Vijay Kumar Gaba

Wednesday, October 28, 2015

Bihar - where all references lose their meaning

Thought for the day

"Small aim is a crime; have great aim."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Scuttlebutt (n)

Rumor or gossip.

(Source: Dictionary.com)

Malice towards none

The feeling "Nitish for PM in 2019" is already taking roots in Bihar.

In case, Nitish wins this election - the victory speech will resonate what we heard in Ahmadabad in 2012.

First random thought this morning

Bihar could be an excellent place for the student of history to understand how the caste system operates in oppressing the poor, and how the religion is used to make the poor accept their oppression and suffering as their fate.

No wonder, in the land of Buddha and Mahavira, superstitions and meaningless rituals dominate the day to day life of the "socially oppressed" and "economically redundant".

The references "Poor" and "Backward" as used in common parlance may not apply to a significant number of Bihari populace.

Bihar - where all references lose their meaning

If your body's internal immune system is very strong, a journey through Bihar is strongly advised. It is an once in lifetime experience.

The State and her people are full of countless contradictions. From 35,000 feet you may not see much social or economic disharmony in the State. However, a little deeper dive tells you the tale you may perhaps not get to hear anywhere else.

At every kilometer in your journey you feel as if Bihar is a massive puzzle with many pieces missing and many unrelated pieces that perhaps got exchanged with the other puzzles. It is therefore almost impossible to solve this puzzle.

Poverty, gender equality, religion, spirituality, nationalism, urbanization, feudalism - all these references lose their standard meaning in the context of Bihar.

Someone sitting in Delhi and Mumbai could never imagine what poverty could actually mean. How Rs32/day income could be a luxury. How 10-15 construction laborers we see cramped in a 10x10 tin roofed room in Delhi's heat/cold may actually be living a rather luxurious life.

It is also difficult to understand that how Brahmins could wield fire arms and perpetrate terror on the poor and the helpless.

While the aspiring Indian are talking about taking over the global giants like Alibaba, Facebook, Samsung, IBM, etc. - the Bihari aspirations are still stuck in the government jobs.

The Bihari laborers who are building swanky buildings and highways across the country and could even be key to building smart cities, have constructed Bihar in most haphazard way. The roads are messy. The new houses look dilapidated. Even in cities like Patna, the concept of town planning appears to have been completely ignored.

Land of countless contradictions

You are faced with countless contradictions at each step. The incongruence appears to be order for the State.

The following examples will make it clear what I am trying to say:

(a) In this land of Buddha and Mahavira, the entire populace seems to be deeply engaged in superstitions, religious rituals (कर्मकाण्ड) that might have lost their relevance centuries ago. In fact these superstitions and religious illiteracy could be traced as one primary reason for the abysmal poverty and hopelessness in the State.

A lot of local people do visit Gaya, the place where Buddha received enlightenment, but not to seek the light of knowledge, but to perform some rituals, which most of them are not sure why should be performed.

Buddhism here is synonymous with radicalism and not identified with spirituality. Mahavira is considered mostly the god of rich Marwari.

(b) To outsiders Bihar usually means a fragmented society - where poor people prefer caste over economic development.

I found this to be little further from the truth. Prima facie, here the caste appears mostly a feudal weapon of socio-economic suppression. The rich, the landlords and the powerful of all castes use this weapon for social or economic discrimination and suppression. The poor, the helpless and the oppressed only use the caste to unite.

(c) The great Maurya kings and the legendary seer Chankaya who together achieved the dream of United India (अखंड भारत) no longer belong here. In two weeks of stay in the State, we could not find a soul who talks or thinks about the Nation or Nationalism. Even the extreme right wingers' thoughts are parochial.

(d) The populace which was in the forefront in the movement for Independence from British rule and movement from independence from the feudal rule of Congress Party is struggling with slavery. Very few raise voice against oppression; and many of those who raise voice against oppression - do so to become oppressors themselves.

(e) The State leadership has always put strong emphasis on "Secularism" (सर्वधर्म सदभाव). However, as we could see, religion as a political factor is relevant only for the "upper caste" voters. The poor and backward people have almost no inclinations towards religious divide.

(f) An average Bihari youth still aspires to be a government officer - mostly civil servant, law officer or police officer. The children from affluent families are opting for management and technical studies. But these are few and mostly leave Bihar for good once they get good job outside Bihar.

The paradox is that the populace which aspires to be administrative, legal or police officer does not come across as the one having much faith in legal and constitutional framework.

Non-compliance is the norm. Compliance is considered a sign of weakness and reason for ridicule and rejection equally by poor and rich.

