Vijay Kumar Gaba

Friday, November 28, 2014

Let people set the agenda

Thought for the day

"Reason has always existed, but not always in a reasonable form."

- Karl Marx (German, 1818-1883)

Word for the day

Nostomania (n)

An irresistible compulsion to return home; intense homesickness.

(Source: Dictionary.com)

Teaser for the day

For the sake of 10cr Biharis, should NiKu patch up with NaMo and join NDA?

Let people set the agenda

Continuing from yesterday, I would like to clarify here that I fully support and admire any effort to improve the efficiency and productivity of government administration. All the regulatory and procedural changes that enhance competitiveness and profitability of corporates are also welcome.

My concern is that these measures bring incremental changes in the direction and trajectory of economic growth. These measures are usually inadequate in bringing any structural change in the economy, something we need desperately at this point in time of history.

The economic model adopted post independence era, which was mostly an extension of the exploitive colonial model used by British Empire, has promoted inequalities, injustice and unsustainability. This is the economic paradigm we need to change by instituting fundamental reforms. Improving efficiency of the extant system is just not sufficient.

In my view the economic reforms should be designed inter alia with the following objectives in view, viz.,

(a) Developing an environment of equality and mutual trust.

(b) Promoting the strengths of Indian economy rather than bridging the weaknesses.

Inarguably, the most valuable resource for India is her people. In not implementing the recommendation of Balwant Rai Mehta committee (1957) on local self governance, our political system has been unable to develop an environment of mutual trust and transparency and thus failed the people of India. Despite, Narasimha Rao government ensuring 73^rdconstitutional amendment in 1992, the political establishment has shown great reluctance in sharing power with the local bodies and common people.

A key economic reform would be to earnestly hand over the ownership of natural resources to “the public”. Instead of few feudal ministers controlling the resources. The trusteeship of all the natural resources may be vested in the local body of people. The local people should determine how these resources should be exploited. Industry based on these resources if developed on co-operative model with equitable ownership of (i) local people (ii) financial investors and (iii) technical experts who would manage the business, the growth could be fast, equitable, and sustainable.

Similarly, local bodies may also be empowered to decide appropriate taxation structure and incentive formulae to achieve the objective of social, economic & gender equalities, sustainability and development.

For example, each local body may determine the development priorities and allocate resources accordingly. Given the diversified demographic, ecological and socio-economic profile of the country, efficient policies for energy, education, employment, industrial development, ecology conservation etc could efficiently be worked out only at the local level.

...to continue next week

Thursday, November 27, 2014

Rate cut expectations

The consensus amongst analysts and economists is stacked heavily against rate cut on 2nd December. However, the bond traders and investors appear convinced of a rate cut.

This dichotomy is not unprecedented. It is often seen during peaks and troughs of the rate and economic cycles.

More often the traders get it right. However, whenever they are wrong, the losses are huge. Whereas economists and analysts usually have not much to lose, should their expectations not materialize.

In the current instance, I am inclined to go with the bond traders and expect not a 25bps but even 50bps rate cut on 2nd December.

This is nothing to do with the FM or industry urging for a rate cut. I believe that under the current circumstance (credit demand growth 13% and deposit supply growth at 17%) a 25bps policy rate cut will hardly make much difference.

My premise for a rate cut is that it is perhaps the last chance for RBI governor to create a cushion for a likely global crisis next year.

With rates almost at the peak, there is virtually no scope for rate hike should a global currency crisis warrant that. A 50bps cut now will provide that cushion at virtually NIL cost as (a) The risk appetite of banks is low and not likely to improve immediately; (b) inflation is falling due to higher base and global commodity price correction and not likely to go up due to lower rates; and (c) there is sufficient output gap in economy to absorb higher demand without stoking inflation. These condition may not be there 6-9months down the line

Peripheral changes would not do much

Thought for the day

"For the bureaucrat, the world is a mere object to be manipulated by him. "

- Karl Marx (German, 1818-1883)

Word for the day

Gaslight (v)

To cause (a person) to doubt his or her sanity through the use of psychological manipulation.

