Do it yourself

May 2021 Bulletin of the Reserve Bank of India, carries some useful insights about the performance of NBFCs during the pandemic. Being a critical source of consumer and MSME finance, performance of NBFCs is usually a broad indicator of the consumption demand, and consumer and business sentiments.

The key highlights of the NBFCs performance, especially during 2H2020, are noted as follows:

·         Pandemic has hit NBFCs hard. “The impact of the pandemic can be seen on both asset quality and liquidity, although the latter was addressed to a considerable extent through timely policy measures.”

·         An unfavourable mix of COVID-19, sell-offs in financial markets and the abrupt winding-up of specific schemes by a mutual fund contributed to NBFCs facing record spike in yields on their debt in Q1: 2020-21. The sharp market differentiation continued between the highly rated and other NBFCs, notwithstanding the surplus liquidity and aggressive policy rate cuts.

·         Retail participation in the NBFC debenture issuances, notwithstanding their small share in overall subscription, witnessed an upswing since June 2020, whereas Mutual funds reduced their exposure to NBFC CPs between March and September 2020 However, Q3:2020-21 witnessed a renewed interest of mutual funds in NBFC CPs. Banks’ subscription of CPs has also increased at a steady pace after Q1:2020-21.

·         The number of deposit-taking NBFCs (NBFCs-D) has gradually diminished and currently stands at 64, of which six have been prohibited by the RBI from accepting further deposits.

·         The consolidated balance sheet of NBFCs registered a Y-o-Y growth of 13.0 per cent and 11.6 per cent in Q2 and Q3:2020-21, respectively. “This double-digit growth in an adverse macroeconomic environment points to the resilience of NBFCs, which were able to cushion the impact of the pandemic on their balance sheets through quick adoption of technology, policy support and reasonably strong fundamentals.”

·         NBFCs continued to preserve cash to ensure adequate liquidity in view of the prevailing uncertainty due to the pandemic.

·         Due to risk aversion and market pessimism post-IL&FS, the share of market borrowings (debentures and CPs) in the total borrowing had fallen and correspondingly the share of bank borrowings had risen. NBFCs also moved towards longer term borrowings in tune with the tenure of their assets to manage their asset-liability mismatch.

·         In Q2 and Q3:2020-21 market conditions had eased, as indicated by the pick-up in market borrowings, particularly in debenture issuances. In the same period, bank borrowings grew at a robust pace, although slight deceleration was exhibited in Q3:2020-21.

·         In the aftermath of the IL&FS event, the NBFC sector attempted to realign its asset-liability mismatches by moving away from short-term borrowings to long-term borrowings. Accordingly, term loans growth remained high at 22.6 per cent and 18.3 per cent in Q2 and Q3:2020-21 (Y-o-Y), respectively.

Term loans constituted over four-fifth of NBFC bank borrowings at end-December 2020, followed by working capital loans and cash credit. While term loans continued to grow at a robust pace, they exhibited a deceleration in Q2 and Q3:2020-21, compared to Q2 and Q3: 2019-20 reflecting tepid demand for on lending of funds. An uptick in working capital loans was witnessed in Q3: 2020-21.

·         Over 70 per cent of the NBFC borrowings are now payable after 12 months and their share has remained stable, indicative of the growing market discipline among NBFCs. Similarly, over 70 per cent of NBFC advances are also now long term (that is, receivable after more than one year).

·         The industrial sector remained the largest recipient of credit from NBFCs-ND-SI even as its share moderated between Q3:2019-20 and Q3:2020-21. Retail sector, followed by services, are the other major beneficiaries and their share grew during the period under consideration.

·         Industrial sector, particularly micro and small and large industries, seemed the worst hit by the pandemic as they posted decline in credit growth. Imposition of lockdown, abrupt stoppage of economic activities and disruption in supply chains to contain the spread of the virus could have affected these sectors the most.

·         Passenger vehicles sales increased by 13.6 per cent in December 2020. It is mirrored in the disbursal of vehicle loans by NBFCs, as these loans grew by 10.7 per cent in Q3:2020-21. Loans against gold also grew robustly as it filled in the cash requirements and possible working capital requirements of small firms.

·         The profitability of the NBFCs improved in Q2:2020-21 compared to the corresponding quarter of the previous year on account of steeper fall in expenditure than in income. Given the persistence of infections, the full effects of the lockdown and suspension of business on the asset quality of NBFCs will be evident gradually.

Self-Reliance (Atamnirbharta) has been one of the key policy objective of Indian government, especially during the second term of the incumbent prime minister. It is clarified that self-reliance does not connotes self-centred systems; rather it encompasses a concern for the whole world’s happiness, cooperation and peace.

The stated aim is to make the country and its citizens independent and self-reliant in all senses. The five primary focus area identified to achieve the objective of self-reliance are —

Economy — Quantum jumps in various growth parameters, not just incremental changes.

Infrastructure — Building infrastructure that represents modern India.

Systems — Making systems technology driven.

Demography — Making the population vibrant.

Demand — Realizing full potential of the power of demand.