(e) Despite large scale male emigration from rural areas, the sex ratio is adverse in most parts of the State.

Both urban as well as rural areas have adverse sex ratio. The areas bordering Nepal, the birthplace of Mother Sita, have the worst Sex ratio (appx 880 female for 1000 male).

I have not heard this in any political discourse or economic package.

(f) Also, no one has raised this point to my knowledge, a very conventional Bihari society perhaps comprises the largest LGBT community. Incest is not only widely in practice but also an integral part of folklores.

(g) Humor is an essential ingredient of the Bihari folk arts (music, drama, songs, literature etc.) But an average Bihari today has a very stiff upper lip. They are silent and stressed. They look much older than their age.

(h) The incidence of deadly diseases like cancer is rising disproportionately in the Gangatic plains of the State. Ganga Jal is no longer Amrut. It is in fact poison for poor Biharis. Nature is certainly not on Bihar's side.

Is someone listening?

Also read:

A Visit to Bihar

Tuesday, October 27, 2015

A visit to Bihar

Thought for the day

"It means, people who are in high and responsible positions, if they go against righteousness, righteousness itself will get transformed into a destroyer."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Kakistocracy (n)

Government by the worst persons; a form of government in which the worst persons are in power.

(Source: Dictionary.com)

Malice towards none

The Grand Alliance victory in Bihar might compel the Congress Party to leave national leadership to "Allied Forces"!

So a loss in Bihar may actually be a step further for BJP in its Congress Free India mission.

First random thought this morning

Ganga Tera Paani Amrut - is one of the most popular Hindi film song. No Hindu ritual is complete without using Ganga Jal. Then why is that the Gangatic plains of Bihar have high incidence of deadly diseases like cancer!

A doctor in Balia say Ganga bring more toxins into the State's food plate than anything else. "Ganga Jal, Tobacco and Alcohol cause more deaths in Bihar than anything else", he said with a grim face.

A visit to Bihar

I'd travelled to Bihar in 2013, along with my team, as part of our Discover India tour. Traversing through this land of rich heritage, bountiful nature and brilliant people was a rather disappointing experience.

Abysmal poverty, poor social and physical infrastructure, completely fractured political establishment, disinclined administration and deeply divided society on caste lines ‑ we saw a little reflection of much acclaimed 10%+ growth beyond a few large and tier two towns. (read more here)

After two years, when InvesTrekk™ team traveled to this politically and economically critical state again, nothing seems to have changed. In fact it would not be untrue if we say that the things have changed for the worst.

The election campaign this time is aggressive, technology intensive, bitter and thoroughly confused.

The usual fervor seen during the election time in this State with high degree of political awareness was nowhere to be seen. The populace is generally stressed, skeptic and disenchanted. This is true for all sections of the society cutting across socio-economic divide.

We sincerely believe that if the last two rounds of growth spurts in Indian economy were driven by western and southern regions, the next round of spurt could come only from eastern and central regions.

These regions are rich in resources, account for a majority of young population and hence have higher propensity for consumption, have seriously underdeveloped social and physical infrastructure base thus higher investment appetite.

Therefore, the objective of our visit was not merely to assess the mood of electorate. The idea is also to assess the preparedness of this region to attract investment and likelihood of any material rise in consumption.

Key observations

This time we travelled through 27 of 38 districts covering all 9 divisions of the State. The key observations of our team are as follows:

(a) The state of agriculture in this predominantly agrarian state continues to be pathetic. Frequent floods, uneconomical holdings, poor marketing and storage infrastructure, lack of formal credit, social biases, fragmented and inefficient food processing industry and high incidence of land related litigation are major reasons cited for lower agriculture contribution to the state economy.

(b) Low agri income and miniscule industrial base has resulted in large labor migration from the state in past 3 decades. This is a strong vicious cycle which the administration is finding difficult to break despite sizable rise in social sector spending. Bihar economy therefore continues to be substantially dependent on the economic growth in the industrialized states like Maharashtra, Gujarat and Tamil Nadu, as a large component of the Bihar growth could also be attributed to the repatriated money by laborers working in other states

(c) With rise in personal vehicle population, poor local road network has become a common complaint even in remote villages. However, inadequate power and poor water management continue to be the most regretted infrastructure bottlenecks.

(d) In past few years the willingness to educate children has increased materially. The rise in public investment in education infrastructure is visible in most parts of the state. However, most teachers in schools and private coaching centers are unfit to be even high school students. Education is certainly leading to rise in aspiration. But the competitiveness and employability quotient of graduates remains very low. Frustration rather than knowledge & competitiveness appears to be the primary outcome.

