Vijay Kumar Gaba

Thursday, August 6, 2015

Staying out of the "spit-game"

"Without stirring abroad, One can know the whole world; Without looking out of the window One can see the way of heaven. The further one goes The less one knows."

- Lao Tzu (Chinese5th or 6th Century BC)

Word for the day

Temerity (n)

Reckless boldness, rashness

(Source: Dictionary.com)

Malice towards none

What is the plan for development of North East?

Opening 1000 good quality budget hotels and offering 75% subsidy on airfare will do what package of Trillion rupees will not be able to do.

Staying out of the "spit-game"

I distinctly remember visiting rural Punjab in early 1990s. The decade old insurgency had just subsided and the life was limping back to normalcy. The air was still filled with uncertainty and fear. Hope was inadequate in consoling the grief struck people who straightaway got busy in collecting the remaining pieces of their lives.

In the climate of rebuilding, the children had again started playing in the streets. Closer to a village school, I witnessed some children spitting on each other from a distance. Curious, I approached them to find what are they up to. They explained that it is a popular child game in the village. In this game children take turn to spit on each other from a defined distance (usually 2mtr). If the spit of a child lands on the opposite party, that opposite party has to give a 10mtr ride on his/her back to the 'winning' player.

At the end of the game, usually all players would be dirty and would have enjoyed ride on someone's back!

I am not sure whether that game is still played in the villages of Punjab. But our elected representative certainly seem to be quite fond of the game and do not mind playing it even on the floor of the Parliament.

As usual at the end of the game we will see them all dirty, mired in the spit of each other, and smugly gratified having ridden on the back of opponents.

As an investor I am not much worried about the politicians' ethical standards and propriety, since as a strategy I usually avoid businesses which are directly impacted by government policies or depend on administrative or political patronage for growth.

In my investment strategy I am not factoring any major impetus to growth in medium term due to reforms like GST. I also do not subscribe to "double digit" growth potential story of India.

Regardless, I believe that ~5% growth is very much possible with the existing regulatory and institutional framework. This sustainable growth with improving entrepreneurial capabilities of Indian citizens, shall continue to provide adequate investment opportunities with decent return potential.

The current match of spit-game is not likely to culminate before Bihar assembly election to be held sometime in October.

In case NDA wins Bihar, we may see a weakened but mostly non-cooperative opposition in winter session, as the ruling parties in next in line (West Bengal, Odisha, Tamil Nadu) would like to prepare ground for their re-election. However, if NDA losses Bihar, the opposition will strike with renewed vigor and belligerence. In both cases, legislative business may continue to suffer.

In my view, the market should therefore be more focused on administrative business rather than expecting any breakthrough on legislative side. Substantive legislative business if happens will be a welcome bonus.

If you are fed up of watching the spit-game, road construction & upgrade, power transmission & distribution capacity expansion, and modernization of public services with increased use of technology are three areas that seems to be gaining traction and deserve your attention.

Wednesday, August 5, 2015

Black & White

Thought for the day

"Govern a great nation as you would cook a small fish. Do not overdo it."

- Lao Tzu (Chinese5th or 6th Century BC)

Word for the day

Boomlet (n)

A brief increase, as in business activity or political popularity.

(Source: Dictionary.com)

Malice towards none

The head of the family needs to realize that children have now grown up. Discuss issues with them at dinner table; offer your advice; let them chose what they like.

Forcing something down their throat will only encourage rebellion.

Black & White

Traversing through narrow streets of old Delhi on first Monday of the Hindu month of Shravan (or Savan as in film songs) was a little different experience this year.

This month is traditionally known as month of Shiva, the Lord of Asceticism. The devotees abstain from all material pursuits and pleasures, observe fast & abstinence, and pray to the Lord for the welfare of entire mankind. Millions of people arduously walk hundreds of miles to bring sacred Ganga Jal to the constituent of Shiva resident in their locality.

