Vijay Kumar Gaba

Monday, February 24, 2014

Atone - pepper, seizure

Thought for the day

“I will give you a definition of a proud man: he is a man who has neither vanity nor wisdom one filled with hatreds cannot be vain, neither can he be wise.”

- John Keats (English, 1795-1821)

Word for the day

Solipsism (n)

Extreme preoccupation with and indulgence of one's feelings, desires, etc.; egoistic self-absorption.

(Source: Dictionary.com)

Teaser for the day

Has Kejriwal exhausted all arrows in his quiver, a little too early?

Atone - pepper, seizure

Last week an MP used pepper spray in the Parliament, apparently to prevent introduction of a Bill to carve out Telangana state out of current Andhra Pradesh. The cited act of MP widely criticized as seizure of Indian democracy by anarchist elements, motivated many elegies; some of them so eloquent that for once I seriously felt that we are living in a banana republic.

A week later the anguish and commotion of “concerned citizens” and “conscious media” over the incidence has subsided materially. Telengana State has been almost created. Common people, who were little bothered about the seemingly bizarre incidence for a blink, have moved on. The MP in question has sought to atone himself by apologizing and quitting politics. Another MP who allegedly feel sick due to use of pepper spray has lodged a complaint with police to make us feel that we are living in a civilized world where rule of law still prevails.

I am now feeling much better and find myself in a position to reflect on the incidence independently (without overwhelming media reports and commentaries) in my own ways, that many find ridiculous and whimsical.

In my view, this incidence was perfectly normal and encouraging for the health of democracy. Unlike many popular conscious keepers of the country, I believe in a democracy the elected representatives should truly and fairly reflect the social, cultural, economic and political conditions of the country.

It is only in aristocracy that we look for an ideal man governing the country, advised by the best minds available. Not in democracy.

Today, if there is widespread anarchy, non-compliance, corruption, intolerance, degeneration, injustice, inequalities, anguish, dismay, and frustration in the society – the and Parliament, state assemblies and elected local bodies should truly and fairly reflect that. Democracy needs our representatives to mirror us and our state of affair. Let them not be something “out of our world” – honest, compliant, tolerant, just, equitable, peaceful, enthusiastic, gratified and facilitators.

To me it is very simple, unless the mirror shows the filth on my face as it is, how would I feel the need to wipe it off and wash myself clean?

Some readers have suggested, somewhat tacitly, that I am wasting too much time discussing political affairs. I should rather focus on financial markets and suggest how to make more money – faster and safer. I see their point, but feel helpless. In my view, a profitable investment strategy has to cross this strait. Nevertheless, I will keep their suggestion in mind.

I would like to initiate a larger debate on the desirable social, political and economic order for the country. I had been accumulating some thoughts on this for past couple of years. I had initially intended to present the thoughts in a closed format - in the shape of a book. However, in past few months I have realized that these thoughts are too utopians and need to be discussed and modified to suit our conditions. I have therefore decided to make it an open source like series from which people may pick whatever they like, debate it, improve it and introduce back in the stream.

I shall begin introducing these Utopian thoughts in coming days. Trust me it has nothing to do with Arvind Kejriwal’s idea of “Swaraj”.

Friday, February 21, 2014

What PM Modi could mean for Indian economy?

Thought for the day

“My work is a game, a very serious game.”

- M. C. Escher (Dutch, 1898-1972)

Word for the day

Moiety (n)

A half, a small part.

(Source: Dictionary.com)

Teaser for the day

What is harsher punishment – hanging by the neck till death or jail term till death?

What PM Modi could mean for Indian economy?

Since February 2013 when first time Narendra Modi made his national ambitions conspicuous, I have been discussing this question with some investors, fund managers, businessmen, farmers, bureaucrats, and young students. The discussions have become more intense and argumentative since September when he was formally announced BJP’s PMship candidate.

Hopes are running high

I have been repeatedly highlighting that the hopes of people from Modi are running unusually high. People in general are viewing him as divine intervention that would get them rid of all the ills currently plaguing Indian society, politics and economy. Businessmen in particular are expecting that Modi will at the least ensure the following:

(a) Proactive, clean, responsive and business/investment friendly administration.

(b) Proactive administration.

(d) An accountable and responsible administration and protect bureaucracy for their bona fide actions.

(Note: Surprisingly, the expectations from Rahul Gandhi are no different, but few believed that he could become prime minister.)

Unfortunately, no one could produce an iota of substantive evidence that would suggest that Modi could meet their expectations in the timeframe they are considering. Probably, we would have much greater clarity once we see the much awaited “Vision” document of BJP.

