Do it yourself

Wednesday, July 8, 2020

Demographic dividend dissipating fast

A recent survey report released by the census office of India highlighted many important characteristics of the latest Indian demographics. As per the report, now more than half the population across segments (rural, urban, male, female) is above the 25yrs of age. With the steady fall in fertility rate and rise in life expectancy, the share of young population in Indian demography is declining steadily.

The key highlights of the data could be listed as follows:

The Sample Registration System (SRS) in India is carried out by the Office of Registrar General & Census Commissioner, India with an objective of providing reliable annual estimates of birth rate, death rate, infant mortality rate and various other fertility and mortality indicators. SRS is one of the largest demographic surveys in the world covering about 8.1 million population. It serves as the main source of information on fertility and mortality both at the State and National levels.
Presently two third (66%) of India's population is in working age (15-59yrs), whereas only 8.1% population is retirement age (60+yr). Working age population is higher in urban areas (69.1%) as compared to rural areas (64.5%).
Total fertility rate for the country is 2.2; but the urban rate (1.7) is much lower than the rural rate (2.4). At prime fertility age (25-29yrs) also the urban rate (119.1) is much lower than the rural rate (160.1).

Total Fertility Rate = he number of children who would be born per woman (or per 1,000 women) if she/they were to pass through the childbearing years bearing children according to a current schedule of age-specific fertility rates. It is commonly believed that a total fertility rate of 2.1 is ideal. If this rate is maintained for sufficiently long period, each generation will exactly replace itself. A lower rate will result in decline in population over a period. Italy (1.47); South Korea (1.29); Poland (1.38); etc are some of the countries facing low TFR.

The fertility rate has shown remarkable decline with the level of education. For illiterate its is 3.0 while for literate it averages 2.1. For graduate and above it has declined to 1.7.
Mean marriage age for the country is 22.3yr. There is not much difference between the rural marriage age (21.8yr) and Urban marriage age (23.4yr).
Uttar Pradesh has the highest birth rate (29.3) while Kerala has the lowest birth rate (11.9). (Birth Rate = Children born per 1000 population)
Chhattisgarh has the highest death rate (8.9) and J&K has the lowest death rate (4.5).
MP has the highest infant mortality rate (54), while the Kerala has the lowest (7).
Overall infant mortality rate has shown significant improvement from 2013 (40) to 2018 (32). Despite this decline, one in every 31 infants at the National level, one in every 28 infants in rural areas and one in every 43 infants in urban areas still die within one year of life.
The sex ratio at birth has however not shown much improvement in this period. Overall sex ratio at birth has worsened from 905 (2013) to 899 (2018). Chhattisgarh has reported the highest Sex Ratio at Birth (958) while Uttarakhand has the lowest (840).

The data clearly points towards the following five things:

(i) The government, businesses and society need to rush to reap the much talked about demographic dividend.

(ii) The talk about a national population control policy at this point in time is totally redundant and could be counterproductive.

(iii) In next 10-15years we may have significant rise in dependent population due to old age, unemployment and skill redundancy.

(iv) The poor eastern and central states account for the highest population below 25years of age. Whereas the southern and western states which are relatively more developed account for the least proportion of young population. This essentially means, we shall see some of the following prominent trends in next 10-15years

(a) Large scale migration of labor intensive industry from southern and western states to the eastern and central states.

(b) Large scale migration of skilled and semi skilled workers from eastern and central India to the other parts.

(c) Relatively much higher rate of investment, savings, infrastructure development, urbanization, industrialization and economic growth in the eastern and central states as compared to the richer southern and western states.

(d) Eastern and central states gaining significant clout in the national politics. At present the relatively poor eastern and central states send the largest contingent to the parliament, but the power is mostly exercised by the relatively richer western and southern states.

(v) Failure to materially increase investments in the development and growth of the young but poor eastern states immediately may push Indian economy permanently into lower middle class orbit.

You can see entire SRS report here https://censusindia.gov.in/Vital_Statistics/SRS_Report_2018/SRS_Statistical_Report_2018.pdf

Tuesday, July 7, 2020

Trip to rural India

Some corporate leaders have repeatedly highlighted that the rural economy is doing much better than the urban economy in India. In their view, the economic recovery from COVID-19 led slowdown will be led by the rural demand. The rise in sales of tractors, passenger vehicles and consumer staples in rural sector has been cited as clear signs of rural recovery. The data of bumper Rabi crop production and highest ever Kharif sowing is being widely used to support the faster rural recovery argument.