Poets have celebrated this month as the month of parting of lovers. Pain and intense longing for love are the primary feelings associated with this period.

This Monday also thousands of devotees thronged the old Gauri Shankar temple in historic Chandni Chowk. The crowd comprised mainly of people from trading and financiers community living in nearby areas. Many migrant laborers working in the vicinity also joined to enjoy delicious Prasad. IS threat of terrorist attacks ahead of the Independence day did not deter people at all.

But the usual enthusiasm and gaiety appeared lacking. Few enquiries with acquaintances took me to the narrow bylanes of the area. Few hours of enquiries highlighted the extreme distress, fear, and apprehensions that informal markets in India are witnessing. This may not adequately explain the declining consumption, tighter liquidity, real estate slump, unemployment, rising mistrust and skepticism. But it is certainly indicative of the botheration. Consider few examples:

(a) The business of "Entry" (converting black money in to white) has taken a big hit after the recent action on fraudulent Long Term Capital Gain transactions. Many big operators of the business are supposedly hibernating in friendly jurisdictions like Thailand and Dubai. The cash cycle is completely stalled causing acute liquidity shortage.

(b) The arrangement of "Committee" (the kitty of business people) has seen multiple defaults causing losses to many organizers and participants. The business that has been traditionally run on trust is witnessing such mistrust perhaps for the first time. The easiest source of financing working capital and small capex is thus shrinking. This is reflected in lower inventory level, reluctance to extend credit to retailers, and lower capex in capacity building at shop level.

(c) In a fall out of Maggi episode, the government authorities have reportedly taken stringent action against importers of food items, especially confectionary. The practice of under invoicing of imports to save on import duty has been rampant in this trade. Most of these traders are in hiding. The prices of chocolates and dry fruits are sky rocketing on shortages as the festival demand is picking up.

No matter what politicians say, "black money" is gradually gaining acceptance as "avoidable dirty thing". This is a sublime structural change taking shape in narrow bylanes of traditional markets located in old cities of India. GST if introduced from FY17 could accelerate the change materially. If not, the change is taking place anyways. Good times!

Tuesday, August 4, 2015

I know it, tell me something new

Thought for the day

"Treat those who are good with goodness, and also treat those who are not good with goodness. Thus goodness is attained. Be honest to those who are honest, and be also honest to those who are not honest. Thus honesty is attained."

- Lao Tzu (Chinese5th or 6th Century BC)

Word for the day

Entelechy (n)

A realization or actuality as opposed to a potentiality.

(Source: Dictionary.com)

Malice towards none

Why the act of preventing the Parliament from functioning is not unconstitutional, unlawful or in stronger words - seditionist?

I know it, tell me something new

Last week, I had a chance to interact with some market participants and economists. I was not surprised to find that the today's RBI meet evoked almost nil interest amongst them. Most of them were rather indifferent to the RBI's likely move on rates. The recent Reuters poll (see here) which suggested that an overwhelming majority believes that governor Rajan will maintain status quo also reflects this attitude.

The discussion on the likely time schedule of rate hike by US Fed and its potential impact on Indian economy and markets was however intense and evoked keen interest from all participants.

I was part of a insignificant minority who believed that the markets have already assimilated the US rate hike cycle and may not get startled by a rate hike late this summer. A trajectory much steeper than presently estimated may though surprise the market.

Insofar as the impact of US rate hike on economy is concerned, I agree with the views of of Nouriel Roubini. I find myself incompetent to add anything therefore reproducing it as it is:

"The prospect that the US Federal Reserve will start exiting zero policy rates later this year has fueled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. The concern is understandable: When the Fed signaled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum” sent shock waves through many emerging countries’ financial markets and economies.

Indeed, rising interest rates in the United States and the ensuing likely rise in the value of the dollar could, it is feared, wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households. Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.

