Vijay Kumar Gaba

Monday, November 17, 2014

Heads or tail - it's your call

Thought for the day

" Each player must accept the cards life deals him or her: but once they are in hand, he or she alone must decide how to play the cards in order to win the game. "

- Voltaire (French, 1694-1778)

Word for the day

Slubber (v)

To perform hastily or carelessly

(Source: Dictionary.com)

Teaser for the day

After so many decades, in Manohar Parrikar, we have a minister who is not a superman. He wants sometime to understand the complex issues of his ministry. Usually, ministers become authority on the subjects of their ministry the moment they sit on the chair for the first time.

Heads or tail - it's your call

Traditionally, the divergence of global markets from the real economic conditions is usually followed by a sharp correction that leads to convergence of realty with hopes.

I have not been able to derive a pattern in such corrections. But sentimentally I feel that the correction are sharper and more painful when hope runs much ahead of ground realty. Many more people lose money in this correction as compared to the people who earn supernormal profits the during the course of divergence.

In the reverse case, i.e., when real economy does much better than the markets, the corrections are protracted and less euphoric. Few people participate in the up move. A majority of investors join the party late, usually when all the fruits have been plucked by smart investors. What is left is either few scarred fruits at the top which are risky to pluck or the overripe rotting stuff scarred all around.

The key point to ponder this morning is what pattern market is forming today.

Is it a case of hope leaping much ahead of the realty? Are we thus heading toward a convergence correction that will be sharp and painful.

The recently concluded earnings season supports this hypothesis. Barring a few pockets, we have not seen realization of hope in any sector. Discretionary consumption demand has remained elusive. Investment demand is at multiyear low level. Global markets are showing distinct signs of deflationary conditions. Sharp fall in energy prices ahead of an expected severe winter in western part of the globe are telling a rather gloomy story.

On the other hand there are indicators which suggest that probably the markets have just completed a long protracted convergence correction, where the global markets have just converged with economic realty.

USD has recovered the entire loss it incurred post July 2007 when sub-prime concerns first spooked the global markets. The financial system looks reasonably stable. The households are cautious but out of deleveraging mode.

JPY has yielded all the gains made since 2007 majorly due to safe haven demand. Euro is converging to USD to reflect poor economic and fiscal conditions in the Europe.

Energy and other mineral prices are down as Chinese extraordinary investment cycle is coming to an end, the OPEC cartel and Russian mafia is on the verge of breaking due to a variety of reasons. Global inflation and wage hike cycle are not visible on the horizon. Food prices are at multiyear low and availability high. Geo-political tensions are palpable but the economics and demographics are completely against a war. No major country has enough youth and fiscal leverage to go into a major war at this point in time. Regional conflict are small and mostly immaterial in global context. The threat of ISIS and Ebola would hopefully come out to be a routine....to continue

Friday, November 14, 2014

My five cents - the Great Wall of India

Thought for the day

"I have become my own version of an optimist. If I can't make it through one door, I'll go through another door - or I'll make a door."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Shenanigan (n)

Mischief; Prankishness; Remarks intended to deceive; deceit.

(Source: Dictionary.com)

Teaser for the day

What is the best option for Shiv Sena?

(a) Claim the entire Hindutava space and become a national party.

(b) Merge with BJP.

(c) Fade into oblivion silently or boisterously.

(d) Turn secular and ally with Congress

My five cents - the Great Wall of India

Imagine would India be a global ITeS superpower without Y2K or technology bubble during late 1990s! Would we build so many houses, roads, malls, power plants, cement plants etc. during last decade but for a global credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! The answer is obviously "No".

From my negligible knowledge of the laws of physics, I understand that we need much less force to stop an object which is falling from a cliff, as compared to the force we would need if we were to reverse the direction of the movement of the object upward.

In economic sense, I refer to this extra force needed to reverse the direction of an economy, as bubble. These bubbles are needed to neutralize the gravitational forces of unemployment, pessimism, poor demand, excessive indebtedness, deflation and poor fiscal health etc. that work to pull the economy down into recession.

