Vijay Kumar Gaba

Thursday, August 20, 2015

Fix the priority first

Thought for the day

"Too much sanity may be madness and the maddest of all, to see life as it is and not as it should be."

-Miguel de Cervantes (Spanish, 1547-1616)

Word for the day

Pre-prandial (n)

Before a meal, especially before dinner, e.g., pre-prandial prayer.

(Source: Dictionary.com)

Malice towards none

The Allahabad High Court order regarding the education of children of government employees etc. is bound to ruffle many feathers.

The moot point is whether the government should take this as an opportunity to reform government run education institutions or a challenge to their authority and freedom?

Fix the priority first

A recent CRISIL report on Indian power sector has highlighted many interesting facts, besides adequately flagging the distress and pain that the sector is facing.

The intimidating data about the indebtedness of the sector and the consequent pressure on lender's asset quality is well documented and has been widely discussed. The fact of falling demand of power and consequent underutilization of installed capacity has also been in news recently.

However, what has not been discussed prominently is the issue of gap between unmet power needs and actual consumption demand.

The CRISIL report highlights that about 25% of the power produced in the country (valued at Rs850bn) is lost due to inefficiencies of the transmission and distributions system whereas the rural parts of the country face an average power cut of 6hr daily. This is when the consumption demand for power has been on average 9% lower as compared to the power availability.

In statistical terms, it is estimated that if the installed capacity of 1,65,000MW operates at 70% PLF, the entire base deficit of power would be wiped off making India a power surplus nation. However, the fact remains that millions of household in the country are still without a power connection. And even those who have a power connection consume very low amount of electricity due high cost or erratic supply.

An average Indian consumes about 1000kwh of electricity annually. This compares with appx 13000kwh for US residents and 3457kwh for China.

Under these circumstances, the conventional strategies to reform power sector may not be sufficient, in my view. The government may need to beyond the usual - hike tariff, recapitalize discoms, cut AT&C losses - this time.

In my view, to find a sustainable solution to the problem, the government should first fix the priority from the following:

Revive discoms - hike tariff, renegotiate PPAs, reduce AT&C losses, etc.
Protect producers - renegotiate PPAs to pay higher prices, ensure adequate fuel supply, restructure debt at favorable terms and encourage fresh investment.
Protect consumers - 24x7 uninterrupted power supply to all at reasonable price.
Protect lenders - allowing lenders to takeover troubled projects, renegotiate PPAs and run these projects professionally.

After fixing the priority, the government should find out what would be the best way for implementation:

Nationalization of troubled power projects;
Privatization of state owned discoms; or
Internationalization of power sector by completely de-regulation and participation of global players.

Wednesday, August 19, 2015

Growth on the fringes

Thought for the day

"Thou hast seen nothing yet."

-Miguel de Cervantes (Spanish, 1547-1616)

Word for the day

Brickbat (n)

An unkind or unfavorable remark; caustic criticism

(Source: Dictionary.com)

Malice towards none

PM Modi delivered yet another entertaining performance overseas.

Hand on your heart & pinky swear - did you watch the show on TV, till the end?

Growth on the fringes

Driving through the famous Yamuna Expressway, I realized that unlike most older roads in Uttar Pradesh (and most other parts of the country), this one has no tree planted on the fringes.

May be tree planting is part of a later schedule. May be it is not.

I observed that this stretch of 145kms clean road could certainly be used for installing pillar mounted solar panels on both sides of the road without any botheration. The electricity thus generated could illuminate many villages alongside the road, and even be used for charging electric vehicles that may ply on the road in future.

It also struck my mind that why a similar exercise could not be done on the vacant land alongside rail tracks to meet a part of railways energy needs.

It is true that at present cost of thermal power perhaps is cheaper as compared to solar energy. But this gap could be easily met if the government directs a part of savings on fuel subsidy to creation of a sustainable energy security solutions.

In rural areas of east Uttar Pradesh and Bihar a majority of poor households use kerosene for lightening purpose. Providing light to these houses through this roadside or railside solar power 'plants' will save on kerosene subsidy and associated health cost also.

