Vijay Kumar Gaba

Saturday, September 20, 2014

Case against "Make in India" - IV

Thought for the day

”Happiness is when what you think, what you say, and what you do are in harmony."

- Mahatma Gandhi (India, 1869-1948)

Word for the day

Disport (v)

To amuse oneself in light or lively manner; to frolic.

(Source: Dictionary.com)

Teaser for the day

Shocked to find millions of examiners evaluating an "Answer" without any reference to the "Question"!

Case against "Make in India" - IV

I am amazed at the ferocity of criticism to my Friday's column wherein I just wished that the "better life" for 1.3bn citizens should be the primary force behind government's development agenda rather than some meaningless numbers on the Excel Sheets maintained by CSO statisticians.

Some of my friends from Mumbai feel that I have become a communist after moving to Delhi early this summer. I strongly refute. Nothing could be farther from the truth. In fact, I have become a serious capitalist in past six months. From a monthly and quarterly performance dominated portfolio, my investment strategy is now focused on generational portfolio that will create and protect wealth for my next generation. This is certainly not communist thinking.

I am a core supporter of modernization and industrialization. But I do care a lot about sustainability.

Investment without realistic assessment of future demand and credible revenue model will only bring distress, as we have seen in past many credit cycles. Development unmindful of Mother Nature will only bring disaster.

India could not be fathomed as an economic story without her 1.3bn strong populace. Unless at least two third of the population actively participates in the process of "earning-consuming-saving-investing", the story is without a plot.

Industrialization that brings riches to 5-7% elite and leaves 40% "struggling to survive" and another 30% "barely surviving", is not sustainable.

The western world managed this type of industrialization when the whole world, including golden goose like India, was their slave. China has so far managed with rather oppressive policies.

India of the day is not ready for this. The aspirations and expectations are flying too high. We can hardly afford any civil unrest over economic issues.

In my view, the sustainable solution for India’s economic problems could be found only by looking within. Borrowing from the thoughts of Mahatma Gandhi, economics needs to follow ethics and not the vice versa. The primary consideration needs to be “man” and not “money”.

To achieve this means Gandhi advocated trusteeship, decentralization of economic activities, labor intensive technology and priority to weaker sections. Many criticize Gandhian economic ideas based on altruism, self reliance, and non-violence as an impractical alternative to free market economics. I believe this criticism is unfair and suffers from parochialism.

I believe borrowing blindly from the western economic models would not work in Indian context. The Indian model will have to be quintessentially Indian. It has to effectively tackle the problems of class conflict, unemployment and poverty while attempting to preserve the lifestyle and values of rural Indians, which are eroding fast with unmindful urbanization, industrialisation and modernisation.

Friday, September 19, 2014

Case against "Make in India" - III

Thought for the day

”It's easier to resist at the beginning than at the end."

- Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Ken (v)

Knowledge, understanding, or cognizance; mental perception

(Source: Dictionary.com)

Teaser for the day

QE3 completely tapered.

Equity markets are at all time high.

US and European Bonds are also close to their peak.

No crash.

No great rotation.

No hyper-inflation.

What'd be the next "big theme"?

Case against "Make in India" - III

The apparent motive behind "Make in India" mission is to alleviate poverty through creation of large number of employment opportunities. This objective, the protagonists claim, will be achieved by acceleration in economic growth through higher industrialization.

I am not sure if there is much evidence to substantiate this optimism. To the contrary, there is some evidence to the effect that during high growth phases in past couple of decades the employment opportunities in industrial sector have remained mostly stagnant. Most employment growth has occurred in services sector, notably construction.

From my experience I know that telecom sector has been the largest incremental employment provider in past one decade. The employment opportunities in traditional high employment provider like textile and government sector have actually contracted.

My friends from Congress party would love me for saying this, but truth of the matter is that poverty level has come down due to the government efforts. Unsustainable and profligate social sector spending in past decade has prevented hunger deaths. But that is all. On the other hand, industrial growth has in fact added to economic and to some extent regional inequalities.

The popular illustration cited by the Prime Minister is that if more tourist come to India, tea vendor will get more business. He needs to think, whether we want more tea vendors chasing tourists and more construction labor constructing large factories and massive physical infrastructure for foreigners without acquiring any meaningful skill that would keep them employed post construction period or we want more research scientists, better equipped farmers and entrepreneurs.

