Do it yourself

Friday, June 21, 2019

Intuition may be better guide in navigating troubled waters

Some food for thought

"The whole secret of existence is to have no fear. Never fear what will become of you. Depend on no one. Only the moment you reject all help are you freed."

—Swami Vivekanand (Indian Philosopher, 1863-1902)

Word for the day

Insipience (n)

Lack of wisdom; foolishness.

First thought this morning

As per various reports, the city of Chennai is totally parched. Residents are struggling to get adequate water even for drinking. Corporate, hotels, restaurants, etc. are rationing the water for their employees and customers.

Muzaffarpur in Bihar is suffering from one of the worst outbreak of acute viral encephalitis. More than 130 kids have already lost their lives in past few weeks to this deadly brain fever; and many more are struggling to survive. Various reports suggest that condition of available medical facilities is pathetic. Reports have also drawn attention to the fact that at least 98 of Muzaffarpur district's 103 primary healthcare centres (PHCs) could not meet even minimum requirements even to begin evaluation. The remaining five got zero rating on evaluation (see here).

A few months earlier, reports suggested that more than 40,000 students skipped UP Board exams in two days because strict checking made copying difficult. (see here)

Does government still want an elaborate consultative process to set its priorities right?

Chart of the day

Intuition may be better guide in navigating troubled waters

Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall,
All the king's horses and all the King's men,
Couldn't put Humpty together again.

In 2008, one of the worst the financial crises in world's economic history, threatened to push the global economy into a state of depression. Sensing the enormity of the crisis, central bankers and governments from across the world put their heads together, and in a rare show of solidarity with each other, agreed on non conventional methods to save the global economy from the imminent threats. The multilateral agencies like IMF also joined hands with the global leadership in committing "whatever it takes" to save the global economy from slithering into a deep abyss. What followed was an enormous deluge of liquidity available to businesses at near zero rate of interest.

To their credit, they were extremely successful in unfreezing the global financial markets, alleviating all the fears of sovereign defaults in countries like Greece, Italy, Portugal, Spain, Iceland etc. The global economy has avoided recession for a decade; and all apprehensions of hyperinflation due to unprecedented quantitative easing (euphemism for money printing) have also been proved unfounded.

Nonetheless, the rate of global economic expansion has stagnated between 2.5 to 3%; and remained highly skewed in favor of US and emerging markets (mostly in Asia Pac region). Commodity dominated Latin America, Africa, and Eastern Europe did not participated much in the recovery.

Moreover, the stability appears to be fragile. Global growth is projected to decelerate to 2.6% in 2019. Leading emerging economies like Chinese and Indian are already witnessing material deceleration in growth. Japan and EU did never managed to attain higher growth. US economic growth is also challenged and Federal Reserve has already spoken about possible rate cut in near future. ECB and BoJ chairmen have also indicated beginning of a fresh easing cycle.

This will in fact be the lowest cyclical peak for the US Fed rates.

The peripheral Europe that was at the center of the last global financial crisis also seems to be just limping along, without any major improvement in economic conditions. The debt levels in most of the economies have already surpassed the peak of 2008.

Another critical point to note is that unlike 2008-09, the world is no longer a harmonious place. To the contrary, we are witnessing serious challenges to the very idea of globalization. Frequent trade conflicts between largest trading partners US, EU and China; uncertainties over Brexit; US economic sanctions on Iran, Turkey, Russia and other countries; Indo-US trade and skilled worker VISA spat; etc indicate that a harmonious global action like 2008-09 is unlikely should economic conditions deteriorate further and financial markets face the heat.

To assimilate the implications of the evolving economic scenario for my investment portfolio, I have been reading views of many reputable experts. Unfortunately, most of them are relying upon the historical data to forecast the future trends. Very few of them are accounting for the non linearity in the economic activity level. For example, someone highlights that "in the past 8 Fed easing cycles, the funds rate on average had to be sliced 165 bps before the stock market embarked on any sustainable rally." But he is not highlighting that in all of the 8 cycles Fed rates peaked above 5%. So expecting a 165 cut from 2.25-2.5% level for it to have impact on equity markets may not be appropriate under present conditions.

I guess, I would go by my intuitive analysis rather than depending on some discreet random third party thoughts.

Let me gather my thoughts on this and share with readers in next few days.

Thursday, June 20, 2019

Tax vanity

Some food for thought

"Our duty is to encourage every one in his struggle to live up to his own highest idea, and strive at the same time to make the ideal as near as possible to the Truth."

—Swami Vivekanand (Indian Philosopher, 1863-1902)

Word for the day

Epiphonema (n)

A sentence that is an exclamation, a general or striking comment, or a succinct summary of what has previously been said.

