Do it yourself

Tuesday, July 22, 2014

Money debasement is norm, tighter policy exception

Thought for the day

”It is not possible to eat me without insisting that I sing praises of my devourer?”

- Fyodor Dostoevsky (Russian, 1821-1881)

Word for the day

Moniker (n)

A person's name, especially a nickname or alias.

(Source: Dictionary.com)

Teaser for the day

How Jaitley's "Growth for poverty" is different from Nehru's "unbalanced growth" model?

Money debasement is norm, tighter policy exception

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” - Milton Friedman

In classical economic theory inflation is always a monetary phenomenon. Seasonal factors or sudden supply shocks affect prices to a limited extent. Such instances of price rise are invariably temporary and self correcting.

In recent times, however we have seen multiple challenges to this classic economic theory of money and price equilibrium. Since 2008 most central banks, especially those in developed countries, have generally followed supper expansionary monetary policies.

Bank of Japan (BoJ) and European Central Bank (ECB) in particular have targeted higher inflation with unprecedented expansionary monetary policies. The effort so have yielded only marginal result. The inflation trajectory continues to remain much below the desired level both in Euro Area and Japan.

(Source: Ice Cap, shows money printed since 2008)

In Indian context, while money growth has remained high for two decades (M3 grew at 17.2% during 1991-2009), we have seen a distinct downtrend in recent years. Currently M3 growth stands close to 13%. In past few year, RBI has monetized just under one fourth of the fiscal deficit.

The price levels have remained stubborn despite tighter money policy. While the price rise could be partly explained by supply side bottleneck, seasonal factors, and global supply shocks due to geo-political concerns, the general rise in price levels over past one decade still needs explanation.

Consistent debasement of money has been a popular tool of successive governments in India. There appear to be no change in this policy paradigm, despite seemingly tighter policy followed in last couple of years. The stickiness of inflation needs to be seen in this context also.

Monday, July 21, 2014

Hope is a good thing...

Thought for the day

”The formula 'Two and two make five' is not without its attractions.”

- Fyodor Dostoevsky (Russian, 1821-1881)

Word for the day

Mot juste (n)

The exact, appropriate word.

(Source: Dictionary.com)

Teaser for the day

Heard on Raisina Hills - "The real budget will be presented from the ramparts of Red Fort on 15th August. Arun Jaitley just fulfilled the accountant's job. Arundhati Roy is not wrong in calling Modi a totalitarian. But she has belittled herself by calling Mahatma 'Casteist'."

Be ready for market rally on 18th August!

Hope is a good thing...

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

This was however not the case.

In my 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.

As of this morning, rise in general price level appears the foremost concern for the politician and common people alike.

There is a broader consensus that to restart the jammed investment cycle interest rates need to come down. Most also agree that it would not be possible to bring rate structure down on sustainable basis if general price levels do not show a definite down trend.

So far, we have heard some seriously concerned voices emanating from New Delhi. These do sound credible. However, we are yet to see a workable plan to bring prices down on sustainable basis. Various ministers and bureaucrats appear tentative in their thoughts and rely too much on hope that things will fall in place automatically - "global correction in commodity and energy prices", "further progress in monsoon", "curbs on hoarding will augment supply" etc.

A deeper study of the economics of Indian agriculture, would suggest that food inflation will only accelerate in next many years, even if things start changing at fast pace from today.

Currency debasement is the easiest and hence most popular tool to camouflage the fiscal profligacy of the government of day.

In next couple of days I shall to examine the structure of retail inflation in the country and suggest likely solution in my view.

I find 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.

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.

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.

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.

...to continue tomorrow

Friday, July 18, 2014

Some random thoughts

Thought for the day

”Without doubt, machinery has greatly increased the number of well-to-do idlers.”

- Karl Marx (German, 1818-1883)

Word for the day

Polaris (n)

The North Star

(Source: Dictionary.com)

Teaser for the day

Ved Pratap Vaidik...Digvijay Singh...Arvind Kejriwal....Rakhi Sawant....Veena Malik....Poonam Pandey!

Some random thoughts

Since its formation Modi government has advocated the use of private public partnership (PPP) model of development rather aggressively. Both railway as well general budgets respective ministers have laid strong emphasis on use of PPP for developing infrastructure of national importance.

However, recently the Surface Transport Minister Nitin Gadkari suggested that "the government has decided to put all public-private partnerships (PPPs) in the road sector on hold for two to three years as just a few infrastructure firms have any capacity to put all public-private partnerships (PPPs) in the road sector on hold for two to three years as just a few infrastructure firms have any capacity to invest in new projects". (read here)

The suspicion here is whether there is some discord within the government as regard to aggressive use of PPP model?

I view these two apparently divergent stance are part of the same script. The capital starved government would certainly be keen on private participation in the development of key infrastructure projects. However, learning from the past experience, the balance sheet strength of the private partner must be the foremost concern to ensure smooth and timely execution.

Insofar as existing stalled PPP projects are concerned where the private partners are in default, the government should consider selling these projects on as is where is basis for faster execution rather than buying these on its own book. This will only add to the pressure on bank's asset quality and fiscal health of the economy.

