Vijay Kumar Gaba

Wednesday, January 22, 2014

An election about personalities and egos

Thought for the day

“Do not be anxious about tomorrow, for tomorrow will be anxious for itself. Let the day's own trouble be sufficient for the day.”

- Jesus Christ

Word for the day

Perspicuous (n)

Clearly expressed or presented; lucid; perspicacious

(Source: Dictionary.com)

Teaser for the day

AK on many occasions has publically pretended his absolute faith in God, especially when asked about his security.

The question is if God is there to secure everyone, why Delhi government needs police to secure the life of its citizens?

Or AK believes that God is exclusively on AAP duty these days!

An election about personalities and egos

The 3QFY14 results have so far been a continuation of 2QFY14. There is nothing to suggest any break in the continuity – slowly improving US demand, poor domestic infrastructure & capex demand and slowly contracting consumption demand. Besides, a few large IT companies, most companies have highlighted margin pressure, demand slowdown and cut in capex plans. Broadly, most large cap results are in line with the expectations whereas mid cap and small cap companies appear struggling. There seems nothing that warrants a change in investment strategy or near term market outlook.

Given the status quo in market, naturally everyone is more interested in politics these days. With AAP throwing an interesting X factor in the arena, the discussions have become more exciting and participative.

In previous elections (except perhaps 1977), many people would just want to listen to various opinions about the likely political scenario post election without being actually concerned. This time however it’s definitely different. Most people have strong opinions and are concerned about the outcome of impending election.

This, in my view, is an encouraging sign for the strength and vibrancy of our democracy. However, this could result in some unintended election outcome in near term. In my view, many of the electorate could cast their vote just to assert their newly found political expression, without actually intending to usher a change or bothering about the consequences.

Wife of one dear friend, a third generation Congress supporter, has committed to vote AAP candidate (whosoever it is), just to prove some domestic points to her husband and father-in-law! Captain Gopinath has admittedly joined AAP without reading its manifesto (now investors would know why both his business adventures failed!). Mr. Kamal Farooqui wanted to join AAP just to prove a point to Mulayam Singh Yadav. Ms. Sarabhai perhaps joined AAP, not because she subscribed to its methods, ideology or programs, but because she wants to avenge her defeat in last elections, which she contested as an independent.

I spoke to many young enthusiasts who recently joined AAP in past couple of weeks. No one, yes not even one, was clear about the basic tenets of the Party, e.g., (a) who is an Aam Aadmi which AAP claims to represent? (b) What are issues, besides corruption, which AAP stands for? (c) What is the definition of corruption in AAP’s lexicon?

Anyways, as I said it has become interesting and exciting. The wanderer in me, who has travelled across India just last summer, does not let me believe that any revolutionary socio-political change is in the offing. We may though certainly witness some evolutionary changes.

Notwithstanding, the aversion of Congress Party to a personality based presidential style contest in the present context, the political discourse is centered around personalities – primarily Modi, Rahul, and Arvind Kejriwal.

In my view, Rahul and Kejriwal have nothing much to lose in this election. It is Narendra Modi who has everything at stake. Tomorrow I highlight how the universe is conspiring to keep him out of power.

Tuesday, January 21, 2014

India needs a true coalition, even if it means a third front

Thought for the day

“Once you make a decision, the universe conspires to make it happen.”

- R. W. Emerson (American, 1803-1882)

Word for the day

Bosky (adj)

Covered with bushes, shrubs, and small trees; woody; shady

(Source: Dictionary.com)

Teaser for the day

Does Congress understand the meaning of bipartisan legislations?

When you pass a law because the opposition agreed to your request for a bipartisan legislation, you do not claim sole credit for that law (Food Security, Lokpal, Land Acquisition etc.).

India needs a true coalition, even if it means a third front

Prior to 2009 elections, the scare of ‘insidious’ communists and Mayawati coming to power was so pervasive that nobody was willing to even reason why the communists were bad and why it was not preposterous for Dr. Manmohan Singh (MMS) to destabilize the government and nation in the extremely tough global conditions, just for civil nuclear deal whose benefits, if at all, would be seen only beyond 2020.

In hindsight many would be regretting market euphoria post the Congress victory in 2009 general elections. Investors, businessmen, traders all celebrated the election results as beginning of new era in Indian politics and economics. 56 months of UPA II have largely undone all the optimism seen in May 2009.

It’s poll time again; and investors are positioning themselves as per their estimates of the May 2014 election results. So far the majority seems to be betting on a Narendra Modi led NDA government. However, opinion polls that may come out in next 4-10weeks may upset many calculations.