(Source: Dictionary.com)

Teaser for the day

Should Manmohan Singh volunteer for examination before Coal block allocation and Telecom Spectrum investigation teams/courts?

Peripheral changes would not do much

I have been insisting since ever that "Economic Reform" is perhaps the most misinterpreted, misrepresented, misused, and abused terminology, especially in Indian context.

Businesses have invariably interpreted it as (a) lesser controls; (b) lower taxes; (c) protection from global competition; (d) deeper and easier access to foreign capital; (e) privileged access to natural resources; and (e) freedom to run variety of ponzi schemes.

Politicians usually refer to this term to connote (a) Sale of minority stake in various PSUs; (b) Sale of sick PSUs; (c) higher foreign ownership in local businesses; (d) higher tax to GDP ratio; (e) simplification and complication of taxation rules and procedures; (f) deepening trade relations with foreign countries; and (g) subsidy management. Of late development of basic infrastructure like railways, roadways, ports, public transport, coal, and provision of essential utilities services like electricity & banking services have also been included in the discourse on economic reforms.

Investors usually use the most pervert and restricted definition of the term 'economic reform'. To them economic reform mostly means (a) measures that would allow unrestrained one way flow of foreign capital to Indian businesses and financial markets; and (b) tax exemptions for income from investment. Often investors also support contentions of businessmen to the extent it helps immediate rise in the value of their investments.

One often wonders how the following are examples of Economic Reforms and these reforms change what?

(i) Wal-Mart is allowed to own 75% of Pantaloon Retail.

(ii) The government stake in Coal India and ONGC is pared by 10% each.

(iii) The government stake in PSBs is reduced to 52%.

(iv) DDT and MAT are abolished and Short term capital gain is also exempted from income tax.

(v) Concessioners under various PPP projects are allowed to exit midway if projects become unviable.

(vi) All industrial and infrastructure projects are cleared by the regulators and authorities in 7days at a single window.

(vii) Government acquires the land for industrial and infrastructure use and give it to the businesses at half the stamp duty valuation rate.

(viii) All natural resources and mining activities are completely decontrolled.

(ix) Electricity tariffs and natural gas prices are allowed to be hiked by 10% every year.

(x) National Food Security Act is repealed.

In my view, these measures do not bring any fundamental change in the way businesses are done or government is run and hence do not qualify to be called "Reform".

Wednesday, November 26, 2014

"Kya lagta hai?"

Thought for the day

"The ruling ideas of each age have ever been the ideas of its ruling class."

- Karl Marx (German, 1818-1883)

Word for the day

Grok (v)

To understand thoroughly and intuitively.

(Source: Dictionary.com)

Teaser for the day

Imagine the chaos if "No parking - no car" rule is implemented retroactively!

"Kya lagta hai?"

In a recent interview, Rahul Dravid famously commented that had he charged one rupee each time he was asked to answer the question "why did he declare the innings at Multan (2004) when Sachin was batting not out at 194?", he would be millionaire by now.

I can also say the same thing with some confidence if I consider how many time my friends ask the question "Kya lagta hai?" (how does the market look?)

I have no hesitation in admitting that I have been often far off the mark in predicting Nifty or Sensex targets over near term. Any hit in the bull's eye had been purely accidental and was never intended.

The only motivation for people who repeatedly pop the question perhaps is that more often I could see the direction of market move right. For example, only last month I suggested that market is in buy on dip mode and any short selling should be avoided for next two years. I was right on this count. Though I did not anticipate market moving above 8250 mark so rapidly.

Anyways, that is an occupational hazard everyone who has to answer "Kya lagta hai?" must live with.

Given the eagerness of many readers and people I interact frequently in the course of my quest for assessing the ground realities, I would like to address this question once again, before I take up more academic issues like reforms and budget expectations.

Near term outlook (3 months)

Near term direction of market is now a function of FII flows and budget expectations. With BoJ and ECB committed to keep the market flooded with liquidity, flows should not be a major problem. The technical overbought conditions may ease in next couple weeks. No surprises if Nifty tests 8970 in next three months. For mow, downside looks protected at 8120 to me.

