Vijay Kumar Gaba

Tuesday, December 8, 2015

Will 2015 have a happy ending?

Thought for the day

"Everybody, my friend, everybody lives for something better to come."

—Maxim Gorky (Russian, 1868-1936)

Word for the day

Gambol (v)

A skipping or leaping about in frolic.

(Source: Dictionary.com)

Malice towards none

Who is a Hindu? Who is a Muslim? Who is a Sikh? Who is a Christian? Who is an Indian? Who is a patriot? and What is tolerance?

And what is this whole debate about?

First random thought this morning

Someone suggested the other day that education in English is insufficient to teach humanitarian and patriotic values. English education can only train us enough to be able to earn our daily bread.

I find this not only insulting to a great language, which unites the people of the whole world, but also to all those patriots, reformers and humanitarians who happen to be educated in English - Ambedkar, Gandhi, Bose, Vidyasagar, Aurobindo, Tata, Naoriji, Naidu, to name just a few.

I find it akin to saying - earning in US$ is unpatriotic and inhuman.

Will 2015 have a happy ending?

Next week the members of the US Federal Reserve Open Market Committee members meet to deliberate, inter alia, whether it's good time to begin hiking key policy rate to further normalize the monetary policy.

It is pertinent to note that the process of normalization had begun in October 2014 when US federal Reserve started tapering the monthly purchase of mortgage backed bonds under third round of quantitative easing program that was initiated in the wake of global financial crisis post collapse of Lehman Bros. in 2008.

There is near consensus that near zero rates are unsustainable & undesirable and it is therefore inevitable that rates will begin to go up. To that extent the hike in the Fed fund rate (akin to repo rate in India) is much anticipated.

What is being debated is (a) whether December 16th is appropriate time to begin raising rates, considering the present global economic conditions, or the decision could be delayed further; and (b) what should be the trajectory of hiking the rate?

The market has been reacting to each data point and statement that indicates to imminent hike or otherwise since past six months. Given that the hike is much anticipated and almost inevitable, this volatility and indecision amongst market participants is intriguing. It highlights to me that the market is unable to comprehend the ripple effect a Fed rate hike will cause. I therefore do not agree with the viewpoint that a US Fed rate hike is mostly factored in the current asset prices.

If the hike does materializes on 16th December a stronger USD, higher bond yields, weaker commodity prices, and sell off in EM equities could be a knee jerk reaction. However, it will be quite some time before the full impact of such move is assimilated.

A US Fed rate hike will not merely symbolize a willingness to restore normalcy in the US monetary policy. The decision may also signal beginning of a new era in global economic order - where widespread trade imbalances created over past two decades would correct and huge reserves accumulated by surplus countries would dissipate.

The real worry is that a large majority of market participants - brokers, analysts, investors, economists, entrepreneurs, business managers et. al. - have not experienced any such transition. All those who are used to near zero rate, easy liquidity, Chinese demand, huge commodities capex and consumption demand from billions plus EM citizens climbing out of poverty may find it hard to adjust. The business managers whose business models have evolved around near zero rates would need to make material adjustments. Some of them will eventually adjust, but many of them will not be able to do so.

However, if Yellen & co. decide to defer the hike decision in favor of a peaceful Christmas vacation, we may see a happy ending to 2015.

Monday, December 7, 2015

Nifty: Advantage bears

Thought for the day

"A good man can be stupid and still be good. But a bad man must have brains."

Maxim Gorky (Russian, 1868-1936)

Word for the day

Spoonerism (n)

The transposition of initial or other sounds of words, usually by accident, as in a blushing crow for a crushing blow.

(Source: Dictionary.com)

Malice towards none

Government: Drive your car on alternate days.

Citizen: I will drive my alternate car every day.

First random thought this morning

Anyone who has followed the Amir Khan's "Quit India" episode on social media even casually, would have noticed three things: (a) Social media is perniciously nurturing the herd mentality of the users that could be easily manipulated by insidious shepherds; (b) 99.99% users would prefer to eat any rotten food rather than cooking for themselves; (c) most user feel guilt for not doing enough for the society and the country and relieve their conscience by forwarding guilt inducing messages to others.

Nifty: Advantage bears

For the first time in past four months, Nifty gave a Sell signal simultaneously on Daily, Weekly and Monthly charts, a definite signal of weakness.

