Do it yourself

Sunday, September 7, 2014

On the brass tacks -II

In past 15years or so, great emphasis has been placed on building of physical infrastructure by private sector enterprise. The private public partnership (PPP) model has been aggressively promoted for building infrastructure assets and public utilities like roads, airports, rapid urban transport system. Many projects under PPP model have failed to produce desired results. Besides a large number of projects are mired in controversies. The reasons are many and varied.

Administrative delays in granting necessary approvals, failure in evolving and implementing an appropriate compensation and rehabilitation policy leading to frequent public protests, stalling of work and judicial intervention are some popular reason cited for partial failure of PPP model.

In my view, inadequate or no attention to social costs and sustainability concerns are bigger reasons. For example, consider the long jams at toll booths across cities. A detailed social audit might suggest that in many cases the time and fuel wasted at toll booths is often more valuable than the toll collected.

Besides, in general economic terms, we have failed in making distinction between the “need” and “demand” for infrastructure. There is no denying that the need for infrastructure is colossal. To meet the ends of social justice, economic equality, sustainable economic growth and regional balance, development of social (e.g., education and health) and physical infrastructure (roads, communication, power etc.) is imperative. But at the stage of development where India stands today, the demand (ability to pay to fulfill one’s needs) for infrastructure is abysmally low.

Moreover, first the rush to accumulate cheap credit and then fiscal misadventure in the name of stimulating the economy post Lehman crisis did lead to excessive debt both at government as well as corporate level in past 10years. This did bring 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. Regulatory framework for sustainability was not ready when mining rights were awarded for numerous coal, iron ore and bauxite mines.

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. Most coal and other mines are yet to start commercial production and KG basin is producing only 1/5^th the assumed gas production.

The infrastructure development therefore needs to be mostly socio-political effort rather than an economic proposition, in my view.

The efforts to make roads, power and airports projects economically viable by bundling land and coal resources in past 15years have proved rather counterproductive. The evolving socio-political paradigm indicates that in foreseeable future it would not be possible to masquerade land and mining mafia deals as infrastructure development projects. ....to continue tomorrow

Thought for the day

”How oft the sight of means to do ill deeds makes ill deeds done! "

- William Shakespeare (English, 1564-1616)

Word for the day

Cupidity (n)

Eager or excessive desire, especially for wealth; greed; avarice.

(Source: Dictionary.com)

Teaser for the day

Modi is establishing direct communication with various sections of the society, e.g., youth, women, businessmen, foreign leaders etc.

The frustration of media persons and studio experts is understandable!

Watch keenly, if "Mama Modi" takes the "Children Day" away from "Chacha Nehru".

Wednesday, September 3, 2014

Why bother about things you can't help

Thought for the day

” Let the one among you who is without sin be the first to cast a stone. "

- Jesus Christ

Word for the day

Cavil (int. verb)

To raise trivial objections; also, a trivial objection

(Source: Dictionary.com)

Teaser for the day

If religion of Sanskrit is Hindu, what is the religion of English, Urdu, Tamil, Bangla, Malyalam, Sindhi, Gujarati, Marathi, Punjabi, French, German....?

Why bother about things you can't help

I am fortunate to have critics who are most charitable in their criticism. For past two weeks especially they are leaving nothing to imagination., Some of them have even picked up selective Punjabi expletives to express their frustration with me.

Their main objection is to my nonchalance to seemingly exciting events and data, e.g., Ukraine, Pakistan, Gaza, ECB stimulus, Fed tightening, etc. My point is that anything which can be clearly seen by the last person standing on the street (that is me) is not worth bothering about. So is not which even the likes of Yellen and Draghi cannot see.

I like to factor in my strategy all that is known and/or expected, whether quantifiable or not, and keep enough flexibility to accommodate any black swan that may chose to visit unannounced. This saves me from reacting to every news headline or getting excited over every hint of trouble.

I understand it is unfair to use this column to take on my critics, but who said life is fair!

Now coming back to normal business, I have been emphasizing that the Indian economy may not sustainably return to the path of high growth (8%+), in next 5years unless the virtuous cycle of "higher income - saving - consumption - investment - income" gets kick started. So far we have not seen any evidence of this happening.

The upward revision in growth estimates so far is coming from expectation of faster execution and administrative efficiencies. New investments are not on the horizon of analysts and economists so far.

