Vijay Kumar Gaba

QE a matter of fact, not going anywhere.

Thursday, June 13, 2013

Keep it simple – Economic growth in India

In our view India has a potential grow 6-6.5% on sustainable basis over next decade. This rate of growth is excellent provided we make it inclusive and sustainable.

Hopes of getting back to 8%+ growth trajectory on sustainable basis would only fuel frustration and motivate inaction.

In prelude to general election no government would want to admit a serious economic collapse, but the fact is that after growing over 8% (seasonally adjusted 5yr CAGR) during FY08 to FY12, the Indian economy has slowed down to more sustainable 6- 6.5%.

The optimists would want to believe that low growth is a temporary phase and we would soon get back to 8%+ trajectory. However, there is small section that accepts that 8% growth in current context is not only unsustainable but undesirable also. We are in the second school.

In our view, Indian economy and people are not yet prepared for higher growth, for the simple reasons:

(a) The current status of basic infrastructure, both social and physical, cannot sustain more than 6-6.5% growth. A forced higher trajectory would only lead to (i) crumbling of even this grossly inadequate physical infrastructure; and (ii) heightened social strife as the system will not be able to complement the burgeoning aspirations.

(b) The brief incidence of higher growth has only led to larger income disparities. With 5% people earning, saving, consuming, investing – we can reasonably expect to grow only 5%-6%. For 8-9% growth we would need 25-30% participation, which seems a distance dream as yet.

(c) 6% growth is not bad per se, provided it generates employment. This could happen only if additional productive employment is generated in rural economy and industry. 8% growth with little additional employment is completely unsustainable.

(d) On more philosophical note, we need a different mindset to sustain higher growth. Corporates not willing to comply with law and governance standards and blatantly refusing to share wealth with other stakeholders; total civic disobedience on citizens part; and badly fragmented society and hence political establishment – certainly do not constitute a conducive background for sustainable higher growth.

Also read:

Keep it simple

Keep it simple – INR

Keep it Simple - QE

Thought for the day

“Cynical realism is the intelligent man's best excuse for doing nothing in an intolerable situation.”

- Aldous Huxley (1894-1963)

Word of the day

Spelunk (v):

To explore caves, especially as a hobby.

(Source: Dictionary.com)

Shri Nārada Uvāca

Infosys has explicitly admitted to poor management, by effecting multiple senior level changes.

The more important question would be how fast the “new management” would be able to regain the ground lost to competition like Congnizant etc., that is if at all they could do it.

Wednesday, June 12, 2013

Keep it simple – Quantitative Easing (QE)

In past couple of weeks, the financial and commodities markets world over have been spooked by mere hint of tapering of US$85bn/month bond purchase program of US Federal Reserve (Fed). The popular media debate these days is completely engrossed in highlighting the ‘disastrous impact’ it might have on global asset prices should Fed reduce the bond buying by let’s say US$10bn/month.

In our view, the debate is little premature and somewhat misdirected. We could not find data about how much bond buying Fed has actually done in past three months, but there is enough evidence to suggest that since beginning of Operation twist in US (September 2011), OMT in EU (August 2012) and Abenomics in Japan (4Q2012) – developed market equities have given positive return while much larger markets, viz., commodities, bonds and currencies have lost ground. US economy has shown some random signs of recovery, while growth has definitely decelerated in Europe, Japan, BRICS, Australia, etc.

In that sense, the two fold objectives of QE – stability in financial markets and faster, sustainable economic growth have been met only in small proportion. The debate over withdrawal or reducing it and fears emanating out of such debate therefore are premature.

To put it most simple terms consider the following:

A person was critically ill, suffering from multiple organ malfunctioning. A team of expert doctors started the treatment. They operated on him multiple times and put him on high dosages of life saving steroids. After tremendous effort they could stabilize his vital functions and put him on life support system. The patient is now stable but has not completely recovered. The team of doctors treating him now proposes that they should calibrate the steroid dosages, as prolonged use could have long term negative implications for his health. They explained the proposal to relatives of the patient suggesting that they want to reduce the dosage gradually. However, they would watch the condition very closely. Should there be any deterioration, they would immediately restore (or increase if need be) the dosage. There was no suggestion whatsoever that the doctors are less confident of their line of treatment or they want the patient to die. The relatives however got panicked and started debating how long the patient will survive and started preparing for the funeral!

The current popular debate over QE tapering is sound something similar.