(e) Despite socialist regime in the state for past 25yrs, the socio-economic disparities continue to grow. While it is certainly a matter of extensive research, prima facie the higher economic growth in the State could be just an offshoot of growth in other parts of the country leading to higher remittances, higher social sector spending, and haphazard private construction activities in all 14 urban agglomerates.

(f) The administration does not appear to be in sync with the government. People in general believe it to be highly inefficient and corrupt. Most block and district level officials we spoke to cited routine interference in their working by politicians and non-compliant elements supported by these politicians. Law and order machinery is found grossly inadequate, unresponsive, and corruptible.

(g) The ongoing State assembly elections are tough to call. In the course of campaign NDA has lost the early advantage and appears to be losing further ground. After two rounds of elections, the advantage is with Nitish Kumar who is gaining at the expense of BJP. In our assessment, the grand alliance is heading towards a comfortable majority.

I shall be discussing these and many other aspects of our Bihar visit in detail in subsequent posts.

Monday, October 26, 2015

Nifty: At the tipping point

Thought for the day

"One of the very important characteristics of a student is to question. Let the students ask questions."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Schlemiel (n)

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

(Source: Dictionary.com)

Malice towards none

Post Bihar elections, BJP may want to review its retirement policy.

Experience after all has "Value", in fact lot of value.

First random thought this morning

1,25,000 good teachers would do much more good to Bihar than Rs1,25,000 crore economic package.

The parents are more willing than ever, students are more enthusiastic than ever, the government is more supportive than ever, the money being spent is more than ever - the only missing piece perhaps is a the teacher! Given that Bihar can regain its glory in two decades.

Nifty: At the tipping point

Nifty has reached a critical level from midterm perspective.

On monthly charts, Nifty has successfully completed the bearish H&S pattern that began to form in October 2014. Nifty corrected 1000 points in this process from monthly close high of 8902 (February 2015) to monthly close low of 7948 (September 2015) in seven months.

At Friday close of 8295, Nifty is now poised at the falling trend line within a broader 8year channel.

The market momentum has slowed down considerably in past few weeks. The monetary stimulus by PoBC and anticipated further easing by ECB next week could prompt some dovish comment from US Fed next week (meeting on 28the October) could potentially create some momentum but closing above 8300 in November would critical for breaking the downward trend.

The more likely scenario in my view is that the falling trend line resistance will be sustained in November also.

Bihar election results would provide more momentum to market than ECB or PoBC actions.

Monday, October 19, 2015

Nifty: Reaching the tipping point

Thought for the day

" Look at the sky. We are not alone. The whole universe is friendly to us and conspires only to give the best to those who dream and work."

—A. P. J. Abdul Kalam (Indian, 1931-2015)

Word for the day

Shirk (v)

To evade (work, duty, responsibility, etc.).

(Source: Dictionary.com)

Malice towards none

Should the popular TV channel Zindagi that mostly shows Pakistani serials be banned and all those who watch it be termed seditionists?

First random thought this morning

Delhi's famous Raavan markets in Tagore Garden is facing serious slowdown in business. The demand for effigies of the supreme symbol of evil is down by 25-30% this year. The economics is not the only reason behind the slow down. Youths' indifference and question mark over the supremacy of Raavan amongst the evil could be some of the reasons.

A small survey of young people to find reasons has thrown some interesting questions. For example, a female DU student quipped "Raavan sounds like a saint in front of modern days politicians and religious gurus, why to burn this poor chap!" A young CA feels "where is Ram who will kill Raavan, we have Raavans only!" Some school students at a metro station feel the trouble of going to RamLila and Raavan burning is not worth taking. They would rather "sit at home and play Angry Bird".

Nifty: Reaching the tipping point

Nifty completed the bullish inverse H&S pattern as expected a couple of weeks ago (see here), giving a decent exit to local participants as is evident from two weeks of continuous domestic outflows and fading momentum.

At 8238 weekly close, Nifty looks good for some more gains. However, fading overall momentum and peaking oscillators suggest that the gains may not be material from the current positions.

Absence of any major economic event and trickling foreign flows may keep the momentum slow but positive. Expect Nifty to gain 1-3% more from the current levels in the near term. The range for this week thus could be 8010-8470. A close below 8010 will confirm the completion of up move.

The short term (3-6 months) trend still remains downward.

Friday, October 16, 2015

Reign your temptations

Thought for the day

"How quick come the reasons for approving what we like!"

