Vijay Kumar Gaba

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.

Friday, February 14, 2014

Stay focused

Thought for the day

“I have never made but one prayer to God, a very short one: 'O Lord make my enemies ridiculous.' And God granted it.”

- Voltaire (French, 1694-1778)

Word for the day

Albumen (n)

The white of an egg.

(Source: Dictionary.com)

Teaser for the day

Stadiums are for playing games!

Stay focused

(Picture courtesy Google search. All rights completely respected)

The behavior of current AAP top leadership reinforces one of the best lessons learned by me wandering through incredible landscapes of our country.

Sitting on the banks of the Mother Ganga at Gangotri many summers back, I noticed numerous large rocks, stones and small pebbles lying in the middle of the current.

The current was so strong that if stopped for a second, it could unsettle even a mountain. But the Mother had no time to take issues with these obstructions. She would gently pat on the back of the obstructionist rocks, stones, pebbles and politely skirt them.

She was solely focused on the needs of millions of hungry and thirsty children waiting for her to irrigate their fields and quench their thirst. The obstructionist forces were getting slowly eliminated by their own friction – reduced to dust in due course. The same dust is used to build homes for the same children of the Mother!

The lesson here is that if you are committed to your mission and remain focused on the chosen path, the obstructions get dissipate by their own friction and eventually follow you.

The conduct of the current AAP leadership is exactly opposite. They are not only stopping by every obstruction, but even creating some of their own; compromising the commitment and losing focus in the process.

In my view AAP is a significant evolutionary event in the history of India; and entirely belongs to the common man, which has brought about this evolution. Arvind Kejriwal & co. should not be allowed to undermine this movement and appropriate it for their egotistical gratification.

Insofar as FIR in KG-D6 is concerned, the conduct of various parties involved may not be beyond suspicion. But loot if any is within the contours of the law of the land. You can change law to prevent repetition. But trying to set the clock backward may not yield much. As we shall see in coal and 2G cases.

Thursday, February 13, 2014

Remembering the “broken window fallacy”

Thought for the day

“We must, however, acknowledge, as it seems to me, that man with all his noble qualities... still bears in his bodily frame the indelible stamp of his lowly origin”

- Charles Darwin (English, 1809-1882)

Word for the day

Sooth (n)

Truth, reality, or fact.

(Source: Dictionary.com)

Teaser for the day

Should the government have handled the “US VISA denial to Modi” case the same way it handled Devyani Khobragade case.

Remembering the “broken window fallacy”

Idling through some blog I stumbled into my favorite Bob McTeer’s following post that explains in simplest possible words how misdirected subsidies and wasteful expenditure in itself seldom leads to acceleration of economic activity. Though Bob had written it in the context of US economy, I find it more relevant in Indian context, especially when we are in the midst of the season of benevolence.

“Some teenagers throw a brick through a baker’s window. The gathering crowd said what a shame, but soon focused on the silver lining: much helpful economic activity will be set in motion when the baker has the window replaced. The repairman has more income to spend on something else, and the seller of something else will have more income to spend on still something else, and so on until we have an expansion of economic activity that is some multiple of the initial repair job.

Bastiat called it a fallacy because, while the spending chain originating with the broken window, does generate economic activity, it does so at the expense of other spending chains that don’t occur because this one did. In other words, had he not had to spend his money on window repair, the baker would have spent on something else, and the beneficiary of that spending would have new income to spend, etc. The broken window didn’t create net new economic activity. What it did was divert economic activity from one set of players to another. While some people benefit from the spending that took place, others are harmed (probably unknowingly) by the diversion of spending away from them.

Broken windows do not add to the wealth of nations. They diminish it by destroying part of the nation’s capital stock and productive capacity. Surely the nation would be better off if unbreakable windows could be produced as easily and cheaply as breakable windows. Surely, the nation, and the world, would be better off if trains, planes and automobiles could run on water rather than on the product of those South Texas oil fields.

The Broken Window Fallacy is a great tool for understanding much of what goes on today. We are confronted daily by pitches for government to spend on this or spend on that to generate economic activity without anyone pointing out that the economic activity that does not take place because of that that does. One classic example is what I call “stadium socialism.” The franchise owner gets local governments to help finance a new stadium on the grounds of all the new business it will generate locally. Left out of the equation is what spending is cancelled by the use of resources in this way rather than other ways and the locations that miss out on the stadium windfall. This doesn’t necessarily mean that I wouldn’t do it if I were the local mayor, but it probably does mean I wouldn’t do it as president.

The broken window fallacy is reproduced over and over every day, but rarely is it as clear as glass.” (BoB McTeer’s Economic Blog)

Wednesday, February 12, 2014

I don’t want whatever I want

Thought for the day

“Civilization began the first time an angry person cast a word instead of a rock.”

- Sigmund Freud (Austrian, 1856-1939)

Word for the day

Blatherskite (n)

A person given to voluble, empty talk.

(Source: Dictionary.com)

Teaser for the day

Yogendra Yadav and Ashutosh please stop saying “Bhai pehle Uska sign le kar aao, phir main sign karoonga.”

Please accept that people have accepted that AAP is different from traditional parties. So behave differently.

I don’t want whatever I want

Most participants in financial markets, including captains of industry and trade have been clamoring for accelerated economic reforms ever since. The present UPA regime has been severely criticized for “policy paralysis” and lack of Will to implement key economic reforms.

Not surprisingly, Narendra Modi is being seen as the divine intervention that will get India rid of the current social, political, and economic crisis.

My interaction with many of these market participants, including industrialist, traders, brokers, analysts, investors and bankers, in past one year has underlined a serious dichotomy. The market is asking for something it does not want – serious economic reforms.

An overwhelming majority of publically traded companies are found to be direct or indirect beneficiary of (a) the inefficiencies of the administration; (b) lack of transparency; (c) incongruent policy framework; (d) unduly supportive politicians; (e) government largesse in form of misdirected subsidies; and (f) protection from fair competition at the expense of consumers, etc.

Some real economic reforms, as against administrative and procedural corrections, could destroy the basic premise behind many large Indian companies.

It needs to be understood that permitting FDI in retail trade when Tata, Birla, Reliance and Goenkas are already there along with Biyani is not a reform. It brings no fundamental change to the economy. It just creates some more competition and brings the collateral benefits to consumers.

What reforms? The market participants are just excited about the potential arbitrage opportunity this move could provide assuming foreigners will buy the existing retailers paying some crazy value for their operations. Somewhat similar is the case with FDI in insurance and pension.

Tell market participants that FDI will be permitted only in green field ventures that will not be allowed to list for 10yrs and see how excitement fizzles out.

The outrage seen after announcement of GAAR in 2012 union budget and alleged irregularities in coal block and 2G spectrum allocation and deafening silence over Radia tapes, in my view, is clear evidence that the Indian corporates who are used to working under the patronage of political establishment are definitely averse to economic reforms, contrary to what they claim publically.

That is perhaps why no one is discussing that economic reforms often mean transformational changes that not necessarily lead to immediate rise in corporate profitability and aid in resource grabbing. On the other hand these usually do lead to lesser protection, more competition and larger accountability for corporates. If you do not want to pay taxes, cost of compliance and market linked compensation for exploitation of natural resources clamoring for economic reforms may not yield much.