First thought this morning

Many people have taken strong exception to the chanting of religious and other slogans associated with our independence struggle on the floor of the Parliament. They have usually been critical of BJP, enjoying a dominant majority in the lower house, for its inability to protect the secular credentials.

I believe these people are living in denial. They are choosing to ignore the fact that just one month ago, these members of the Parliament have been elected by majority support using these very slogans only. Expecting them to stop shouting these slogans would actually be naive. Honoring the democratic traditions, the will of the majority must be accepted as the law of the land.

We, the people of India, have unambiguously expressed our priorities. If the Parliament and State assemblies are functioning as per the priorities set by us, there should not be any complaints.

On a more fundamental note, I would reiterate that the government must work to remove the terms "secular" and "socialist" from the preamble of our constitution. Let there be clearly marked "Right" and "Left" politics in the country so that the people can chose between Bread and Moon (Roti aur Chaand). These degenerated socialists and pseudo secularists have already done tremendous harm to the elementary fabric of our society.

Chart of the day

Tax vanity

Many people reportedly bought tickets for over hyped India-Pakistan ICC World Cup 2019 encounter in black market paying as high as £1000 per ticket. Add to this another £1500 for VISA fee, economy class return airfare, 2night stay in London. This comes to staggering £2500 (INR 2,20,000) per person for watching a match with a 6th ranked ODI team in world - which has not been playing good cricket for two years; comprises mostly inexperienced & inconsistent cricketers; and belongs to a country widely perceived to be an enemy. Moreover, as per the available weather forecast there was only a 50% chance of a full match being played.

Thankfully match happened and India won decisively as expected. However, if we ignore the fun on the sidelines (drums, bhangra and nationalistic fervor) the cricket was lacking from both sides. Virat Kohli gave himself out despite umpire saying not out. Rohit Sharma gave two run out chances. Dhoni played a poor shot to get out in a hurry. Bhumrah bowled below par. Bhuvneshwar again raised doubt about his fitness. Entire Pakistan team performed poorly save for some random glimpses of brilliance by Amir and couple of batsman.

This reminds me of the Justin Bieber's Mumbai concert in summer of 2017. People virtually scrambled to pay INR70,000 for each concert ticket; travelled to New Mumbai stadium, and waited for many hours in hot and humid weather for a pop singer to come and lip sing a few of his popular songs, easily available for free download on internet.

I see three bothersome trends in these events:

(a) Income inequalities in India have risen to a level where a section of people is able to splurge obscene amount of money just for vanity purposes. I acknowledge that this has been happening ever since ancient times. But earlier the underprivileged did not have smart phones in their hand beaming such acts of self indulgence live to their anguish, elevating their sense of deprivation.

(b) The people at bottom of the pyramid are inspired to give priority to aspirational spending (expensive smart phone, expensive vacations, extravagant marriages & birthday parties, etc.) over necessities like good education, healthy food, better living conditions etc. This is persistently increasing pressure on the government to provide for the education, health, housing, fuel, electricity, water etc.

It is common knowledge that a large portion of farmers' debt is non farming debt. This debt is mostly taken for unaffordable marriages, religious rituals on birth & death and medical treatment. This debt cannot be repaid from meager farm income that is barely sufficient for survival. This leads to frequent calls for debt waiver. The governments are obliged to honor these loan waiver calls due to their political compulsions. The vicious cycle is thus perpetuating. The primary consequence of this is perennial shortage of growth capital.

(c) Media has become too potent to influence economic behavior of consumers. This is true for most of the democracies where media enjoys reasonable degree of freedom. But in our case since it threatens to damage the socio-economic structure of the country, a certain degree of control, may be higher standards of self regulation and stringent check on motivated campaigns, may be warranted. Alternatively, the State may consider running a counter campaign whenever a need is felt.

If the Finance Minister is searching for new avenues of raising tax avenue and wealth redistribution, this kind of vanity spending that impacts less than 2% of the population may be a good target. Let the GST on Justin Bieber concert ticket be 40% and the foreign exchange purchase for non-business and non-medical purposes may also be subject to 12% GST. Those who can spend Rs2,20,000 on Indo-Pak match, they can spend Rs2,50,000 as well.

Wednesday, June 19, 2019

Get ready for the transformation

Some food for thought

"There are two freedoms - the false, where a man is free to do what he likes; the true, where he is free to do what he ought."