We had suggested in one of our earlier posts that QE is a matter of fact, not going anywhere. It will remain here till it completely outlives its utility – not likely in next 3yrs at the least, most likely till the time EU economy shows definite signs of revival, Japan achieves its objective of creating nominal inflation in the economy and gets out of decades of stagnation, and global trade rebalancing especially in relation to China makes steady progress.

For records, TARP – the US government US$750bn response to Lehman collapse, has more or less been withdrawn. No one talks about it. No one sulks over its withdrawal.

Also read:

“QE a matter of fact, not going anywhere”

Thought for the day

“If you procrastinate when faced with a big difficult problem... break the problem into parts, and handle one part at a time.”

- Robert Collier

Word of the day

Codger (n):

An eccentric man, especially one who is old

(Source: Dictionary.com)

Shri Nārada Uvāca

Ashwini Kumar, Pawan Bansal, Navin Jindal…at the end of the day, Congress Party will seriously regret messing with the caged parrot.

Tuesday, June 11, 2013

Keep it simple — Indian rupee

In deference to the popular debate and pronounced concerns over sharp depreciation in INR value versus

US dollar, we thought it appropriate to begin this series with a simplistic view and outlook of INR.

Portfolio investment of few billion dollars may not have any lasting impact on the exchange rate.

We do not expect any meaningful rise in inbound FDI till the new government takes charge and spells new rules of the game. This may take at least 15months.

Bharti and HUL transactions may though help a bit in short term, provided RIL or some other entity does not make a large overseas acquisition.

Like any other tradable thing, the exchange values of a currency vis a vis other currencies depends on the relative demand and supply of these currencies at any given point in time.

The recent sharp depreciation of INR vs. USD in recent months indicates that the demand for USD vs. INR has sharply outpaced the supply. There are several reasons for this higher USD demand versus INR. For simplicity, we may classify these reasons in three categories (a) structural, (b) cyclical and (c) speculative. Some examples are as follows:

Structural reasons

(a) There have been some significant changes in the composition of foreign trade of India in past one decade or so leading to structurally higher demand for USD.

The structure of our imports has changed in favor of consumer goods as the domestic supply has failed to meet the burgeoning consumption demand. A large part of this demand has in fact been generated through massive government social spending and failure to rationalize fuel and food subsidies. The imports and therefore demand for USD is mostly inelastic to economic growth.

On the other hand the composition of exports has changed in favor of engineering goods, from dominantly consumer goods (tea, tobacco, leather, spices, textile, jewelry etc.). This has increased the correlation of exports to global growth which is not likely to improve dramatically in near future.

(b) A spate of scams, scandals and policy flip flops in past 5-7yrs have seriously dented the credibility of the Indian political establishment and administration. This has certainly led to increase in risk premium for INR denominated assets. Besides this has also prompted higher outbound FDI. There is nothing to suggest that this trend will reverse in near future.

(c) Serious infrastructure and procedural constraints have impacted India’s export competitiveness especially relative to China, thus resulting in slower exports growth.

Cyclical reason

(d) Persistently high inflation and huge fiscal deficit has led to higher rates and therefore higher value of INR in past few years. With inflation easing and fiscal deficit in control, the interest rates are forecast to come down. This may adversely impact capital inflows and therefore BoP. The recent sharp fall in INR could be attributed to this factor alone.

Speculative reason

(e) The Fed Chairman’s recent remark about tapering of QE has led to widespread speculation about rise in US bond yields and USD value. This has led huge speculative short positions in EM currencies (including INR), that have seen large USD inflows in recent years, anticipating outflows.

In our view, we shall see correction of speculative and cyclical fall in INR over next 6months. In 2014 INR shall stabilize in 52-54 range.

Thought for the day

“My mother wanted us to understand that the tragedies of your life one day have the potential to be comic stories the next”.

Nora Ephron (1914-2012)

Word of the day

Spang (adv):

Directly, exactly

(Source: Dictionary.com)

Shri Nārada Uvāca

Jairam Ramesh finds Rohan Murthy entry into Infosys ‘a conflict of interest’!

What about Rahul Gandhi’s appointment as Congress VP?

Monday, June 10, 2013

Keep it simple

Making profitable investment perhaps did never sound so complicated and complex as it does today. A plethora of often contradictory data emanating from diverse sources on hourly basis seems to be confounding even sophisticated investors.