In Indian context, our governments have used the force of bubbles rather reluctantly. We have mostly participated in global bubbles. Whether it was commodities bubble in early 1990's; dot com bubble in late 1990's or credit bubble in mid 2000's.

The Atal Bihari Vajpayee led NDA government did make a reluctant attempt to create a domestic bubble to fight the economic sanctions, by large scale investments in infrastructure sector especially roads and energy. In the process many government monopolies like coal, oil & gas E&P, telecom, roads, power, airports, ports etc. were divested. The bubble did get support from easy global liquidity post dotcom bubble bust. The consequence was super normal economic growth during 2003-08 period.

In my view, if the incumbent government wants to reverse the direction of the current economic cycle quickly, it must create a bubble almost immediately. I could think the following three ideas for creating this bubble:

(a) Initiate some ostensibly egregious construction project like Taj Mahal or Fatehpur Sikri. A statue of Sardar Patel is not enough.

One such project could be to construct a 15 feet high wall alongside the entire railway lines in the country. The construction may start simultaneously in all villages using MNREGA funds.

Local and aspiring artists, architects and sculptors could be engaged to give a distinct local cultural color to the wall. This wall when fully constructed will protect the railway line, facilitate faster speed trains, conceal the disturbing filth and garbage usually strewn on vacant land adjacent to railway lines, reduce noise pollution for the adjacent localities, and make rail journey more pleasant.

(b) Cut personal income tax rates and small savings interest rates by 50% to leave more money in the hands of consumers to spend.

(c) Abolish all restrictions on FDI in productive activities subject to each million dollar of FDI creating at least 2 new direct jobs.

Thursday, November 13, 2014

My five cents: Reforms -II

Thought for the day

"The water in a vessel is sparkling; the water in the sea is dark. The small truth has words which are clear; the great truth has great silence."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Suasion (n)

The act of persuading; persuasion.

(Source: Dictionary.com)

Teaser for the day

Kidnapping, rape and murder in Uttrakhand, "the Abode of God", is unfathomable.

Something is going seriously wrong somewhere!

My five cents - Reforms II

On my recent trip to the state of Uttar Pradesh, I had a chance to visit some villages in interiors of the eastern part of the state. As widely acknowledged, this region figures in the bottom 10% in terms of economic development. It was shocking to see that despite plenty of water, fertile soil, hard working people, and rich cultural & historical traditions, the people here live in pathetic conditions. Many are forced to migrate to large cities to work as laborers. The administration is callously indifferent and mostly absent.

Wandering through the villages I discovered that most upper caste households have milk yielding cattle in their home while dalits and backward caste people do not have such assets. I observed that in each household about 4-5 man hours are spent on tendering, milking and feeding the cattle. In many cases children as young as 8-10yeras were spending half their day taking cattle for grazing, instead of going to school. The average milk yield is not more than 5-6ltrs per day, which is mostly used for self consumption. The cow dung is a major source of cooking fuel.

In my view, the kind of economic reforms we talk about sitting at Raisina Hills or Nariman Point may not be of too much relevance to these people. To improve the lives of these people, we need to find local solutions.

Let me suggest an example that I worked on after coming back from this trip:

The government should motivate and facilitate a cooperative dairy in each village of the state.

(a) In this cooperative the Gram Sabha may contribute 100 acres of land.

(b) Each household in the village contributes its cattle.

(c) The household which do not have cattle may be subsidized (50% subsidy, 25% equity and 25% bank loan) to buy and contribute cattle. The optimum size of a cooperative dairy could be 1000 cattle.

(c) The land will be used for constructing a mechanized dairy, biogas plant, milk processing unit, growing cattle feed and a water reservoir. The construction work could be taken under MNREGA. The required plant and machinery may be financed at the prescribed concessional rate for agriculture loans (presently 7%).

(d) With proper feed and technique, the average yield of the cattle could be improved to 10ltr/day in two years and 20ltr/day in five years.