But, although the prospect of the Fed raising interest rates is likely to create significant turbulence in emerging countries’ financial markets, the risk of outright crises and distress is more limited. For starters, whereas the 2013 taper tantrum caught markets by surprise, the Fed’s intention to hike rates this year, clearly stated over many months, will not. Moreover, the Fed is likely to start raising rates later and more slowly than in previous cycles, responding gradually to signs that US economic growth is robust enough to sustain higher borrowing costs. This stronger growth will benefit emerging markets that export goods and services to the US.

Another reason not to panic is that, compared to 2013, when policy rates were low in many fragile emerging economies, central banks already have tightened their monetary policy significantly. With policy rates at or close to double-digit levels in many of those economies, the authorities are not behind the curve the way they were in 2013. Loose fiscal and credit policies have been tightened as well, reducing large current-account and fiscal deficits. And, compared to 2013, when currencies, equities, commodity, and bond prices were too high, a correction has already occurred in most emerging markets, limiting the need for further major adjustment when the Fed moves.

Above all, most emerging markets are financially more sound today than they were a decade or two ago, when financial fragilities led to currency, banking, and sovereign-debt crises. Most now have flexible exchange rates, which leave them less vulnerable to a disruptive collapse of currency pegs, as well as ample reserves to shield them against a run on their currencies, government debt, and bank deposits. Most also have a relatively smaller share of dollar debt relative to local-currency debt than they did a decade ago, which will limit the increase in their debt burden when the currency depreciates. Their financial systems are typically more sound as well, with more capital and liquidity than when they experienced banking crises. And, with a few exceptions, most do not suffer from solvency problems; although private and public debts have been rising rapidly in recent years, they have done so from relatively low levels.

In fact, serious financial problems in several emerging economies – particularly oil and commodity producers exposed to the slowdown in China – are unrelated to what the Fed does. Brazil, which will experience recession and high inflation this year, complained when the Fed launched QE and then when it stopped QE. Its problems are mostly self-inflicted – the result of loose monetary, fiscal, and credit policies, all of which must now be tightened, during President Dilma Roussef’s first administration.

Russia’s troubles, too, do not reflect the impact of Fed policies. Its economy is suffering as a result of the fall in oil prices and international sanctions imposed following its invasion of Ukraine – a war that will now force Ukraine to restructure its foreign debt, which the war, severe recession, and currency depreciation have rendered unsustainable.

Likewise, Venezuela was running large fiscal deficits and tolerating high inflation even when oil prices were above $100 a barrel; at current prices, it may have to default on its public debt, unless China decides to bail out the country. Similarly, some of the economic and financial stresses faced by South Africa, Argentina, and Turkey are the result of poor policies and domestic political uncertainties, not Fed action.

In short, the Fed’s exit from zero policy rates will cause serious problems for those emerging market economies that have large internal and external borrowing needs, large stocks of dollar-denominated debt, and macroeconomic and policy fragilities. China’s economic slowdown, together with the end of the commodity super-cycle, will create additional headwinds for emerging economies, most of which have not implemented the structural reforms needed to boost their potential growth.

But, again, these problems are self-inflicted, and many emerging economies do have stronger macro and structural fundamentals, which will give them greater resilience when the Fed starts hiking rates. When it does, some will suffer more than others; but, with a few exceptions lacking systemic importance, widespread distress and crises need not occur."

(Reproduced from the Project Syndicate - Click here to read the full article)

Monday, August 3, 2015

NIFTY: gathering strength to break the range

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 (Chinese5th or 6th Century BC)

Word for the day

Olio (n)

A mixture of heterogeneous elements; hodgepodge.

(Source: Dictionary.com)

Malice towards none

Who is a patriot and who is not;

Who is a seditionist and who is not;

Who can judge and who cannot;

Who should judge and who shouldn't?

NIFTY: gathering strength to break the range

In past one year Nifty has mostly remained in 8000-8600 range, with breif excursions on both sides of the range.

The current trend seem to indicate that it still does not have enough momentum to break the range on either side. Sluggish volumes and volatility indicate that it may take at least few months more to sustainably break out of this range. Nonetheless small excursion outside this range are still likely in next three months.