Especially on daily charts Nifty is positioned precariously on the break down point of trend line from the beginning of the current bull market from August 2013. Besides, it is also on the verge of completing a bearish head & shoulder formation.

The Nifty bears shall have a distinct advantage from this point forward. The market may witness selling on all upward moves from here.

A gap up opening above 7814 today, on positive global cues and GST optimism, shall save the day for Nifty in the near term.

Traders may begin to build gradual short positions above 7945 level. Aggressive shorting may be considered below 7667 (on closing basis) or above 8260 level.

Friday, December 4, 2015

TINA is ephemeral

Thought for the day

"It is amazing how complete is the delusion that beauty is goodness."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Propinquity (n)

Affinity of nature; similarity.

(Source: Dictionary.com)

Malice towards none

My Gotra and Caste is asked every time I conduct a religious ritual - from birth of a child to death of an elder.

So what's wrong in this, if it changes nothing in terms of conduct of rituals or cost of ritual?

And why the government should interfere in this, if

First random thought this morning

Extensive media coverage of Chennai deluge has drawn global attention to the city. There is rush to help the marooned people. It always feels good to see so much concern for fellow countrymen and humanitarian efforts.

What I do not know is what is the condition in other coastal areas, especially small villages. Are those poor people getting adequate help?

TINA is ephemeral

Yesterday I highlighted that there is a debate as to whether TINA (there is no alternative) puts India in a advantageous position to draw larger share of global investment; or this actually makes India more vulnerable to incremental deterioration in the global economic conditions? (see here)

This debate is prominent as India's peer largest EM group (BRICs) are facing serious economic challenges.

Brazil is in the midst of a dramatic economic downturn that’s left the country to suffer through the worst inflation-growth outcome (i.e. stagflation) in more than a decade.

Unemployment and inflation are soaring (annual headline IPCA inflation at 10.28%, unemployment at 7.9% in August, up from just 4.7% a year earlier) while output is plunging (IBC-Br monthly real GDP indicator down 6.1% Y/Y in September) and the market is losing confidence in the government’s ability to end a political stalemate on the way to shoring up the fiscal books and hitting primary surplus targets.

Russia is in crisis again, having been hit with the double whammy of plummeting energy prices and heavy sanctions laid on by the West over Putin’s foreign policy.

Given that the country has been in recession for over a year as $40 oil doesn’t pay the bills country’s struggling economy, the probability of a Russian default cannot be as low as the CDS pricing is indicating.

(Source: Bloomberg)

China has reached “peak debt”. Additional borrowing will not only prolong the Ponzi and thereby exacerbate the eventual crash, but won’t even do much in the short-run to brake the current downward economic spiral. That’s because China is so saturated with debt that still lower interest rates or further reduction of bank reserve requirements would amount to pushing on an exceedingly limp credit string.

To wit, at the time of the 2008 crisis, China’s official GDP was about $5 trillion and its total public and private credit market debt was roughly $8 trillion. Since then, debt has soared to $30 trillion while GDP has doubled. And that’s only when you count the massive outlays for white elephants and malinvestments which get counted as fixed asset spending.

So at minimum, China has borrowed $4.50 for every new dollar of reported GDP, and far more than that when it comes to the production of sustainable wealth. Indeed, everything is so massively overbuilt in China——from unused airports to empty malls and luxury apartments to redundant coal mines, steel plants, cement kilns, auto plants, solar farms and much, much more—-that more borrowing and construction is absolutely pointless.

Though the market may like to work on TINA basis for few months. But in my view this is a bad news for India. As I mentioned a few days ago (see here), in past one decade the export destinations of India have changed in favor of emerging markets from developed markets. The share of North America and Europe has fallen in India's export basket whereas Asia and Africa have gained. Besides USA, China (including HK), UAE and Saudi Arabia are now amongst our top five export destinations.

Many of these economies might be in a midterm downtrend due to correction in commodities cycle; hence the export demand from these economies may not pick up in hurry. In fact these economies account for much of "invisibles" also, and could be an additional cause of worry on that count too.

I believe, weakness in emerging markets, especially China, is rather a bad news for Indian economy.

...more on this next week

Thursday, December 3, 2015

What's amiss?

Thought for the day

"One of the first conditions of happiness is that the link between Man and Nature shall not be broken."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Winkle (v)

To pry (something) out of a place.