To make an assessment, we visited some rural areas of UP and Rajasthan over last weekend. After visiting over 50 rural clusters and speaking with many people (traders, local administrators, farmers, laborers, etc.) our impression about the situation as follows:

(a) The staple Rabi crop of cereals and sugar cane has been good and prices have been supportive in these two states. However, the fruit and vegetable crops have not been good and caused losses to large number of farmers. The rise in sowing area for Kharif crop is mainly due to return of migrant laborers and good rains in past three months.

(b) The government work under MNREGA, acceleration in construction of road projects, shortage of farm and construction labor has resulted in created significant demand for tractors and farm equipments. The trend may continue for few more years.

(c) Due to paucity of labor, many farmers in UP and Punjab have used direct planting for sowing paddy this time. If the outcome is satisfactory, the labor requirement for paddy cultivation may fall sustainably by 75-80%. The government shall be supportive of this technique as this method is significantly less water intensive. The demand for rice planters and harvesters may rise multifold in coming years at the expense of migrant laborers. This essentially means that while the large farmers will gain materially (higher productivity, lower cost and better prices), the poor laborers will struggle to find employment at the prevailing rates (Rs600-900/day). This augurs well for sale of cars, SUVS, tractors, farm equipments, high quality seeds, premium liquor, etc., for staples etc it may not be a good news.

(d) The migrant laborers are facing a variety of problems in their villages. There is significant rise in family disputes over house and land properties. The children who were born and raised in large cities are finding it difficult to adjust to village life, especially education. Many laborers are willing to come back to cities, but most of them are unlikely to bring their families along. This means persistent pressure on the village civic infrastructure for longer duration than earlier anticipated. Most laborers have outstanding dues to be settled in cities (Rent, DTH bill, Phone Bills, Grocery & Milk bills etc.) Almost none is in a position to pay. So it will be a fresh begining for most of these laborers - new place and may be new work also.

(e) The government has provided decent money under various schemes. The food is available in plenty. The pre COVID-19 ration schemes (Rs 1/kg food grain) is functioning well to provide sufficient foodgrain for subsistence to the below poverty line (BPL) citizens.

(f) The post COVID-19 free food distribution scheme (PMGKY) which is primarily targeted at the daily wage earners and poor who would have lost employment due to lockdown, has not been successful in meeting its target. It is feared that most of the ration released under this scheme may have been misappropriated by the scrupulous politicians and administrators. Many people indicated towards this possibility but were scared of speaking in specifics. Many people highlighted cases of sudden riches in their villages. New cars, tractors, motor cycles were cited as the signs of new riches.

Overall, we got a mixed feeling. It would be prudent to wait for the Kharif harvest to get a clearer picture.

Friday, July 3, 2020

Few random thoughts on unemployment in India

In the blockbuster Hindi movie DDLJ, the heroine is deeply in love with a guy against the wishes of her father. Her mother is afraid of her husband’s retribution and advises the two lovers to elope. But the hero, who is equanimous and noble, tells her that the path suggested by her appears easy but it would lead them nowhere. He would rather prefer the path of courage, honesty and integrity which though arduous definitely leads to the desired destination.

Swami Jagadatmananda in his famous work “Learn to Live” extolled the readers - the sincerity and honesty of the means to achieve a goal is equally important as the goal itself.

Historically, our governments have however usually not concurred with this thought. They have rather preferred to take the easy road.

Three years ago, the government banned the condom TV commercials between 6AM to 10PM. The right path would have been to discuss the issue with the latex manufacturers and marketers to make commercials educative and plain, rather than seductive. The effort complemented with a mandate all schools to educate children (12yr and above) about safe sex could have yielded many positive results; reduction in cases of rape by juveniles being one of them.

A couple of summers ago, I visited a cricket coaching camp in south west Delhi. The visit was both motivating and shocking at the same time. Motivating because 60 odd children, aged 12-17yr and attired in proper white cricketing gears, were slogging in 42°C temperature. Some parents were also waiting on the sidelines. Most of these aspiring cricketers were from lower middle class families. Their parents could hardly afford the cost of proper gears and coaching fee. Speaking to some of these children, I realized that playing IPL and make tons of money, is latest dream career for many children these days. The shocking part was that none of the children or parents appeared to have a Plan B in place.

Last year I highlighted that a lot of new age businesses and start ups in India may be mere adaptations of the successful global business models, lacking in innovation and sustainability. The palpable idea behind most of these businesses also appears imitation of global practice of "create and sell".

I would refrain from commenting on appropriateness, or otherwise, of this practice of cloning; but I must say that a large majority of these imitated ventures are most likely to fail, making life miserable for the employees, the entrepreneur and in some cases the financiers also. It is only a matter of time when there will be no place left in the junk yard and sale of anti depressants would have risen exponentially.