The raging debate over implications of continuing with or withdrawal from the ‘tiger ride’ called quantitative easing (QE); consumption squeeze due to European austerity and US sequester; proverbial great rotation from bonds to equity; gold vs. risk assets; developed markets vs. emerging markets; credibility of Chinese growth data and its sustainability; will Abenomics succeed in bring Japan out of economic abyss; how will the new normal slower growth period impact the “commodities’ world” especially Australia, Canada, Russia and host of developing LatAm and African economies; and above all are we heading to a massive currency crisis much bigger than mid 1990’s, is keeping investors perplexed.

Adding to the intrigue is the geo-political tensions brewing in middle-east, Korean peninsula, Chinese sea, Afghanistan, Iran; and civil unrest brewing in Europe, China & some Latin American nations.

In our domestic context many factors, including but not limited to, like poor governance (both corporate and political); low historical returns and collapsing new employment opportunities, persistent high inflation etc. are keeping domestic household savings away from equity markets.

The professional investors are also wondering whether the 8%+ growth period of 2004-2008 was an aberration in more attainable growth trend of ~6% and therefore they should be reworking their investment strategies away from growth to consumption and scale down their return expectations.

In this milieu, in our view, the only way to make profitable investment is to keep things simple. We feel where economic fails (as certainly is the case at present) we must look at philosophy for solutions. Which means it is better to get back to old traditional school of investment.

In the coming days we shall be presenting a highly simplistic view of various investment considerations like economic growth trends, inflation, rates, currency, global liquidity conditions, corporate fundamentals, equities’ market and political uncertainty etc. that in our view might help provide some direction to household investors in structuring or restructuring their asset allocation.

It is a common saying that keeping things simple is often most complicated thing in life. From our empirical study and anecdotal experience we have concluded that more often than not keeping things simple works best in making profitable investments.

We shall commence third phase of our ‘Discover India’ tour with a trip to southern states of Tamil Nadu and Andhra Pradesh next week and shall also be covering the eastern states of Odisha, West Bengal and Bihar in this phase.

Thought for the day

Massive inequality, we have learned, isn't the best way to run an economy after all. And when you think about it, it's also profoundly ugly.
Thomas Frank (1965 - )

Word of the day

Wonk (n):
A stupid, boring, or unattractive person.

(Source: Dictionary.com)

Shri Nārada Uvāca

Does L. K. Advani have better ‘secular’ credential than Narendra Modi? “Post Babari” history is in fact more bloody than “post Godhra” history.

Friday, June 7, 2013

Mandate 2014: Chhattisgarh – perplexing

Our team travelled to Chhattisgarh in last week of May’13 and was in the capital Raipur when Maoists ambushed the convoy carrying many Congress party leaders and killed over 25 people. We visited 11 districts of the state. We could not visit the southern tribal districts of Bastar, Dantewada, Bijapur and Narayanpur due to security reasons.

On first impression, we found the state full of paradox and perplexing. It took some real deep probing the common man to find some of the answers.

For example more than 2/3^rd of the state’s population comprises of SC/ST and dalits. The industrial infrastructure is largely public sector. But the political forces like BSP, SP and communists have only marginal presence in the state – not only at legislative level but at the ground level also. This seemed counterintuitive in first instance.

We probed over 250 people from various walks of life to find the reason. What we discovered is that the state has an extremely deep rooted Sufi tradition. A substantial large part of the poor and backward population subscribes to numerous Sufi sects and therefore believes in equality, contentment and non-violence. In fact, we found no sympathy for the Maoist and Naxals amongst common people.

The key observations during our Chhattisgarh trip include the following:

(a) The economic disparities in the state are overwhelming. The quintessential Marwari owns almost all private enterprise. Local population mostly depends on agriculture, forest produce and industrial/construction labor.

(b) The social structure is mostly feudal. Resources are mostly owned by a few and the majority depends upon them for provisions.

(c) The society is mostly harmonious with little internal strife on caste or religious grounds. Gender prejudices are relatively much lower.

(d) A large majority of the population appeared politically indifferent. However, the current administration enjoys tremendous goodwill of the people. The incumbent Chief Minister is very popular both with people and administration – a rare feat in Indian context.

(e) The economy retains the colonial structure. The economic structure is mostly based on exploitation of local natural resources for exports to other states as well as foreign countries, especially Japan.

(f) Despite being rich in minerals, sufficient in power and availability of local labor the state has not made much progress in industrialization and urbanization. The strong allegiance of local populace and administration to sustainability is cited as the primary reason. Naxal violence may also have prevented development of large private enterprise.