As of now, in my view, Modi does appear assertive and has shown tendency to take quick decisions in economic administration matters. A few quick decisions could boost the sagging business sentiment and help kick start the stalled investment cycle. Fortunately, many other things are already falling in place and would work in his favor.

In my view, the following positives could emerge if Narendra Modi gets to lead the next government with a clear mandate:

(a) Business and investor confidence may recover on the hopes that policy making will be proactive, business friendly, consistent and faster.

(b) Important economic and financial legislations like GST, DTC, Insurance and Pension Bills etc. may get cleared in FY15 itself. In my view, BJP’s opposition to GST is purely political and has nothing to do with theie economic idelology.

(c) Important administrative reforms are implemented to uplift the morale of bureaucracy. This is expected to expedite the project execution.

Besides, the macroeconomic environment may also begin to improve on its own as core inflation and therefore rates bottom out, and consumer demand recover post good Rabi harvest.

Need to evolve a federal economic model

Indubitably, at present India is struggling with the limitations of the Nehruvian model of economic development that we have followed since independence. Even BJP, when it came to power in 1998, decided to leave the alternative model “integrated humanism” proposed by its ideologue Mr. Deendayal Upadhyaya and followed a variant of Nehruvian model terming it “Gandhian Socialism”.

The current variant of the Nehruvian model is largely a distortion of the classical Keynesian model that advocates a larger role for the private enterprise with active state intervention during extremities of business cycle and argues against higher savings in both private and public sector. The Keynesian model has its genesis in the great depression and mostly found useful during larger economic crisis.

Modi seemingly favors Laissez-faire

However, Modi seems to be an advocate of Laissez-faire or free market which entails minimal state intervention even during crisis. He has implemented or should we say supported the model in Gujarat with limited success. But it is pertinent to note that unlike many other states, Gujarat has a history of 200years of industrialization and 60mn people who are globally recognized for their enterprising skills.

This is certainly not the case for most parts of the rest of the country.

It is therefore important to evaluate whether the Gujarat model could be replicated at the national level, or in other words whether Modi can deliver the same results as PM what he has delivered as CM of Gujarat.

…which may not be relevant to a large part of India

In my view, considering the present state of socio-economic development of various parts of the country, it would be 10-15years too early to test the Laissez-faire model at the pan-India level. Modi’s Gujarat model therefore may need significant adjustments at the national level. Perhaps an amalgam of Gujarat’s Laissez-faire, Goa’s minimal intervention and Chhattisgarh’s socialist models could provide a more workable model at this point in time.

I do however strongly feel that the Gujarat model should not become Modi’s limitation also. Modi has very successfully demonstrated his strategy skills in past one decade. It would be totally wrong to assume that he would not be able to adapt to the larger responsibility and formulate an appropriate strategy for integrated development of the country.

Immediate implications

Given that the 2014 elections are being fought very aggressively, and acrimoniously, I do not see consensus evolving on key social, economic and financial reforms till the tempers cool down, may be two years down the line).

In my view, therefore, the limited implications of general elections in terms of industry performance would be better visibility of order flow for capital goods from 2015, improvement in working capital cycle. Improvement in capacity utilization level would depend on the correction in inventory level, pick up in consumption demand and higher government plan expenditure.

I do not subscribe to the enthusiastic perception that the economists sitting in London and New York advising strategy on the basis of Planning Commission or CSO data sheets, would be of much help to Mr. Modi. I feel we have had enough of bureaucrat/economist contribution to the economy. Now please let statesmen run the economy.

Thursday, February 20, 2014

The big bang theory

Thought for the day

“Landlords, like all other men, love to reap where they never sowed.”

- Karl Marx (German, 1818-1883)

Word for the day

Bestiary (n)

A collection of moralized fables about actual or mythical animals.

(Source: Dictionary.com)

Teaser for the day

The big bang theory

The NDA regime led by Atal Bihari Vajpayee (1998-2004) is remembered, in market parlance, for its big and bold decisions. The tenure started with the big blast (May 1998 nuclear test) and was punctuated by major initiatives like NELP (hydrocarbon exploration), SEZ (key reforms in land, labor and tax laws in select zones), NHDP (highways), PMGSY (rural roads), AAY (food security for poor), SGRY (employment for rural poor), SSA (primary education for all), airports privatization, port privatization, Electricity Act 2003, spread of mobile telephoney, 100% FDI in core sectors, etc.

These initiatives excited the global investors at a time when Indian IT professionals were making big impression on global technology canvass. A supportive regime, Y2K problem, easy credit post LTCM and Asian crisis (rates lowest since 1970s) and depressed commodity prices (inflation lowest in decades) helped big investment initiatives.