I feel one Noble prize in Mathematics, physics, or chemistry can achieve what a thousand Olympic gold medals or Cricket world cups would not. Similarly, 10% higher crop yield and 10% less wastage of agri produce can bring more prosperity to India than 100 smart cities or 100 Industrial zones. Potable water to every home will alleviate poverty much faster than 3000 airports.

Anyone who has travelled beyond large cities in China would confirm that even after 25years of relentless pursuit of industrialization, notwithstanding the impressive aggregate economic data and gigantic infrastructure, there is abundant distress and discontent in the country. It may be another couple of decades when China comes close to developed nations on "better life "parameters. Even if it does, that is.

India does not have that much time. PM Modi has even less. Moreover, "India" is not "China" and "Indians" are not "Chinese" at all.

In my view, the focus of government should be on "better life" for all Indians rather than the banalities like 8% GDP growth, Indian companies in Fortune500 club, number of Indian billionaires, etc.

I sincerely believe that India should follow Gandhi more than Nehru, Mao, or Deng for that matter...to continue next week

Thursday, September 18, 2014

Case against "Make in India" - II

Thought for the day

”You do ill if you praise, but worse if you censure, what you do not understand."

- Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Sporadic (adj)

Occurring singly, or occasionally, or in scattered instances.

(Source: Dictionary.com)

Teaser for the day

What is top priority for "concerned" Indians at this point in time?

(a) iPhone 6

(b) Accessories for iPhone6

(c) Counting abs of Shahrukh Khan

(d) Separate VISA for visiting Edinburgh

(e) Hotel booking for October 2-6 and November 6-9 long weekends.

Case against "Make in India" - II

Making cement is perhaps one of the simplest manufacturing processes. This primarily involves calcining the limestone mixing it with clay or ash and grinding it into fine powder. Having produced it for many decades, many manufacturers in India still claim superiority for using foreign technology in this process. A popular advertisement campaign reads 'Italian technology se bana majboot cement".

Similarly, most automotive companies claim superiority because they have use German, Japanese, American or Italian technology in manufacturing their products. Most heavy engineering, power equipment and consumer electronics manufacturers also use foreign technology in their factories or assembling plants.

In this backdrop, I see the "Make in India" as a mere political rhetoric.

Successive Indian governments since Rajiv Gandhi (1984-1989) have realized that India's strength lies in its vast and diligent labor force. Given the serious constraints in terms of capital, energy, technology and raw material the Nehruvian economic model based on heavy industries (largely converters of natural resources) has therefore been deliberately diverted to a service based economic model that is less energy & capital intensive.

The midway diversion has though remained inadequate in conviction and slack in pursuit. Little attention has been paid in developing and promoting the human resource, which was supposed to be the biggest strength of Indian economy.

"Make in India" would now mark yet another midway diversion to the growth strategy. During parliamentary election campaign early this summer Rahul Gandhi said that his priority would be to get petty low skill mass manufacturing industrial jobs back from China. I fail to understand why on earth you want those low paying low skill jobs and highly polluting industries back. The focus should rather be on skilling the work force and creating high paying skilled jobs in advanced technology industry and services sector.

Besides, starting a manufacturing revolution in India would pre-requisite our energy production to at least grow by 50% in next couple of years. Not even hard core optimists would hope for that.

Allowing foreign manufacturers to establish facilities near the source of raw material and abundantly cheap labor could evoke immense interest. But what about experiences of POSCO and Vedanta. Does Modi government plan to override local concerns, especially relating to sustainability. Are we learning anything from recent Uttrakhand and Jammu and Kashmir disasters.

Moreover, it is elementary economics that you should not produce if you could buy cheap. The slowdown in China is deepening. The latest energy revolution in Americas (shale gas) is leading to a fresh manufacturing revolution there. The humongous amount of industrial capacities are lying idle and available for taking. This will lead to large scale spare capacities in Europe, as it slips into deflation and Euro weakens further. We should be looking at buying/using these facilities rather than building our own....to continue

Wednesday, September 17, 2014

Case against "Make in India"

Thought for the day

”The greatest deception men suffer is from their own opinions."

- Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Refractory (adj)

Stubbornly disobedient; unmanageable.

(Source: Dictionary.com)

Teaser for the day

What does various by-poll results suggest:

(a) Modi magic is waning.

(b) Amit Shah's political strategy of polarization on religious line has totally failed.

(c) The era of BJP vs. Rest has firmly arrived.

(d) Cong has a real chance in Haryana and Maharashtra.

(e) BJP needs to change its post May'14 media strategy.

(f) All of the above.