(e) Each dairy could thus produce 10,000 litter of milk every day. Each member household could be provided 2 litter milk at Rs10/ltr and rest could be processed and sold in the market. (CMP Rs40/ltr)

(f) The dairy will produce 10,000 kg of cow dung daily, that could be used to produce electricity for running dairy, biogas plant, milk processing unit, a water pump to fill water reservoir, a community kitchen where all villagers can come to cook their meal, and a charging station where villagers could charge their LED lamps provided by the government.

(g) In five years, the plant could supply electricity for basic needs (2 LED bulbs and 2 fans) to each household.

(h) The plant will produce 35-40000kg of organic manor every day, a part of which could be sold to members at subsidized rates and rest in the market. The income from this could be used to set up, run school and primary health center in the village and lay pipeline for supplying clean water from the reservoir to each household. In 10yrs, each dairy would be able to produce enough CNG to run two busses from village to nearest city for subsidized public transport.

(i) The government may support marketing of milk and milk products, establishing a breeding centre in each district to develop high yielding variety, and a veterinary hospital in each district.

(j) In each such dairy up to 20% of its productive population, stray cattle from nearby cities and towns could be housed.

To some this idea may sound little utopian or impractical, but my research suggests that it is financially viable and socially & politically feasible.

The advantages could be multifold.

· The project serves the primary purposes of economic development - self employment, self-reliance, prosperity, fiscal prudence, rise in household income, equality, improvement in quality of life etc.

· The sentiment of cooperation takes root over a period of time, promoting social harmony, and scope for more cooperation say in the areas of farming, cottage industry and trade.

· Children could go to school instead of rearing and tendering cattle and fetching drinking water.

· Women could work at the dairy, biogas plant, milk processing unit rather than milking cattle, managing cow dung and fetching drinking water.

· Villagers get clean water and energy at home, sufficient milk and decent income, besides good basic social infrastructure in the village.

· Agri productivity and income could be enhanced by using organic manor at a reasonable cost.

· The cleanliness of villages and nearby towns is improved as all cattle (including stray) are managed at a central place and their waste processed profitably.

· Regional disparities get resolved over a period of time.

· Resources are used optimally.

· With self reliance growing - the fiscal pressure eases structurally, over a period of time.

Lest the primary message is lost, I may reiterate that my suggestion here is that reform need to change the status quo, which may not be the same in Banda and Bengaluru.

Wednesday, November 12, 2014

My five cents - Reforms

Thought for the day

"Don't limit a child to your own learning, for he was born in another time. "

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Boisterous (adj)

Rough and noisy; clamorous; unrestrained

(Source: Dictionary.com)

Teaser for the day

Are "Science & Technology" and "Law & Justice" much lesser problems in India as compared to "Health" and "Railways"?

If no, how an underachiever in one is suitable for the other?

My five cents - Reforms

As stated yesterday, when faced with the task of catapulting the economic activity to a higher orbit it is imperative for the policy makers to distinguish between "administrative corrections", "systemic efficiencies" and "reforms".

The businesses, investors and consumers also need to assimilate that economic reforms do not necessarily result in more profit and convenience in the immediate term. To the contrary, economic reforms are more likely to cause pain and inconvenience in the immediate term as these involve fundamental changes in the processes and practices of doing business and consuming goods and services.

For example, consider the following:

(a) 100% FDI in insurance does not qualify as a reform, in my view. It merely enhances the capacity of insurers to take more business on a larger capital base. It may change little for a large section of consumers. Making health and accident coverage compulsory for all employees and petty service providers, including domestic helps, drivers, porters etc., compulsory would be a reform.

(b) Transfer of de jure power to fix prices for transportation fuel to IAS officers at the helm of public sector oil marketing companies from IAS officers assisting the Prime Minister and Cabinet Committee on Economic Affairs is merely a administrative change. A 30% rise in global crude prices will most likely cause this change to reverse, as was the case in 2003-04.

A reform in this area would be implementation of an integrated energy policy that motivates and (where necessary) forces changes in the consumption patterns. Reducing energy intensity of water, improving quality of public transport, and improving fuel efficiency of roads would provide a sustainable solution.