Short term outlook (6-12 months)

Market may witness higher volatility and larger moves in next 6-12 months. While not much further negative is expected to occur on domestic front, global uncertainties may rise with deceleration in Europe, Japan, China and major commodity producing emerging markets. Save for a drastic global event like Lehman collapse (not improbable), Nifty should move closer to 9400 and may not fall below 7420 level. Strong buying and leveraging opportunities will emerge in to 7850-8000 Nifty range.

Mid-term outlook (12-24 months)

Expect Nifty to make a strong positive move over next two year with upper bound at 10800. The risk reward at present from this perspective is positive. Much sharper move could be expected in broader markets.

Tuesday, November 25, 2014

Reset the counter to zero

Thought for the day

"The English have all the material requisites for the revolution. What they lack is the spirit of generalization and revolutionary ardour."

- Karl Marx (German, 1818-1883)

Word for the day

Ardour (adj)

Great warmth of feeling; fervor; passion:

(Source: Dictionary.com)

Teaser for the day

Ajay Maken: Erapalli Prasanna sent in to bat against Malcolm Marshall without any protective gears!

Reset the counter to zero

In past six months we heard Prime Minister giving inspirational speeches around the world. His diligence, zest and devotion to work are already part of folklore. He has taken noble initiatives like adoption of villages by elected representatives and cleanliness drive. More admirably, he has successfully skirted controversies. He has earned accolades from many adversaries and established remarkably friendly relations with heads of states of Japan, Britain, Australia, and US.

But could we say this about his team of ministers also? Besides random stories of punctuality and business friendliness, we have not heard much of a "Plan".

The business and investing community is waiting for the budget with great hopes. The expectations are running sky high leaving Nil margin for any disappointment.

However, if I were to assume that union budget prepared and presented by finance ministry is an aggregation of the plans and ideas of all the operating ministries of the government, I do not get a sense of any revolutionary ideas coming through on February 28th. A few tax concessions here and there, some procedural easing, and tons of rhetoric is all I would anticipate.

Please note that so far not many ministers of the Modi government have shown ability or willingness to take risk and make a fresh beginning. All their proposals, ideas and plans are incremental in nature and therefore not likely to usher any radical reforms.

Moreover, some of them appear constrained by their dogmatic and parochial mindset. This may rake in frequent and avoidable controversies and friction. Waste of valuable legislative time and energy due to this rhetorical approach cannot be ruled out.

Now consider this. the primary function of HRD ministry is to create and provide adequate infrastructure for development of human resources and create an enabling environment that facilitate equitable access to such infrastructure. It is not and should not be a function of the government to decide what children should study. The government should focus on providing facilities in schools to teach all relevant subjects and let the children decide what they want to study.

Instead of engaging in meaningless rhetorical debate about making Sanskrit and Yoga compulsory subject in schools, HRD minister should focus on improving the standard of teaching in schools so that the middle class parents could be saved from spending ridiculous amount of money on fee for "coaching classes".

Another major reform could be get over colonial mindset ("schools are factories to produce obedient servants for the crown") and eliminate the degree requirement for all jobs. Anyone who passes the pre-employment qualification test should be eligible for the job irrespective of his formal education.

In next few days, I would highlight my wish list of reforms in various that government should focus on.

Monday, November 24, 2014

Neutralize Jayadratha before Abhimanyu crosses the point of 'no-return'

Thought for the day

" The production of too many useful things results in too many useless people. "

- Karl Marx (German, 1818-1883)

Word for the day

Apocryphal (adj)

False; spurious

(Source: Dictionary.com)

Teaser for the day

I forcefully reject the system which makes it compulsory for my child to study something which she is not interested in.

Neutralize Jayadratha before Abhimanyu crosses the point of 'no-return'

In the epic 18 day war of Mahabharta 13th and 14th day are dedicated to the young Pandava prince Abhimanyu.

On 13th day, the Kaurava General Dronacharya laid out an impregnable 7 tier formation of his army, Chkravyuh, to capture the Pandava King Yudhishtra. He knew that on Pandava side only Arjuna and his charioteer Krishna knew the technique of penetrating and breaking this defense formation. He accordingly planned to distract them away from the battle field on early morning of 13th day and then capture the helpless Pandava King. He was unaware that the young prince Abhimanyu also knew how to break and enter the formation. He however did not how to exit.