It is unfortunate to note that our policymakers are mostly indifferent to this problem. They urgently need to recognize that a resource starved economy like ours can hardly afford the "start up" failure rates of developed countries. Each failed business not only losses its own capital, it blocks the path for some other genuine ideas also.

The worst part is that that the reset initiated by the global financial crisis and pushed further by demonetization, GST, IBC, COVID-19 etc, is bringing the hordes of traditional businesses to the junk yard every day. New businesses joining this race will only compound the problem manifold.

Few days ago, I drew attention of readers towards the fact of rising cases of suicide by disillusioned youth. Spread and popularity of electronic and digital media has lured many young people to choose performing arts or sports as preferred career options. Consequently there is huge supply demand mismatch. Variety of sports leagues, web series, TV serials, movies, standup comedy shows, realty shows etc can accommodate only a limited number of performers/players. Tik Tok, YouTube, etc could also become a medium of regular earnings only for a few thousands. The millions others will unfortunately end up miserable.

We have heard sorry tales of hundreds of talented people working hard and struggling to become successful in Bollywood; engineering, medical or civil services failing to find success. Some of them resigned and ended their lives. But here we are talking about millions of unsuccessful people. Close your eyes and reflect for few seconds to understand what I am trying to say. After TB and Diabetic capital of the world; India certainly does not need the title of suicide capital of the world.

I am not concerned about the ban on platforms like Tik Tok etc. Given the number of people who are eager to use this kind of platform to demonstrate their talent or skill or illusion of that, twenty new platform will rise in no time. What I am worried about is that the government does not have any policy to engage the youth in the nation building effort.

I suggest that the government must on top priority basis prepare a comprehensive strategy for engaging youth in the nation development endeavor. A nationwide MNREGA type scheme must be launched for youth, whereby they could be engaged in the socially useful productive work (SUPW). Millions of jobs like traffic management, night patrolling in areas susceptible to crime against women, enforcement of cleanliness of public areas, old age care, social forestry, teaching & skilling to unschooled, etc could be assigned to the youth not having a regular job. This shall help in developing of a sense of nationalism, belongingness, and responsibility amongst youth, besides keeping them occupied in productive jobs rather than leaving them on their own to waste time or take to the path of crime and unlawful activities.

Thursday, July 2, 2020

Disengagement with China in markets should be no less strategic than at borders

Continuing from yesterday (see here)

The Indian economy suffers from a variety of deficits. The most talked about deficit, i.e., fiscal deficit in fact is the least worrisome amongst all the deficits, in my view. I believe that some of the most worrisome deficits include:

1. Growth capital deficit

2. Advanced technology deficit

3. Skill deficit

4. Trust deficit

5. Compliance deficit

6. Governance deficit

7. Productivity deficit

8. Social infrastructure deficit

9. Employment opportunity deficit

10. Demand deficit

To successfully achieve the objective of self reliance, as being popularly understood, we must first bridge these deficits.

In recent years, China has been helpful in bridging many of these deficits, especially growth capital, technology, productivity, employment opportunities and demand deficits. Chinese investors have invested millions of dollars in Indian start ups by way of risk capital. Chinese have supplied affordable solutions in the areas of energy, transportations, chemicals, healthcare, etc. Affordable Chinese consumer imports have created huge employment opportunities for millions of self entrepreneurs, traders, street vendors, and aided in creation of demand, especially consumption demand. The Chinese economy funded these deficits at the expense of its labor and stability financial system.

We must pause here and assess that since due to legacy issues we always have a wide and deep trust deficit with China, was it advisable in the first place, to let Chinese and Indian economic interest intertwine so much?

Keeping the jingoistic nationalism aside, we must also consider that the non essential, toys, plastic decorative items, small appliances & tools which are more visible and talked about items, constitute a miniscule part of the total imports from China. The imports are dominated by electronics, engineering products & components, agro chemical, specialty chemical, medical equipments, precious metals and Iron & Steel. Our main exports to China include Cotton, gems & jewelry, copper, ores, organic chemicals. China is therefore present in our entire value chain.

Disengagement with China in markets therefore has to be equally strategic as in case of borders. We cannot and should not do it overnight by taking some whimsical, but popular, decisions. We need to have a strategy to fill the deficits by alternative means and render China redundant before disengaging ourselves. Self reliance in this context would mean, building capacities in the fields of advanced technology, raising the level of skill, compliance and governance to attract adequate amount of growth capital, raising productivity to enhance savings potential for domestic funding of growth; and bridging the trust deficit between the people and the administration.