The polls conducted in past few months indicate that the Congress led UPA constituents should lose ground in the election due to various governance related and economic issues; but BJP led NDA is also not likely to improve its tally dramatically. So there are chances that we have 1989 or 1996 like situation where so called third front could have a shot at forming government with or without support of Congress or BJP. Some are even seeing a AAP (50+) government with Congress (~120) and other Mr. Cleans (Nitish, Navin, Mamta) supporting it to keep BJP out.

The mute question is should investors be worried about this probability of a non-BJP non-Congress government that may have left leaning AAP, Mamta or Communists as its constituents?

In my view - absolutely not. The investors should rather be happy with the prospects of a true coalition coming to power.

In my view, post independence the best periods for the Indian economy have been those when a “coalition” government was in power.

I do not consider UPA II a coalition. TMC, NCP, DMK all have same socio-economic agenda as the Congress.

By “coalition” we do not mean multi party governments. In our view, coalition government means where people with different and many a time completely diverging socio-economic policies jointly participate in a government. They arrive at the common minimum agenda of agreement and focus on executing the same, hence avoiding conflicts and logjams.

The first cabinet of India post independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we still got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajeev Gandhi (1984) are not really known for good governance or socio-economic reforms.

In my view equal credit for MNREGA and RTI, two major reforms done during UPA I should be given to the communists, who ensured that the Congress Party stays focused on the promise of inclusive growth and accountable administration.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, MNREGA) were all coalition governments supported by socialists/communists. These governments are all remembered for socio-economic reforms causing fundamental positive changes in the economy. None of these governments is remembered for non-governance, anti market policies or anti business stance.

Monday, January 20, 2014

‘The great India story’ – revisiting the fable

Thought for the day

“To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment.”

- R. W. Emerson (American, 1803-1882)

Word for the day

Litigious (adj)

Inclined to dispute or disagree; argumentative.

(Source: Dictionary.com)

Teaser for the day

After publically saying that no sitting MLA will be given Lok Sabha ticket, Arvind Kejriwal says he will contest Lok Sabha election if Party tells him to do so!

Does someone recall Idi Amin?

‘The great India story’ – revisiting the fable

Conventional economists have long argued that monetary and the real economies interact in a limited way through the determination of nominal quantities such as prices, wages, exchange rates and so forth. Therefore although a change in the quantity of money may create short term disruptions, the real economy would eventually settle at the same long term equilibrium as before. Implying that at 'normal' levels of money, a change in the money supply will not alter the long term economic equilibrium.

In short, additional money made available to people, without any additional productive capacities made available, makes no difference to real economy. It just increases the price of existing goods in the same proportion as the additional money available.

The problem however occurs when the supply of additional money becomes a constant and that too in an abnormal proportion. This not only disrupts the short term equilibrium but alters the structure of long-term equilibrium too. This is precisely what is happening in the case of economies that have followed excessively loose monetary policies for an extended period of time. In fact, this has impacted the emerging economies which fell prey to this slush of excess money and let their medium to long term equilibrium altered, believing that this excess money is ‘normal’ and would remain a constant.

India unfortunately is one such economy that has allowed the structure of its real economy tempered, though still not irretrievably, by easy money in past 15years. For example, consider the following:

The excess money or credit that got created out of thin air has not flown equally to all. It rather has got concentrated in few hands. However, the illusion of growth and prosperity has engulfed all. The aggregate numbers have become gigantic; and it has led to ballooning of the aspirations of the underprivileged to unsustainable levels.

Given that we are democracy that works on “relative majoritism” feeding these aspirations has become a central subject of competitive politics. The state finances are therefore in a structural long term pressure with no exit in sight.

The rush to accumulate cheap credit has lead to excessive debt both at government as well as corporate level in past 7years. This has brought a lot of unmanageable demand forward in time. For example, over 50GW power projects were initiated and fertilizer policy was made when the feed stock supply chain to fuel the power and fertilizer plants was far from ready. The capacity to pay unaffordable toll was not there when over 5000km of toll roads were commissioned. Many of these power plants are lying idle and so are numerous industrial projects conceived based on supply assumptions from these plants. Many toll roads have become unviable or are lying uncompleted.

If we believe that this misallocated capital and unmanageable changes in consumption patterns are short term phenomenon, the correction is sure going to be extremely painful- prepare for it.

And if we think that these are long term changes – there is no “great India story” as essayed by numerous analysts and strategists.

Friday, January 17, 2014

Begin at the bottom

Thought for the day

“Even if you are a minority of one, the truth is the truth.”

- Mahatma Gandhi (Indian, 1869-1948)

Word for the day

Hornswoggle (v)

To swindle, cheat, hoodwink, or hoax.

