Wednesday, May 8, 2019

State of external debt

Some food for thought
"A hero is one who knows how to hang on one minute longer."
—Novalis (German Poet, 1772-1801)
Word for the day
Avenaceous (v)
Of or like oats.
 
First thought this morning
The totally degenerated and despicable current political discourse reminds me of a famous couplet written by reputable Urdu poet Bashir Badr Sahib:
दुश्मनी जम कर करो लेकिन ये गुंजाइश रहे
जब कभी हम दोस्त हो जाएं तो शर्मिन्दा हों|
I assume all political leaders know it well that it is not necessary that any single party or pre poll alliance gets comfortable majority to form a stable government post 23rd May. In this eventuality, parties might be forced to realign into new groups or alliances.
Losing control in the heat of the election campaign is easy and very common. But leaders must take care that they might need to embrace the very person they are disparaging and slandering. From their past experience they would know that regardless of the public posturing, it is very difficult to behave normal and work cordially together after taking such hard positions against each other during election campaign.
They should remember another famous couplet of Bashir Sahib:
मुख़ालिफ़त से मेरी शख़्सियत संवरती है
मैं दुश्मनों का बड़ा एहतेराम करता हूं
Chart of the day

 
State of external debt
Last month the finance minister released data (see here) for India's external debt position as at end of 2018. I find the following points noteworthy in the data.
(a)   At end-December 2018, India’s external debt was US$521.2bn, an increase of US$10.8 billion over its level at end September 2018. However, adjusted for valuation gain of US$20.3bn due to INR appreciation during the Oct-Dec qtr, the external debt was higher at US$541.8bn.
(b)   External Commercial Borrowings (ECB) continued to be the largest component of external debt with a share of 37.4 per cent, followed by NRI deposits (24.1 per cent) and short term trade credit (19.9 per cent).
(c)    Short-term debt on a residual maturity basis constituted 43.5% of total external debt at end-December 2018 (as against 42.0% at end March 2018) and 57.3% of foreign exchange reserves (as against 52.3 per cent at end-March 2018).
(d)   US dollar denominated debt continued to be the largest component of India’s external debt with a share of 45.9% at end December 2018, followed by the Indian rupee (24.8%), SDR (5.1%), yen (4.9%) and euro (3.1%).
(e)    The ratio of concessional debt to total external debt stands at 8.7% as at end December 2018, as against 9.1% as at end March 2018.
(f)    External debt to GDP ratio is almost unchanged at 20.3%, in last one decade.
(g)    The ratio of Forex reserves to total external debt has deteriorated from 112.2% in FY09 to 75.5% in December 2018.
(h)   Debt service ratio has deteriorated from 4.4% in FY09 to 6.5% in December 2018.
 
 

Thursday, May 2, 2019

Hedge, don't panic

Some food for thought
"Plenty of people wish to become devout, but no one wishes to be humble."
—Joseph Addison (English Writer, 1672-1719)
Word for the day
Guddle (v)
To catch (fish) by groping with the hands, as under rocks or along a riverbank

First thought this morning
Mohit Raj, a young man in 30s, completed his studies about a decade ago. He had two roads to choose from - (1) Accept the campus placement offer from a leading private sector bank and pursue a lucrative career in corporate banking and (2) listen to his heart and dedicate his life to welfare of underprivileged students.
Mohit, younger of two brothers, comes from a lower middle class family from Bareilly in Uttar Pradesh. His parent worked about 14-16hrs a day to give good education to both the children. The elder brother followed the traditional path - IIT, IIM, MNC Bank, Singapore, marriage settled. But Mohit did not want to. He would rather choose the path less travelled.
He applied for one year fellowship program of Bill Gates funded Indo American Foundation and was selected. In this program he gained rich experience of social work, especially child rights. Post his fellowship program, he worked on few of projects of the foundation in various parts of the country. The work took him to heights of Kargil and Drass in J&K, dense forests of Satpura in central India, and backwaters of Kerala.
In 2011 he and his college time friend Sanchi decided to start something of their own. Thus was born, TYCIA (Turn Your Concerns Into Action) Foundation, with a paltry capital of Rs10000. They rented a small room in a village near Dwarka in New Delhi and started a bridge school for the children of migrant laborers. Since then they have travelled a long distance working for children of migrant laborers in cities, tribal children and farmers in forests and imprisoned youth in jails. They manage collective farming projects for Korku tribals in Satpura forests of MP. They run a 1000kms Explore India tour for urban youth taking them to the most backward areas in country and make a case for inclusive growth. They give life skill and formal education to youth incarcerated in various prisons of the country. If sometimes you feel skeptic about the degeneration of India society think about youth like Mohit and you will immediately be filled with hope and optimism.


