Vijay Kumar Gaba

Wednesday, February 10, 2016

Douse the fire, and make house fireproof - II

"The idol of today pushes the hero of yesterday out of our recollection; and will, in turn, be supplanted by his successor of tomorrow."

—Washington Irving (American, 183-1859)

Word for the day

Aeromancy (n)

The prediction of future events from observation of weather conditions.

(Source: Dictionary.com)

Malice towards none

Do you trust Headley?

First random thought this morning

After living 7years in Mumbai, I shifted back to Delhi last year.

Personally, I do not find any perceptible difference in the air quality of Mumbai and Delhi. My young kids haven't have any notable respiratory complication in past one year. I do not suffocate during my morning walks or evening strolls on the roadside. My neighbors have got their lungs screened last weekend, out of paranoia. Doctors found no trace of toxins everyone is claiming to be abundantly present in the city's air.

The website of Delhi Development Authority (DDA) still claims that Delhi is "the greenest capital city" in the world. CBI may investigate whether there is a major scam behind all this!

Douse the fire, and make house fireproof - II

In past three decades, the steel and textile industries in India have been a regular pain for the banking sector; responsible for demise of development institutions like ICICI, IDBI, IFCI and UTI. Though the current credit cycle is led by power and infrastructure sector - steel (including mining) is no less a pressure a point even now.

A forensic study of the problems of the steel and textile industries, to determine the causes of frequent relapse, would be in order. It is especially critical in view of the virtually painless growth of capital intensive automobile, telecom and pharma sectors. These sectors have managed the global competition and grown without much protection from government.

In fact, so far the entire new economy (euphemism for information technology, media, telecom and related services) has not been much of a trouble for the banking system. We did not hear about any major defaults in the aftermath of dotcom crash at beginning of this millennium. Even a major event like Satyam, in later years, did not leave any scar on the banking system. Capital intensive telecom industry has grown leaps and bounds in past two decades, without bothering the banking system at all.

In past few years ecommerce sector has been logging high growth. Most of this industry has been financed by risk capital. Banking system, a major beneficiary of the growth in the sector, has not have much to bother about.

I find the "large employer" excuse for continuous protection to steel and textile sectors, much less persuasive now. I know for sure, incrementally telecom sector has been the largest employment creator in the country. Automobile and pharma sectors also do not lag much behind.

I have few questions bothering me. For example,-

(a) Isn't it a good time to tell the errant entrepreneurs in steel and textile sectors to set their house in order, become globally competitive or shut shops? My gut feeling is that their total economic contribution to the economy would not be more than the value of damage they must have inflicted to the economy in all these years, in terms of bad loans, disruptions, labor unrest, litigation, etc.

(b) The growth in telecom sector may plateau in next few years. There are indications that revenue growth may no longer match the rise in costs. The spectrum auction next fiscal will increase the exposure of banking sector to telecom industry significantly. Do RBI, banks, industry and the government have a plan there?

(c) The first round of elimination in ecommerce has already begun. This will only accelerate as the industry matures. Though the direct exposure of banking system to the sector may be low. But indirect exposure could be serious - housing, auto, education and other personal loans to people who will lose their jobs. What's the plan there?

(d) The push to Start ups may entail larger participation of banking sector. Have we developed a robust screening and due diligence mechanism to select only the right kind of start ups for promotion? Or we plan to fund all and then count losses?

Tuesday, February 9, 2016

Douse the fire, and make house fireproof

Thought for the day

"They who drink beer will think beer."

—Washington Irving (American, 183-1859)

Word for the day

Alpenglow (n)

A reddish glow often seen on the summits of mountains just before sunrise or just after sunset.

(Source: Dictionary.com)

Malice towards none

The reaction of the global community to every misadventure of Kim is a surety that no one is prepared for a bigger war, and it's not happening in foreseeable future.

First random thought this morning

A full scale Sino-Indian partnership can solve many of world's problems today. Capital starved India could benefit from idle factories and decongested ports of China. Demand starved China could benefit from most confident Indian consumers. Indians could learn discipline and austerity from Chinese commoners. Chinese could learn English and democracy from Indians.

With more than one third of global population, they both could together dominate the global markets and politics.

But how do we do away with history of mistrust? Utopian thought...duh!

Douse the fire, and make house fireproof

Continuing with the efforts to protect domestic steel industry, last week the government prescribed minimum import price for 173 steel products.