The Pandavas planned that Abhimanyu should break open the gates of the Chkravyuh taking the mighty Bheema and other warriors along with him, who would then destroy the formation from within. The plan started off well, but the Kaurava's son-in-law Jayadratha using an old boon from Shiva stopped the entire army of Pandava at the gates broken by Abhimanyu, leaving the young prince fight his battle alone, all by himself. The prince fought valiantly but finally succumbed to injuries when a multitude of Kaurava commanders attacked him together.

On the 14th day, Arjuna, the father of Abhimanyu, took the revenge of his son's killing by beheading Jayadratha.

This story has been a inspirational tale for the millions of Indian children for ages. We have heard it time and again to learn the lessons of bravery, gallantry strategy, righteousness, importance of pregnancy period, and inevitability of death, etc.

While glancing through newspapers, flipping through new channels and surfing through social media last week, I was strongly reminded of this inspirational tale.

I find that PM Modi's situation today is same as that of Abhimanyu on 13th day noon. He has taken a big task on himself hoping that other warriors from BJP will help him. He has successfully broken the defense of opposition, valiantly penetrated in their territories, but finds himself alone there. His Arjuna (read Amit Shah) is busy fighting Tribal kings Soren and Abdullahs; and all other warriors have been blocked by Jayadratha from following him. I see the feudalistic idea of nationalism playing the role of Jayadratha in this case.

While the PM is moving around swiftly destroying old paradigms and raising new hopes, all his army men are being overwhelmed by the feudalistic idea of nationalism and following a dogmatic and in some cases regressive agenda, when the dispirited opposition forces are uniting to stop the juggernaut of Modi.

Why cannot we all accept that 1.25bn Indian are Sovereign Democratic Socialist Secular Republic. No minister or judge or politician can infringe upon our right to freedom and equity; whether it is studying Sanskrit, wearing jeans, or marrying intercaste. What the ministers may however do is to convey their likes and dislikes in a polite manner...more on this tomorrow

Friday, November 21, 2014

Maid in India

Thought for the day

"Every man is guilty of all the good he did not do."

- Voltaire (French, 1694-1778)

Word for the day

Flummox (v)

To bewilder; confound; confuse.

(Source: Dictionary.com)

Teaser for the day

Wonder why Salman Khan's sister's wedding is so much news!

Maid in India

For past couple of days many readers have been losing patience with me. They find me totally distracting. The common refrain is "why do you bother so much about decades. Tell us what the market will do between 9:15AM to 3:30PM today". They are not wrong. Neither am I. It's only matter of different approaches to achieve same goal.

Many live life as a series of discrete days. I see life as a continuous time series. I do not assign much importance to the discrete days, like last or first days of months, quarters, and years, in the infinitum of time. The random data points published on these days also do not bother me much. These data points, including daily prices, monthly sales and production numbers, quarterly profits, are relevant to me if they form a discreet pattern in a secular trend.

Now coming back to our discussion from yesterday, I believe that nurturing our youth well should be the top priority of the government. The incumbent government has in fact shown some promise by laying strong emphasis on skill development. But to me efforts so far look devoid of a conceptual framework. The objective appears to be limited to engaging youth in some sort of employment to keep them away from unlawful activities. This is not enough. In my view, youth should be educated and trained with the constitutionally mandated objectives of:

(a) Equality - regional, social, gender and economic;

(b) Dignity of life -self reliance and social status;

only then the effort will make a socio-economic and perhaps political sense.

Opening thousands of engineering and management colleges without a conceptual framework has yielded nothing in past two decades. Thousands of qualified engineers/management graduates churned out every year end up doing petty jobs adding unacceptable level of cynicism to the economy.

A better alternative would be to open a micro institute in each village which trains its youth to work as domestic help - 6month course in basic language skills and etiquettes, nursing child and old, attending phones and cooking.