Image may contain: 11 people, people smiling, outdoor

 
Hedge, don't panic
While an increasing number of market participants speak about likely market volatility in the wake of election results and suggest methods to protect against an "adverse" election outcome on 23rd May 2019, few have highlighted the structural changes that have taken place in Indian economy in past decade or so. Many recent news items that announce these changes have not been adequately highlighted. For example, consider the following:
(a)        Apple has decided to begin mass manufacturing its devices in India (see here)
(b)   Around 200 US companies looking to shift manufacturing base from China to India (see here)
(c)    The external trade profile of India has seen material transformation in past one decade. Imports have been moving away from traditional oil & gold domination; and exports have diversified away from traditional consumer goods like textile, gens & jewelry, leather etc. Manufactured engineering goods have become a major source of export income. Electronics has become a major import item.
With many global leaders like Samsung, MI, Apple, LG, etc. deciding to produce in India; new biofuel policy raising the ethanol blending to 10% in transportation fuel; massive investments in renewable beginning to yield results; electric mobility becoming a viable option in next 5-7years; and various productivity enhancement missions in pulses and oilseeds achieving targets, we may see a definitive shift in India's import profile going forward.
This all shall happen when India gains prominence as a manufacturing export destination.
(d)   Shifting away from colonial (cheap labor and material source) model, India is also becoming a research and development (R&D) hub for global manufacturers and service providers.
In my view, ignoring these trends or taking these trends only as a measure of shift from China due to geo political or tariff reasons would be a mistake.
These changes are primarily outcome of massive investment made in infrastructure development over past 20yrs. The investments that were primarily prompted by the economic sanction post Pokhran tests in 1998, and accelerated as part of fiscal stimulus in the wake of global slowdowns in 2001 and 2009.
We have paid huge cost of this massive infrastructure building drive in terms of crippling of financial sectors due to NPA problem, episodes of massive corruption leading to paralysis of policy administration and disruptions in markets place due to large scale bankruptcies.
But it is also a fact that a high quality capacities terms power generation, ports, road network, railways, civil aviation, financial services, telecommunication, manufacturing, and GSTN have been created and/or shall be put in place in next 2-4yrs.
This infrastructure surplus will be the primary driver of India's foreign trade (and trade balance), job creation and socio-economic transition.
This status quo, in my view, shall prevail regardless of the form and constitution of political administration at the helm.
Investors ignoring these trends under influence of mostly speculative fears about political conditions post 23rd May, would do that at their own risk. Hedging against potential volatility may be a good idea. Panicking from election results is worse idea.
More on this tomorrow.