A number of programs, schemes and incentives have been announced in past one year under the umbrella of Self-Reliant India, encompassing support to a variety of sectors like agriculture, MSME, manufacturing, housing, infrastructure building, and exports, etc.

From various documents and public speeches by the prime minister and his cabinet colleagues, it appears that the idea of self-reliance is still at the stage of developing a conceptual framework; even though a slew of schemes and incentives have already been placed under this umbrella. Defining this idea in terms of a robust conceptual framework may actually take few more years, given the extraordinary circumstances presented by the Covid19 pandemic, which may result in result in reprioritization of fiscal and monetary policy objectives.

There is little debate on the point that digitalization has to be at the core of any economic development and modernization plan for future. In this context, I find it pertinent to highlight some of the data from ‘Digital Economy Compass 2020”, published by statista group. The report, inter alia, highlights some of the key global markets and consumption trends that may sustain in post Covid19 world. It also mentions the key players in each evolving market segment.

The services like healthcare, fitness, learning, entertainment, gaming, 3D printing, contact tracing (bio metrics, travel, GPS, demographics, talent hunt, etc.), communication, financial services (payment gateway, money transfer, transactions), collaborative software development, cloud hosting, cybersecurity, business and manufacturing process automation have acquired larger part of the markets (consumption, investment, and development etc.)

Manufacturing processes are being increasingly dominated by artificial intelligence, robotics, internet of things, etc. Development of 5G ecosystem is another major area of growth in global economy. Blockchain technology has made a prominent place in global commerce ecosystem.

Global trade is overwhelmingly dominated by ecommerce. Last year Chinese ecoomerce giant Alibaba alone logged a total merchandise trade that exceeded GDP of all but 14 top nations in the world.

Work from home trend is likely to sustain for longer than presently expected. This is leading to higher demand for products and services like home automation, food delivery, gaming, streaming of music and video, home management services, fitness, e-dating, shared mobility etc.

All these trends are essentially leading to materially higher demand for electronic devices (phones, tablets, laptops, servers etc.) and semiconductor chips to be embedded in various appliances (washing machines, cars, alarm systems, automatic machines, smart TV, refrigerators etc.)

Software is essentially the fulcrum that supports this entire global digital ecosystem. There is a variety of software development services like enterprise software, system infrastructure software, application development, and productivity enhancement software, etc.

The point to note is that presently Indian capabilities in these spheres are limited. Only 4-5 Indian companies appear on global podium, but their participation is mostly limited to software services. In most other areas our capabilities and size are limited in global context. The government programs and schemes (e.g., production linked incentive for mobile manufacturing) are presently focusing on low end value addition (mostly component assembly and contract manufacturing). If India has to become self-reliant in the modern world, the focus has to be on joining the top league in global digital ecosystem. Manufacturing mobile phones and chemicals may help in little more than managing the current account.

 In past one year, ‘K’ has emerged as one of the most popular letters in economic jargon. Unlike past economic crisis when ‘R’ (recession and recovery) and ‘D’ (depression and deflation) were popular letters, this time a multitude of dichotomy created by pandemic is subject of popular narrative. In fact, I believe that these dichotomy in various trends was always present, but the pandemic has just exacerbated these, making them look more prominent.

In past few months, a ‘K’ shaped movement has been reported in many segments. For example, consider the following –

(a)   The developed world, China and few other emerging economies appear to have mostly recovered from the pandemic shock; whereas numerous emerging and underdeveloped economies are still struggling to emerge from the pandemic related losses.

(b)   Another manifestation of ‘K’ shaped movement is seen in the price movement. While the Purchasers’ prices (wholesale inflation) have seen sharp surge in past one year, consumer prices have not matched yet.

(c)    The bond yields have also moved in a ‘K’ fashion over past one year. The gap between US 2yr and US 10yr treasury yields has increased from ~50bps to ~150bps over past one year.

(d)   The wealth and income of people has also shown a ‘K’ tendency. While the top echelon of the society have accumulated record amount of wealth in past year; the millions who were just coming out of poverty have slipped back and many who were struggling to come out are even worse now. Numerous smaller business and self-employed people are staring at deep abyss of uncertainty and hardship, while many new unicorns are emerging from new technologies and newer ways of doing business.

In stock markets also, sector wise ‘K’ shaped performance is clearly visible. While consumers have underperformed materially, cyclicals are their running to their decadal highs. The dilemma for small investors is what strategy they should follow!

 I had an opportunity to e-meet the promoter of a decent sized enterprise yesterday. His company manufactures some auto parts mostly for replacement market. The business of this company had been doing extremely well for past more than a decade, before it hit a small bump last year. It recovered from the fumble in two quarters and was about to regain its pre Covid trajectory in 1QFY22. The intense second wave has however derailed the business from recovery path. The promoter now expects the business to normalize not before summer of 2022. Even for that he is not very confident. I have known this gentleman for past 17years. It was for the first time I found the gleam in his eyes missing. A driblet of sweat on the temple was also rather conspicuous.