(c) Cutting on some travel cost, curtailing number and place of meetings, stationary expenses etc. is a cost management exercise. Empirically, all these expenses tend to rebuild as the fiscal situation eases with the economic cycle. Labeling this as expenditure or fiscal reform might be a mistake. A small reform in this area could be to identify routine government jobs that do not involve public dealing or matters of national security; and allowing the employees to perform these jobs from their homes with use of technology.

(d) Food security programs have been integral part of the government agenda since independence. Despite leakages and inefficiencies, the public distribution system (PDS) has helped millions. Similarly mid-day meal schemes have also worked well. Now bringing the prices of food down to Rs1 or Rs2 per kg for BPL families may not qualify as major reform to the current system, in my view.

Defining the upper bound in terms of accumulated money and wealth (Upper Richness Line or URL) may though bring dramatic changes in the business models and CSR functions....to continue tomorrow

Tuesday, November 11, 2014

My five cents

Thought for the day

"Emancipation from the bondage of the soil is no freedom for the tree."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Sinistral (adj)

Left handed: Of, pertaining to, or on the left side; left (opposed to dextral).

(Source: Dictionary.com)

Teaser for the day

I ask the PM and all his ministers in the cabinet - "Do they act without "Fear or Favor" and "Affection or Ill-Will", in accordance with the Oath of office and secrecy they take before assumption of office?

My five cents

Reportedly, the government has set the ball rolling for budget preparations little early this year.

From public utterances it appears that the Team Modi wants FY2016 union budget to be a stepping stone for delivering the election promise of good governance and faster & inclusive growth.

I believe, like all good citizens, it is my duty to contribute my five cents for this good cause.

Many of my suggestions may sound repetitive; which these are indeed. I strongly believe in the doctrine of "perseverance pays". Therefore, I am persisting with them. I would request my regular readers to bear with me for few days.

1 Introduce "reforms"

I believe that it is high time the government, businesses, investors and people start distinguishing between "administrative corrections", "systemic efficiencies" and "reforms". Reforms, in my view, involve fundamental change in the ways and means by which an objective is sought to be achieved.

2 Put more money in the hands of consumers

Given the current economic situation, the fastest way to return to potential growth is to motivate domestic consumption demand. Putting more money in the hands of consumers is therefore imperative. Employment, lower taxes, DBT, small ticket large scale schemes - drinking water to all homes.

3 Focus on divestment against disinvestment

The government needs to accept that 62% or 52% government holding in public sector banks changes nothing on the ground. It just helps fiscal accounting or provides some more capital to be lost for the banks. The government needs to work on completely divesting most of its monopolies and businesses, including commercial banking, railways and civil aviation.

4 If you cannot beat them, join them

The government needs to evaluate whether it is feasible to stop people travelling to Las Vegas, Macau, Bangkok, and Phuket etc. or stop students going abroad to second rate universities even in countries like Russia, China, Australia etc. If it is found infeasible, why not allow a Vegas or Macau or Phuket or Harvard to be created on Indian shores?

5 Focus more on services than manufacturing

"Make in India" is a commendable thought. However, at this given point in time, a capital intensive and material resource intensive program such as this may not be commercially feasible to implement fast. On the other hand, focusing on services which are more labor intensive and require less capital and material resources may be more suited to Indian conditions.

I shall be elaborating on these thoughts in next few days. In the meantime readers are welcome to contribute their few cents.

Monday, November 10, 2014

Something is amiss

Thought for the day

"From the solemn gloom of the temple children run out to sit in the dust, God watches them play and forgets the priest."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Kickshaw (n)

A tidbit or delicacy, especially one served as an appetizer or hors d'oeuvre.

(Source: Dictionary.com)

Teaser for the day

Just imagine Congress Party wins the Delhi assembly elections!

Many stalwarts, who have nothing to do, and cannot even enter Rajya Sabha, are in a tussle to become Chief Minister.

Poor Mr. Lovely who fought really hard to win the election is left alone to live another day.

Something is amiss

The results of recently concluded US congressional elections appear to have surprised many. The global media is witnessing intense discussion as to reasons and implications of the popular verdict that may see President Barack Obama reduced to a lame duck during rest of his tenure.