The problem was that many of these programs were initiated hurriedly without putting an adequate institutional mechanism in place, thus leaving the scope for misuse (of discretionary powers by minister and bureaucrats), litigation (ownership of natural resources), misappropriation (of natural resources by scrupulous allottees), non-compliance (environment and sustainability norms) and wide viability gaps (in absence of immediate demand) and thus planting the seeds of financial stress, economic slowdown, mistrust and corruption we are witnessing today. Subsequent UPA government have watered and nourished these seeds well.

Now, having learned from the mistakes of omission and commission made and follies committed during past two decades, Indian businessmen and investors are hoping (or should I say assuming!) that new leadership will carry further the “big bang” initiatives minus the follies, and thus reinvigorate the Indian economy.

I am fully with them in their hopes and assumptions.

However, the only caveat is that the new leadership will not be able to plant the seeds of prosperity unless the field is cleared of the poisonous crop of mistrust, misdeeds, and misallocations that has taken deep roots. Like Chankaya the new regime will have to first uproot these plants and appropriately inoculate the soil.

This is not going to be easy. It will cause tremendous pain to investors and entrepreneurs, and disruption of business activity and financial stress.

We have seen some glimpses of this cancelling of telecom licenses by the Supreme Court, deallocation coal blocks by the government, de-notifiaction of a number of SEZs, withdrawal of investment proposals by road developers and steel companies and rising financial stress in the economy.

We shall see more of these. IDBI, ICICI, IFCI, UTI all are witness to what happened when last time these correction were carried out.

That is not exactly good news for someone looking for immediate gains in stock market.

More on what Narendra Modi might mean for Indian economy tomorrow.

Wednesday, February 19, 2014

Third fronts have mostly been good for economy

Thought for the day

“The schools would fail through their silence, the Church through its forgiveness, and the home through the denial and silence of the parents. The new generation has to hear what the older generation refuses to tell it.”

- Simon Wiesenthal (Austrian, 1908-2005)

Word for the day

Elegy (n)

A sad or mournful musical composition; especially a funeral song.

(Source: Dictionary.com)

Teaser for the day

Once out of denial – the Congress Party will be most relieved. It is the only party that can do better than expectations.

Third fronts have mostly been good for economy

A government without Congress or BJP post 2014 is less likely in my view. However, for the argument sake even we take a hypothetical situation where non-aligned regional parties like JDU/RJD, TMC/CPM, BJD, DMK/AIDMK, SP/BSP, TRS/TDP, etc. get sufficient seats to form a government along with Congress joining or supporting from outside.

The moot question is should investors be worried about this probability?

I had expressed my opinion on this many times in past. I am happy to reiterate.

In my view the investors should rather be happy with the prospects of a larger number of regional parties with different socio-economic ideologies sharing power at center.

I find that post independence the best periods for the Indian economy have perhaps been those when a “coalition” government was in power.

By “coalition” I do not mean multi party governments. In my 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 particularly known for good governance or socio-economic reforms.

Morarji Desai (1977, FM H. M. Patel, Bureaucrat – FERA dilution, Gandhian socialism, Mandal Commission), V. P. Singh (1989, FM Madhu Dandavate, Socialist – tax reforms, social justice), Chandrasekhar (1990, FM Yashwant Sinha, Bureaucrat, fiscal commitment, government exiting non-strategic businesses) PV Narsingh Rao (1991, FM Manmohan Singh, Economist – economic liberalization, Industrial delicensing, LERMS, financial sector reforms), Devegoda/I. K. Gujaral (1996, FM P. Chidambaram, Lawyer turned politician – dream budget, tax reforms), Vajpayee (1998, 1999, FM Yashwant Sinha, Jaswant SIngh – divestment of government monopolies like roads, power, coal, NELP, NHDP, SEZ, nuclear program) and Manmohan Singh (2004, FM P. CHidambaram – RTI, MNREGA) were all coalition governments supported by socialists/communists.

These governments are all remembered for some structural socio-economic reforms causing fundamental positive changes in the economy.

None of these governments is particularly remembered for non-governance, anti market policies or anti business stance.

I will therefore be not too worried if our base case of Modi led NDA government does not materializes.

Tuesday, February 18, 2014

Nothing to fear

Thought for the day

“For to win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill.”

- Sun Tzu (Chinese, 544-496BC)

Word for the day

Impugn (trn v)

To attack by words or arguments; to call in question; to make insinuations against; to oppose or challenge as false;

(Source: Dictionary.com)

Teaser for the day

Want a Lok Sabha ticket - hurl your shoe on a minister!