(Source: Dictionary.com)

Malice towards none

Heard many parts of the parliamentary debate on intolerance.

(a) Found the entire debate intolerable.

(b) Failed to understand what MPs were actually debating about.

First random thought this morning

I feel the whole problem lies in the assumption that our elected representatives are demigods and therefore infallible.

Half the intolerance and frustration will go if we change our assumption and accept that the politicians are normal human being like ourselves and would do whatever it takes to protect and promote their vested interests.

The next logical step would be to elect only those people whose vested interests are aligned to common men and not those who promise to 'provide for common men' from the riches they will make through their political election and social elevation. If it sounds like Marx, it's ok.

What's amiss?

The recent data about India's economic growth has triggered three debates:

(a) The disaggregated data does not corroborates the headline growth number. How to reconcile these two? Is there a subterranean current in the economy which the disaggregated numbers like corporate earnings, credit growth, PMI, capacity utilization, business confidence, investment demand, gold demand etc. are not able to capture; or there is some error in capturing the headline growth numbers?

(b) The new methodology is globally more accepted and better measure to capture the economic activity. But whether the jump it is showing in economic activity is really due to incremental improvement or merely on account of the change in method? Some analysts have highlighted that "perhaps deflators have been underestimated in the new GDP series because services deflator has been pegged more to WPI than CPI. Correcting the CPI/WPI ratio since the start of the new national accounts series, real GVA growth could possibly be overestimated".

(c) Indubitably, the BRIC peers of India are going through a challenging economic downturn. Same is true with most other meaningful emerging markets. The debating point is whether TINA (there is no alternative) puts India in a advantageous position to draw larger share of global investment; or this actually makes India more vulnerable to incremental deterioration in the global economic conditions.

I am not an economist and I certainly do not understand much of the economic jargon. But I can confirm on the basis of what I have seen during my frequent travels to various parts of the country in past few months (including remote villages in Bihar Seemanchal area, rich farmlands of Western UP, Punjab and Haryana, tribal areas of Chhattisgarh & Jharkhand, industrial estates of Gujarat & Maharashtra and trading hubs of Delhi, Mumbai, Hapur, Rajkot, & Surat etc.) that most traditional businesses and households are facing multiple challenges and are seriously stressed.

From media headlines I find that the new age businesses, mostly technology based start ups and e-retailers are throwing some big numbers, both in terms of fresh investment and incremental revenue growth. I am not sure how much these matter in the bigger picture of a US$2.5trn economy comprising 1.26bn people.

The good part of the data is that the 32bps QoQ jump in GVA was mostly contributed by the higher government spending. The government getting back to investment business is very encouraging. However, I will watch it for two more quarters to confirm whether it is sustained or dissipated due to higher revenue spending and political expediency.

From what I see, I may say that our economy may not deteriorate much from here. However, I may not necessarily agree with view that we are already in the "middle" of a recovery. At best we are just beginning to recover and continue to remain fragile and vulnerable to potential global shock......to continue

Wednesday, December 2, 2015

Negawatt more valuable than Megawatt

Thought for the day

" I sit on a man's back, choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means - except by getting off his back."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Quixotic (adj)

Extravagantly chivalrous or romantic; visionary, impractical, or impracticable.

(Source: Dictionary.com)

Malice towards none

The developed nations' stance on climate control - नौ सो चूहे खा कर बिल्ली हज को चली!

First random thought this morning

One can understand politicians to preach tolerance to people so that no one raises voice against their misdeeds.

But thinkers, writers, artists, who have always lead revolutions from the front, wanting people to be tolerant is little perplexing.

सबसे ख़तरनाक होता है
मुर्दा शांति से भर जाना
तड़प का न होना सब सहन कर जाना
घर से निकलना काम पर
और काम से लौटकर घर जाना
सबसे ख़तरनाक होता है
हमारे सपनों का मर जाना
(Avtar Singh Sandhu 'Pash')

Negawatt more valuable than Megawatt

The government's desired path of double digit GDP growth would require energy consumption to grow at around 7% annual rate, even allowing for the trend growth in energy intensity.

As IEA stated in a recent report, despite gradual rise in domestic production, the import of energy by India would continue to be rise in next decade.

Moreover, in achieving sustained higher growth double digit growth target, the challenges to protect the environment will also intensify. It will be necessary to evolve mechanisms through which a suitable balance can be struck between the energy requirements of development and the environmental needs.