It would be worthwhile discussing whether installing solar panels alongside all new highways, expressways and railways could be made an integral part of the road and rail contracts at the awarding stage itself. This will in effect automatically divert a part road cess collected on sale of transportation fuel towards sustainable energy security solution.

PM informed the nation that in past one year the government has saved INR15,000cr from voluntary relinquishment of LPG subsidy. This money alone could be used to set up 2500MW roadside solar power generation capacity. One successful project will motivate many others to give up LPG subsidy.

In this environment of falling prices and credit cost, the government should focus on creating sustainable growth solutions by investing rather than obsessing about containing fiscal deficit below 4%.

I have said it many times before and do not mind repeating it again. Non-conventional power is one idea that is catching up fast with the people. A road trip across villages of UP and Bihar would show you that "Chinese Power Bank" are the hottest FMCG products for the power starved. These power banks are used to keep mobile phone operational during regular long power cuts.

Small roof top and portable solar panels is one idea whose time has come, in my view. Rising cost of regular electricity and poor availability will continue driving consumers in smaller towns and villages towards this renewable source.

I believe this certainly has the potential to become even a bigger market than mobile telephony and Maruti 800.

Tuesday, August 18, 2015

GST is not make or break

Thought for the day

"Forewarned, forearmed; to be prepared is half the victory."

-Miguel de Cervantes (Spanish, 1547-1616)

Word for the day

Auroral (adj)

Of or like the dawn.

(Source: Dictionary.com)

Malice towards none

Does Donald Trump reminds you of Ronald Regan?

GST is not make or break

In past couple of months various segments of the government have tried hard to sell GST as the panacea for faster economic growth. The sentiment has also been echoed in matching notes by the captains of Indian industry. Both the finance ministers have gone on record to say that GST will ensure double digit growth of India in immediate future.

There can be hardly any doubt about the need for and importance of a unified market and simplified tax structure. GST certainly promises to fulfill this need. To that extent its desirability cannot be challenged. No one is actually doing this. The opposition is mostly to the technical details. I am sure the issue will be sorted out in the due course. Captain Amrinder Singh, deputy leader of Congress party in Lok Sabha, has already condemned the the party stance on this publicly. It is therefore not something I will lose my sleep over.

The problem lies in the assumption that GST will catapult Indian economy into top gear almost immediately, to which I beg to differ.

The high growth phases in India have so far been mostly a function of sporadic rise in domestic demand catalyzed by fiscal profligacy, unsustainable private debt and/or global commodity cycles.

Consequently, growth has been volatile and fragile. Every decade we have struggled to remain out of the spectrum of "hindu rate of growth" due to some global crisis, poor monsoon, or political stalemate, etc.

Sustainable productivity gains have not played major role in India's economic growth structure, except perhaps for the green revolution that saw material gains in agro productivity in 1960-1970s.

Unlike many Asian economies that chose the path of industrialization on the road to economic development, we have taken the route of services. This has resulted in poor infrastructure development and lower job generation. Regional and socio-economic imbalances are two major outcome of this, adding to the fragility of growth.

Using the words of Dani Rodrick, there are plenty of world-class firms in India, and the expansion of the middle-class is unmistakable. But only a tiny share of labor is employed in productive enterprises, while informal, unproductive firms absorb the rest.

The prime minister's call of "start up and stand up" has to be seen in this context. The recent trend in "start ups" is distinctively reminiscent of dotcom bubble in late 1990s and early part of 21st century. It is bound to bring pain to many people and riches to a few and therefore has the larger potential to be a growth shock rather than growth driver.

For a sustainable and consistent 10% growth we need much more than GST. Mr. Jayant Sinha has rightly said that we need to focus on what could be done through executive orders and without legislative approvals.

Next four months, before winter session of the Parliament begins, will show how much the government is actually able to do that. I have not seen any evidence suggesting that the government is making conscious effort to avoid the path of confrontation. The managers from the government side would be better off if they carefully study the implementation of VAT and failure of HPCL/BPCL disinvestment program during Vajpayee regime.

Monday, August 17, 2015

Nifty: preparing for a rendezvous in 8620-8850 range

Thought for the day

"There are only two families in the world, my old grandmother used to say, the Haves and the Have-nots."

