise too.)

(g)   There is marked improvement in the candidate profile of all major parties. Though complete cleansing of criminal elements is appears some distance away, a strong beginning has definitely been made.

(h)   The public scrutiny of political parties has strengthens and deepened. Never before in history of independent India have major political parties been forced to retract their decisions immediately due to public outcry.

(i)      BJP appears to be emerging a pan India competition to Congress, paving the way for emergence of largely two party/two front political structure in the country in next couple of decades.

You may brush aside these trends as mere rhetoric, but I’m sanguine.

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Two short stories

Thought for the day

“The distinction between the past, present and future is only a stubbornly persistent illusion.”

— Albert Einstein (German, 1879-1955)

Word for the day

Ad infinitum (adv)

To infinity; endlessly; without limit.

(Source: Dictionary.com)

Teaser for the day

Mamta Banerjee is certainly more Aam, Anarchist, Honest, Transparent, Experienced, & Gritty than Arvind Kejriwal.

Does TMC has a better claim over the territory which AAP is aggressively trying to encroach upon?

 

Two short stories

Power of ‘the 49’

A dear friend, one of few smart equity analysts I know, also happens to be an ardent fan of RBI governor Raghuram Rajan. While I do not share much of his adulation for the governor, I was left completely speechless when he argued last week “notwithstanding your deep skepticism over long term efficacy of “Americanized policy ways” of the governor, Rajan will continue to enjoy support of ‘the 49%’ for his charming personality”.

Shopping for kitchen yesterday I suddenly realized why the charming governor could actually be dear to ‘the 49%’. I am sure he is regularly assisting his wife in shopping groceries, fish vegetable and fruits. Because, only a person who actually visits the market regularly and keeps a tab on the grocery bills would know that the downtick in consumer inflation is merely a statistical phenomenon and could be totally misleading. Notwithstanding the claims of the finance minister regarding success in bringing down the consumer prices, the bill for daily kitchen expenses is rising every week. Besides, the petty inflation for middle class may actually be running into high double digits – if you evaluate movie tickets, popcorns, haircut, parking charges, doctor fee, salary for domestic help and drivers, phone bill, utility bills, tuition fee etc.

That is perhaps why the governor has not only refrained from easing rates, but also refused to hint any imminent easing; disregarding the high decibel clamor from Industry captains who might be oblivious to the power of 49% and may not be regular in grocery shopping.

China – friend or foe

Historically the Sino-Indian relations have been defined by strong trade and cultural ties. There is no evidence of any substantive conflict between the two ancient civilizations prior to 1950. In fact many studies have suggested that prior to middle 19^th century Indian and Chinese economies thoroughly dominated the global economy for many centuries.

Despite such great shared history and economics the mention of two most populous nations together only evokes a sense of rivalry in India.

From my friends in US, Hong Kong and Singapore I understand that a common Chinese citizen carries no sense of rivalry for India or Indians. For most Chinese businessmen India is one of the biggest “opportunities” at hand. For Chinese politicians the territorial dispute with India is more of a “carry over” agenda item for their routine meetings.

To the contrary, a common Indian citizen hates China from the core of his heart, Indian businessmen are ambivalent towards China – they are scared of competition and enamored by the opportunity, and politicians leave no opportunity to highlight the Himalayan threat.

Recently (a) an Australian journalist sought to redefine the role of China in Indo-China war in 1962; (b) Rahul Gandhi is often seen “vowing” to bring back all jobs back lost to China in past couple of decades and (c) Narendra Modi has dared China to control its territorial ambitions.

I wonder is there a way to reset Indo-China relation to pre-20^th century era!

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Market betting on continuity, not reforms

Thought for the day

“All modern American literature comes from one book by Mark Twain called Huckleberry Finn.”

— Ernest Hemingway (American, 1899-1961)

Word for the day

Bedash (v)

To dash or spatter (something) all over;
To demolish or ruin; obliterate.

(Source: Dictionary.com)

Teaser for the day

When the US started quantitative easing, I said right away it will not end before we have QE-99. Usually, when government introduces a programme, they don't end it, and my sense is though they have implemented some tapering, the moment US stock markets drop 10 per cent-20 per cent, they will actually increase active bond purchases. (Marc Faber) 

Market betting on continuity, not reforms

“Tere Vaade par jiye hum toh ye jaan jhooth jana;
Ke khusi se mar naa jaaate gar aitbar hota.” (Mirza Ghalib)

(Make no mistake that I believe in your promises. If I did the thrill would have killed me.)

BJP finally released its much awaited manifesto on Monday.