He is not only worried about his business. The worries are in fact emanating from a variety of factors. For example,

·         Having lost couple of senior family members to Covid, the family is terribly shaken. They are insisting they the family migrates to a “better place” to live. He has faced this situation earlier also and was able to manage it well. But this time his resistance is weak. He is finding it hard to convince his US educated children to stay back and work for the betterment of the country.

·         His working capital requirements have increased materially, as many of his customers (mostly traders) have failed to pay in time. He is staring at significant losses from irrecoverable debts. His raw material cost has also increased and he is in no position to pass it on completely. Therefore, he has to cut production. He is contemplating retrenching at least 20% workers in two weeks.

·         He faces serious threat from the larger peers who mostly produce for OEMs. Some of them have already started servicing the replacement market due to slowdown in OEM demand.

·         Many of his workers are turning violent generally. Many of them have faced hardship in treating their family members. He finds that workers’ belief in system is materially diminished. Some of them have turned cynical and get easily provoked. Their chances of becoming non-compliant are far higher now.

·         He expects his bankers to soon downgrade his credit facilities, which will further raise his credit cost. Though he has the wherewithal to withstand tough conditions for next 3-4years, a prolonged phase of uncertainty could precipitate the fall.

This gentleman is quite convinced that any hopes of normalization in 2021 are terribly misplaced. He feels it will be at least 15-18 months process to normalization. From his workers he understands that unlike the first wave which spared the hinterlands, the impact of this second wave is deep and wide. It has seriously damaged socio-economic fabric of the country. Many households’ finances have been damaged structurally, pushing them into vicious cycle of debt and poverty.

He agrees that the pandemic has fully exposed the inadequacies of our social infrastructure and disaster management capabilities and significant improvements must be expected in next few years. Nonetheless, surviving these next few years could be quite challenging for a significant proportion of the population.

 “Commodities” is the most important buzzword in equity markets these days. Chartists, analysts, economists, strategists and traders et. al. are predominantly talking about stocks of commodity companies. The strong rally in the stocks of commodity producers is primarily based on the material rise in the global commodities’ prices, especially in past one year.

I analysed the market performance since announcement of first lockdown (25^h March 2020). I also looked at the market performance in three other timeframes, viz.,

(i)    Since January 2021, because most of the restrictions announced in March 2021 were lifted, US elections were completed and vaccine launches had already begun.

(ii)   Since February 2021, because a market exciting budget was presented with strong on infra building and fiscal discipline; and UK exit from EU was complete, and global trade had started to normalize.

(iii)  Since April 2021, when a second wave of pandemic started to hit few states of India badly

The following are some of the key trends observed in the performance of market in these time frames.

1.    “Metals” have been a clear outperforming sector over all timeframes. Nifty Metals has returned 255% since Lockdown 1.0, more than double of the second best performing sector, i.e., Nifty IT (121%). Auto (109%) and Pharma (108%) are other sectors that outperformed Nifty (90%) in this timeframe.

2.    Pharma has materially underperformed metals over all timeframes. Which sounds bit counterintuitive, given the pandemic situation.

3.    FMCG is a top underperformer over all timeframes, despite huge social sector support, resilient rural sector, and strong corporate performances. Some of this could be explained by significant outperformance of FMCG sector in previous year

4.    Media is another noticeable laggard, despite work from home, lockdown, etc.

5.    Despite huge outlay for capacity building in 2020 stimulus packages and FY22budget, Infra sector has performed mostly in line with the benchmark Nifty over these timeframes.

6.    Realty has been the worst performing sector over all these timeframes.

7.    PSU Banks have outperformed their private sector peers in 2021. This is in line with PSEs in general outperforming Nifty in current year.

8.    Announcement of much awaited scraping policy does not seem to have nay impact on auto sector. Nifty Auto is down 4% since budget.

9.    The positive momentum that was created in reality sector last year due to duty incentives and lower rates seems to have subsided. Nifty Realty has underperformed materially after Budget.

10.  In FY22 so far, Only commodities and pharma have yielded meaningful return.

 The localized lockdown and mobility restrictions in past 6weeks have led to scaling down of FY22 GDP growth estimates. The new estimates mostly imply that Indian economy may record marginally negative growth during two period from April 2020 to March 2022. These estimates though assume (i) No community transmission of infections; (ii) no nationwide lockdown; (iii) no wider shutdown of industries and construction work; and (iv) normalization of mobility restriction in 2HFY22. Any further worsening of pandemic situation may lead to further downgrade of growth estimates resulting in spillover impact over FY23 as well.

The global rating agency S&P, recently published a note saying, “The possibility the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability.” The note further stated that agency is “looking at two scenarios, both entailing a cut in its GDP growth forecast for India:

·         In a moderate scenario, new infections peak in May 2021. If that happens, the hit to India’s GDP growth is estimated at 1.2 percentage points, indicating that India’s GDP is likely to grow 9.8% in FY22 compared with 11% growth estimated previously.

·         In a more severe scenario, new infections peak in late June 2021. In this case, the hit is estimated at 2.8 percentage points, with growth of 8.2%.”

As reported by Bloomberg, the scenario projections by S&P assume that initial shocks to private consumption and investment filter through to the rest of the economy. For instance, lower consumption will mean less hiring, lower wages, and a second hit to consumption, the note said. The severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks. Leverage remains elevate.