The corporate profit growth in past couple of quarters is also mostly driven by cost efficiencies and better export demand. There is no evidence of pricing power returning to producers or material rise in consumer demand.

In my (over) simplistic assessment the following pieces need to fall in place before the virtuous growth cycle led by investment and credit is kicked in.

(a) More money needs to flow in the hands of consumers so that consumption demand and household savings could grow at faster rate.

(b) Credit worthiness of enterprise engaged in high gestation capital intensive infrastructure projects needs to improve.

(d) Enabling industrial, fiscal and sustainability policy environment needs to be firmly put in place.

(e) Monetary policy needs to ensure that the foreign flows are not used to feed asset price bubble like during 1991-1995 and 2003-2007 but are strictly channelized to built productive assets and social & physical infrastructure.

In next few days, I shall discuss these points in some more detail. All suggestions, comments and views (even with expletives) are welcome at vijaygaba.investrekk@gmail.com

Tuesday, September 2, 2014

Solve the puzzle

Thought for the day

”For if you love those who love you, what reward have you? Do not even the tax collectors do the same?"

- Jesus Christ

Word for the day

Bletting (n)

The ripening of fruit, especially of fruit stored until the desired degree of softness is attained.

(Source: Dictionary.com)

Teaser for the day

Pakistan gets its own AAP moment.

There are lesson for all - Anna, Quadri, Kejriwal, Imran, Manmohan, Sharif and Modi!

Solve the puzzle

In past couple days some market commentators and analysts have made seriously buoyant forecasts about Indian equity markets, almost disregarding the global unease about the bond and equity rallies in developed markets. It certainly feels good to hear calls for 10000 Nifty level in next 6-7months translating into 25% return from the current levels.

The latest trigger for the bulls is the GDP data for 1QFY15, which came at 5.7%, though not unexpectedly. As I suggested yesterday, the stream of latest data, including GDP data for 1QFY15 and PMI numbers for past 6months, support optimism about "worst is over". There is however little to suggest that the virtuous cycle of higher savings, investments, credit and consumption is likely to get kick started tomorrow morning.

I feel the latest GDP data needs to be seen in this context. Even a prima facie look at the CSO press release of 1QFY15 GDP data raises some questions. For example, consider the following:

(a) Good rabi crop is reflected in strong Agriculture growth. But this number is corroborated by private consumption which fell, continuing the trend of past many quarters.

(b) Strong growth in construction sector growth did not reflect in banking and real estate sector growth. From other data we know that infrastructure construction, especially roads, has not done well in that period.

(c) Government consumption expenditure rose, perhaps due to election related spending. However, considering that over 60% government spending is done on social sector, the decline in social sector growth is difficult to explain.

(d) Rise in investment also is not corroborated by decline in financing, banking and insurance sectors. The credit growth number for the corresponding period also do not confirm this.

(e) Gold might have contributed much to lower imports number. Oil import is also lower. Both these are not sustainable.

(f) Mining growth is purely due to lower base, as the coal and iron ore production data does not confirm this sharp rise.

(g) The shortages in power supply belie the spectacular rise in electricity and gas production.

(h) Rise in manufacturing and exports could be due to other economies doing well rather than Indian economy doing well. Lower consumption number confirms this.

I would like this puzzle to get resolved before changing my investment strategy from overweight consumption and exports to overweight investment and credit. For now I am sitting tight. I shall though look at rebalancing my portfolio this month to take care material outperformance in certain stocks.

Sunday, August 31, 2014

It's not UPA vs. NDA

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

Osculate (v)

To kiss

(Source: Dictionary.com)

Teaser for the day

Hindu, Hindi, Indian, Bhartiya, Hinduness, Hindutava, Indianness, Bhartiyata - What is the debate actually?

It's not UPA vs. NDA

India GDP expanded 5.7% in 1QFY15, confirming the trend witnessed in past couple of quarters. This is highest rate of growth in nine quarters.

Though the long term growth trajectory, considered necessary for substantial investment in building additional capacities and generating sustainable employment is expected to remain stuck at 6% for at least 3 more years, it is comforting to note that the economy has perhaps already hit the rock. The trend from here most likely will be positive, though the trajectory may be flatter and speed may be slower than desired.