(g) The best part is that the whole state is very passionate about education. With impeccable execution of food security, the state administration has enabled people to strive for education. The tribal population in non-tribal districts was found to be most enthusiastic.

(h) The modern consumerism has not yet made any significant inroads in rural and semi-rural areas, though the road network has improved substantially.

Read our special series Mandate 2014

Thought for the day

Between two evils, I always pick the one I never tried before.

-Mae West (1893-1980)

Word of the day

Hadal (adj):

Pertaining to the greatest ocean depths

(Source: Dictionary.com)

Shri Nārada Uvāca

Fully knowing that the delivery mechanism for food security legislation is far from ready, Congress Party would be more interested in failing to pass the Bill and put the blame on opposition rather than passing the Bill and facing the flake for failing to deliver the promised food.

Thursday, June 6, 2013

Mandate 2014: Madhya Pradesh – complacent, poor and green

We travelled over 7500kms through 24 districts of Madhya Pradesh (MP) spanning 7 divisions and five major regions, i.e., Bundelkhand, Baghelkhand, Mahakaushal, Nimar and Malwa.

The first impression is that MP is truly an agrarian economy. People are friendly and complacent. Life moves slowly, except in Indore which has large immigrant population and has evolved as major education and ITeS center over past decade. Poverty is in abundance. Economic divide is relatively wider. Social and religious divide was however not as prominent as seen in the neighboring Gujarat, Rajasthan and UP.

The key highlights of the trip were as follows:

(a) The state is truly an agrarian state. People are generally complacent and youth is not running for greener pastures as was seen widely in the neighboring UP. The best part is that people are extremely conscious of nature and environment – a trait not seen commonly elsewhere. Bhopal would be a serious contender for best cities in the countries. We found the capital city incredibly clean, green, sustainable, friendly and secure.

(b) The socio-political structure is largely feudal in nature where people look upon political establishment and administration for most provisions.

(c) The political awareness of people is relatively lower. We found rural population mostly indifferent to the political establishment. The urban population, though politically aware, was not found to be having strong allegiance to any political party or ideology.

(d) The incumbent Chief Minister however enjoys tremendous goodwill especially with rural and semi rural youth and women. The urban youth and elite find him less aggressive in pursuing growth agenda but still prefer him over most other leaders from the state.

(e) The state has seen steady progress in infrastructure building and social sector development, especially primary education and health, over past one decade. As such we did not find any anti-incumbency in the state for ruling BJP. To the contrary, Congress appeared a divided house with number of central leaders (through their proxies) staking claim for the top post after end 2013 state election. We feel BJP may win again comfortably.

(f) The urbanization trend has not touched a large part of the state; primarily due to low population density, large tribal population and huge protected forest area.

(g) The state has successfully eliminated the dacoit culture from Chambal valley. Most erstwhile dacoit families have been assimilated in the mainstream. Law and order does not appear to be a problem in the state.

(h) Farmers were found to be in general poor, ill-equipped and using primitive technology. Power situation has improved somewhat but still far from satisfactory.

(i) Industry is largely agro-based. ITeS is emerging as a major industry.

Read our special series Mandate 2014

Thought for the day

“Don't let your special character and values, and the truth get swallowed up by the great chewing complacency.

- Aesop (620-560BC)

Word of the day

Anodyne (adj):

Not likely to offend; bland; innocuous.

(Source: Dictionary.com)

Shri Nārada Uvāca

Is the Modi vs. Advani vs. Sushma Swaraj vs. Shivraj vs … contest in BJP a sign of evolution of the party in democratic traditions or degeneration of the party into individualism?

Wednesday, June 5, 2013

Mandate 2014: Uttar Pradesh – land of million Grigoryevs - Part II

…continuing from yesterday

Unlike Karnataka, Maharashtra, Goa, Gujarat and Rajasthan we found the state of UP bustling with activity. There was no complacency. Driving over 5000kms through 11 divisions of UP, we gathered lot of hope. The pessimism, complacency and disillusionment seen elsewhere was present in much less proportion.

The youth in particular appeared “self motivated”. In that sense the feudal structure of the state appeared to be cracking from many places. The youth is certainly accepting the government facilitation but we found them least reliant on the political establishment or government -- something not found elsewhere, except Gujarat, in our journey so far.