In the immediate term, a strong resistance zone operates in 8600-8800. A close above 8850 in next 6weeks (not unlikely), shall bring it in resistance free zone of 8930-9150.

Whereas a close below 8336 on failure of this up move shall bring it to rest in support free zone of 8010-8224 (again not unlikely).

Therefore in effect 8336-8850 is a No Trade zone.

Friday, July 31, 2015

Growth vs. sustainability

Thought for the day

"There is a harmony in autumn, and a luster in its sky, which through the summer is not heard or seen, as if it could not be, as if it had not been!"

- Percy Bysshe Shelley (English, 1792-1822))

Word for the day

Schlemiel (n)

An awkward and unlucky person for whom things never turn out right.

(Source: Dictionary.com)

Malice towards none

Two Muslims were buried in India yesterday.

One was mourned by all125cr Indians.

The other perhaps by none outside his family.

And some would still argue that it's about religion!

Growth vs. sustainability

As per an ancient Hindu tradition, all Hindus are obligated to feed Brahmins and crows during the ancestors' fortnight (पितृपक्ष) that usually comes in the month of September every year. It is widely believed that feeding Brahmins and crows in this fortnight pleases souls of the ancestors and thus redeems the person performing this ritual from the debt of his ancestors.

Besides, a grand feast has to be organized by all Hindu males within 3weeks of the death of their parents, wives and children in which Brahmins, Dogs and Crows are fed.

I know from my interactions with numerous villagers and urban poor, this feast (श्राद्ध) could be one of the top 20 reasons behind perpetual indebtedness of rural Indian household, bonded labor and distress.

The moral of the story is that the feast will be held regardless of you. In case you want to enjoy the feast, you need to survive till good times (अच्छे दिन) arrive; lest Brahmins and crow shall enjoy the feast.

Relating this analogy to the politics and economics -

Ø It must be understood that to benefit from whatever good a government does, the political parties running that government will benefit from that good only if they survive to see the result of their good deeds. Otherwise, the party that will form the successive government will enjoy the benefit. We have seen this recently, when the UPA-1 government enjoyed the fruit of seeds sown by NDA-1 government.

I am sure PM Modi is fully aware of this and he would make sure that he survives long enough to enjoy the feast of all structural reforms he is trying to implement.

Ø In past one decade corporate India has invested huge amount of money in creating capacities. Many of these capacities, especially in infrastructure and real estate sector, have been created without bothering about the present demand conditions. Consequently, a significant amount of these capacities are economically unviable. Promoters who created these capacities, bank managers who funded these capacities, and investors who provided equity to these promoters and lenders - all are in distress.

There is no argument against need for these capacities. The demand will also come in next few years. But the question is who will enjoy the feast. The bank managers would have retired or shunted out for his poor performance. The promoters would have diluted his equity substantially at distress price. The equity investors would have booked the loss.

The Brahmins and Crows - the new bank manager in whose tenure these capacities will become viable adding to bank's profitability, investors who will buy equity at distress prices and acquirers who would be managing the show - will feast on the misery of others.

The conclusion is simple - Growth is critical component of life. But growth by at the cost of sustainability only benefits the Brahmins and Crows!

Thursday, July 30, 2015

Forget lift, some are already talking about QE4

Thought for the day

"If Winter comes, can Spring be far behind?"

- Percy Bysshe Shelley (English, 1792-1822))

Word for the day

Accouterment(n)

Personal clothing, accessories, etc.

(Source: Dictionary.com)

Malice towards none

How long could we afford to put the matter of terror attacks to rest just by blaming Pakistan, without assigning any local accountability?

Forget lift, some are already talking about QE4

Post Lehman collapse, for once it appeared that the US is becoming a marginal force in the emerging global order. Emerging economies like BRIC, South Africa. Mexico, Indonesia etc. asserted themselves as leaders in a new multipolar world. G-20 was formed to undermine the supremacy of G-3, G-8 etc. The global multilateral financial and development institutions also saw rise in influence of these countries in their affairs.