A notable feature of recent macro economic data is the continuity. The data has been consistent in degree and direction of growth for past many months. This suggests that (a) the bottoming of economy is firm and sustainable; and (b) it's not UPA vs. NDA or MMS vs. NaMo, it is rather about Indian economy, entrepreneurs, consumers and investors.

The new government has certainly enthused business and consumer confidence. The global investors are also certainly more positive about investing in India as compared to past 3-4years. But it may be due to a variety of factors. For example, (a) Indian economy is bottoming at a time when most peers like Brazil, Russia, Indonesia etc. are going downhill and China is stagnating; (b) India offers one of the best yields amongst non-junk rated sovereigns; (c) given that India has taken hard decisions on fiscal discipline, rates and inflation, amongst emerging markets it is widely seen as having best cushion against a recurrence of 2008 like collapse.

...to continue tomorrow

Thursday, August 28, 2014

No free rides

Thought for the day

” When you have got an elephant by the hind legs and he is trying to run away, it's best to let him run. "

- Abraham Lincoln (American, 1809-1865)

Word for the day

Rusticate (v)

To go to the country

(Source: Dictionary.com)

Teaser for the day

Is Modi relying too much on Japan? or Vice versa is also true?

No free rides

Yesterday I called 50people randomly selected from my phone book to ask "what if Google, Facebook, Wikipedia, WhatsApp, and Yahoo are not available from tomorrow morning?". The reactions were unusually but expectedly uniform. I could imagine that all of them had expression "are you mad?" and "Do ya even realize what're you talkin' 'bout?"

Not surprised, I followed this up with a supplementary "what is all these service providers start charging for their services?" Now the silence was deafening. The unease was palpable.

No one could deny the critical role these services play in our day to day life. The utility is unquestionable. But we are accustomed to enjoy these services for free. We have never planned paying for these.

I am sure that if I have to directly pay for these services, I will cut down the usage by at least 75%. The sense I got from the people I called, most of them will be very discrete in using these services.

I believe that this "for free" attitude of ours has introduced serious problems in Indian economy. Not only consumers, but investors and industrialist are also often seen on the lookout for freebies.

We all appreciate that serious economic inefficiencies have crept in the system due to schemes like tax Free zones, free food, free electricity, free water, free air, free mines, free tickets/passes, interest free, etc. These schemes invariably lead to misallocation of capital, regional imbalances, lower productivity, misuse, wastage, leakages and various forms of corruption.

The classic example is sudden rise in markets value of a company which announces a bonus issue of shares. Theoretically, a bonus issue causes no change in the intrinsic value of a company. In fact post bonus issue the company has enlarged equity base to service, which in some cases could be disadvantageous to shareholders.

The PPP model of infrastructure development in India also appears to be an outcome of this "For Free" seeking mindset. The projects are often undertaken under the model with 5:95 equity to debt ratio. It is popularly believed that some promoters even avoid putting 5% equity using scrupulous methods. In case project is successful, they make lot of money. However, if the project fails, the loss is absorbed by the lenders (mostly public sector banks) and tax payers.

I understand the Prime Minister call for reform of this "For Free" mindset, has disrupted peace in many corporate board rooms.

The independence day exhort of PM to shed "what's for me in this?", "cleanup the filth around you", "focus on quality and sustainability of your business", "make positive contribution to society" clearly shows the intent.

But "Good Days" will come only when and if we are ready for that.

Wednesday, August 27, 2014

"Vote" over "voter" - III

Thought for the day

”Stand with anybody that stands right, stand with him while he is right and part with him when he goes wrong."

- Abraham Lincoln (American, 1809-1865)

Word for the day

Gregarious (adj)

Seeking and enjoying the company of others.

(Source: Dictionary.com)

Teaser for the day

Will the SC ruling on coal block allocation in past two decades mark end of the reign of the Gangs of Wasseypur and Khadi clad Gundey on Indian natural resources?

"Vote" over "voter" - III

The draft report of the Expert Committee on Integrated Energy Policy set up by the Planning Commission submitted in December 2005 explicitly stated that “India faces formidable challenges in meeting its energy needs and providing adequate energy of desired quality in various forms to users in a sustainable manner and at reasonable costs.

India needs to sustain a 8% to 10% economic growth to eradicate poverty and meet its economic & human development goals. Such economic growth would call for increased demand for energy and ensuring access to clean, convenient and reliable energy for all to address human development. To deliver a sustained growth of 8% through 2031, India would, in the very least, need to grow its primary energy supply by 3 to 4 times and electricity supply by 5 to 7 times of today’s consumption. The energy challenge is of fundamental importance to India’s economic growth imperatives (emphasis supplied).