Nothing to fear

Continuing from yesterday, I would like to first deal with the least likely (in my opinion) but most debated feared outcome of the 2014 election, viz., AAP leading the government with full support of Congress party and “others”.

In my view, in the absence of a formal economic policy vision documents presented by AAP, the following four precedents, provide indication towards the likely economic approach of AAP:

(a) Withdrawal of permission granted by previous regime for 100% FDI in multi brand retail trade,

(b) Electricity & water subsidy for low users, and

(c) Challenging the gas pricing formula prescribed by Rangarajan Committee and accepted by the Union Cabinet in an unconventional way; and

(d) Questioning the Delhi discoms and threatening de-privatization of power distribution function in the state of Delhi.

Sensationalism apart, I believe nothing could be deduced from these instances that would suggest that AAP could bring any radical change to the status quo insofar as the economic policy of the country is concerned. This may however be a matter of concern for those unscrupulous businessmen who misuse loop holes in the policy for personal gains and to the detriment of the common people.

Most non-Congress ruled states, including BJP, have made it clear that they would not permit FDI in multi brand retail trade in their respective states. In fact Rajasthan BJP government has also withdrawn the permission given by the previous Congress government in this respect. There is nothing that makes AAP stand out.

To the contrary, it does indicate that AAP actually is more than willing to side with the traders, who are not particularly known for their compliance standards insofar as the taxation and municipal rules and regulations are concerned, if they see them as their political constituency, much like BJP.

Most parties, including BJP and Congress, when in power have offered electricity and water subsidies for segments like low users, farmers, etc.; so nothing new or worth worrying here. AAP seems business friendly as it has extended the subsidy to the industrial users also without any discrimination.

The FIR against Mukesh Ambani should be seen in the context of the tremendous nuisance value it carries (Ambani now being equivalent of Tata-Birla of 1970’s). The details of FIR suggest it is mostly untenable and carry no implication for AAP, as the complainant is Delhi government not AAP or any of its members. Deriving any indication of economic policy from this would be inappropriate in my view.

The accounts of discoms and operators of E&P assets have been consistently challenged by various parties. It is not a secret that cost escalation of projects through unfair and unethical means is a common practice amongst Indian entrepreneurs. This practice is actually one of the primary source of money laundering. If this practice could be checked – who should be complaining?

Monday, February 17, 2014

Some random questions

Thought for the day

“A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves.”

- Lao Tzu (Chinese)

Word for the day

Chirk (v)

To make a shrill, chirping noise.

(Source: Dictionary.com)

Teaser for the day

Instead of studio hopping, should Arvind Kejriwal take one week break and reflect back?

Some random questions

Sunday evening during presentation of our latest report on India’s current political landscape and outlook for 2014 elections to a group of Rotarians, some very interesting questions were raised. I find it worthwhile to share some of these questions with our regular readers.

A large part of the discussion was focused on the economic impact of the outcome of elections.

While most of the participants were enthusiastic about the prospects of a Modi led NDA government, the discussion was mostly focused on “fears” of a Non-Congress Non-BJP government.

Many questions were raised to test a hypothesis – “what would happen to the economy if AAP gets 50+ seats in next Lok Sabha, Rahul Gandhi puts his weight behind it and somehow Kejriwal gets to form the next government”.

Given the radical methods used by AAP during the 49day Delhi experiment, many were worried that this might completely derail the slithering economy. The participant debated whether the economic ideology of AAP is closer to communists or the Swadeshi Jagran Manch (a unit of RSS).

Some not so young participant recalled how the radical Industries Minister George Fernandez had forced IBM and Coca Cola out of India in 1977. The question was could we see BP (from KG basin) exiting, and RIL shifting focus to completely on shale gas in US rather than wasting time on E&P activities in India.

In my view, this is an extremely difficult hypothesis to test at once. I would like to break this in pieces and test each piece separately.

The major pieces could be as follows:

(a) Modi forms a majority NDA government. (Our base case)

(b) NDA form a government, not led by Modi, but with a much larger set of constituents. (Good probability)

(d) A minority Non BJP-Non Congress is formed with outside support of Congress. (Less probable)

(e) A minority government Non BJP-Non Congress is formed led by an AAP leader. (Least likely)

During the course of this week we shall discuss the economic scenario in each of these scenarios.

We have received tremendous response to our “Mandate 2014: Decisively transformative” (14 February 2014) report. Most readers have found it thought provoking. Many readers have commented that it certainly does not match with the popular discourse and therefore needs to be debated more intensively.

We agree. Let’s do that.

In case you missed it, you can write to investrekk@gmail.com to obtain copy of the said report.