Case against "Make in India"

In past few months leaders from both ruling NDA and opposition UPA have spoken about making India a manufacturing hub. PM's Independence Day "Make in India" exhort has also evoked significant interest in business circles. Investors are obviously enthused by the prospects of beginning of a new investment cycle that would potentially kick start a virtuous cycle in the economy.

As I have stated in past few days, in my view this may not be good economics. It may rather be foundation for yet another bubble. As I highlighted on Monday, though a bubble in itself may not be a bad idea, it invariably leaves financial investors devastated. It therefore calls for abundant precaution to be exercised by my fellow investors.

Before I start arguing my case against "Make in India" program at this stage of Indian economic progress, I would like to reproduce an interesting discourse from Unlearning Economics, I find relevant to the current circumstances. I had in fact presented it earlier this year also.

"First, something which is expected to do a certain job - whether it's an economic system or the economists who study it - is expected to do this job all the time. If your stock broker promises to make money but loses it after an asset bubble bursts, you won't be comforted by the fact that they were making money before the bubble burst. And if an economic system, or set of policies, promise to deliver stability, employment and growth, then the fact that it fails to do so every 7 years means that it is not achieving its stated objectives. In other words, the "invisible hand" cannot be acquitted of the charge of failing to do its job by arguing it only fails to do its job every so often.

Second, the argument implies there was no causal link between the boom and the bust, so the stable period can be understood as separate from the unstable period. Yet if the boom and the bust are caused by the same process, then understanding one entails understanding the other. In this case, the same webs of credit which fuelled the boom created enormous problems once the bubble burst and people found their incomes scarce relative to their accumulated debts. Models which failed to spot this process in its first phase inevitably missed (and misdiagnosed) the second phase.

A lot of the major macroeconomic frameworks (such as Infinite Horizons or Overlapping Generations models) have two main possibilities: a steady-state equilibrium path, or complete breakdown. In other words, either things are going well or they aren't - and if they aren't, it's usually because of an easily identifiable mechanism, one which constitutes a "notably rare exception" to the underlying mechanics of the model. Such a mentality implies problems, including recessions, are not of major analytical interest, or are at least easily diagnosed and remedied by a well-targeted policy. Subsequently, those versed in economic theory may have trouble envisaging a more complex process, whereby a seemingly tranquil period can contain the seeds of its own demise. This causes a mental separation of the boom and the bust periods, resulting in a failure to deal with either.”

...to continue

Tuesday, September 16, 2014

By-polls and markets

The market reacted negatively to the recent by-poll results in which the ruling BJP has received serious setback, especially in the state of Uttar Pradesh.

In my view, the market participants should be encouraged by the current political trend as it will more likely:

(a) Lend further urgency to the efforts of the government to put the things in order insofar as the economic growth and development agenda is concerned;

(b) Push the hardline elements within BJP to fringes.

(c) Motivate scattered opposition to unite to make it BJP vs. the rest in coming elections as well as in the parliament. This brings a strong (though hostile) opposition in place to exercise necessary check and balance on the government. This may also mark the end of fractured coalition politics.

(d) As Amit Shah will emerge as the biggest loser after all this. His brand of polarizing politics will face serious challenge in forthcoming elections.

Some part of the correction is also ongoing due to jitteriness over what Fed will conclude tomorrow evening.

In my view, a change in guidance for rate hike may not be due as yet. However, if it does happen, this could disturb markets in the short term.

This could be a good opportunity for investors looking to buy for long haul.

Saturday, September 13, 2014

Mythology of bubbles

Thought for the day

”I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do."

- Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Geep (n)

The hybrid offspring of a goat and a sheep

(Source: Dictionary.com)

Teaser for the day

If BJP makes a government in Delhi and works for common good, in 2018 no one will remember how the government was formed.

For all you know AAP may not even be there to remind people!

Mythology of bubbles

In Hindu mythology, once the forces of good (Sura) and evil (Asura) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the savior Lord Vishnu. The Savior advised them to go and explore the great ocean to find new resources and vigor to make a fresh beginning.

Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered huge amount of wealth and resources that included the nectar that would immortalize the consumer and venom that would destroy whoever consumes it.

Realizing that if the evil forces get the access to nectar and other resources found during the exploration it would seriously jeopardize the interest of the forces of good, Lord Vishnu tricked the forces of evil and appropriated the entire nectar for consumption by the forces of good.

Lord Vishnu also requested the almighty Lord Shiva to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.

Post this the forces of good became more powerful. But whenever they deviated from the path of common good, they were overpowered by the evil forces and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.