If every year 20 youth from each village could be employed as domestic help in cities earning Rs7000pm, they can easily remit Rs100,000pm (5000x20) back to their families. This works out to be Rs7200cr annually for 600000 villages. This money will create sustainable demand for quality school, good health center, paid electricity, financial services, housing, travel and other civic amenities.

At this point in time, nursing colleges will make much more sense than medical colleges. Providing drinking water to each household will bring more girls to schools than mid-day meal.

And let me tell you, not dowry or pride but incest is the primary cause of skewed sex-ratio and gender inequality in many states. Any youth policy that does not address this problem will remain as ineffective as the efforts made so far have been.

Thursday, November 20, 2014

Broaden the horizon

Thought for the day

"Who serves his country well has no need of ancestors."

- Voltaire (French, 1694-1778)

Word for the day

Star-crossed (adj)

Ill-fated; Thwarted or opposed by the stars;

(Source: Dictionary.com)

Teaser for the day

Should the government consider setting up a regulatory body for the Business of Religion?

Broaden the horizon

Continuing from yesterday...

Now, if demographic rebalancing is going to be a critical factor in the transition of emerging global economic and market to a new paradigm, and Indian youth has to play a critical role in this process, most profitable business and investment themes have to revolve around him.

I know this is cliché. But the unfortunate fact is that Indian growth in past two decade or so has miserably failed in creation of adequate productive jobs for the burgeoning workforce of the country.

I feel in spite of fully recognizing the potential of the youth and the problems faced by them, successive governments have mostly failed in implementing an integrated youth policy that would focus on harnessing this tremendous reservoir of energy.

India has so far issued three editions of national youth policy. The first edition was a brief 5 page vision paper which recognized the importance of youth but did not provide any conceptual framework for the growth and development of this one third segment of the population.

The second edition was issued in 2003 and contained a detailed framework for the implementation. It recognized that “the question of employment is, at present, of very serious concern for the Indian youth and that several social issues arise out of widespread unemployment and under-employment of the youth”. The policy emphasized that “critical issues in this area include a mis-match between skills-requirement and employment opportunities, low technology levels, low wages and low productivity, occupational shifts in employment, under-employment owing to seasonal factors, excess labor supply in relation to demand, migration of the labor force from the rural to urban areas and limited participation of women in the work force, especially in the organized sector”.

The policy was supposed to be implemented forthwith and reviewed after every five year. The change in government in 2004 however meant that it was hardly implemented.

The previous government had issued a draft policy in 2012 with the goal of “empowering the youth of the nation by bringing holistic development”. The objective, inter alia, included “Through a sustained program of education and training and appropriate support services, help young people become economically self-reliant and productive units of the country, either by taking up employment or by setting up their own business enterprises.” The policy has yet not been adopted. I hear that the incumbent government is working on a new draft that may be released in next 6 months.

My issue with the government approach is that it is too parochial. The government appears more concerned with keeping youth engaged so that they do not indulge in unlawful activities. I want youth to be considered most valuable and scarce natural resource, more precious than gold and diamond, and prospected and marketed accordingly....more on this tomorrow.

Wednesday, November 19, 2014

For the fear of Viking age - II

Thought for the day

"He was a great patriot, a humanitarian, a loyal friend; provided, of course, he really is dead."

- Voltaire (French, 1694-1778)

Word for the day

Gravitas (n)

High seriousness (as in a person's bearing or in the treatment of a subject).

(Source: Dictionary.com)

Teaser for the day

Does MSY seriously believe that he can keep people in dark by not providing them free laptops?

For the fear of Viking age - II

Ever wondered why the leaders from most developed countries in Americas, Europe and Pacific rim are embracing PM Narendra Modi so tightly; especially in light of the fact that he was a persona non grata in many of these countries, including USA, just a year back!

Is it his oratory skills; his charming and warm persona; his popularity; command over a market of 1.25bn, or something else? I guess it is his receptiveness and responsiveness to the world leaders.

Even a casual study of Indian foreign relations in past few decades will highlight that the reception PM Narendra Modi is getting is not unprecedented. In past Indira Gandhi, Rajiv Gandhi, Atal Bihari Vaypayee and Manmohan Singh have all got such receptions. They were perhaps just not as responsive.