—Jane Austen
(British, 1775-1817)

Word for the day

Otiose (adj)

Being at leisure; idle; indolent.

(Source: Dictionary.com)

Malice towards none

Many seem to be implying that if you had chosen not to protest in 1975, 1984, 2002, 2013 - you have seized your right to protest!

Someone remind them that Lord Krishna acted only when Shishupal abused him for 101st time.

Reign your temptations

The current result season has expectedly started on a low note. Industry leaders like TCS, HUL and ZEE have posted results which were below even moderate expectations. More importantly, the managements of these companies are not sounding particularly optimistic about the prospects in near future.

The management of HUL has categorically confirmed many trends that I have been highlighting from time to time (see here). For example:

(a) The premium segment has done well while the economy segments have faced pressure. (See here)

(b) Rural demand has moderated and outlook remains uncertain in view of multiple constraints - lower farm income, slower wage rate growth, moderate growth in government's social sector spending and lower remittances from laborers migrated to urban centers. (Also see here)

(c) Only a part of the lower commodity prices is reflecting in the bottom line of corporates. The raw material advantage is obliterated by higher advertisement and marketing spend (A&M), larger discounts and rising wage cost etc. The pricing power has diminished considerably and competition intensified.

It is interesting to note that the higher A&M spend of consumer companies is reflected in ZEE's results (37% growth in advertizing revenue). But poor subscription growth has normalized this advantage.

On the global market side, both Infosys and TCS have highlighted muted near term outlook on moderate demand growth, persistent pricing pressure and rising costs. HCL Tech has also guided short term caution in near term. (See here and here).

On domestic investment demand front, the recent guidance from the management of L&T is noteworthy. (see here)

All this leads me to believe that we may see material downward revision in current earnings estimates once the current result season is over.

Currently, the consensus FY17e Sensex earnings estimates are around Rs1850 (down from Rs. 2050 in April 2015). Thus, at 27k Sensex is trading 14.6x FY17 earnings, close to its long term average of 15.5x one year forward multiple.

In my view, these earnings estimates may come down by another 5-8%, led by IT, industrials and consumers. In which case, the upside potential in next 12months, from the current levels, will be further moderated to 6-8%.

I am tempted to believe that the current India enthusiasm amongst foreign investors may sustain in 2016 also, leading to re-rating of Indian markets to higher multiples.

But finding ideas to execute my temptations will be a tough ask. All I want is already expensive. All that I do not want at current prices, I will not buy at 10% higher prices, no matter what.

My trader friends are suggesting buying November Nifty straddle for Bihar election results. I am not too inclined, but will take a call once my team comes back from Bihar post Dussehra holidays.

Thursday, October 15, 2015

Protecting the vulnerable

Thought for the day

"I have been a selfish being all my life, in practice, though not in principle."

—Jane Austen
(British, 1775-1817)

Word for the day

Cognoscenti (n)

Persons who have superior knowledge and understanding of a particular field, especially in the fine arts, literature, and world of fashion.

(Source: Dictionary.com)

Malice towards none

What is the raison d'être of Shiv Sena today?

Protecting the vulnerable

Indian government has raised tariff barriers on import of steel, aluminum, vegetable oils, etc. in recent weeks to protect the domestic manufacturers from global dumping.

This week India's three copper majors — Hindalco Industries, Vedanta Ltd and Hindustan Copper Ltd—have reportedly warned (see here) "the government that the sector is facing an imminent shutdown in the face of a surge in cheaper imports from Japan and ASEAN countries, which could jeopardise the Narendra Modi-led government's 'Make In India' initiative.

Operating at 75% of capacity, the industry has cautioned about further cuts in production that could impact 10,000 jobs, blaming free trade agreements or FTA which would allow an influx of duty-free copper by 2021, for making the entire sector unviable.

The stock market has reacted very positively to these protection measures. All major metal producers' stocks have surged 10-30% in past few days.

These protective measures may be desirable to protect the domestic industry from temporary cyclical adjustments in the global markets. In fact most developed countries have used these measures quite often.

However, in case of structural adjustments in global markets, the utility and desirability of these measures is highly questionable.

In my view, it is matter of wider debate whether the current slowdown is merely a temporary cyclical adjustment or it is part of a wider structural adjustment necessitated by the damages inflicted on the global economy by the recent global financial crisis (GFC).

The debate may remain inconclusive for many years, and may even last till the adjustments are fully carried out.

Under the circumstances I do not find myself competitive enough to comment on the desirability or otherwise of these protective measures in Indian context. Though I feel bad that in this festival season my favorite sweets will be expensive by 20% due to expensive ghee and sugar.