Incidentally, the current estimates appear to assuming a fast normalizing developed world, and hence buoyant export sector and capital flows.

IMF has projected US and China economies to move beyond their pre-Covid levels in 2021 itself, led by sharp rise in both consumption and investment. Even EU that bore the brunt of pandemic in 2020, is expected to reach near pre-covid level in 2021. This essentially implies rising global inflationary pressures creating possibilities for an earlier than currently forecasted monetary tightening. The capital flows to emerging market may there get impacted, if these forecast come true.

What no one is forecasting is a re-lapse of pandemic in the developed world. Rationally, it does not look likely, given the speed of vaccination, development of preventive ecosystem and treatment protocols. However given that the virus is mutating itself fast, assigning zero probability to this occurrence in economic forecasts may not be fully appropriate. God forbid, if this happens, Indian economy may decline rather precipitously.

The government had surprised the markets by maintaining strict fiscal discipline in Union Budget for FY22. So far we have not heard any relaxation in budget estimates of fiscal deficit. However, any worsening of conditions from here may require another dose of fiscal stimulus. It is pertinent to note that the fiscal stimulus last year was mostly focused on capacity building and easing liquidity. The present conditions require strong social sector spending program, which primarily aims at cash handouts. The recent setback to the ruling BJP in UP local body elections and West Bengal assembly elections; and continuing farmers’ agitation may motivate the government to consider material cash subsidies to poor and farmer ahead of critical state assembly elections in UP, Punjab, Odisha, Goa and Uttrkhand. All these elections are due in February/March 2022.

Insofar as stock market is concerned, the consensus appears to be leaning towards the strategy that the localized lockdowns may not hamper the industrial and construction sector like 2020, as the government has spared the manufacturing and infrastructure activities from lockdown restrictions. The consumption may however get impacted materially. Cyclical over Consumers appears the preferred trade as of now.

More on this next week.

In an unscheduled press conference yesterday, the RBI governor admitted that the Covid19 pandemic has recently intensified in India. This intensification could derail the still fragile economic recovery. He implied that the impact on livelihoods due to restrictive access to workplace, education and income mediums could be significant and needs immediate attention.

The governor also highlighted that “The global economy is exhibiting incipient signs of recovery as countries renew their tryst with growth, supported by monetary and fiscal stimulus. Still, activity remains uneven across countries and sectors. The outlook is highly uncertain and clouded with downside risks.” He underscored that “Consumer price index (CPI) inflation remains benign for major AEs; in a few EMEs, however, it persists above targets on account of firming global food and commodity prices.”

The governor also highlighted the emerging inflationary pressures and softening bias in bond yields as follows:

·         “CPI inflation edged up to 5.5 per cent in March 2021 from 5.0 per cent a month ago on the back of a pick-up in food as well as fuel inflation while core inflation remained elevated.”

·         “Domestic financial conditions remain easy on abundant and surplus system liquidity. The average daily net liquidity absorption under the liquidity adjustment facility (LAF) was at ₹5.8 lakh crore in April 2021. The first auction under G-SAP 1.0 conducted on April 15, 2021 for a notified amount of ₹25,000 crore elicited an enthusiastic response as reflected in the bid-cover ratio of 4.1. G-SAP has engendered a softening bias in Gsec yields which has continued since then.”

In fact the governor announced that “Given this positive response from the market, it has been decided that the second purchase of government securities for an aggregate amount of ₹35,000 crore under G-SAP 1.0 will be conducted on May 20, 2021.”

It is therefore clear that regardless of the inflationary pressures, the liquidity conditions may remain benign for 2021 and no thought of monetary tightening may be entertained by MPC/RBI. Persistently, poor credit growth also supports this view.

It is pertinent to note that Banks’ non-food credit growth was just 4.9% in March 2021, almost a 4yr low. Credit growth in service and manufacturing sectors continues to remain materially below par; though agriculture and personal credit is buoyant. During March 2021, industry credit off grew a dismal 0.4% yoy, while credit to large industries segment continued to contract (-0.8% YoY). The credit growth pickup in February 2021 failed to sustain. The April credit growth number may still be disappointing, given the widespread mobility restrictions across large states.

Though RBI governor emphasized strongly on the need to support small, medium and unorganized businesses; the credit growth to this segment remains anaemic, highlighting the extreme risk averseness of lenders. Loans for Housing & education; and to weaker sections have also suffered recently. Given that MCLR rates are now stable as most of the transmission of policy easing has already occurred, any material fall in rates may not be expected in 2021.

 In his latest policy statement, US Federal Reserve Chairman Jerome Powell commented “Inflation has risen, largely reflecting transitory factors.” The FOMC noted that “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” and said that “the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.” (see here)

These comments of Federal Reserve have triggered a fresh debate on probability of imminent “hyperinflation” and a global “commodity supercycle”.

As per a recent report of Bank of America Securities (BofA) after the third week of earnings. mentions of “inflation” have now quadrupled YoY; and after last week, mentions have jumped nearly 800% YoY!