However, the events of past six years indubitably establish that Uncle Sam may have lost a few battles, but it is certainly on course to win the war. Consider this:

(a) Plagued by sub-prime crisis which crippled its financial institution, the US did not bow down. It successfully transmitted the disease to these resurgent emerging economies and rescued its financial institutions.

Most emerging economies, especially India and China are now struggling with huge sub-prime assets with no clue as to how to get rid of these. After all their machines do not print US$ and Uncle Sam has stopped his printers.

The troubled US banks and financial institutions are strongly back in business and to their old ways too.

(b) Many influential voices from the US have already suggested that the era of global economic cooperation and coordinated policy action seen during 2008-09 crisis is over. Fed chairperson Yellen has been quite categorical on many occasions that we will do only what is in the best interest of the US. If monetary tightening in the US disrupts common man’s life in 100 countries so be it.

(c) US exported deflation to the world through persistent zero interest rates and strong USD. This deflationary spiral has brought the commodity driven economies to their knees. The threat of petro dollars is mostly off the table now.

(d) After attaining a degree of energy independence, the US also does not bother about situation in Middle East or South Asia.

Iraq was raided merely on the basis of unfounded doubts about weapons of mass destruction. Syria has actually used these weapons and no action has been taken. ISIS is brutally beheading people at virtually at will. We are yet to see a comprehensive plan to check the menace. Sanctions on Iran have been lifted. Cuba is a friend. Ukraine is left for EU to sort out with Putin.

(e) Large ownership of US treasuries by Chinese and Japanese have been a point of pressure for US for long. However, some recent reports are suggesting that even this pressure point is gradually releasing as China has been forced to sell huge chunks of US treasuries to stem the rot in their financial markets.

As per a JPM report, YTD China has sold around half a trillion dollars worth of USD assets, rather unwillingly. More such sale is expected in coming months........(more on this tomorrow)

There are speculations over how it would impact the Fed's monetary policy decision. But one thing is certain - Uncle Sam will be the only one left laughing when cows come home.

Wednesday, July 29, 2015

Some said, some unsaid

Thought for the day

"First our pleasures die - and then our hopes, and then our fears - and when these are dead, the debt is due dust claims dust - and we die too."

- Percy Bysshe Shelley (English, 1792-1822))

Word for the day

Persiflage (n)

Light, bantering talk or writing.

(Source: Dictionary.com)

Malice towards none

"I AM KALAM!"

Some said, some unsaid

It is commonly believed amongst borrowers that the RBI’s rather disproportionate emphasis on inflation has proved to be counterproductive.

Though many professional investors and global financial and rating agencies have been quite appreciative of the governor's strong focus on price stability, the borrowers find little evidence to the effect that the monetary policy has achieved any meaningful success in reversing the trend in inflation in past two years. The argument that without such strict measures the price situation could have been worse is only hypothetical.

The global commodity crash, RBI's maneuvering in currency market to keep INR relatively stronger and material erosion of producers' pricing power due to diminished demand (both investment and consumption) has resulted in producers' price inflation being in negative territory in 2015. But that is no cause of celebration and rightly no one is celebrating.

There is some credible evidence to suggest that the tight liquidity conditions might have exacerbated the supply side constraints; which in turn are responsible for persistency in inflationary trend in consumption articles. In fact RBI has recurrently admitted that the supply constraints are more structural in nature.

I would not like to join this debate at this point in time. Though in my firm view, RBI has certainly not managed the growth-inflation trade off in desirable fashion.

The half hearted efforts to control prices that were overwhelmingly burdened with the guilt of constricting growth at a time when the whole world is struggling with serious economic slowdown have yielded little. Structurally the price situation might be as grim as it ever was. The growth has faltered and looks more threatened than before.