Insofar as the trading the up move in metal and sugar stocks is concerned, I would prefer to let it go; despite being highly tempted to short sell.

In this context, I would like reproduce a recent blog post of my favorite Bob McTeer. Incidentally, I fully agree with his views.

"The Trans-Pacific Partnership: Are We Up To The Challenge?

“What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” —Henry George

To close our borders to imports, that is. And to those who think exports are okay but imports are not, and that countries who have a surplus in trade with us are “killing us,” Henry also pointed out that:

“To have all the ships that left each country sunk before they could reach any other country would, upon protectionist principles, be the quickest means of enriching the whole world, since all countries could then enjoy the maximum of exports with the minimum of imports.”

The Trans-Pacific Partnership trade pact is about to test the economic literacy of the American public and politicians. I’m not optimistic that it will pass because we all understand and appreciate the benefits of freer foreign trade. Henry George would probably be disappointed. It may pass, however, because the balance of lobbying power could tilt in its favor. In other word, business interests desiring better access to foreign markets may beat the protectionists. I’ll take it that way too, if necessary.

The TTP is a trade pact among 12 Pacific Rim countries: the United States, Canada, Mexico, Peru, Chile, Australia, New Zealand, Brunei, Japan, Malaysia, Singapore, and Vietnam. These countries reportedly account for about 40% of global trade. The TTP is supposed to represent the administration’s tilt toward Asia.

I haven’t read the agreement and don’t know the details. I’m pretty sure I would regard the safeguards included for labor and environmental standards as watering it down. I’d rather have my trade pacts neat, but in this day and age I understand that won’t happen.

My limited purpose here is to arm the good guys who favor freer trade with some ammunition against specious arguments we’ll be hearing against it.

The main argument proponents use against freer trade is that it will cost jobs. Will it? Yes, of course some jobs will be lost as imports substitute for domestic production. But just as many jobs will likely be gained as exports expand. There will be job losses, but not necessarily net job losses.

This offsetting of job losses with job gains doesn’t just depend on luck. Automatic economic mechanisms will produce that outcome. When we import more, the exporting countries earn more dollars with which to purchase imports from us. If they don’t, on a multilateral basis, the dollar will depreciate against foreign currencies and make our imports more costly in dollars and our exports cheaper in foreign currencies. Flexible exchange rates tend to promote balance between our job creating exports and job killing imports. You can’t import without exporting an equivalent value over time. You can’t export without importing an equivalent value over time.

The problem is that job losses from imports or movement of production abroad are visible and easily identifiable. The job gains from exports or import substitution are less so. It’s the old seen versus the unseen problem.

So far I’ve concentrated on the jobs question. On production. We should not forget that exports are the cost of trade while imports are the benefits of trade. We are all consumers and we all benefit when output expands because of increased trade, just as we benefit when new technology increases production. All the focus in political debates is on the producer and jobs. Some of us make a living by producing something that is exported. All of us benefit from more plentiful imports.

Speaking of debates, ‘they are killing us’ usually refers to countries that have a trade surplus with us. I guess for us to kill them we have to have the surplus. This is silly.

I have a deficit with just about everybody I deal with. I buy food at the grocery store, gasoline at my local service station, get hair cuts from my barber. I have a deficit in trade with all of them because I don’t sell them anything. I have a surplus with a couple of firms I sell my services to, witch, so far, covers my deficits. My balance of trade is multilateral, not bilateral.

It’s the same with countries. We don’t have to match our purchases from each country with sales to the same country. Our surplus with some covers our deficits with others. The fact that we’ve had a trade deficit for several years covered by a surplus in capital flows does not change the principles. In the first place, its a fairly stable deficit. But, more importantly, The various balancing mechanisms, including exchange rates discussed earlier, work on the capital accounts as well. A deficit or a surplus tend to bring about their own cures over time.

Consider trade between the citizens of Texas and the citizens of California, or any other state. Since we don’t keep the records, we don’t know which has a deficit and which has a surplus. But we can be confident that corrective forces are at work, automatically, without policy intervention.

The two quotes from Henry George are devastating to the protectionist argument. However, the most famous argument against protectionism came from my hero, Frederick Bastiat, who fought the free-trade battles in France in the mid-1800s. He used wit and sarcasm to make his case. He wrote a fictitious letter to the French Parliament on behalf of the French candlemakers arguing forcefully for the shutting out of the sunlight from houses to sustain the prosperity of the candlemakers. The sunlight was, after all, unfair competition. All they wanted was a level playing field."