—Charles Kingsley (English clergyman, 1819-1875)

Word for the day

Caterpillar (n)

A person who preys on others; extortioner

First thought this morning

By choosing Shri Om Birla, Member of Parliament from Kota-Bundi in Rajasthan, for the post of Speaker of 17th Lok Sabha, BJP has given many messages that the Congress Party must learn from. For example—

(a) This is the second high profile appointment by BJP that has surprised the people authoritatively claim to know almost everything about Indian politics. Very few of these studio experts may have imagined elevation of Shri Ram Kovind and Shri Om Birla to high constitutional posts. Till yesterday there was no mention of Shri Birla as favored candidate for the post of speaker.

Congress Party totally lacks this element of unpredictability.

(b) BJP leadership has been consistently giving message to its present and prospective members and cadre that anyone of them can rise to higher posts. Despite the strong media campaign about Modi-Shah stranglehold on the Party, the message from the party had been unambiguous, strong and very effective.

Congress Party has consistently failed in trying to empower the cadre or even giving this message. Consequently, it has become largely a party of leaders not connected with people at large.

(c) BJP is effectively conveying to people that there is no dearth of leaders in the party and therefore succession should not be an issue, should PM Modi decide to follow "retire at 75" rule in 2024.

Indecision on Rahul Gandhi's resignation is highlighting that there is no one willing to take the mantle in Congress Party.

Chart of the day

Get ready for the transformation

On Monday, lenders of the grounded airline company Jet Airways, led by SBI, have decided to begin insolvency proceedings against the company as all attempts to revive, what was the largest airline in the country just ten years ago, failed (see here). Earlier, last month promoter family of Jet Airways was denied travel permission by Indian immigration authorities.

Similarly, ICICI Bank has reportedly moved NCLAT to expedite the insolvency plea against Jaiprakash Associate (JPA), which was amongst the top five infrastructure builders in the country just a decade ago. (See here) Earlier, the Supreme Court had sought details of personal assets of the directors of the group company Jaypee Infra and directed them not to part with any of the assets till further orders.

In yet another incidence, UCO Bank has declared Yashovardhan Birla (heir of RD Birla branch of larger Birla clan), chairman of Yash Birla Group, a willful defaulter in a Rs670million loan default case.

HDFC AMC has been forced to take Rs5bn worth of Essel group debt from schemes managed by it to its own book.

From the mentioned incidence, the following three things are quite clear to me:

(a) The government is mindful of the political risk of allowing any potential defaulter or fraud accused to travel abroad. It does not want any repeat of Malaya, Modi, Choksi episode.

(b) Bankers are now willing to act against large promoters without impunity. This must bring substantial change in the behavior of promoters, especially the traditional ones who are used to political and therefore patronage.

Juxtaposing with rising use of technology, increasing competition as the entry barrier for small banks is removed, and willingness of the government to allow lateral entry of professionals at the top level in public sector banks, I see these trend as key structural positive for Indian economy, businesses and therefore markets.

In my view, in next 5years we shall definitely see inter alia the following trends emerging in our financial system that will make future credit cycles different and more predictable.

(1) Breakdown in notorious banker promoter nexus.

(2) Improvement in credit discipline of promoters as the tendency to over leverage dissipates.

(3) Lower credit cost of lenders may allow them to lend money at relatively cheaper rates.

(4) Faster and efficient IBC process, allowing prompt and better recovery of stressed assets either through resolution or liquidation.

(5) Evolution a vibrant retail debt market for high yield paper, as lower rated businesses find it tough to get money from banks, NBFCs or mutual funds. This market shall supplement the fixed income mutual funds.

I my view, it is critical that various stakeholders like bankers, borrowers, auditors, credit rating agencies, investors, investor advisors etc need to take cognizance of these emerging trends and accordingly prepare themselves.

Especially, investors and investment advisers need to acquire necessary skills for investing in high yield bonds. After all this retail debt market, that has eluded Indian investors for more than two decades, will be much larger as compared to equity market and offer more opportunities, albeit with higher associated risk.

Tuesday, June 18, 2019

Making a puncture proof economy

Some food for thought

"Have thy tools ready. God will find thee work."

—Charles Kingsley (English clergyman, 1819-1875)

Word for the day

Lulu (n)

Any remarkable or outstanding person or thing.

First thought this morning

Last weekend, I had an opportunity to attend a career counseling event for the students who have just passed their 11th or 12th standard exam. The objective of the event was to create awareness amongst students and their parents, about various options available to them for further study and/or training.

On the face of it the objective appeared quite noble and useful. However, as it turned out, the real motive was to—

(a) Attract the "residual" students and their distraught parents and motivate them for taking admission in private universities/institutions charging astronomical fee, or take professional "coaching" for another year and reattempt admission in engineering, medical or other good colleges and institutions; and

(b) Convince the existing 12th class students that without professional "coaching" their chances of getting admission in any good course or college/institution are quite bleak.