Indira Gandhi could not stay non-aligned in cold war; Rajiv Gandhi was too naive and got overwhelmed by poor economic conditions & internal politics; Atal Bihari Vajpayee exploded the Bomb and thus created an environment of mistrust with western powers; and Manmohan Singh was perhaps just too reluctant, reclusive and underwhelming.

Narendra Modi is experienced, free, confident, non-aligned and appears focused solely on economic agenda. The fact that Indian Diaspora in many developed countries has become increasingly prosperous and influential in their local context, also goes in favor of PM Modi. That is why he seems to be getting warm and positive vibes from many politicians.

But the moot point is why global leaders are looking keen to strengthen their relations with India, despite serious disappointment and setbacks in past few decades.

The transiting economic and market paradigms, I mentioned yesterday, perhaps would also provide answer to this inquisition.

In my view, demographics are playing a major role in the shift of the economic and market context this time. Most developed and even large developing countries are struggling with demographic imbalances presently. The problem is particularly severe in Europe and Japan.

In Europe on one hand population is aging fast and thus straining the fiscal and economic growth (pension, healthcare, lower income growth, low taxes and lower consumption); on the hand there is mounting concern over change in socio-religious structure of the population (see here).

In my view, it is not long when we will see radical and dramatic changes in immigration policies of many European and pacific rim countries, if not for anything else - for the fear of return of Viking age.

India, which has the largest pool of educated & skilled young English speaking people, is therefore naturally seen as the major partner in bringing the desired demographic changes....to continue

Tuesday, November 18, 2014

This set and game goes to US

Thought for the day

"Doubt is not a pleasant condition, but certainty is absurd."

- Voltaire (French, 1694-1778)

Word for the day

Celerity (n)

Rapidity of motion or action; quickness; swiftness.

(Source: Dictionary.com)

Teaser for the day

Have we learned any lesson from KFA that could be applied to SpiceJet and Air India?

This set and game goes to US

Continuing from yesterday...

I am increasingly inclined to believe that perhaps the paradigm is shifting in global markets. I am certainly not suggesting "it is different this time". What I am saying is "it is the same as always".

The global market paradigms have shifted every few decades. The shifts have been caused by a variety of factors. Sometimes it has been led by shift in strategic and geo-political power (spread of European empires in 17th and 18th centuries and strength of US post second War). Sometimes technology innovation (industrial revolution in Europe and US, Japanese manufacturing renaissance post WWII and then internet revolution in US) caused the shift. Rise of oil economies post 1970's in middle east Asia and Chinese and Korean manufacturing revolutions have also caused material shift in global markets. Nature has also played vital role in causing tectonic shifts in global power equations and market balances. Decline of great Roman empire is case for study.

In most of these market transition phases, currencies have played a key role. Therefore it is pertinent to evaluate the current transition in global market paradigm from this angle also. And this is where I see a difference. In most earlier instances the emerging currency (including gold and silver in earlier instances) has changed its relative global value during the course of the shift. Sometimes strength in the currency or gold & silver stock played a critical role, as in case of British and Portuguese dominance in earlier centuries. In some cases weakness in currency supported the shift, as in case of the rise of Korean and Chinese manufacturers causing decline of Japanese dominance.

The present case appears no different. Japanese are trying to regain their lost market share in global manufactured goods market by depreciating their currency. Germans are struggling to retain their market share by forcing the Euro down. While US has almost won the war to retain the supremacy of dollar.

Considering that US fiscal deficit is shrinking fast, Current account is favorable and monetary stimulus has been withdrawn - the supply of USD to the global market is declining at a rapid pace. On the other hand, the demand for USD shall rise at even faster clip as Japanese, Chinese and European mints work overtime to print local currency.

This all will happen, when most emerging markets are saddled with huge dollar denominated debts; and commodity producers who sell in USD are facing serious erosion in demand.

I have written earlier (see here) also that Uncle Sam may have lost a few battles, but it is certainly on course to win the war. At this point in time no challenger is in sight.

However, we may see some resistance emerging in next decade. More on this tomorrow.