Some of the key highlights of our discovery of UP are as follows:

(a) Owning and brandishing guns had traditionally been a passion, especially in Western UP. We found a conspicuous change – utility vehicles have replaced gun as primary passion. Sophisticated revolvers though continue to remain a coveted possession in both rural and urban upper middle class.

(b) Motor cycle has replaced bicycle as a mandatory dowry item. 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’. A Gram Pradhan (Village’s Local Body Head) felt this is a collateral damage of better road and mobility network. Roads were indeed much better.

(c) We found most small factories running on diesel genset. All owners cribbed about poor power supply. Genset and inverters have become more important household appliance than TV and refrigerator.

(d) Many people told us how the state has been mismanaged post separation of Uttrakhand. Special status and large hydro power production has led to new industries flocking to Kashipur/Rudrapur area, besides neighboring Paonta Sahib and Baddi in HP. Many small industries like leather and textile have lost to cheap Chinese imports. Agra sells more Chinese fake leather shoes and Varanasi sells more Chinese artificial silk sarees.

(e) Society is divided on caste and religion but surprisingly the division is not as acrimonious as was found in the case Gujarat (religion) and Rajasthan (caste).

(f) Political awareness is very high in the state despite poor literacy rate. However, political commitment is relatively low. Most young voters would vote for the individual candidate rather than the party he belongs to. Nonetheless, Mayawati has a strong area of influence in dalits and most backwards. Congress and BJP have a miniscule core constituency.

(g) The common feature was total and complete disregard for political establishment and government. Local self government in rural area has gained tremendous strength in past one decade.

(h) Most people feel Akhilesh Yadav is an underperformer. However, they would give him some more time.

Read our special series Mandate 2014

Gujarat

Rajasthan

Tuesday, June 4, 2013

Mandate 2014: Uttar Pradesh – land of million Grigoryevs

In the final leg of Phase II of our ‘Discover India’ tour, we travelled through 65 districts of Uttar Pradesh (UP), Madhya Pradesh (MP) and Chhattisgarh in north and central India. This was the most interesting leg of our journey so far in which we have covered 11 states.

In this leg we commenced our journey from Western Uttar Pradesh and travelled through Brij, Rohilkhand, Awadh and Budelkhand regions of the state covering 11 of the 18 divisions.

Our first impression of the state strongly reminded us of the famous Anton Chekov story “The Malefactor”. Most of youth and middle age people we interacted with, behaved like Denis Grigoryev the protagonist in the story.

"Denis Grigoryev!" the magistrate begins. "Come nearer, and answer my questions. On the seventh of this July the railway watchman, Ivan Semyonovitch Akinfov, going along the line in the morning, found you at the hundred-and-forty-first mile engaged in unscrewing a nut by which the rails are made fast to the sleepers. Here it is, the nut!. With the aforesaid nut he detained you. Was that so?"

"If I hadn't wanted it I shouldn't have unscrewed it," croaks Denis, looking at the ceiling.

"What did you want that nut for?"

"The nut? We make weights out of those nuts for our lines."

"Who is 'we'?"

"We, people.... The Klimovo peasants, that is."

For once everyone appeared to be a free spirit – as if no rule of law exists. They would do whatever suits them – some would do it sheepishly, but most would be audacious in their defiance of rules. “Don’t bother…yahan sab chalta hai” almost appeared to be the state anthem.

On probing a little deeper, we discovered these are 200million people who are in great rush to move forward. The youth in particular is very diligent and eager to grow out of the perennial constraints that have afflicted this historically rich but economically backward state since independence.

We found, in past two decades education is perhaps the only area where the state has made definite progress. Though the standard of government schools continues to be below par, private English medium institutions have mushroomed in every nook and corner and people, especially lower middle class and backward class, are making tremendous effort to afford their children good education.

The American dream is fast catching up with the middle class youth in UP. It is more like Hyderabad and Bengaluru (where youth aspire to get foreign jobs on the basis of their professional skills and training) and quite unlike Punjab and Gujarat (where youth aspire to settle abroad by using their contacts). At current rate in two decades UP may turn out to be one of the largest destinations of inward remittances in the country.

Thought for the day

“Business opportunities are like buses, there's always another one coming."

- Richard Branson (1950-)

Word of the day

Zakuska (n):

A Snack

(Source: Dictionary.com)

Shri Nārada Uvāca

With BCCI drama now almost over, should we get back to some less important business like economic growth, governance etc?

Read our special series Mandate 2014

Gujarat

Rajasthan