The Expert Committee made suggestions based on the following approach:

(a) Markets that promote competition.

(b) Pricing and resource allocation to take place under market forces under an effective and credible regulatory oversight, as far as possible.

(d) Improved efficiencies across the energy chain.

(e) Policies that reflect externalities of energy consumption.

(f) Policies that rely on incentives and which are implementable

Despite having such a vivid idea about the problems and well documented approach to the solution, the government not only took a divergent route but also did all possible things to scuttle the growth of energy sector.

The NDA government had for once effectively dismantled the administrative pricing mechanism for transportation fuel; de-regulated the oil and gas exploration and production under New Exploration Licensing Policy (NELP); allowed private players in retailing of transportation fuel; privatized power production and related coal mining.

The successive governments however undid most of these steps in the interest of short term political gains. It dithered for many years on revision of market price of transportation fuel and LPG. Failed to implement the coal mining policy; national solar mission remained mostly on papers; nuclear energy program has seen very little progress despite all the political hoopla in 2009; subsidies have been misdirected and mostly remained uncontrolled till tye hot summer of 2013.

A two day trip to rural Bihar, Jharkhand, Eastern UP will prima facie explain how by making people dependent on subsidized kerosene for lighting and cooking purposes, successive governments have successfully broken the spines of millions of households. They walk miles, stand in queue for hours to get a couple of litters of this health hazard fuel. This time and energy could have been spent much more productively, if the government subsidy was well planned, e.g., for roof top solar panel, solar lanterns, solar charging stations closer to their home...to continue tomorrow

Tuesday, August 26, 2014

"Vote" over "voter" - II

Thought for the day

” Some single mind must be master, else there will be no agreement in anything."

- Abraham Lincoln (American, 1809-1865)

Word for the day

Qualm (n)

An uneasy feeling or pang of conscience as to conduct; compunction

(Source: Dictionary.com)

Teaser for the day

What is more important (a) Planning Commission or (b) Commissioning the plans?

"Vote" over "voter" - II

“Although poverty and inequality play a powerful role in shaping our children’s educational opportunities, inequality is not inevitable, and poverty is not destiny,” said Sean Reardon, a professor of education who helped to establish the workshop on Poverty, Inequality and Education at Stanford University to examine the challenges to closing the growing opportunity gap in USA.

While it is popular to examine the state of economy on usual macro parameters like price conditions, growth rate, employment level, trade balance, business confidence, consumer confidence, savings, investments, and productivity etc., in my view the true scale and primary lead indicator of the economic conditions is the level of human development. Especially in a people centric (against resource centric) economy like India, the importance of human stock can hardly be overstated.

I therefore believe that complete failure in developing a strong education, skilling and training system aimed at equalizing the society is a one of the weakest link.

It is widely acknowledged that the extant education system is grossly inadequate. The poor standard of education and educators in a large majority of public educational institutes is not only perpetuating the socio-economic inequalities in the country, it is also proving to be a serious challenge to (a) economic growth in terms of shortage of skilled workforce; (b) fiscal consolidation by increasing the dependency ratio of people on the government; and (c) internal security by forcing youth to undertake unlawful and disruptive activities.

A large majority of Indian workers, artisans and laborers acquire their occupation skills and training on the job. Their exploitation aside, the skills they acquire are mostly of poor quality. By the time they realize or try to become independent of their masters, they are already casted in a rigid mold. They are usually their past prime learning age and have no option to chose a different occupation.

With this state of populace, the dream of upgrading 700mn Indians from poverty to middle class will remain only that a dream. The fabled India story that is quintessentially built on the premise of a strong middle class who will earn, consume, save, invest.

The government and the industry needs to understand that a uniform, good quality education system and skilling and training program should be much higher priority than building airports and smart cities. Appointing almost uneducated graduates as teachers to win their votes is sufficient.

CAG also needs to examine whether the government has optimally used the 3% education surcharge collected from all taxpayers, or an alternative mechanism is needed to administer this huge corpus.

Those who are regular visitors to Mata Vaishno Devi Shrine (J&K) from pre Shrine Board days would understand better what I am suggesting here....to continue tomorrow