The primary objective of the measure is to protect domestic steel producers from dumping of cheap produce by global competitors. The collateral benefits will accrue to the banking industry saddled with huge amount of loans to the domestic steel industry.

For an insider the measure might be necessary and unavoidable given the financial stress steel industry is facing and the extent of banking sector exposure to the industry that would have gone bad but for this measure.

But sitting at an arm's length, it appears an act of black mailing and arm twisting by large steel producers, who judged demand growth wrongly and rushed to set up new capacities. No surprises if the bankers who extended huge amount of loans, apparently without due diligence, to these steel czars are also found in cahoots.

Thinking philosophically, prescription of minimum import price for steel products, appears illogical and incongruent with the vision of the government.

First, it is an impediment to the Make in India mission of the government. In words of Engineering Export Promotion Council (EEPC) imposition of minimum import price on certain steel products will have a "serious debilitating" impact on the sectors' exports which are already declining.

The introduction of minimum import price (MIP) on steel products will raise the cost of raw materials for engineering products by about 6-10%, EEPC said in a statement.

"Segments like auto and auto parts, industrial and electrical machinery, products of MSME sector, which in any case have low margins and are facing cut throat competition will face sudden escalation in raw material price, giving a further jolt to the exporters," it added.

The move would also have an inflationary impact on the entire manufacturing sector, it said, adding "the government must provide steel at global competitive prices."

Second, the practice may encourage over-invoicing of imports to evade additional duties. This will defeat the government's mission to minimize the incidence of black money in the economy. Higher cost for domestic economy and flight of capital by way of rise in hawala transactions have been the outcome historically.

Third, and the worst, it may not help the steel industry much as, the measure may result in an inverted duty structure for many engineering products, making import for manufactured items more beneficial rather than importing raw material and making it here.

We have seen similar situation in edible oil and tyres.

...to continue

Monday, February 8, 2016

Nifty: greed still dominating sentiment

Thought for the day

"I've had it with you and your emotional constipation!"

—Washington Irving (American, 183-1859)

Word for the day

Desiderata (plural noun)

Things wanted or needed; the plural of desideratum.

(Source: Dictionary.com)

Malice towards none

The advertizing corporates are turning intolerant towards Amir Khan.

Will a celebrated career end for absolutely wrong reason?

First random thought this morning

A visit to the Auto Expo in Grater NOIDA last weekend made four things clear: (1) The aspirations of young India are really flying high; (2) Indians' preference for larger and better cars is growing with each new model launch; (3) The Indian car market is becoming seriously competitive; and (4) Our administration is seriously unequipped and under-trained for holding large events.

Nifty: greed still dominating sentiment

The current market cycle started in September 2013. Like any other bull market, the broader markets have massively outperformed the benchmark indices in this cycle too.

Though the two corrective phases, one in August-September 2015 and the other in January-February 2016 have reduced the outperformance to some extent, however there is still nothing to suggest that the market cycle that started in summer of 2013 is coming to an end.

Juxtaposed to persistently lower volatility, increasing participation of domestic investors despite consistent FPI selling in past many weeks, good response to IPOs, and mostly positive market breadth, it could be said that greed is still the dominant sentiment in the market and no collapse is imminent, save for a Lehman type global event.

As I highlighted last week, in strict technical sense, Nifty has already secured a midterm bottom around 7200 and looks set for an up move on monthly charts. After trading with higher intraday volatility short term charts have also cooled down a bit. A weekly close above 7610 will set market up for a decent up move. Anything below 7350 is a buying opportunity for me.

Friday, February 5, 2016

Governance by ambivalence - II

Thought for the day

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

—Karl Marx (German 1818-1883)

Word for the day

Kerflooey (adv)

To cease functioning, especially suddenly and completely. E.g., As soon as the storm hit, every light in town went kerflooey.

(Source: Dictionary.com)

Malice towards none

What should the government aim for - "gender equality" or gender neutrality"?

First random thought this morning

Last week I received more than 20 "Forwards" of a Whatsapp message celebrating announcement of our National Anthem as "the best anthem" in the world by UN!

I was not surprised by this ridiculous claim or the celebrations over it. I have been witnessing this hubris since my childhood. What bothered me was the people who were spreading this message. These were CAs, IIM graduates, senior bankers, principal of a prestigious private school, et. al.

On the positive side, I can now explain many election results better and can forecast many more even better!