BofA analyst also concludes from the corporates’ earnings commentary that “On an absolute basis, [inflation] mentions skyrocketed to near record highs from 2011, pointing to at the very least, “transitory” hyper-inflation ahead.”

As per the recent World Bank Commodity Outlook report (see here) “Energy prices are expected to average more than one-third higher in 2021 (a significant upward revision from the October report) followed by a smaller increase in 2022. Non-energy prices are forecast to increase 19 percent in 2021 (also revised upward from October), but a modest decline is expected in 2022 as metal price increases partially unwind. The outlook is heavily dependent on the path of the pandemic, with the potential for additional upside risks if the vaccine rollout gathers pace and strong growth in the United States generates significant global spillovers. However, on the downside, the global recovery could yet be derailed by renewed outbreaks in large economies.”

Not being an expert on commodities of economics, I draw the following from the discussion on “hyperinflation” and “Commodity supercycle”

1.    Presently, the consensus is revolving around “transitory hyperinflation”. There are some technical analysts who are forecasting a prolonged bull market in commodities (commodity supercycle) but it is far from consensus.

My views are clear on this account. I strongly refute any case for a “commodity supercycle”. (see “Commodities – trade “yes”; invest “no””)

2.    Inflation and Deflation are always transitory in nature. It is primarily the job of the central bankers to manage this transition in a way that these trends do not cause significant disruption to the economy. A high transitory inflation could be easily compared to a cyclone that destroys the weak structures and trees falling on its way.

The problem occurs when the central bankers persistently refuse to use the available monetary policy tools, arguing that “it is transitory” and “this shall pass too”. This tendency weakens the markets’ faith in central bankers and raise doubt about their relevance per se.

We have also seen RBI following the same tendency. In past three policy statements, the persistence of inflation has been recognized but action has been avoided. I am sure inflation may not last much beyond FY22, but in next few months it can destroy economics of many household, businesses and eventually lenders.

One thing I am really concerned about is the “transitory” food inflation. The weather in many parts of the world has been unusually dry in past many months. Notwithstanding the forecast of IMD, I have gathered from old farmers (who forecast monsoon based on some natural signs) that monsoon may be below normal at least in North and North West India.

The global food prices are already running at multiyear highs and look good for a further move north. The recent food buying spree of China may be another indication of things to come.

Many people I regularly speak with have expressed surprise over market’s resilience despite (i) worsening pandemic conditions; (ii) persistent FPIs’ selling; (iii) downgrade of economic growth forecasts for FY22; and (iv) likely earnings downgrades due to renewed mobility restrictions.

To be honest, I am not at all surprised with the market resilience. I believe market resilience is underlined by the following five major factors –

1.    Sharp rise in global commodity prices and consequently elevated inflationary expectations fuelling a rally in commodity stocks, especially metals and agro commodities.

2.    Extreme pressure on MSME sector, especially those in unorganized sector. This is resulting in accelerated consolidation of business in top companies resulting in sharp rise in their valuations.

3.    RBI commitment to lower rates.

4.    Consistent rise in non-institutional participation in market. This segment is usually less sensitive to valuation and more concerned with momentum. Given that Covid-19 has resulted in higher private savings; lower working capital requirement for smaller businesses, the liquidity with this segment remains comfortable.

5.    Lower systemic leverage. Tighter margining and funding rules implemented by the regulators have resulted in materially lower systemic leverage as compared to previous crisis periods. This has prevented any panic selling in the market so far.

In my view, worsening of economic conditions may keep market supported for more time, before it begins to hit larger corporates; and/or rates begin to rise to control inflation.

The sharp rise in infection and mortality rates in past one month have attracted global attention towards India. I would also like to share some thoughts on the worsening pandemic conditions in India.

In the sacred text of Shri Durga Saptshati, eighth chapter is dedicated to the killing of a demon named Raktabīja by the Mother Supreme. The Raktabīja was a very powerful and strong demon. He had a super power. Whenever his blood dropped on the ground, a clone of his (equally powerful and strong) would emerge from every drop of blood so fallen. Killing him therefore was extremely difficult task. All attacks on him would result in thousands of his clones emerging in no time. The mother Supreme then thought of a trick. She summoned goddess Kali and ordained, “I shall hit Raktabīja now; enlarge your mouth and consume each drop of his blood before it touches the ground.” This way the entire blood of Raktabīja was finished without any clone taking form. The demon eventually succumbed to the injuries inflicted by the Mother Supreme. His elimination paved way for eventual elimination of his masters, the demon king Shumbha and his tyrant brother Nishumbha.

As India’s struggle with intense second wave of Covid-19, inspiration could be drawn from this episode from scriptures. Each infected Covid-19 patient is infecting multiple other healthy persons. If the contagion continue to spread at this rate (or even at a slightly lower rate), it is estimated that close to 20% population may catch infection in next few months. At a mortality rate of 2%, we are staring at a potential of over 5million casualties. Even thought of such an eventuality is frightening.