The best thing about the 50 plus page document is that it strongly supports the continuity and does not promise any radical shift in policy paradigm. Amidst an overdose of generics laced with usual rhetoric and confidence of a winner, the document focuses strongly on sustainability, indigenization, true federalism, decentralization, and e-governance.

The comforting part is that traditional BJP issues like 370, Ram Mandir, Cow slaughter, and common civil code etc. have been dissipated to last half page and seem to have been incorporated to address the old school internal BJP constituency only. Avoidance of other contemporary controversial issues like Section 377 (IPC) and decriminalization of politics, Jan Lokpal, Autonomy to CBI etc. is also conspicuous. In this sense the Congressization of BJP appears almost complete.

The worst part (or is it good?) is that the manifesto does not propose any major economic reform. It just talks about administrative simplification of processes and better use of IT on delivery of various public services. In my view, markets should take cognizance of this.

This brings us to very hotly debated issue amongst my readers – whether the recent upsurge in equity market is in response to the “continuity” and strengthening of recent corrective monetary and fiscal measures; or is it a hope driven rally – hope of radical shift in policy paradigm under the new regime.

I have been openly siding with the school which believes that market is not at all ready for any radical reforms. It is seeking continuity of extant policy regime with a “friendly” implementation apparatus.

The reasons are obvious. Any radical shift in policy paradigm will essentially involve move away from “crony capitalism” and/or “crony socialism”. This would certainly (a) hurt the economic viability of many businesses surviving and thriving on administrative patronage; (b) challenge the sustainability of many businesses that exist only because of the systemic inefficiencies; (c) increase overall cost of doing business and therefore impacting the profitability adversely; and (d) lead to higher and deeper competition from global players.

And if it is continuity we are hoping for, politics (and Narendra Modi) will cease to be a major consideration for the markets 6months down the line. The market will increasingly look to global cues for determining its direction. In my view, these cues will most likely be positive. I therefore would continue to avoid domestic reform story and focus on global bubble theme for next 12-18months. And I promise to come back home much before cows do. (See here and here)

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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Affordable is profitable

Thought for the day

“Let us raise a standard to which the wise and honest can repair; the rest is in the hands of God.”
-George Washington (American, 1732-1799)

Word for the day

Ambivert (n)

One whose personality type is intermediate between extrovert and introvert.

(Source: Dictionary.com)

Teaser for the day

If not in politics what these people should be doing?

·         Rahul Gandhi

·         Digvijay Singh

·         Lallu Yadav

·         Sharad Pawar

Affordable is profitable

I met with couple of private equity managers last evening. The idea was to share the learning from my Discover India Trips and gain some understanding of the investment climate in the country from their experience. What I learned was quite useful, and I deem it fit to share with the readers.

Not going into too much detail and avoiding jargon, I understand that in past 5years most of the private equity has ventured into five broader sectors – education, real estate, healthcare, agro processing and e-commerce. Besides logistics and technology startups have also attracted good interest from private equity, venture funds and angel investors.

The investments in education sector have mostly not done well for a variety of reasons. In my view, the tutorial business model is not sustainable as it is based on the basic premise that the inefficiencies in the mainstream education system are perpetual. The classroom business model is not viably scalable as affordability is still largely missing and political structure will likely remain socialist. Only content development and management model appears but that too till the time this sector is opened to global competition. The best domain appears to be development and management of vernacular content. Not much activity is so far seen in that sphere. The consequence is that most investments in these sectors have not performed as per the expectations.

The real estate sector has caused maximum disappointment to private investors. Lack of demand, delay in execution, and poor transparency levels appear primary drivers of the disappointment. Affordability is a major detriment in this space also. Political involvement had been both a major driver as well as hindrance in growth of this sector. The general opinion is heavily skewed in favor of lower political involvement and better affordability going forward, especially if a strong national leadership emerges from 2014 elections.

Healthcare business is still mostly driven by export demand rather than domestic demand. Given the rising pressure on global corporations due regulatory changes; and governments to reduce cost of healthcare – this space has seen strong growth. Most investors in this space appear happy and enthusiastic about future growth.

Agro processing industry in the country unfortunately is a great example of mismanagement. Though extremely critical, this industry is growing completely on “subsidy” rather than “viability” consideration. In my view, the fate of this industry may not be much different from wind energy.

E-commerce is the most active and interesting area of investment. From my own personal experience I can vouch that many e-market places are very efficient, hugely relevant, popular and scalable. These ventures adequately address the issue of accessibility, affordability, aspirational consumption, cost efficiency and bring the benefits of free market and economies of scale to the consumers especially in tier II &III cities and towns. I shall eagerly wait for couple of them going public at a reasonable price!

Readers can send their views, comments, criticism to the author at vijaygaba.investrekk@gmail.com

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