-Miguel de Cervantes (Spanish, 1547-1616)

Word for the day

Twittery (adj)

Tremulous; shaky.

(Source: Dictionary.com)

Malice towards none

Out of the two performances on Saturday - one at Red Fort, New Delhi and the other one near Galle Fort, Sri Lanka - which one was better?

NIFTY: preparing for a rendezvous in 8620-8850 range

On short term charts Nifty has successfully defended a triple bottom last week and recovered smartly, filling two material downside gaps created on 8th and 27th July 2015.

With most short term momentum indicators supporting an up move, it is poised to test the right shoulder of a 3month H&S pattern at ~8600.

A successful negotiation of this level (close above 8620) would establish Nifty in a tough resistance zone of 8620-8850.

At this point in time there are virtually no indications to suggest that Nifty will be able to cross this tough resistance zone in next 2-3months.

However, if it does manage to close sustainably above 8850 in next 3months, it could move past its previous highs and even closer to 9480 levels in no time.

On the reverse side, failure to cross 8850 in next 3months and a fall below 8280 will lead it to much lower levels than.

The most likely outcome for now however appears to be a rendezvous in 8620-8850 range in September before it corrects back to 8320-8650 range.

Thursday, August 13, 2015

China begins the endgame

Thought for the day

"Arrogance on the part of the meritorious is even more offensive to us than the arrogance of those without merit: for merit itself is offensive."

-Friedrich Nietzsche (German, 1844-1900)

Word for the day

Chiliad (n)

A group of 1000.

(Source: Dictionary.com)

Malice towards none

Raj Thackeray says "Salman is man without brains"!

Hmmm....lets discuss something else.

China begins the endgame

I am increasingly inclined to believe that perhaps the paradigm is shifting in global markets. I have written this thing earlier also, but considering the pertinence of the idea, I do not mind it repeating it - It is no different this time; in fact it is more likely to be 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 critical to evaluate the ongoing transition in the global market paradigm from this angle also.

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. China has joined the competition by letting CNY decline. While US has almost won the war to retain the supremacy of dollar, but not without exacerbating the disinflationary pressure in the global economy. The commodity producers worldwide are under severe financial stress and the relative currencies like AUD, RUB, CAD, BRL have depreciated materially in past one year.

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 is happening when most emerging markets are saddled with huge dollar denominated debts; energy and other mineral prices are down as Chinese extraordinary investment cycle is coming to an end; 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 especially in view of the threat of IS.

The catch phrases of past decade (GEMs, BRICS, Frontier Market etc.) may be forgotten in few years. In the new paradigm, it will be US, Germany, China, India (?) and few tiny economies like Myanmar. Good times!

(Next post on Monday, 17 August 2015)

Wednesday, August 12, 2015

CNY devaluation to strengthen disinflationary forces

Thought for the day

"Every church is a stone on the grave of a god-man: it does not want him to rise up again under any circumstances."

-Friedrich Nietzsche (German, 1844-1900)

Word for the day

Mondegreen (adj)

A word or phrase resulting from a misinterpretation of a word or phrase that has been heard.

(Source: Dictionary.com)

Malice towards none

It is a pity that AAP has adopted "lying" as the principal weapon in their fight against corruption.

Do not they know the basic tenet of Satyagraha - "Goals are important, means are equally important".

CNY devaluation to strengthen disinflationary forces

USD bull have another reason to rejoice besides the prospects of Fed lifting rates from near zero level later this year - devaluation of CNY by the Chinese central bank. USD has already surged over 20% in past 12 months, according to Bloomberg Correlation-Weighted Indexes.

Chinese authorities must have been meaning to let the control on CNY go as the data trade deteriorated over past few months. The action was perhaps delayed to get entry in SDR basket. The deferral of a decision by IMF to entertain Chinese request for CNY entry in SDR basket over weekend "released the valve".

CNY has thus joined the currency war initiated by JPY & EUR and unwittingly joined by competing currencies like KRW, IDR and AUD.

The latest move of PoBC shall add materially to the disinflationary pressures, besides adding to the debt burden of USD borrowers.