It is therefore critical that virus (SARS-CoV-2 and its various mutants) must be killed before it is able to replicate itself. Aggressive testing and vaccination are two very potent methods to achieve this goal. Unfortunately, we are facing serious challenges on both these solutions. Testing infrastructure is proving to be grossly inadequate, discouraging even the people with clear symptoms to get themselves tested. Vaccination drive is not progressing at desired pace. In this situation, one can only expect the situation to worsen before it begins to improve.

I have the following two suggestions for the government to kill this incarnation of Raktabīja:

Vaccination

1.    The government may immediately declare Covid-19 a “national emergency”. Set up a Covid-19 task force comprising of Chief Secretaries of all states.

2.    Set up an emergency fund to raise US$50bn for Covid-19 management. Some large projects may be suspended and resources may be diverted to this fund. A one-time 10% cess may be imposed on income of top 500 companies. Multilateral and Bilateral agencies may be tapped for special loans.

3.    The fund may be used to procure adequate stock (at least 2bn) of vaccines from all possible global sources, including setting up local capacities, in next 6months.

4.    Train one million volunteers to give injections in next one month. Each volunteer should be able to vaccinate 50persons every day.

5.    Vaccinate people door to door in next one months.

Testing

Make Rapid Antigen Test (RTA) test kit available for OTC sale at a subsidized price of Rs5/per kit. Encourage people to self-test at least once a week.

Do not get discouraged with non-gold standard of the test. Remember, the results of self-test pregnancy test, digital blood pressure monitoring machines, digital thermometers, self-test blood sugar monitoring etc. are far less than 100% accurate. But all these monitoring means do play a material role in preventing care.

 Once upon a time a sparrow couple made their nest in a wheat farm. In few days, lady sparrow laid four eggs. In two weeks eggs were fully hatched and four chicks were born. In the meantime, the wheat stems had started growing tall. In another two weeks, the chicks started to fledge and the wheat kernels began to turn golden. This was the day when parent sparrows first discussed about leaving their nest and move somewhere else.

“The crop will be soon ready for the harvest. Our nest shall be exposed and trampled by the harvesters”, the lady sparrow feared. Her companion however was not worried as yet. “Nothing to worry as yet”, he assured her.

In another three weeks, the farm turned completely golden with wheat completely ripe to harvest. The lady sparrow was terribly worried now. “We must fly out now. The chicks have also grown up now and can easily fly to the woods behind the hill”, she argued with her companion. “Nothing to worry as yet. We have plenty of food here. Let chicks eat god and become strong”, the companion remained nonchalant.

In couple of days, the farmer came to the farm with his wife. He looked at the ripe crop with pride and said, “we shall now call my brothers and begin harvesting the crop from tomorrow”. They soon left the farm. The lady sparrow was terribly frightened now. ‘We must fly out right now”, she coaxed his companion and chicks. “Nothing to worry for now”, the companion quipped playing with the chicks.

After couple of days, the farmer again came to the farm with his wife. “My brothers are all thankless and selfish”, he said annoyingly. I would help them whenever they need, but they have refused to help me in harvesting. I shall now call all my neighbors and begin harvesting from tomorrow. “I beg you please let’s fly out now”, the lady sparrow pleaded with the family. The children had become strong and comfortable in the farm by now. “Not yet”. The companion reiterated. The children agreed.

One week passed, nothing happened. One day the farmer and his wife again came to the farm. He saw that the wheat kernels were beginning to wither now. The golden crop had developed many black spots. “We live in a world full of selfish and thankless people. We cannot count on anyone for help”, he said furiously to his wife. “Let’s buy our own tools and begin harvesting ourselves from tomorrow”, the farmer said resolutely. “Hey guys let’s get ready, it’s time to fly out”, the sparrow told his companion and children, with a sense of urgency. “What happened now” the lady asked. “Farmer has realized that no one helps those who do not help themselves”. He will definitely come tomorrow and begin harvesting, the companion bird explained.

From my exposure to ground realities, I can confidently say, “common people have now realized that government and administration can help them only if they are willing to help themselves”. I believe that the anguish and annoyance of people is fast turning into self-help enterprise. Numerous community enterprise have sprung up everywhere to help those suffering from pandemic. Help has started to pour from every corner of the world. Indubitably, there is cynicism towards apathy of the politicians and administration. However, one can see signs of this cynicism abating slowly or transforming into resolve to fight it out.

For politicians and administrators it may the time to join the fighting enterprise of common people or fly out as soon as possible.

After almost 5300years, the human civilization may again be entering a copper age. In the Copper Age 1.0 (which mostly occurred between 4500BC to 3300BC) the human transited from stone age to metal age. Copper age was just before we learned to mix tin with copper to make bronze, a stronger metal to be used for hunting tools. A variety of research shows that the invention of first proper round wheel may have happened in this period. The wheel was initially used primarily for pottery and children toys, before it was used in vehicles to transport man and material. Copper age therefore is considered to be an important watershed in evolution of human civilization.

A strong consensus is evolving amongst global expert that acceleration of climate change efforts mean that human may be entering Copper Age 2.0, as the “Red Metal” shall play a critical role in decarbonisation of global economy.