Over the years I have realized that it is not just a mythological story to be heard during religious ceremonies and forgotten immediately thereafter. It is also not a usual morality emphasizing victory of good over evil. It is much beyond. This applies to all aspects of life, even economics.

In modern economic parlance, the ocean exploration is akin to the period of irrational exuberance that eventually lead to building of a 'bubble' in the economic sphere.

Bubbles are initiated when all the participants get tired, frustrated and exhausted from prolonged economic weakness. At that point in time, all the stakeholders muster the courage and supported by the 'authority' do things they would never do in normal times. They do excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale unfathomable during normal times.

The nectar or the good that emerges from these bubbles is shared by all. However the venom is consumed only by the financial investors who invariably end up poorer after every bubble is burst.

If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during last decade but for a credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! ...to continue tomorrow

Friday, September 12, 2014

Yet another midway diversion proposed

Thought for the day

”If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me."

- William Shakespeare (English, 1564-1616)

Word for the day

Maudlin (adj)

Tearfully or excessively sentimental.

(Source: Dictionary.com)

Teaser for the day

Does Arvind Kejriwal know that you could only buy the things which are put on sale by the present owners!

Yet another midway diversion proposed

A recent Deutsch Bank research report highlighted that India is witnessing emergence of a "clear and internally coherent economic model" that includes "export oriented manufacturing, heavy infrastructure building and urbanization". in a material shift away from "India’s current services-driven growth trajectory" This emerging model is found akin to "an East Asian growth model based on the mass deployment of labour and capital".

The DB analysts believe that "The new strategy will require keeping the Rupee weak and dramatically expanding the financial system. International experience shows that the model can generate growth and jobs, but sustaining such rapid financial expansion is not without risks."

The report highlights that while India's export growth so far has been driven by services, auto sector has demonstrated that with right kind of policy support Indian enterprise could do well in global manufactured product market also.

The key to shift would be our ability to substantially augment energy supply to the industry and "ability of the domestic financial sector to sustain rapid expansion".

The Prime Minister Narendra Modi in his public discourse has strongly emphasized on the need for expansion of manufacturing sector to create jobs for millions of youth joining the work force every year. In fact during his election campaign Congress leader Rahul Gandhi had also echoed the same sentiments.

In April 2013 in a series of five articles (see side bar) I had expressed my concerns over frequent midway diversions on core issues taken by Indian policy makers.

I still feel that he current socio-economic mess in the country is outcome of total adhocism in policy and program formulation & implementation, non compliance with the comprehensive socio-economic structure conceived in the Constitution, and lack of committed leadership, especially in past three decades.

The political establishment has so far mostly failed in justifying the midway diversion from the prescribed socialist framework taken in mid 1980’s. The obduracy shown by successive governments in relinquishing enormous amount of discretions enjoyed by political establishment has been a consistent obstruction in the way to evolve the intended quasi capitalist or neo-socialist policy framework that would lead to sustainable and faster growth.

A brief spell of high growth, which many may find accidental in hindsight, has probably misplaced the popular aspirations and thus added to the complexity of the problem.

I feel the country needs to comprehensively review the constitutional framework for evolving a wider consensus on the policy direction for sustainable socio-economic development in the current context. Blindly following East Asia model of capital and energy intensive growth may not be ideal in our context.

I will write more on the current flavor "Make in India" next week.

Related articles

A midway diversion to nowhere

A midway diversion to nowhere - Disinvestment

A midway diversion to nowhere – Foreign capital

A midway diversion to nowhere – Energy policy

A midway diversion to nowhere – youth policy

Thursday, September 11, 2014

Some books to finish and few places to visit

Thought for the day

”Maids want nothing but husbands, and when they have them, they want everything."

- William Shakespeare (English, 1564-1616)

Word for the day

Plebeian (adj)

Vulgar; common; crude or coarse in nature or manner.

(Source: Dictionary.com)

Teaser for the day

TRS chief says "Will bury anyone who dares disrespect Telangana"!

What could be worst disrespect to the motherland than suggesting that it is capable of being disrespected by any tom dick harry?

Some books to finish and few places to visit

In past few days, I have outlined my thoughts on hurdles Indian economy faces in achieving a sustainable 8%+ growth path.

Positively, many readers have appreciated that there is little on the ground which could kick start the virtuous cycle of "higher income - saving - consumption - investment - income" in near term.

Most also agree that morning star is now visible and signs of a brilliant dawn are emerging on the horizon.