The "career counselors" there were young sales representatives of "coaching centers" or "private institutions", mostly inexperienced and in search of a regular job.

I got a chance to interact with many parents, out of which the following three were noteworthy:

(1) A college dropout owner of a decent sized corrugate box making unit who wanted his son to get admission in 3yr BBA or 5yr integrated MBA program. He was sure that a management degree will help his son handle the business better.

(2) A Chartered Accountant managing his own real estate development business, whose son got 69% in 12th class and wanted to pursue a degree in management before joining his family business.

(3) A graduate owner of a travel agency, whose son unsuccessfully tried for 2yrs to get admission in a good engineering college.

None of these young aspirants admittedly had any clue about their family business. Their studies so far were limited to cramming the text books and passing board school exams.

Would it not better if our schools give option to these aspiring businessmen an option to learn things that would help them in handling their family business better, rather than learning subjects, like advanced mathematics, that are of little use to them and wasting precious time preparing for examination of subject that they never wanted to learn in the first place.

Chart of the day

Making a puncture proof economy

As per media reports, the French tyremaker Michelin is introducing a puncture proof vehicle tyre. As per The Economist article (see here) "punctures can be extremely dangerous, especially if a tyre blows out at high speed on a motorway. For decades carmakers have sought various solutions, but with new materials and novel manufacturing methods, a genuinely puncture-proof car tyre has finally appeared."

When I shared this news item with some of my contacts, the reactions were mostly predictable. Few admired the innovation. Most expressed worry about the employment of millions of people engaged in puncture repairing occupation.

Hypocrisy of the car owners worrying about the puncture repairing boys apart, this must trigger a larger debate in our country, where rising unemployment is certainly the single most critical socio-economic issue.

In my view the policy makers must focus, inter alia, on the following factors while devising economy policies for next 2-3 decades at least.

(a) As per the latest global trend, unskilled and semi skilled jobs in manufacturing and services shall be increasingly handled by technology itself. The new employment opportunities shall therefore mostly arise in the fields of developing and managing the technology.

(b) Increased focus on farm sector infrastructure (power, water, technology and equipments) and empowerment of farmers shall result in large scale redundancy of underemployed (or employed in disguise) labor in the farm sector.

(c) The demand for semi skilled construction and other labor in traditional markets like Middle East may ease in future as automation of processes picks up.

(d) Sectors like telecom, modern retail and ecommerce that have added most of the incremental employment in past 10-15yrs, shall saturate in next decade or so. This will be the period when maximum number of new workers will join the Indian workforce.

(e) Incrementally, the number of female workers joining the workforce may increase faster as various programs aimed at increasing the share of female population in economic activities begin to yield results.

I fully appreciate that creating productive employment in a developing country like India, at present juncture, is much more complex problem then most would like to believe. The policy makers need to focus on enhancing productivity and global competitiveness, open the economy to global competition, while

I would suggest the policy makers to consider, amongst other numerous things, the following three in devising a sustainable economic policy that aids creation of adequate employment opportunities.

1. Human resources must be treated as a precious natural resource. Indian government must consider itself a custodian of precious human resources for the entire humanity. Adequate effort and resources must be invested in prospecting, development, maintenance, utilization and preservation of this resource.

It must be appreciated that human resource is to us what crude oil is to Saudi Arab, Diamonds are to Botswana, Copper is to Congo, Gold is to South Africa and Alps is to Switzerland.

2. We may emphasize more on skills that people would usually not like to be replaced by technology. Instead of wasting resources on developing skills that are more likley to be replaced by technology in near future, it is better to invest in technology that eliminates the need for these manual skills. Nursing is one skill that may remain in demand. Pakora making (cooking) may still be liked with human touch. Spiritual teachings, storytelling, etc are some other in my mind.

3. Since Industrial Revolution and World Wars, the global economy has travelled many million miles. The classical economic development model where unskilled and semi skilled labor moves to industry from farms as the share of agriculture in incremental GDP growth falls and then skilled labor moves from industry to services, may not work in our case.

Despite primarily being an agrarian society, the share of agriculture in our economy is close to 13%; even though more than 50% of our workforce is still employed in agriculture and allied activities.

The manufacturing sector accounts for less than 17% of our annual GDP. All incremental growth in manufacturing shall mostly be capital intensive and therefore not expected to add proportionately to the additional number of jobs. The new jobs therefore must come mostly from the services sector.

Therefore, as a matter of policy, the government must add larger emphasis on promotion of services rather than industry.

Emphasizing on industries that could be developed as a partnership between farmers and small entrepreneurs and located at the farm itself would be an ideal solution for mass job creations. Enhancing purchasing power through targeted cash subsidies may ensure substantial local market for the produce of these small industries to make them sustainable.