Vijay Kumar Gaba

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.

Monday, January 13, 2014

Do not mistake moss for green shoots

Thought for the day

“Condemn none: if you can stretch out a helping hand, do so. If you cannot, fold your hands, bless your brothers, and let them go their own way.”

- Swami Vivekanand (Indian, 1863-1902)

Word for the day

Wamble (v)

To move unsteadily

(Source: Dictionary.com)

Teaser for the day

Delhi government gets 50000 complaints of corruption in three days. What does it mean?

(a) Aam Aadmi is making fun of AAP.

(b) Delhi is the worst place to live on this planet.

(c) Both of above

Do not mistake moss for green shoots

US employment data is one single piece of information global financial markets have watching keenly since US Federal Reserve pegged the monetary stimulus to the job creation.

The latest data suggests fall in rate of unemployment below 7% (6.7% actually) after a long time. A benchmark Fed has highlighted more than once as a key signal of economy normalization and therefore catalyst for winding down the unprecedented accommodative monetary policy.

However, what the headline data does not highlight is that it is not the lower numerator (no. of unemployed persons) that has caused lower unemployment rate, but the lower denominator (total workforce). The denominator dropped from 155.3 million last reading to 154.9 million present reading, implying that the labor participation rate just dropped to a fresh 35 year low, hitting levels not seen since 1978, at 62.8% down from 63.0%. (read more at Zero Hedge)

This means now more Americans are unfit for employment (skill shortage or mismatch), less Americans are willing to work (more dependency) and new job creation is happening in sectors that require higher skills (mostly technology).

I do not know whether India should worry or rejoice about this. Lower unemployment rate means faster winding down of QE and potential 2015 rate hike. Historically a reversal in US rate cycle has been bad for Indian economy and market. Remember, this shall happen when the world’s biggest economies seek to refinance $7.43 trillion of sovereign debt in 2014. Higher rate and lower liquidity shall raise borrowing costs while nations struggle to bring down elevated budget deficits. As per some reports the amount of bills, notes and bonds coming due for G-7 plus Brazil, Russia, India and China is little changed from 2013 after dropping from $7.6 trillion in 2012, according to data compiled by Bloomberg. At $3.1 trillion, representing a 6 percent increase, the U.S. faces the largest tab.

While budget deficits in developed nations have fallen to 4.1 percent of their economies from a peak of 7.8 percent in 2009, they remain about double the average in the decade before the credit crisis began. The cost for governments to borrow may rise further after average yields last year rose the most since 2006, as the global economy shows signs of improving and the Federal Reserve pares its unprecedented bond buying. (read more at Bamboo Innovator here)

The good part is that more skilled professional from India may find jobs in US and other developed countries. The equity market excitement about IT sector might be stemming from this window of opportunity. What market perhaps is not factoring is that relative valuations are about to enter bubble zone and standalone valuations are much further away from fair. Next year US begins the process of next elections and Devyani Khobrgade episode suggests that at least Democrat voices are not going to be kind to India.

The employment, deficit and growth conditions back home are not showing that we are anywhere closer to the bottom of the cycle. Though some are willing to accept slippery moss for green shoots.

Friday, January 10, 2014

Too good to be true! Might be! Perhaps not!

Thought for the day

“I knew it was too good to be true. Some things never change...”

-Unknown

Word for the day

Welkin (n)

The sky; the vault of heaven.

(Source: Dictionary.com)

Teaser for the day

It appears from recent actions of the government that it deliberately allowed US diplomats (any probably many others) to break a number of laws.

Will someone explain why?

Will AAP seek prosecution of officers who failed in their duty to enforce law?

Too good to be true! Might be! Perhaps not!

Five years ago in late summer of 2008, the global financial markets received what was thought to be one of the biggest shocks in history of world finance. The crash of Lehman sent shockwaves across the world. Enormous amount of investors’ wealth was destroyed. Epithets for EU and US were written and rehearsed in right earnest.

The 2013 however saw a dramatic turnaround. And at beginning of 2014 it everything appears superbly normal.

· TARP money has been mostly refunded.

· QE has begun to taper. Bond yields have started firming.

· The feared hyper inflation due to humongous liquidity infusion has failed to make any appearance.

· US unemployment levels have fallen to more acceptable levels.

· UK housing prices are above 2007 highs.

· UK car sales are close to 2006 high levels.

· To dismay of EU breakup proponents, EU has just got a new member in Latvia.

· PIGS are flying everywhere. Ireland has already returned to bond market. Greece may soon join the party.

· Many global equity markets are trading close to or higher than their pre Lehman 2008 high levels.

· Junk bond issues are close to 2007 highs.

· Gold, silver and US treasuries, widely considered safe havens, are consensus underweight/sell.

· JPY is at multi year low to USD and EUR is close to its strongest levels.

· Most EU yields are at reasonable level.

· Most analysts are bullish on EU and bearish on EMs.

· After decades Japan is back on investors’ radar.

· New theme MIST (Mexico, Indonesia, South Korea and Turkey) has been coined to replace fallen from grace BRICs.

· China has not crash landed as most feared. The soft landing has been rather well managed.

· No major war has erupted despite serious provocations. Iran appears to have fallen in line. Egypt, Syria, Libya, are simmering but just that. Pakistan had its first ever democratic change of government and al-Queda has failed to make major strike post Osama elimination.

Instinctively, all this looks amazing - too good to be true. Perhaps it is not! Might be it is! Next week lets attempt to look India under this light or should we say ‘grey shade’.