(Source: Dictionary.com)

Teaser for the day

Given the Binny – Kejriwal mudslinging on TV channels, should AAP ask people of Laxmi Nagar (East Delhi) as to whether they would like to recall their MLA Vinod Kumar Binny?

Begin at the bottom

In my “Discover India” tour last summer (see here) I found that even after more than 6 decades of becoming an independent political union, India is still far away from becoming a socio-economic union. The failure of national economic policy in recognizing this regional diversity is perhaps one of the primary reasons for sub-optimal outcome.

Most of the states, regions within states and communities within regions have diverse socio-economic behavior. A blanket policy for all is least likely to succeed in meeting its objectives.

This perhaps why the center driven Nehruvian model of large industry led growth with active state participation has mostly failed in evolving a strong structural base for the Indian economy. Consequently, we still continue to be an economy largely dependent on labor & resource arbitrage and trading. We have failed in making significant progress in the areas such as technological advancement, productivity gains, innovation and localization.

In my assessment, electoral considerations have overwhelmed India’s economic policy. The inevitable consequences are:

1. Overemphasis on weaknesses and ignoring strengths.

2. Overemphasis on “provision” rather than enablement.

3. Failure to develop a truly federal structure of governance as mandated by the Constitution.

4. Failure to develop an environment of mutual trust and faith between the political establishment and people in general.

In my emphasis of economic policy should be on:

a) Developing an environment of mutual trust through decentralization of power to the primary unit of administration, i.e., village council.

(b) Building on the locale strengths while adequately taking care of weaknesses.

Mahatma envisioned that “Independence begins at the bottom... A society must be built in which every village has to be self sustained and capable of managing its own affairs. It will be trained and prepared to perish in the attempt to defend itself against any onslaught from without. This does not exclude dependence on and willing help from neighbours or from the world. It will be a free and voluntary play of mutual forces. In this structure composed of innumerable villages, there will be ever widening, never ascending circles. Growth will not be a pyramid with the apex sustained by the bottom. But it will be an oceanic circle whose center will be the individual. Therefore the outermost circumference will not wield power to crush the inner circle but will give strength to all within and derive its own strength from it.” More on this in next post.

Thursday, January 16, 2014

Not just the cap, we need more of Gandhi

Thought for the day

“Know thyself.”

- Ancient Greek aphorism

Word for the day

Antebellum (Adj)

Before or existing before a war; prewar

(Source: Dictionary.com)

Teaser for the day

Congress supports AAP which publically spits venom against it; does not subscribe to its current favorite policies (like FDI in retail and fiscal prudence); makes unconstitutional announcements (like electricity subsidy without Assembly approving the budget); and makes seditious gestures like “I want complete independence” and “Inquilab Zindabad”.

Is it just to keep BJP out or there is something deeper running here?

Not just the cap, we need more of Gandhi

Twelve village councils in Niyamgiri area of Odisha rejected the proposal of Vedanta group to mine bauxite from the area for its Aluminum project. Though the mining proposal certainly has other concerns such as environmental degradation and impact on livelihood of local tribes, the primary objection of these tribal village councils was primarily on religious grounds. These tribes worship the Niyamgiri hills as Niyam Raja a sacred deity.

The Supreme Court upheld the supremacy of village council’s decision and the government has accepted it as a rule. The environment minister Vereappa Moily said a couple of days ago "I have rejected the Niyamgiri because all the panchayats have rejected the proposal.....When the panchayats reject, we cannot go ahead with it. We have made a rule that if the Panchayats (reject), we cannot (grant clearance)."

Media has hailed the determination of local tribes and Rahul Gandhi has come out in full support of the decision. Business community and professionals have mostly refrained from expressing any opinion on this publically.

Now contrast this with (a) recent decisions of several village panchyats in Bihar, UP, Rajasthan and Haryana to ban use of mobile phones by unmarried girls; and (b) proposal of Delhi government to ban FDI in multi brand retail trade. Both the proposals have met with outrage and termed regressive and completely unwarranted. I personally do not support both these decisions. Perhaps these examples are not comparable also.

But the question here is much wider – Should the elected local bodies be given the right to decide what is good and what is bad for their respective constituents? If an elected Panchayat with 50% female members takes a decision which may appear regressive to many, should it be accepted as lawful or not?

In my view if we deny the right of duly elected local bodies to make rules or code of conduct for their constituents, the Parliaments’ right to make legislation affecting personal or social life of people may also come under question.