The government resolve to change the energy mix by materially increasing the share of energy from renewable sources is commendable, but the imperative need to achieve higher level of energy efficiency besides focusing on augmentation of domestic supplies of energy cannot be ignored.

The domestic consumption of electricity in India is about one fourth of the total. In past decade per capita availability of electricity for households has improved significantly, but is still abysmally low in global comparison. However, the steadily rising household income and village electrification program is leading to accelerated rise in demand for electricity.

Currently, in India, 14 out of every thousand people own a car as against 20 in China and 140 in Brazil. Developed countries like Germany, UK, Japan and US have a ratio of 400 cars per thousand people. The rising household disposable income has led to conspicuous increase in the total addressable market for the passenger cars.

The relatively low cost, energy savings and carbon emission reduction potential that could come from improving energy efficiency in buildings, transportation, industrial processes etc. is yet to be fully exploited; though there has been a conspicuous interest in renewable energy.

Therefore, while endeavoring to increase the production of energy through conventional and renewable means, it is also critical to promote energy efficiency. The efforts like promoting LED lamps for lighting are encouraging indicators.

A unit of energy saved by a user is greater than a unit produced, as it saves on production losses as well as transport, transmission and distribution losses. Thus a “Negawatt”, produced by a reduction of energy need has more value than a Megawatt generated.

I would be delighted to see government setting a target of 10,000 Negawatts of energy efficiency in next four years, besides 20GW target of renewable energy production.

Tuesday, December 1, 2015

2016 Budget Speculations - 1

Thought for the day

"All happy families resemble one another, each unhappy family is unhappy in its own way."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Nocturne (n)

Music: a piece appropriate to the night or evening.

(Source: Dictionary.com)

Malice towards none

GST may be a good beginning, but by no means it's panacea for all that ails Indian economy.

First random thought this morning

The Congress Party disrupted the entire monsoon session of the Parliament insisting that EAM Sushma Swaraj, MP CM Shivraj Singh and Rajasthan CM Vasundhra Raje must resign before the Parliament transacts any business. The winter session has begun and we are not hearing any such demand. What should we infer from this?

(a) Congress Party is not serious about the issues it raises. (b) The Party was actually bargaining for some something else and resignations were not the real issue. (c) The government has offered something really meaningful to Congress for not raising the issue of resignations again.

In any case where do the People of India come in the whole picture?

2016 Budget Speculations - 1

The government looks determined to make laws and procedures relating taxation simpler, transparent and predictable. The objective is to promote ease of doing business, improve compliance level, minimize litigation and disputes, and augment revenue collection through better Tax-GDP ratio.

Everyone acknowledges it is going to be a tall order. It may lead to higher incidence of tax in the short to medium term. For many who are used to exploiting the loop holes in the extant system or have managed to stay out of the taxation net, the process may rather excruciating.

Some of the most garrulous supporters of the tax reforms may actually not savor the actual implementation of taxation reforms, inasmuch as the tax reform for them usually means more exemptions & lower incidence of tax.

In my view, the process of taxation reforms may actually impact the sentiments in stock market negatively.

Though I sincerely believe that the government may not want to rock stock markets when, inter alia:

(a) The global markets are entering a period of turbulence with rate hike by US Fed;

(b) The government might need to raise much higher amount of resources through sale of public sector equity;

(d) FPI flows could turn materially negative due to unwinding of US carry trade and risk-off conditions in global markets.

From the bytes I have gathered from the ministers and officials at North Block, in particular the following tax proposals in the Union Budget for FY17 could rattle the sentiments of market participants:

(1) Abolishing the complete exemption of long term capital gain on sale of equity share and equity mutual funds. This may not have much revenue impact, but may be considered critical for improving compliance, especially in light of the recent SEBI probe into blatant misuse of this provision for money laundering and tax evasion.

(2) High service tax to align service tax rates with proposed GST rates.

(3) Withdrawal of a multitude of exemptions for business class assesses so that the marginal rate of tax could be brought down to target 25%. This will definitely result in higher incidence of taxation of business.

(4) The implementation of 7th Pay Commission and OROP will leave a large hole in finances of governments (state and center) and railways. The hole may be sought to be filled partially through higher effective tax on discretionary consumption and lower subsidies.

(5) The government may also consider some sort of "smart city cess".