For example, as per Bloomberg estimates CNY devaluation will add US$10bn to Chinese companies' debt (see here). In case of India, as at the end of 2014, ~US$185bn (Rs11,84,000cr) worth of external commercial loans were outstanding for Indian non-government borrowers. Out of these appx 60% were US$ denominated. It is difficult to assess what is the un-hedged exposure of Indian corporate who have borrowed in USD, but even a small un-hedged part could impact the balance sheets materially.

Another cause of concern is that India's external debt profile today is certainly worse than the financial crisis period of 2008. Debt is higher, debt service ratio (annual debt payment to annual exports) is worse, reserve are relatively lower, short term maturities are almost double than 2008 when compared to Fx reserve.

Sooner or later RBI will have to let INR go beyond the red zone of 64-65/per USD. The weak balance sheets already suffering from adverse business conditions and poor debt service ability would find it increasingly difficult.

(Source Ministry of Finance)

On the positive side, the "IT & Pharma exporters" trade could strengthen further, some MNC parents may find it attractive to hike their stake in India operations or export from Indian shores.

Tuesday, August 11, 2015

Better late than sorry!

Thought for the day

"He who would learn to fly one day must first learn to stand and walk and run and climb and dance; one cannot fly into flying."

-Friedrich Nietzsche (German, 1844-1900)

Word for the day

Atrabilious (adj)

Gloomy; morose; melancholy; morbid.

(Source: Dictionary.com)

Malice towards none

The political narrative in Bihar is expectedly full of humor, satire and sarcasm.

Some elite are taking it too seriously as reflection of the political standards in India.

Better late than sorry!

Every morning, newspaper report pouring of millions of dollars in Indian start ups - mostly ecommerce related. Valuation in all these cases is just a number "XYZ invested so much USD in ABC assigning it a valuation of so much US$" is the usual narrative.

Reading all these astronomical numbers accompanied by numerous "rag to riches" stories, a common man like me does obviously feel exasperated. The question "Am I missing the once in a lifetime opportunity?" keeps pestering the conscious mind incessantly.

To be precise, I feel like standing behind a large circle of crowd gathered on a busy road jumping and sweating to see what is happening inside the circle. When you join the crowd, for once it feels like you are the only one ignorant of what is going on; everyone else appears in the full know of happenings. 'Loser" is the word which first comes to the mind for self-condemnation at this point in time.

After sometime when you settle down a bit in the crowd, you try to enquire from other people, and realize that there are many who share your ignorance. The feeling suddenly changes, like the weather on hills, when more people join the crowd behind you and ask you "what happened?" You brashly feel important and enlightened, for the moment.

The usual denouncement to each episode is that the ruffled crowd disperses from the venue with numerous versions of an event that perhaps did not took place at all.

Fully knowing you have been fooled by your inquisition and excitement to join the crowd, you nonetheless take the story home and transfer your guilt to some innocuous audience.

All those who had been part of the crowd in mid 1990s (Financial sector IPOs), late 1990s and early 2000s (ICE bubble) and mid 2000s (infra, reality and credit bubble) would certainly sympathize with what I am trying to say.

However, the new blood in the market, like each earlier episode, want to experience the things first hand; even if it means burning their hands.

Most of these start ups yet have no defined revenue model. The business models are still sketchy and evolving with the market developments. They are burning cash at crazy pace without creating any asset - physical or intangible.

If my experience is any guide, at least 75% of these start ups may die prematurely.

I have written this before also. The day is not far, when the swanky offices, fancy salaries and ambitious dreams would all lay devastated and we would need a startup that would cremate the remains of the unfortunate kids. Wonder, when the job is done, who would cremate this last startup!

On my part, I am resisting hard not to join the crowd this time. I would like the crowd to disperse and assess the market conditions at peace. Would leave the bounty for the adventurous and invest in ecommerce for annuity returns after all weak players are strained out.

Monday, August 10, 2015

NIFTY: good times ahead

Thought for the day

"You have your way. I have my way. As for the right way, the correct way, and the only way, it does not exist."