Governance by ambivalence - II

Last month, a village panchayat in Aligarh (UP) decided that farmers already staggering under the burden of a bad crop and loans should not be expected to continue the tradition of Mrityubhoj, the ritual feeding of people on the 13th day of death. (see here)

The Panchayat said that only 10% of farmers and villagers have 20 bighas (~1 hectare) and above of land, the rest have only 10 bighas (~0.5 hectare) or less. They should, therefore, be freed "from expectations of feeding people, a ritual that often involves huge expenses.

The event, though not reported prominently in media, is very significant in the overall socio-economic context of the country.

It is common knowledge that death, birth and marriages are three most important reasons for household indebtedness in India. This is more true in case of Indians living in rural areas, but also applies to the city dwellers.

Many of these traditions and rituals have perhaps outlived their relevance and have serious economic and social consequences.

For example on economic side, these practices have been seen leading, inter alia, to (a) wasteful expenditure by way of elaborate and unaffordable ceremonies and feasts; (b) misallocation of capital, e.g., by way of buying gold and avoidable (often prohibitively expensive) debt; (c) misallocation of labor, e.g., by way of bonded labor and unnecessary migration.

On the social side, malice like female infanticide, dowry deaths, exploitation by money lenders and bonded labor, mindless migration to cities, oppression of poor and lower caste people, human trafficking, could trace their genesis in these practices and rituals.

I have no qualms in saying that any economic reform program cannot be effective if it does not deal with these aspects of socio-economic milieu.

Unfortunately, so far political expediency and shortsightedness has constricted our political establishment from addressing these issues. On the contrary, we have seen many instances of elected leaders encouraging and promoting such practices.

Another social issue that has serious economic consequences is the issue of women rights. The recent agitations over women's right to enter places of worship.

What I understood from my discussion with some administrators, law enforcers and politicians is that (a) everyone is approaching the issue from the three angles of religious sanctity, gender equality and social acceptance. Whereas, in my view, given the modern context, the government should be working towards achieving the goal of "gender neutrality".

So rather than providing for gender based reservation and concessions, the ultimate goal should be to eliminate the Gender column from all forms & documents; and obliterate all gender based references from the statute books. In the interim a firm stand should be taken towards anything that is found discriminating on the basis of gender (of course including the 3rd gender).

Thursday, February 4, 2016

Governance by ambivalence

Thought for the day

"History repeats itself, first as tragedy, second as farce."

—Karl Marx (German 1818-1883)

Word for the day

Aposiopesis (n)

A sudden breaking off in the midst of a sentence, as if from inability or unwillingness to proceed.

(Source: Dictionary.com)

Malice towards none

Why denial of VISA to Anupam Kher by Pakistan should be an point of discussion in India?

First random thought this morning

As per media reports, the government may consider asking cash rich PSEs like Coal India and NALCO to buy back shares from the government. This will help the government to meet its disinvestment target.

While there could be a valid argument that such buyback will enhance RoE of the companies and hence eventually benefit the minority shareholders. But this argument does not settle the moral and ethical issues.

Rather, the disbursal of cash through dividend would be more appropriate and just from minority shareholder viewpoint.

Governance by ambivalence

One of my dear friends quipped the other day that "Either PM Modi is a great student, or the only student left in the country, as everyone is out there to teach him a lesson!"

Listening to some ministers in the union cabinet and BJP spokespersons, I find that my friend is not alone in his exasperation over criticism of the Prime Minister. They all believe this criticism is actually not due to him.

I however beg to differ from them. I find this exasperation yet another sign of the ambivalence of BJP and the government on many critical issues of social and economic importance. I count the confusion created by this ambivalence amongst the reasons for socio-economic chaos the country is witnessing at present.

Let me explain it in some detail.

PM Modi likes to ask questions in all his public speeches. He asks questions very emphatically and repeatedly. From the day he assumed the highest executive office, his endeavor has been to seek suggestions and advice through various portals and forum. If PM himself wants to have a participative democracy, it is natural for people to give advice and suggestions. The point of ambivalence however is that if you want to learn from people's experience, they will teach you a lesson, then why get exasperated!

There are many instances of ambivalent standpoints, that have created avoidable confusion amongst investors and citizens alike.