Friday, April 26, 2019

Think about your patient first



First thought this morning
Voting for the election of 17th Lok Sabha is complete in more than 300 (of 543) seats. Voters in more than 20 states have exercised their franchise. From the voting pattern so far and anecdotal evidence collected by me, the following four trends are noteworthy:
(a)   The overall voting percentage this time is similar to 2014, however there are significant differences at regional level.
In 2014 elections the voter participation was amongst the highest since independence. Analysts attributed the high voting percentage to the Modi wave and peoples' longing for change. This time apparently there is no wave, or material anti incumbency for that matter. The still high voter participation therefore is bewildering for both analysts and political parties. Everyone is therefore trying to see it from their own prism. The incumbent and their supporter are seeing this as a vote for stability, while the others are terming it as a vote for change. Higher number of first time voters who are not as droopy as their elders could be another reason for higher participation rate.
(b)   Usually wherever a stronger regional party is present, Congress is not doing well. Haryana though could be an exception. The general feeling is that the contest this time is primarily between BJP and Congress, and the regional party INLD (and its factions) is in total disarray. RLD in Bihar has held together well under the same circumstances (patriarch in jail).
(c)    The campaign so far appears as if we are voting in a referendum on the Prime Minister and not in a general election for Lok Sabha.
(d)   Given the penetration level of electronic, digital and social media, the ban on campaigning upto 48 hrs prior to voting, has become totally redundant.
Chart of the day
Think about your patient first
Once a patient was admitted to an upscale private hospital (XYZ) with a serious cardiovascular ailment. The cardiology team at the hospital was headed by an experienced old surgeon, who was lately rendered incapable of performing complicated surgeries due to his blurred vision and trembling hands.
The team he headed was however not harmonious. Many doctors were either incompetent or had allegiance to their vested pecuniary interests. They would often indulge in unethical practices and conduct unbecoming of a reputable medical practitioner.
The management of the hospital was fully aware of the state of affairs at the hospital, but did little to put the house in order. The popular belief is that the management itself encouraged the disharmony amongst the team members and incongruence of the objectives to stay in control of the institution and maximize the profitability.
The head of the team diagnosed the patient's condition accurately and proposed a line of treatment, which would treat the patient promptly with minimum pain and cost. The team members however disagreed. They wanted the patient to spend more time in hospital and undertake a variety of experimental tests and procedures. This would cost the patient much more and cause more pain. The management concurred with the unethical lot of doctors.
After spending some time in the hospital, paying huge costs, and suffering tremendous pain, when the relatives of the patient saw condition of the patient worsening, they moved him to another hospital (PQR).
The doctors at PQR studied the case history and discovered that the patient's condition was accurately diagnosed at XYZ and correct line of treatment was proposed by the head of the department. The doctors there decided that once the condition of the patient is stabilized they would follow the same line of treatment as suggested by the old surgeon at XYZ.
In few days, the condition of the patient stabilized and he was moved out of the intensive care to normal ward. The doctors at PQR hospital then started the treatment as suggested by the head of the department at XYZ.
However, considering the slow recovery and frequent relapse, the head of the department at the PQR decided to try some unconventional treatment. The patient did not respond to these unconventional methods and his condition worsened materially.
He was again moved to intensive care. The doctors then followed the line of treatment prescribed at XYZ. The patient stabilized and his vital signs showed some improvement. But the patient is far from being cured and remains hospitalized, suffering pain and expenses.
The relatives of the patient are now in a quandary.
Fully aware that doctors at XYZ correctly diagnosed the disease and advised the right line of treatment, they still do not want to reconsider XYZ for its lack of ethics and unfair practices.
They are not too pleased with PQR either, as the unconventional experiments done by doctors there cost them significant amount of money besides inflicted tremendous pain to the patient. But they are willing to forgive PQR since it is now following the same line of treatment which XYZ would have followed.
There is a third hospital (LMN), but it is new, untried, untested and lacks adequate infrastructure. The doctors there have good track record of minor surgeries and treating minor ailments. But trusting them with a serious case and major surgery could be a big risk.
In the meanwhile—
(a)   Doctors and management of XYZ are accusing the management and doctors at PQR of unethical practice and incompetence, charging them with appropriating their diagnosis and following the same line of treatment as they had suggested.
(b)   Doctors and Management at PQR are trying hard to convince the relatives of the patient that if they consider shifting from their hospital, the life of the patient could be at serious risk.
(c)    The doctors and management of LMN are trying to lure the relatives of the patient with a promise that they would engage the good doctors from XYZ and continue with the same treatment at somewhat lesser cost.
PS:
If it is not clear enough, I may disclose identity of the characters in this story:
The patient - Indian economy
Relatives - Indian voters
XYZ - Dr. Manmohan Singh and Sonia Gandhi managed UPA
PQR - Narendra Modi led and managed NDA
LMN - The coalition of regional parties