It is pertinent to note that many states in the USA have different laws relating to abortions, same sex relationships, legal for smoking and alcohol consumption, gambling, prostitution etc. Similarly, divergence exists in many constituents of European Union also.

I am raking this issue, because to my mind herein lies the sustainable solution to the India’s economic challenge. Mahatama Gandhi once very rightly said “India lives in her villages”. In my view any socio-economic model that does not begin with accepting village as the primary unit of consideration is bound to fail in India.

Mahatama Gandhi may be out of favor with current crop of politicians, but eventually we will have to go back to him for he only has offered an economic model that can bring prosperity to India in a manner which is equitable, just and sustainable. More on this tomorrow.

Wednesday, January 15, 2014

It’s like FY2000 only

Thought for the day

“There are two things in New York, euphoria and disaster.”

- Bill Parcells (American, 1941 - )

Word for the day

Infinitesimal (Adj)

Immeasurably small; less than an assignable quantity:

(Source: Dictionary.com)

Teaser for the day

What if AAP leads the Left Front in general elections to provide a true third dimension to Indian politics with Congress led UPA at center and BJP led NDA to the right?

It’s like FY2000 only

The Indian stock markets are on the edge, waiting to plunge in the bubble territory, much like 1999-00. The long term stock returns (Nifty 5yr CAGR) in 2013 were 16% (much higher than 25yr average of 12%); the yoy delta in long term equity return in 2013 was 17%, highest in three decades. This happened when the long term economic growth slumped below four decade trend line and long term earnings growth had been consistently down to single to low double digit.

The market breadth is as narrow as it was in 1999-00 and volumes poor. The only saving grace is low volatility and low retail participation. I shall watch out for these two factors to turn negative to get a signal of bubble reaching the bursting point.

Tuesday, January 14, 2014

Data is your sword and mine too

Thought for the day

“No poet or orator has ever existed who believed there was any better than himself.”

-Marcus Tullius Cicero (Roman, 106-43BC)

Word for the day

Suppletory (Adj)

Supplying a deficiency.

(Source: Dictionary.com)

Teaser for the day

Mani Shankar Iyer is the best. Says India’s inflation is doing of US Federal Reserve; candidly admits that “If there were an election today, we would do very badly.”

Data is your sword and mine too

The market reaction to poor November IIP data was not at all surprising; especially short covering in financials. Poor industrial growth and lower consumer inflation could be a perfect excuse for RBI not to hike rates on 28^th January.

Turning a blind eye to hike in rates by Employees’ Provident Fund Organization (EPFO) which manages majority of retirement savings of Indian workers could however be perilous.

The production and sales data for automobiles, cement, steel etc. indicates that IIP data is not likely to improve in next few months in any significant measures. Inflation may however come back as the fresh winter vegetable stock gets consumed. Remember every year storage cost, wages, interest cost, and transportation charges etc. are rising much faster than the productivity gains. In my view, vegetable and fruit prices shall continue to rise 6-10% every year for next many years, unless some far reaching farm sector and agricultural produce marketing reforms take place.

Yesterday morning, one friend who manages treasury of a midsized corporate showed me an SMS from fund manager of a large fund house. The message exhorted my friend to invest in long dated securities highlighting that in past one decade, benchmark yields have been higher than 9% only for 40days. The current high yields therefore offer a great opportunity. He sought my opinion, given that I have been advocating short duration and FMPs for past couple of years.

In my view, this is an interesting piece of data. But it could be misleading if seen in isolation or without considering a longer series. For example, it would be interesting to see how many times in past one decade we had (a) US liquidity tightening and 10yr yields rising over 100% in a matter of few months; (b) USDINR above 60 level; (c) short term debt over 30% of total debt with high roll over risk; (d) total debt to GDP ratio consistently above 125% with public debt accounting for 2/3^rd of total; (e) household debt growth outpacing corporate debt growth; (f) consistently rising investment - savings gap; (g) corporate debt equity over 70%, RoE below 15%; (h) severe financial repression by government through high negative rates; (i) Forex cover for less than 8months of import; and (j) external debt close to 25% of GDP with threat of rating downgrade if elections do not provide a stable government.

It would also be interesting to find how the yields behave during 1990’s, the period which resembles more closely to the current conditions. The benchmark yields were perhaps above 9% for most part of the decade.

The same fund manager has also pointed out that Sensex has given no return for last six years (2008-2013) while earnings have grown over 60% during this period; and therefore it is also a good opportunity to invest in equities.

Never heard 6years as benchmark before! However, if we consider five years (2009-2013), Sensex has given over 100% return with about 50% rise in earnings.

I would continue to advocate short duration, FMPs and high quality equity to be bought over next several months.