This endeavor inevitably include bringing India into a state of equilibrium by removing social, and regional, economic imbalances, e.g., through-

Industries and businesses who have thrived historical on government largesse and not necessarily on the enterprising abilities of promoters giving back to society by way higher taxes, higher voluntary CSR spending, technology upgrade for better resource utilization, etc.;
Regions like Gujarat and Maharashtra, which are economically more developed despite not being endowed richly with natural resources, acknowledging that a part of their development is due to imperial designs of British regime and share their wealth with exploited regions like Jharkhand and Odisha.
Caste and communities which command ownership of the major part of economic resources and occupy most of the social space, voluntarily vacating some space for the historically oppressed and downtrodden.
Populace which has grown to be non-compliant by habit, not necessarily by intention, changing habits like spitting on roads, violating traffic rules, encroaching on pavements in front of their house/shops, exploiting domestic helps and child labor etc.

Wednesday, July 1, 2020

Self reliance is about contentment

Continuing from yesterday (see here)

As I highlighted yesterday, "Self Reliance" may be mostly a political slogan at this point in time; as not many people in the government, legislature and administration appear to be adequately clear about the concept itself. It would be a great idea if the government comes out with a white paper on the issue.

In my view it is important to assimilate the following considerations, if we truly want to evolve into a 'Self Reliant" economy.

First of all, we need to accept that "self reliance" is primarily a philosophical concept. Its economic implications are mostly incidental. The flow of "self reliance" therefore begins from the core of society, i.e., the individual, and moves outward toward the community and the State. For a State to be self reliant, all its constituents, i.e., individuals, communities, traditions, customs, culture, etc need to commit unconditionally to the objective of self reliance. Any incongruence amongst various constituents will defeat the purpose. A few individuals or communities aspiring to be globally competitive, wealthy, and famous, and therefore placing their lives relative to the others, may not allow the State to become self reliant.

Secondly, it is to be understood that the traditional Indian tenet of "contentment" is quintessential to the concept of self reliance. The individuals and communities must work to limit their needs, desires and aspirations to the spiritual goal of realizing the greatest truth, and designate the material pursuits only as a mean of subsistence.

As Gandhi ji stated, the western life style of chasing material and financial wealth cannot lead to self sufficiency, swaraj or self reliance. In fact the whole idea of economic development, as we are pursuing today focuses on centralization of power - political and economic.

Third, the pseudo socialist and quasi feudal nature of our democracy often leads to wasteful expenditure, policies and plans focused on winning elections rather than achieving sustainable economic growth and development, serious misallocation of capital and sub-optimal use of resources. We have seen politicians creating undue demand for color televisions, smart phones, laptop computers etc. by manipulating the process of democracy. In rural and semi-urban areas, motor cycle has replaced bicycle as a mandatory dowry item. These days, it is almost impossible to marry your daughter if you cannot afford a motorcycle in dowry. Smart phones also find place in most ‘demand lists’. It is clear that our society is defying the classic McGregor's evolutionary pyramid and moving directly from sustenance to aspirational consumption. The demand thus created is neither desirable nor sustainable.

Fourth, self reliance shall essentially result in material disengagement from the global economy. In the modern day context when geopolitical and cultural relations have essentially become a subset of economic relations, this disengagement may not be limited to trade and commerce issues.

Having these considerations will essentially bring us to the Bhutanese model of development, where the focus is on the individuals' happiness and spiritual elevation rather than the length of the roads & railways, strength of the armies, and other meaningless economic statistics.

The governance then will have to be modeled on the traditional concept of Ram Rajya - where the socio-economic equality & justice is prime consideration for the King, who is always subservient to the subjects.

Obviously, not many people think in these terms when swearing by self reliance. So, what are the implications for self reliance as being understood popularly?....to be continued tomorrow

Tuesday, June 30, 2020

Self Reliance is not about ultra Nationalism

In an interview with the Manchester Guardian in 1965, the then foreign minister of Pakistan Zulfikar Ali Bhutto famously said, “If India builds the bomb, we will eat grass or leaves, even go hungry, but we will get one of our own. We have no alternative.”

The world has seen how Pakistan has built the nuclear bomb and what cost its citizens have paid for the toy that will perhaps never be unboxed. It may be argued that the nuclear arsenal build by Pakistan and India has created a strong enough deterrence for any war between the two countries. Regardless, we had a war in Kargil (1999) and significant rise in the violence in the Kashmir Valley and along the line of control (LoC) since both countries declared themselves to be the nuclear powers in 1998. India has struck twice deep into PoK and changed the status quo materially in J&K in past 5 years. Many soldiers and civilian die every year on the both sides of LoC; and Pakistan economy is surviving on the IMF support. Bhutto did not realize that hungry people would need food to survive, which nuclear weapon cannot provide.