Some active participants in the equity markets have however suggested that hurdles in achieving higher savings and investment rate should not be deemed as "no profit making opportunity" in the market in near term. I could nothing but agree with them. I receive plenty of "stupendous trade" ideas every morning. Many of them actually go up 2-20% for several days.

Every day morning I find a slew of companies which traded at their all time high levels. Admittedly, I have never heard about 70% of these companies. A preliminary enquiry shows a large number of these "multi baggers" have little to show in their financial statements. Surprisingly, their profits jump with investor's sentiments and ebb accordingly. Obviously I am not at all excited about these "circuit hitters".

The tremendous response to some recent IPOs also reminds of exuberant times seen during 1989-90, 1994, 1999, 2005-07.

But what is catching my attention is small bubbles on the surface of services sector suggesting a strong undercurrent and high temperature underneath. Retailers, e-commerce platform providers, logistic services, pharma R&D, ITeS, telecom, entertainment, E&C contractors have all seen their market value burgeoning exponentially. Many players in this space have been able to raise risk capital at rather elevated valuations in recent past. Though comparatively smaller in overall macroeconomic context, this space appears to have decoupled and moving ahead alone.

I am a big fan of enterprise, innovation, large scale and ideas that directly touch of people. However, I do not like to invest in businesses (a) I fail to understand; (b) where visibility of positive cash flows is low; or (c) where valuations are high just on hopes.

I would therefore be very selective in venturing in this space. I guess I have enough time at my hand to make the selection. The nagging feeling I get from conditions in Europe provides me comfort that soon there will be an opportunity to buy at my will. I need stand in long queue at the upper circuit freeze level to buy any stock.

This soon however may not be tomorrow morning or next week. But that is fine with me. I have some books to finish and few places to visit. I can therefore wait little longer without getting bored.

For those getting itchy I would suggest studying the market behavior during July 2007 when subprime problem first hit the market and September 2008 when Lehman actually collapsed. The yield curves across Europe are also depicting a story.

Wednesday, September 10, 2014

On the brass tacks -IV

Thought for the day

”I am not bound to please thee with my answer. "

- William Shakespeare (English, 1564-1616)

Word for the day

Taciturn (adj)

Habitually silent; not inclined to talk.

(Source: Dictionary.com)

Teaser for the day

After Uttrakhand last year, it's J&K this year!

Is anyone listening what Mother Nature has to say?

On the brass tacks -IV

Historically, a large majority of Indian businesses have grown on government patronage and/or resource arbitrage opportunities and have been low on innovation, productivity and scale. The politically advantageous socialistic façade of the government, especially during 1950-1990 led to misallocation of resources, trade and capital controls, demand suppression, and protectionism that promoted low productivity.

The conditions have changed in past 10-15years but not sufficiently to make a majority of Indian businesses globally competitive.

Consequently, we have a multitude of businesses that are usually unable to survive a cyclical downturn on their own. Invariably, public sector financial institutions and the government have to bail out the ailing businesses. The problem is these businesses are never allowed to fail.

The instant cyclical downturn has also seen severe stress in the financial system due to failure of patronized entrepreneurs in managing their affairs adequately.

Unfortunately, most of these businesses happen to be in the sectors considered critical for revival of economy, viz., infrastructure, energy, and resources. These are the sectors which could absorb huge investments, generate large scale employment and enable consumption demand to grow at a faster rate.

As we discuss it here, a number of large corporate have already reneged or are on the verge of defaulting on their covenants. The amount of accommodation loans masqueraded as restructured loan to protract the default technically are staggering. Their balance sheets are destroyed to an extent that they can take no further business. Their equity stakeholders are too distressed to provide them further support. The only way out for them is to sell their assets.

A few balance sheets which are strong have the option to choose between acquiring an operating or partially built asset at favorable terms or undertake a green field project. To me the choice is but obvious. So how the fresh investment cycle will get started?

Moreover, we are entering a phase when 2-3years down the line easy credit situation prevalent in western world may cease. The cost of capital will start rising for already troubled businesses.

The long term solution lies in opening the Indian markets to open global competition. The government may provide support to businesses which have demonstrated their capability to compete with global players. The inefficient and incompetent should be allowed to fail.

In the short term however, the government will have to undertake the onus of kick starting investment cycle on itself. The best way would be create social sector infrastructure, e.g., education, skill development, water, sanitation and healthcare. The government has rightly initiated some programs in this direction. The faster and efficient implementation is the key.