-Friedrich Nietzsche (German, 1844-1900)

Word for the day

Ballyhoo (n)

A clamorous and vigorous attempt to win customers or advance any cause; blatant advertising or publicity.

(Source: Dictionary.com)

Malice towards none

Now since the government has agreed to the Congress's land law, why not agree to their GST Bill also, so that at the least the ball is set rolling.

Changes could be done later at a convenient point in time.

NIFTY: good times ahead

The Indian market is expectedly moving in a narrow range lacking momentum to break out on either direction. Last week also despite Nifty failed to break sustain any up move.

The current level of momentum is indicating that the market may remain stuck in this range for few more trading sessions.

A positive signal from market is provided by the Crude-Sensex relative chart. Historically, the crude prices have led the market higher or lower with a lag of few months.

The current sharp fall in crude prices which is expected to continue for some more time may potentially lead the markets to much higher levels than present.

As per the past trends, other things remaining the same, the Indian benchmark indices should track the current correction in crude prices during October 2015 - March 2016. Even if the international crude prices remain at the current level, benchmark indices may gain 10-14% in next 9months.

The key to watch would be any sharp fall in INR vs. USD and/or material rise in bond yields.

Politics and legislative business is assumed to remain poor in these assumptions.

Friday, August 7, 2015

Sad and scary

Thought for the day

"Life is a series of natural and spontaneous changes. Don't resist them - that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like."

- Lao Tzu (Chinese5th or 6th Century BC)

Word for the day

Twitterpated (adj)

Excited or overcome by romantic feelings; smitten.

(Source: Dictionary.com)

Malice towards none

Should the government call for a national referendum on the issue of a unified market for the country (GST)?

Sad and scary

Three news items in past one week have been disconcerting indeed. Though not surprised, I feel sad to see that my worst fears are coming out to be true. These three news items reflect a certain degree of incongruence, lack of cohesion, inconsistency and adhocism in functioning of the government of the day.

The first news item relates to the proposal under consideration for making it compulsory for sugar mills to export millions of tonnes of surplus supplies to support local prices. (see here)

In past one decade, sugar industry has seen negligible addition in cane crushing capacity. Most of the mills are reeling under losses and reported to have unpaid cane arrears in excess of INR20bn. No bank is willing to extend credit to these beleaguered mills. Many mills in fact are reportedly considering not to operate in the forthcoming crushing season (see here). Food inflation continues to be high and RBI has expressed concerns over this in its latest policy statement (see here). The global sugar prices have corrected over 40% from the recent highs (see here). No state government is willing to review their cane pricing mechanism.

Under these circumstances, how the exports of sugar will help anyone. This will add to the global glut pushing the prices further down and make Indian producers even more uncompetitive in midterm, besides adding to inflationary pressure in the short term. There is no guarantee that after clearing the stock and repaying debt to the farmers and banks, the mills will remain viable and/or would be prepared to produce more. The situation will be same as in case of state electricity board. Despite whatever reforms and restructuring every time, they remain in deep s**t.

The second news item (see here) relates to the unavailability of a major part of the 87GW power generation capacity created over the last 6yrs due to lack of fuel linkages or buyers. Approximately 10GW of gas-based projects are completely stranded due to non-availability of sufficient gas to run them. Some 16GW based on imported fuel is at risk since costs can’t be passed on and another 13GW is facing inadequate coal supply.

One fails to understand how "Make in India" and "Skill India" could even be fathomed without these power capacities operating at full capacity. Instead, the government is pouring humongous investment in expensive solar and wind power energy (see here).

Third news item (rather a series of news items) relates to government's failure in getting the Parliament to function. The principal opposition Congress Party had made its intentions clear well in advance. Despite this the government did not have a plan. Instead of giving it back to the opposition, the ruling party leaders appeared happy playing victim, rather bizarrely. Masochism is the word for their disposition.

It appears that perhaps they also do not want critical bills having implications on state center relationship (GST and Land Bill) being discussed in the Parliament before Bihar election. BJP still seems to be suffering from the idea that they lost Delhi election due to Land Acquisition Ordinance.

This, if true, is a sad and scary commentary on the state of political affairs in the country.