As the data would suggest US economy seems to be doing pretty well. Energy cost has fallen materially. Unemployment level has fallen to pre-crisis level. Fiscal condition has improved. Economic is back on its feet as stimulus stands withdrawn and growth is picking up. Foot soldiers are back from battlefields in Iraq and Afghanistan. Opponents like Russia, Libya, Cuba, Iran, Syria etc are weak in their knees.

Why the popular sentiment is so much against the President and his Democrat colleagues?

The answer perhaps lies in the Fed Chairman Janet Yellen's recent remarks about rising socio-economic inequalities in the US. “It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority,” said Yellen during an Oct. 17 speech at the Federal Reserve Bank of Boston. “I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”

This also has a lesson for the incumbent government in India. Any effort to achieve 8% growth would be meaningless if it is achieved without participation of the bottom 50% of the population. Focusing too much on the top 5% is perilous - both economically and politically. A deeper study of the 2004 loss of NDA-I and TDP, despite huge popularity of Atal Bihari Vajpayee and N. Chandrababu Naidu respectively, would provide useful clues.

Back home, the financial markets are suggesting a serious conundrum for the government and RBI.

RBI has conducted large reverse repo deals of Rs600bn and OMO selling of Rs100bn. Despite that benchmark 10yr yields have fallen below 8.2%. This large liquidity in the traditionally busy season when seen with the consistently weak PMI, IIP and services sector growth data is worrisome. The 2QFY15 corporate numbers are also suggesting lack of demand across sectors, regions and sections.

Under these circumstances lower inflation may not be a good sign, as it highlights the total lack of pricing power in the economy. In my view, it is too early to assume sustainability of low energy prices over a longer period. Hence, any hasty monetary policy decision based on lower inflation and lower energy prices may prove to be ineffective or even counterproductive.

Populism aside, given the material fall in most competing currencies and slowing demand in traditional export markets, there might be a need to maintain USD/INR at current or even slightly weaker levels to keep our exports competitive. Expected rise in flow post BoJ stimulus would not make things easier either.

Sunday, November 2, 2014

9K on Nifty - I'll pass; you take it, if you must

Thought for the day

"Clouds come floating into my life, no longer to carry rain or usher storm, but to add color to my sunset sky."

- Rabindranath Tagore (Indian, 1861-1941)

Word for the day

Crapehanger(n)

A person who sees the gloomy side of things; pessimist.

(Source: Dictionary.com)

Teaser for the day

Most left leaning intellectuals were found searching for "substance" in PM's Man ki Baat.

Isn't it paradoxical?

Because the King talking to his subjects only about welfare schemes and money is very feudal and burgeon.

9K on Nifty - I'll pass; you take it, if you must

The global markets are once again on a high dose of steroid. As feared, Bank of Japan has undertaken yet another "whatever it takes" type of adventure. The immediate repercussions are (a) "risk on" trade gets more legs; (b) short sellers get squeezed out; (c) Yen weakens to coax main competitors Korea and China to follow the suit and make effort to weaken their currency triggering a currency war; (d) USD strengthens and therefore deflationary pressures on developed economies exacerbate and (e) ECB adds to the stimulus making US tapering look irrelevant in global liquidity context.

However, the midterm implications could be far worse than 2008-09 collapse.

Remember, this stimulus is not USD liquidity. This may conversely lead to massive USD demand at a time when US fiscal and current account deficits are shrinking and USD printing presses are taking some time off after working 24X7 for five years. This means USD may strengthened faster and in greater measures than anticipated earlier, making life painful for all emerging markets who are deeply indebted by dollar denominate debts.

Commodity world is staring at a deep abyss as the global consumption is showing no sign of turnaround. Chinese, South and East Asian, European, Indian, Latin American and even Middle East factories are running much below their rated capacities. This stimulus is not likely to change much on these grounds. On the other hand it may actually pressurize commodity producers to lower their local currency prices to match the gain in USD.

Watch for widespread losses and rising unemployment, stress and unrest in major producers like Australia, Canada, South Africa, Russia, Brazil, Chile etc.