In an interview earlier this week, the Finance Minister Arun Jaitely stressed that "for utilities the user will pay for what they use. Unless users pay, utilities can't survive." This could mean higher electricity charges as well as a cut in subsidies. This essentially means that the government intend to materially cut subsidies on energy and transport.

As an analyst I would tend to believe that it is a step in right direction to ensure (a) energy efficiency, (b) proper capital allocation, (c) effective and targeted subsidy programs and (d) structurally improved fiscal health of the government.

However, as a consumer I have some serious doubts. For example,

(a) On paying "Fair fare" for rail travel will I get full service?

What is "Fair Fare" is also a matter of debate. To me the fare calculated based on the bloated and highly inefficient cost structure is not fair for me. I would like the employee costs (pensions, perquisites, bungalows etc.) to be recalculated as per current competitive pay structures.

(b) I am happy to pay full price for transport fuel and cooking gas, provided an even playing field is given to all potential suppliers and I am given an option to buy from whatever seller I wish to. I should not be forced to pay for the PSU inefficiencies of OMCs.

After all no one is complaining for full and fare telecom tariff or even air tickets.

Thursday, July 17, 2014

A new star is born

Thought for the day

” History does nothing; it does not possess immense riches, it does not fight battles. It is men, real, living, who do all this.”

- Karl Marx (German, 1818-1883)

Word for the day

Writhen (adj)

Twisted

(Source: Dictionary.com)

Teaser for the day

BRICS Bank - Delhi gets the corner office, Shanghai all other jobs!

A new star is born

This is part of "a system of measures that would help prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies." - Russian president Vladimir Putin

“The BRICS are gaining political weight and demonstrating their role in the international arena.” - Brazilian President Dilma Rousseff.

"We are pleased to announce the signing of the Treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of US$ 100 billion. This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements. The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures." Official BRICS summit statement

Establishment of a new multilateral development bank on the lines of International Monetary Fund (IMF) by leading emerging economies nations is potentially a watershed development in global financial markets.

Viewing this development just as an effort by five BRICS nations (Brazil, Russia, INDIA, China, and South Africa) would be myopic. It would also be inappropriate, in my view, to view this event as just a protest response against delay in implementing IMF reforms as promised in 2010 in the wake of global financial crisis. or assertion of their collective dominance by BRICS leadership in the international arena.

I view this as yet another development in the process of multi-polarization of the world. With a tinge of the memories of pre-cold war era, I feel a financial alliances like BRICS could provide a much better balance to the world against strategic alliances like NATO.

Many are seeing this as an effort to set up a final currency war to displace USD from world's sole reserve currency position.

Last month, Putin's security advisor, Sergey Glaziev, in a hard hitting article had stressed on the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves. The objective, according to her, should be to break the Washington's money printing machine that is feeding its military-industrial complex and giving the US ample possibilities to spread chaos across the globe, fueling the civil wars in Libya, Iraq, Syria and Ukraine.

I hope the BRICS leaders are not working with this design in mind. Indubitably, it is important to have counter balance in the global financial markets overwhelmingly dominated by US and EU. However, if the primary objective is to teach US a lesson, it will not work, in my view.

It would be interesting to see how fast and how big this institution grows in next decade or so. In my view, we shall see many more emerging economies especially from South East Asia and Latin America joining this new development bank in next few year, giving it a wider acceptance and stronger base.

One only wishes that this does not meet the fate of non-aligned movement (NAM.! Amen!

Wednesday, July 16, 2014

Match stricter compliance with good governance

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

Hypocorism (n)

The practice of using a pet name.

(Source: Dictionary.com)

Teaser for the day

Acche Din (Good days) means - more compliance and less corruption; less controls and more supplies.

Match stricter compliance with good governance

Participating in a couple of discussions on Union Budget for FY15 yesterday, disillusioned me a little further. I could see a rather stark expectation mismatch amongst participants from various fields.

Nonetheless the national agenda was on no one's mind. While everyone tried reading and interpreting the budget proposal from their myopic vested interest view points, none appeared concerned about the impact on the large section of the population that suffers most from inadequate social and economic infrastructure and higher price levels.

I could decipher the following key reasons for displeasure and disappointment amongst participants from financial markets:

(a) Failure of the Finance Minister in proposing anything that will induce a bubble in the asset prices, especially listed equities and real estate.

(b) Tax proposals indicating that the tax department is closely examining all investment schemes and other transactions that are primarily designed for tax avoidance purposes and do not serve any other useful purpose, e.g., Fixed Maturity Plans (FMP) of mutual funds that have bank CDs as only underlying; forfeiture of advance against property that has been rampantly used as money laundering; clarification on inclusion of 35AD deduction in calculations of MAT; grossing up of the dividend amount for the purposes of calculating DDT and exclusion of CSR in calculating PBT, etc.,

(c) Refusal of the finance minister in engaging into avoidable controversies through unprepared and ill-considered stand on contentious issues like GAAR, GST, DTC, MAT on units located in SEZs etc.