The government wants India to become a preferred tourist and investment destination for the world. But most of its constituents are stuck in medieval mindset insofar as lifestyle is concerned. The ambivalence on the issue of sale & consumption of products like liquor, tobacco & beef and decriminalization of same sex relationships is however confounding. How could one expect foreigners to call India home under these circumstances.

Would it not be more appropriate if the government restricts its role to enforcing law and order and leave these issues to the discretion of people? If at all, BJP can run a public campaign to "educate" people about "bad" impact of these products and such behavior.

Alternatively, if the government is sure about its stand, why not initiate a public debate, conduct a referendum and bring a constitutional amendment to ban production, sale and consumption of all "sinful" products and services.

Similarly, there is a great deal of emphasis on innovation, technical knowledge and modern life style through programs like Startup India, Skill India, Smart Cities, Clean India, Digital India. However, there is little effort on modernizing the primary education system. On the contrary it is common to hear some minister or the other advocating traditional methods of imparting primary education implemented originally by Lord Macaulay.

...to continue tomorrow

Wednesday, February 3, 2016

Rajan puts the ball in Jaitely's court

Thought for the day

"If anything is certain, it is that I myself am not a Marxist."

—Karl Marx (German 1818-1883)

Word for the day

Cupidity (n)

Eager or excessive desire, especially to possess something; greed; avarice.

(Source: Dictionary.com)

Malice towards none

I support Maneka Gandhi's suggestion of a compulsory sex determination test on all fetus!

This should be followed up by appropriate counseling of would be parents and safety precautions for female fetus.

First random thought this morning

Jumping traffic signal is not just a minor legal offence. It is a manifestation of the total disregard for the right to a peaceful and safe existence.

It is no different from selling adulterated food and fake medicine; using infected devices in a hospital; leaving potholes and uneven road behind after digging the road for utility repairs; allowing people to travel on the roof of a train or bus; or simply killing someone in a fit of anger or over joy.

Disregard for others' right to safe and peaceful existence should carry strictest possible punishment and this law should be enforced earnestly.

Rajan puts the ball in Jaitely's court

With a strong backhand smash, Governor Rajan has put the ball forcefully in the government's court.

Like a good teacher, Governor Rajan gently patted on the back of the government and threw in couple of advices embalmed with a good deal of caution.

While appreciating the current momentum of growth as "reasonable", the governor highlighted that it is certainly below the potential and also below the medium term expectations.

Expressing concern over cooling growth drivers, he advised the government to "rekindle the growth drivers" to achieve a "durably higher growth trajectory".

Highlighting the challenges for the finance minister, the governor sought continuous improvement in the business environment to revive the private investments while continuing the fiscal consolidation efforts. The advise embalmed with caution went like this "Underlying growth drivers need to be rekindled to place the economy durably on a higher growth trajectory. The revival of private investment, in particular, has a crucial role, especially as the climate for business improves and fiscal policy continues to consolidate".

To rub off some Davos effect, the Governor did not forget to highlight the responsibility India bears to the global economy. Being one of few islands of stability in otherwise challenged world, India cannot compromise on its commitment to financial stability, fiscal discipline and sustainably faster growth.

Reiterating his commitment to objectivity and transparency in decision making, the governor made it clear that his monetary policy action would be guided by the path of inflation and structural reform measure in the forthcoming Union Budget that would boost growth while maintaining the fiscal discipline. The operative words of the policy statement, in my view, are the following:

"The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17."

The following cautionary statement notwithstanding:

"For 2016-17, growth is expected to strengthen gradually, notwithstanding significant headwinds. Expectations of a normal monsoon after two consecutive years of rainfall deficiency, the large positive terms of trade gain, improving real incomes of households and lower input costs of firms should contribute to strengthening the growth momentum. Yet, still weak domestic private investment demand in a phase of balance sheet adjustments, re-emergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening export growth could act as headwinds."

Tuesday, February 2, 2016

Take the path less travelled.

Thought for the day

"Landlords, like all other men, love to reap where they never sowed."

—Karl Marx (German 1818-1883)

Word for the day

Pugnacious (adj)

Inclined to quarrel or fight readily; quarrelsome; belligerent; combative.

(Source: Dictionary.com)

Malice towards none

Death of Jyoti (aka Nirbhaya) changed a few things.

What will Rohith's death change?

First random thought this morning

The conflict over entitlement of women to enter places of worship in India is reflection of a bigger multifaceted social struggle.

Right to temple entry has historically been a manifestations of the caste discrimination, gender discrimination and economic inequalities.