A substantially cheaper Yen could also reignite geo-political rivalry between old foes Korea, China and Japan.

As per a Reuters report, the data this week data from both sides of the Atlantic will give clues in the coming week on just how bad the euro zone economy is and just how sustainable is its U.S. counterpart.

European Central Bank meets to decide on monetary policy and a new slate of economic forecasts and the United States will release its influential monthly jobs data.

A negative reading may precipitate ECB stimulus and softening of US rate hawks. The equity bulls will take full charge. The bond bears on the other hand will have to spend cold nights with their accountants to assess the massive losses inflicted upon them. In my view, their losses will be much more than what they might have earned in 2009-2011 by betting on European bonds.

And guess who will be having the last laugh? Of course it will be the mighty US Federal Reserve, who bought all the bonds that came its way in past 3years. It might very well end up making much more money than what people thought it would have sank in saving US financial markets.

Coming to business, I am not too excited about the market rally in past couple of weeks. I would stick to the plan, looking beyond 2015.

Friday, October 31, 2014

QE is dead, long live QE

Thought for the day

"The most common lie is that which one lies to himself; lying to others is relatively an exception."

- Friedrich Nietzsche (German, 1844-1900)

Word for the day

Indignant (adj)

Feeling, characterized by, or expressing strong displeasure at something considered unjust, offensive, insulting, or base:

(Source: Dictionary.com)

Teaser for the day

Does our Constitution allows me the freedom to express my views on how women, children or men should dress, so long I am not imposing my views on anyone including my family?

QE is dead, long live QE

US Federal Reserve (The Fed) finally brought the curtains down on its two year old bond buying program, popularly known as "QE3", being the third round of quantitative easing post Lehman collapse in early winter of 2008. The gradual withdrawal ("taper") of the US$85bn a month buying program had started early this year.

The markets have appeared to taken the event rather with some relief. Remember, the talk of tapering and fear of potential consequences had caused substantial volatility in global markets last year.

I find it pertinent to reproduce the farewell note written by my favorite Bob McTeer for readers benefit. Trust me, few could have done this job better.

"I retired from the Fed on November 4, 2004, which will be 10 years ago in 6 days. At 8 AM tomorrow, I’m scheduled to give a speech on the economy after which I’ll have to give a defense of Quantitive Easing.

Texas audiences are polite, but they know deep in their bones that there is (was) something not quite right about QE. Their doubts have something to do with the impropriety of “printing money” even if doing so seems not to have turned out too badly. I’ve tried and tried to explain that there has been very little money printing during QE, and that is why the dire consequences of hyper-inflation, a collapse of the dollar, sky-high interest rates, and gold through the roof have not taken place. Unfortunately, it’s also the main reason that QE has not stimulated the economy any more than it has.

But nobody seems to believe me. They are deeply invested in the notion of money printing. They don’t want to hear that the Fed has been “printing” bank reserves and that banks have held onto large amount of those reserves as excess reserves without using them fully to fund new loans and investments and thus unleash the money multiplier. I realize I will never win the debate because everyone calls it an “experiment” and won’t let the jury come in until the experiment ends. As long as I’m leading on points, the experiment isn’t over.

Many critics still expect to be right about the dire consequences—just you wait. Well, I have some bad news for them. Growth in the M1 and M2 measures of the money supply has actually slowed over the past year; so, we aren’t on the verge of an inflationary blowout. QE is ending quietly.

Not that I’ve been a big fan of QE. I was when it started around November 2008. Chairman Bernanke’s improvisations saved our cookies back then. Sometime between then and now, the economy was probably strong enough to survive an earlier phase-out or taper, but every time one Q was about to end the economy swooned and we got another one. Following along one meeting to the next, I remained supportive, but, looking back on it, I find it hard to imagine that it lasted so long. Good riddance.

I do find it amusing that many of the early critics of QE are now faulting the ECB for not getting into the game earlier. I do dread the inanity of trying to guess in the next few FOMC meetings whether the phrase “considerable time” will survive and just how long is a considerable time anyway. Don’t forget that Chair Yellen following the previous FOMC meeting said that considerable time had nothing to do with time."