As per a recent research note of Goldman Sachs, “The critical role copper will play in achieving the Paris climate goals cannot be understated. Without serious advancements in carbon capture and storage technology in the coming years, the entire path to net zero emissions will have to come from abatement - electrification and renewable energy. As the most cost-effective conductive material, copper sits at the heart of capturing, storing and transporting these new sources of energy. In fact, discussions of peak oil demand overlook the fact that without a surge in the use of copper and other key metals, the substitution of renewables for oil will not happen.” The report further notes that “At the core of copper’s carbonomics is the need for the world to shift away from a production system based on the chemical energy of hydrocarbons (oil and gas), to one based on a range of sustainable sources – electromagnetic (solar), kinetic (wind) and geothermal. Copper has the necessary physical properties to transform and transmit these sources of energy to their useful final state, such as moving a vehicle or heating a home.”

ING’s research team noted that “Copper seems to be marching towards the peak from its previous cycle thanks to risk-taking and inflation fears. The red metal’s constructive fundamentals, and green narrative on the demand side, seem to be reinforcing the bull run. Given that policymakers seem to be allowing the economy and markets to run hotter, we see further upside for prices near-term.”

ING research further highlighted that “Macro tailwinds, combined with copper's constructive fundamentals and a 'green' narrative in medium- to longer-term demand, could see upside risks dominate for copper…suggesting the red metal could be on a parabolic run, testing previous highs.”

A senior executive at BHP, one of the largest copper producers in the world, was quoted as saying that surging demand for green renewable energy implies that “To keep pace with these mega trends, copper production will have to double over the next 30 years.”

No surprises that copper prices in global markets have risen more than 85% in past one year.

The Goldman Sachs’ note cited above notes that “Crucially, the copper market as it currently stands is not prepared for this demand environment. The market is already tight as pandemic stimulus (particularly in China) have supported a resurgence in demand, set against stagnant supply conditions. Moreover, a decade of poor returns and ESG concerns have curtailed investment in future supply growth, bringing the market the closest it’s ever been to peak supply.”

Are we prepared

Insofar as India is concerned, we mine about ~0.2% of global copper concentrate and contribute about ~4% to the total global copper production. The three major players Sterlite Copper, Hindalco Industries and Hindustan Copper dominate the copper industry in India. The copper production in India has been declining for past years, mainly on account of legal issues; whereas the consumption is rising. The reliance on imports therefore is rising.

The moot point is how do we prepare for Copper Age 2.0? At present it seems that Copper and Natural Gas imports will replace the Crude Oil imports. We might therefore continue to remain vulnerable on trade account and energy security.

The stock price of few top IT services companies in the country recently corrected sharply after declaration of 4QFY21 results. The explanation commonly offered and widely accepted for the fall in stock prices was that “the results were not as per the street expectations”. I find this little intriguing, especially in the current market environment.

It is well acknowledged that in recent times, the non-institutional investors (“retail investors” in common parlance) have been the dominant players in equity markets world over. In my past 30years of interacting frequently with this category of investors in India, I know that a large majority of these non-institutional investors are not well versed with financial analysis, especially related to the forecasting of financial performance and deriving fair price based on such forecasts.

Moreover, there is an insignificant minority in this category of investors which actually relies on the target prices forecasted for a security by “fundamental analysts”. This simply because they invest in a stock for much larger gains than an average analyst can possibly forecast.

Therefore, I find it little hard to accept the explanation that not meeting consensus forecast disappointed the “market”, even though the results are good and the forward guidance provided by the company is even better.

Another disturbing fact is the level of discussion on TV channels and social media about the future performance of reputable company. For example, I heard some young enthusiastic analysts having 6-8years of post qualification experience in equity analysis, questioning the guidance of the managements of companies like Tata Steel, Infosys, TCS, etc. I saw an analyst, who has spent just 5hours in a cement plant; has never purchased a bag of cement for himself; has always been a commerce student; learned the chemistry of cement from St Google, rejecting the demand forecast made by the management largest cement company in India.

Obviously, these analysts’ forecasts will eventually prove to be way of the mark. However, that is none of my problems. My problem is whether an investor should be relying on the forecast and guidance of the management, which has consistently delivered on its guidance; or go by the “street expectations”; particularly, when few are aware about the constituents of this “street”. It may be pertinent to note that in case of many mid and small cap stocks only 2-3 nondescript brokerages release their estimates. Thus the “street” in these cases may be extremely narrow, dark and stinking.

In this context, the following findings of a recent study by UBS Securities are also interesting to note:

(a)   In past one decade, the market consensus has overestimated one year forward Nifty EPS by an average of 20%, at the beginning of the relevant financial year. E.g., the earnings of FY22 are likely to be overestimated by 20% on 1 April 2021.

(b)   The analysts were so off the mark that even on the last day of the relevant financial year when only one quarter of earning was remaining to be declared, there was usually an overestimation by ~9%. In past year this error has ranged between 10% to 15%. Implying that even on 31 March 2021, the consensus Nifty EPS for FY21 could be overestimated by ~9%.

So before you call your broker to execute a trade based on what the anchor or analyst on TV is telling you about the earnings forecast, street expectations, forward guidance etc, please hold for a second and think “do you actually want the TV anchor or a random analyst to drive your investment decisions?”