Recently, a new dimension, i.e., challenge to the outdated socio-religious traditions and beliefs, has been added to the conflict.

The state here has two options: (a) take the popular path or (b) or take the road less travelled.

Take the path less travelled

In recent months, China has repeatedly bothered global markets. A hard landing in China has become the worst nightmare of market participants. The next move of PoBC on CNY value adjustment (devaluation if you like it that way), is widely anticipated as Fed's next move on rates. The Chinese equities are amongst the worst performers globally. The fabled BRICs are no longer mentioned together.

In the meanwhile, the global commodities have crashed to cycle lows, to account for loss of the Dragon's hitherto insatiable appetite.

Exchange rates for commodity and emerging market currencies relative to reserve currencies (e.g., USD, JPY, GBP and EUR) are also at their lowest ebb.

Unprecedented US$2.5trn worth of bonds are trading at negative yield. And there is no sign of this anomaly being corrected in near term. On the contrary, we are hearing credible murmurs about more monetary easing by ECB Chief Mario "Whatever it Takes" Draghi. Many believe, US Fed's chairperson Janet Yellen might also have to stay or even reverse Fed's decision to end ZIRP regime.

The global trade has virtually stalled. Most economies are just managing to avoid technical recession in headline numbers. Otherwise, the sentiments and disaggregated data is almost recessionary.

Given this grim scenario, it is normal for any finance minister to compromise on fiscal discipline and make proactive efforts to encourage domestic growth and make exporters competitive.

Governor Rajan does recognize this like everyone else. Therefore, he is right in advising the political establishment to refrain from any fiscal profligacy at this point in time. I am sure, besides poor manufacturing and agriculture growth, a busy election season ahead will also be on the back of his mind while cautioning the government.

In my view, it is a defining moment in Indian economic history. Choosing the right path could lead India into a golden period of sustainable growth and prosperity. One mistake here could drag us back by couple of decades.

I might be a small insect, completely oblivious of the global economic realities, and foolish enough to comment on this subject. But on the basis of whatever information I could get, I firmly believe that China is definitely going the Japan way. It is not going anywhere for next decade or may be two. It is certainly not collapsing either. In next 6-12 months, the global investors may realize this and move on.

If India could show some character by keeping a strict fiscal restraint and allowing the private enterprise to flourish, in next two decades we may have a different growth path than Japan, China and Brazil. Otherwise, we may be heading towards a precipitous stagnation; remaining a low middle class economy perhaps forever.

More thoughts on this later this week.

Monday, February 1, 2016

Nifty: Collapse prevented, trend reversal yet far away

Thought for the day

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

— Karl Marx (German, 1818-1883)

Word for the day

Insouciant (adj)

Free from concern, worry, or anxiety; carefree; nonchalant.

(Source: Dictionary.com)

Malice towards none

"Intolerance" drama of 2015-16 is no different from the "Policy Paralysis" drama of 2012-14.

The actors though have reversed their roles, with villains of yesteryears playing the protagonist today and vice versa.

First random thought this morning

There is increasing evidence suggesting that Japan is heading the Japan way. The excesses of last two decades might take an equal amount of time to get absorbed and adjusted. The rest of the world though might move on in couple of years. There is no point worrying too much about China. We should rather look for opportunities.

Nifty: Collapse prevented, trend reversal yet far away

Nifty successfully tested its midterm support level of 7200 (recording a low of 7241) last week and closed above its significant resistance level of 7560 on monthly charts. On weekly charts also Nifty is forming a strong bottom. A close above 7610 this week will confirm even a short term bottom in 7350-7440 range. On Daily charts though Nifty appears little hot and may need some cooling down.

1. With this Nifty has made a firm bottom in 7190-7240 range on medium term charts. Any fall below 7350 on intra month basis in next 3months may be a good buying opportunity for investors with 3-5yr horizon.

2. Market may witness rise in intraday volatility in the market. If not accompanied with material rise in implied volatility, traders with 3-6months horizon may use such intraday falls as buying opportunities.

3. Short Bank Nifty - Long Nifty trade could be close to maturity. About 1% further outperformance of Nifty may provide opportunity to short term traders to initiate a Long Bank Nifty - Short Nifty pair trade.

4. Short trade might be avoided for this week. Short position, if any, may be held with strict stop loss of 7610 Nifty level on closing basis.