I am totally in favor of free and fair monetary policy regime. RBI shall have full autonomy in determining and conducting the monetary policy.

However, the autonomy should not come without accountability. RBI, through its governor, should be made accountable to the public for the course of policy it chose to follow. Like in case of many autonomous central bankers he should periodically testify to the people, through the parliament, about the appropriateness and adequacy of its policy measures in light of the extant circumstances and the future outlook based on such circumstances.

The Finance Minister, Planning body (NITI Ayog) chief, and RBI governor are commonly seen talking to each other through press conferences and TV channels.

Poor investors and common public are left in the lurch to decipher what is said, what is said without being said, what is meant by that is said, and what is left unsaid.

I am interested in knowing what catastrophe will occur if policy rates are cut by 100bps, along with 200bps cut in SLR and sale of US$10bn in open market.

Tuesday, July 28, 2015

Thank Mr. Tharoor and move on

Thought for the day

"All of us who are worth anything, spend our manhood in unlearning the follies, or expiating the mistakes of our youth."

- Percy Bysshe Shelley (English, 1792-1822))

Word for the day

Fumarole (n)

A hole in or near a volcano, from which vaporizes.

(Source: Dictionary.com)

Malice towards none

Rather frenzied response to any suggestions against commutation of Yakub Menon's hanging in 1993 serial blast case should worry the government.

It may be indicating a blemish in the primary fabric of Indianness in the garb of patriotism.

Thank Mr. Tharoor and move on

Shashi Tharoor won accolades from Indian Netizens, including the prime minister, for his passionate and impressive arguments for reparation payable by the British crown to the people of India. (see the video here)

Encouraged by the overwhelming acceptance of his argument, many must be wondering whether he should be made the Minister for Reparation of India and sent to Afghanistan, Iran, Mongolia, Turkmenistan, Tajikistan, Greece, Portugal etc. for seeking reparation for the plunder of India by Turks, Mongols, Huns, Greeks, Afghans, Portuguese, and Mughals invaders over past 2000yrs.

There are some dissenting voices who find the Tharoor's argument rhetorical and entertaining rather than substantive (e.g. Akar Patel -see here).

I being a philistine and unenlightened soul unlike Mr. Tharoor or Mr. Patel, however do not see any merit in discussing this tokenism of pride, retribution and justice.

I believe that the tendency to embellish our trite socio-economic with this sense of pride in our ancient past might in effect be harming us. The need of the time, in my view, is to move past 20th century and embrace the 21st century that may truly belong to India and Indians.

Let's accept that who British and others plundered were mostly disparate group of feudal lords who did not believe in the idea of India as a nation; many of them were equally cruel to their subjects and hence more than equal partners in invaders' crimes and plundering.

Since independence our attitude and policies towards foreign businesses and investment have been suffering from the false sense of pride in our ancient past and phobia of East India Company, Mahmud of Ghazni, and Muhammad of Ghor, et. al.

If we want to execute our vision of re-establishing India at top of the world in 25yrs we cannot afford to reinvent the wheel. We will have to rely on the technologies already developed and capital already accumulated. It is highly improbable that we could grow emulating China's cultural revolution by closing our doors to the world for a decade or more.

Nehru gave assurance to foreign investors in 1949 that there will be no discrimination between foreign and Indian capital and foreigners. The emphasis was however changed in early 1970’s with the implementation of FERA which marked the first major departure from the stated policy of welcoming foreign capital. In 1990’s FERA was repealed and replaced with much softer FEMA. However, there have been frequent flip flops on the of issue foreign investment in India despite deep recognition of the need and desirability of such capital.

Frequent controversies surrounding foreign investment through Mauritius route and recent cases like Vodafone highlight the lack of conceptual clarity and consistent framework for foreign capital.

It would be wrong to suggest that the complete removal of capital controls is desirable at this stage. However, inconsistency and incongruence in the framework governing the foreign capital is completely avoidable.

We need to remember investors will come when they like and not when we want them desperately.