Similar is the sentiment in India these days. The politicians are exhorting people to shun Chinese goods; and people appear ready to forgo consumption of goods with Chinese connection. "Self Reliance" is the war cry against China.

Being self reliant in my view is the best economic policy. But, "self reliance" could have entirely different connotations. Even within the government there appears no consensus over the form and degree of "self reliance" we are talking about in present day context. Listening to and reading about the views of various functionaries of the government, politicians in power, and people supporting "boycott China" movement on social media and streets, I find the following popular perceptions of "self reliance" -

(i) Use only Made in India products.

(ii) Become a manufacturing powerhouse like the South East Asian economies did in 1990s; and produce for the global economies. In the process we should encourage the global corporations to either relocate their manufacturing facilities from China to India; or source their global requirements from the manufacturers in India.

(iii) Become trade surplus economy; especially in manufactured and agriculture products, reversing the colonial model of development, i.e., supplier of raw material and importer of manufactured items.

(iv) Ban "unnecessary" imports from China, e.g., toys, decorative items, furniture etc.

(v) Become "self reliant" in defence production.

(vi) Ban all investments by Chinese investors in Indian businesses.

However, a deeper probe reveals that most people have no objection to the investments from and trade with Japan, Korea, UK, European Union, Canada, Russia, Australia, Gulf Countries, Latin American and African countries. Insofar as the USA is concerned, the feelings are mixed and ambivalent. Most of the people however do not mind deeper economic relations with the USA, provided the USA offers little more favorable terms in terms of VISA and taxation.

So basically, when we say "self reliance" and "trade barriers" we are primarily talking about limiting trade with the "enemies" China and Pakistan" and restricting the movement of labor from Bangladesh.

The worst part is that very few people leading the "boycott China" movement from the front, do not have even basic knowledge of the contours of India's trade with China. They hardly realize that the so called "non essential" items imported from China are a miniscule part of the total trade, but may be accountable for the employment and affordable consumption of millions of lower middle class and poor people in India. ....to continue

Friday, June 26, 2020

2020 Mid Year Review - Investment Startegy review

Year 2020 has been a very eventful year so far (see here). In past six months many events have taken place which will have long term repercussions. In that sense these six months could be compared to the period between May 1990 and December 1990 (see here). While long term implications of these events will unfold over many year to follow; in the immediate term we have seen the global economy slipping into one of the worst recessions since the great depression of 1930s (see here). The corporate earnings have been greatly impacted in 4QFY20 and 1QFY21 by the COVID-19 induced lockdown; and the visibility of next few quarters is also clouded. The earnings estimates for FY21 and FY22 have been significantly moderated accordingly.

The performance of stock markets however appears materially diverging from the economic and corporate performance. A sharp outperformance of midcap stocks, especially those with relatively poor earnings stability and outlook has raised concerns about bubble like conditions in the stock market (see here). On the other hand it has also made many investors who choose to change their asset allocation in favor of cash and high quality debt, anxious about sharp underperformance of their portfolios. I had also tried to address this dilemma of investors' (see here) besides outlining my strategy in the present circumstances (see here).

After completing the midyear review of the markets, economy, corporate performance, my portfolio performance, and extant investment strategy, I am quite satisfied with my investment strategy and no need to make any changes. I may share the main features of my current investment strategy as follows:

Assumptions

Lock down restriction may be fully lifted before 30 September 2020 and normalcy may return in businesses and logistics by 31 December 2020.
Interest rates may remain lower for longer.
Chemical manufacturing in India may see great impetus as global supply chain looks to shift from China.
Poverty shall rise and so shall the efforts to alleviate it, bringing greater focus on food production and availability.
India will be able to become part of some meaningful trade blocks that may emerge post lockdown

Asset allocation

Equity investment strategy

Continue to focus on a mix of large and mid cap stocks, with decent liquidity, solvency ratios and operating leverage.

(a) Overweight on healthcare services and IT services sectors with 35-40% allocation to these two sectors.

Be mindful of the possibility that India may actually just participate in the global trend and not much may be achieved on the ground in the areas of healthcare services. So buying established businesses at reasonable valuation would be a key consideration.

(b) Underweight financial services and discretionary consumption.

(d) Target 12%-13% price appreciation from my equity portfolio in next 12 months.