India's trade gap widened to $13.93 billion in March of 2021 from $9.98 billion a year earlier. The trade gap was however lower than the preliminary estimates of a higher $14.11bn. The key highlights of trade data were as follows:

·         In March 2021 exports soared 60.3% to a record high of $34.5bn (up from $27.5bn in Feb’21), marginally higher than the preliminary estimate of $34bn.

·         The exports surged ~60% yoy in March, driven mainly by $6bn rise in non-petroleum products’ export.

·         Imports in March 2021 were $48.4bn ($40.5bn in Feb’21), led by non-petroleum imports of $38.5bn ($31.5bn in Feb’21). Imports surged 54% yoy

·         Overall exports contracted by ~7.2% yoy in FY21, a reasonable figure given the difficult period for trade due to global lockdowns.

·         Imports were down 17% yoy in FY21, mainly on account of 37% lower petroleum import due to lockdown and mobility restrictions.

·         Trade deficit widened in March 2021 to $13.9bn ($12.6bn in February and $9.98bn in March 2020)

·         Pharma exports maintained high growth in March, growing 49% yoy to $2.3bn, an all-time high.

·         For FY21, India recorded current account surplus equal to 1% of GDP, due to lower imports and higher FPI flows. Overall BoP surplus in FY21 was $84bn.

I usually do not like to read too much into monthly macro data, unless there is a sustainable trend that could be reasonable extrapolated to future periods. However, I find that any decision based on headline trade data might be erroneous. It is important to factor in the details. For example, consider the following:

(a)   While almost all items recorded positive growth, majority of the growth in imports and exports was driven by abnormal growth in a handful of items.

Out of ~$17bn yoy increase in exports, gold imports alone accounted for 50% delta or $8.3bn. Reportedly, gold imports touched 98.6 tons in Mar 2021 from 13 tons a year ago.

(b)   Export’s growth was led by the growth Engineering products’ export, which accounted for almost one third of the export growth. It is estimated that large stimulus spending in trade partner countries led to higher engineering product growth. However largest export growth was recorded in Iron Ore, led by sharp rise in prices.

(c)    With fresh mobility restrictions the trade momentum may slow down again. FPI flows may also taper this year reducing the CAD and BoP surplus. The consensus appears a CAD deficit of ~1% for FY22. INR may therefore

On the positive side, the advance economies are outpacing the emerging economies in growth recovery. This trend augurs well for Indian exports, especially engineering goods. A weaker INR (my view 74-74.50/USD average for FY22) might be an added advantage.

India is presently passing through the worst phase of the pandemic. The scenes at hospitals, crematoriums, pathological labs, and in homes are heart-wrenching. Many young lives are being lost for want of basic facilities like medical oxygen and ventilators. Distressed and anguished citizens are begging for help, but to little avail.

It is distressing to find that there is no dearth of people who are trying to take advantage of this calamity by hoarding and black marketing essential drugs and medical equipment. The worst part is to find that many highly educated and influential people, who have developed symptoms of the disease, not getting themselves tested or not disclosing it to their contacts; and thereby accelerating the spread. Many people with symptoms have traveled in public transport risking the lives of co-passengers and adding to the alacrity of spread.

Last year we all had seen disturbing visuals of pandemic aftermath from developed countries like US, UK, Spain, Italy, etc. We had seen how the pandemic had exposed the fault lines of the healthcare system in those countries.

The most unfortunate part is that despite getting more than nine months of lead time (since the second intense wave hit the developed world) we failed to develop inadequate basic health infrastructure to handle the emergency. Rather, at many places the infrastructure already built last year to manage the crisis was either diluted or completely dismantled. Citizens had also lowered their guard. Norms were being flouted with impunity.

Anyways, we have this situation to survive and learn our lessons. In my view, the following could be the key learnings for this crisis:

(a)   First of all, we need to introduce Ethics as a main subject at primary and secondary level. The ease with which educated, uneducated, rich and poor break compliance rules, endanger others’ lives with selfish motives, is despicable. No society or country can expect to develop with this tendency.

Recently, I had an opportunity to look at the language books of primary and higher secondary classes. I was aghast to note that none of the books contained any story from Panchtantra or Jataka tales, indubitably amongst the best treasures in ethics and wisdom. In my view, Panchtantra alone may suffice as literature book for primary classes (standard 1 to 5).

(b)   We need to build a robust healthcare infrastructure in private public partnership. The CSR spending of corporate sector must exclusively dedicated to health and education at least for next one decade.

(c)    Physical activity (NCC, Sports, Yoga) must be actually made a compulsory subject till graduation level. Many young people are struggling with weak lungs, respiratory issues, weak immunity etc. It is extremely important to inculcate healthy life style and develop strong immunity from very young age. This must be strictly implemented, unlike the present system, where physical education period is usually free time for students.

(d)    The graduation program must include at least 500hrs of compulsory social service (CSS) for all streams. Each college must affiliate at least five recognized NGOs and students must be assigned to these NGOs for completion of CSS. Any cheating in this must result is total disqualification of the student.