(d) Disregard of expert opinions, in particular global economists and columnists.

I found most of this criticism frivolous and misplaced.

I believe inducing asset price bubble at this stage of economic cycle (domestic and global) could be disastrous. The global economy looks more fragile today than it was in 2008.

Multiple rounds of monetary injections have not been successful in reviving the economic activity even to pre 2008 sub optimal levels. The public debt levels have also risen sharply in past couple of years as yields in many European countries have fallen to pre Lehman levels. The conventional monetary policy tools stand exhausted and unconventional means are yet to pass the test of stemming a collapse (though these have been very successful in protecting the bottom).

Insofar as higher utility prices and stricter compliance are concerned, in view these are conspicuous signs of Achhe Din (good days). The only thing we need to wait and see is that it is matched in equal proportion by good governance!

Tuesday, July 15, 2014

Union budget FY15: Customary praise and misdirected criticism

Thought for the day

” The production of too many useful things results in too many useless people.”

- Karl Marx (German, 1818-1883)

Word for the day

Tumultuary (adj)

Confused; disorderly; haphazard

(Source: Dictionary.com)

Teaser for the day

FIFA World Cup over. Let's catch up some sleep, markets permitting!

Union budget FY15: Customary praise and misdirected criticism

The first budget of Modi government has evoked mixed response from various quarters.

The views supporting the budget are customary and sound rather obliged to praise it. These voices have come mostly from large industrialists. Their views are mostly driven by hope. "It's only a beginning", "they had little time", "It is a trailer, big picture will emerge only in February" etc. are common refrains. I believe no one taking these views seriously; not even those expressing these views.

On the other hand the criticism has mostly come economists, analysts, political observers and political opponents. Their arguments are even more bizarre. "No big bang", "continuation of UPA policies", "straight from Chidambaram's book", "too ambitious" are the common headlines in this camp.

I have supported the budget statement because for the first time in couple of decades, I saw a government focusing on the intrinsic strengths of Indian economy rather than overemphasizing on the weaknesses. I have reasons to believe that this trend will continue till 2019 at the least. To me the taxation structure appears skewed in favor of the rich and might need correction to improve purchasing power of middle and lower middle class consumer.

Given the fragile state of Indian as well global economy, it is prudent to maintain status quo and not make too many experiments. I do not see anything wrong in this.

The UPA had shifted its stance towards fiscal prudence and monetary corrections in summer of 2013 with PC and Rajan both taking some serious measures. Almost everyone, including financial markets, recognized, lauded and supported the effort. I do not understand why people expected a material departure from this set course.

I have reiterated my views on "big bang reforms" rather frequently. I strongly believe that PMGSY (rural road program) has and will continue to bring more benefits to large corporate than multibillion dollar mega projects. These roads bring food and labor to them and take their produce back to the 60% of Indian populace. Trust me the quintessential "India Story" is all about rise in consumption at the bottom of the pyramid.

Insofar as the fiscal targets are concerned, I see little justification for the skepticism. I think 4.1% fiscal deficit is certainly achievable, if the government just maintains its current pace of fiscal tightening and moves ahead with long stalled sale of assets like Hindustan Zinc, Balco, and ONGC etc.

GAAR has been a contentious issue for couple of years now. While the retroactive implementation of these provisions (or any substantive tax provision) is not desirable, the ongoing litigation has queered the pitch for the government. I think the last word on this matter is still not out and a rational decision will be taken soon.

Inflation is a concern not just this parched summer but for next many years till the supply augmentation efforts of the government yield result. I guess a review would be in order only after the government completes half the term.

Sunday, July 13, 2014

The third dimension

Thought for the day

”From each according to his abilities, to each according to his needs.”

- Karl Marx (German, 1818-1883)

Word for the day

Shoat (n)

A young pig.

(Source: Dictionary.com)

Teaser for the day

We have heard numerous voices raising concern about money laundered out of India.

Has anybody spoken about the money laundered into India yet?

The third dimension

An annexure attached to the Union Budget outlines the Revenue foregone under the Central Tax System during Financial Years 2012-13 and 2013-14. I find this often ignored part of the budget document quite interesting and to an extent intriguing.

The statement highlights the extent of concentration of financial power in the hands of few top corporate and the tax disparities between smaller and larger tax payers. This also raises some doubts about potential misuse of corporate veil for wrongful purposes.

As the following table shows, about 46% of the sample 6.18.806 companies did not show any profit and therefore did not any tax. The bottom 95% companies' share in total income was a meager 7.35%. Top 272 companies accounted for 57% share in total income.

I appreciate that lot of these companies will be shell companies or holding companies which normally do not have any recurring income. Nonetheless, the disparities are so stark that it raises many doubts.

On the other hand the effective tax rate for large corporate is 20.97% where as smaller companies pay in excess of 26%. The average for unincorporated assesses (partnerships, AOP and BOIs) is also over 25%. This to my mind a reason for examining whether the tax concessions are promoting disparities or it is just incidental.