Vijay Kumar Gaba

Thursday, March 17, 2016

Could it be different this time - 3

Thought for the day

"Judge a man by his questions rather than his answers."

—Voltaire (French, 1694-1778)

Word for the day

Natter (v)

To talk incessantly; chatter.

Malice towards none

If 2014 Bihar elections were Modi vs. Nitish; 2015 TN elections are Jaya vs. Karuna; 2015 Bengal elections are Mamta vs. Sitaram; — what will be 2017 UP elections like -

Maya vs. Mulayam

Modi vs. Mulayam

Amit Shah vs. PK

Hindu vs. Muslim (Yogi vs. Azam)

Tolerance vs. Intolerance

Where does Akhilesh fit in this?

First random thought this morning

The central government has revised grid connected solar power generation capacity target from 20GW to 100GW by 2022. The current installed capacity is 5.7GW. Besides, the off-grid use of solar power is also rising fast.

This is happening at a time when the growth in conventional power supply is outpacing demand growth, leading to sustained fall in merchant power tariffs. Given the economic forecast for FY17, the condition is not likely to change materially in next one year.

Would be interesting to know how Rajan & Arun Jaitely plan to manage PM & Piyush Goyal's ambitions, without compromising banks' asset quality?

Could it be different this time - 3

Personally I do not prefer the term "black-money", as (a) I am never able to distinguish one money from the other and (b) I find it kind of racist.

From my experience I know that trading, real estate, and bribery have been the most prominent amongst various sources of generating un-taxed money in the economy.

Besides gold, Agriculture income and long term capital gain in listed equities have been the most popular methods to regularize the un-taxed money. Both these methods have been used blatantly in past decade to evade taxes on income.

There has been a concerted effort on past of the government to plug these avenues of tax evasion through various legislative and administrative means.

In an ideal world, GST shall curtail under reporting of trading income; real estate and land acquisition regulations shall institutionalize the real estate business; and duty/TDS on purchase of valuable items will constrict use of un-taxed income.

However, taxing fraudulent agriculture income and capital gains will deal a fatal blow to the parallel economy.

For decades, politicians have avoided the issue of tax on agriculture income for obvious reasons. It is common knowledge that they themselves are the largest beneficiary of this exemption.

For statistical purpose, I may highlight that about 92.5% of Indian farmers own less than 5acre of land. In fact only 2.24% own land in excess of 10acres. 68% of total land is used for growing cereals and pulses and only 2% each is used for orchard and animal husbandry.

Given the standard of yields in India, it is therefore safe to assume that 95-97% of Indian farmers do not fall in tax net (Annual taxable income Rs2,50,000 or more). So what tax exemption politicians are debating about is not difficult to guess.

If I am forced to hazard a guess, I would say in next five years appx. Rs20lakh crore of income could be brought to tax net by implementing GST & real estate regulation, and preventing misuse of exemption for LTCG and agriculture income. The other things remaining same, this will almost double the income tax collection.

The fringe benefits will include, material fall in housing prices (and therefore accelerated growth in construction sector), material improvement in banks' CASA deposits and therefore lower cost of funds businesses, better targeting of subsidies, etc.

This combined with materially lower leakages in the public expenditure due to use of technology, direct cash transfer, engagement of local bodies in executions, shall be good enough to move into higher growth orbit for Indian economy.

...to conclude tomorrow

Also read

Could it be different this time - 1

Could it be different this time - 2

Wednesday, March 16, 2016

Could it be different this time - 2

Thought for the day

"If God created us in his own image, we have more than reciprocated."

—Voltaire (French, 1694-1778)

Word for the day

Apatetic (adj)

Assuming colors and forms that effect deceptive camouflage.

Malice towards none

What is more worrisome for Americans at this point in time:

(a) Trump may become the president of the country; or

(b) If Trump gets Republican Party's nomination, then a woman might become the president of the country?

First random thought this morning

After ECB, the BoJ has also cautioned the market about the poor economic outlook. All eyes are on FOMC meeting outcome today. If Fed also holds rates and uses a similar language to express its concern over global economic outlook, the alarm bells may begin to ring rather raucously.

The best case for markets would be if FOMC decides to stay on course by hiking 25bps and shows flexibility by assuring in "whatever it takes" language.

Could it be different this time - 2

Since past two years, we have seen some material changes in the Indian economic policy framework. The impact of these changes, though not yet being acknowledged publically by anyone for obvious reasons, is far reaching. Though, I do not want to ascribe these changes to any political party, it would be unfair to deny the role of the strong commitment of the current leadership in enforcing and accelerating the pace of these change. And it is this pace and intensity of the changes that is giving me confidence that it could be different this time.

I would highlight few examples to explain my point:

Like all other emerging economies, the debate in India has always centered around “crony capitalism”. All political parties have accused each other of pursuing crony capitalism. I have always maintained that this debate is completely misdirected, for (a) it leaves the biggest scam out of the purview of debate and (b) it does not focus on “crony socialism”, which to my mind has harmed the country more than anything else.

Maintaining the negative real rates for households (household inflation minus term deposit rate) for a very long period is the biggest scam perpetrated on the poor people of this country. The inflation tax, as I call it, paid by poor and middle class savers for cheaper financing of “crony socialism” for the benefit of politicians and "crony capitalism" for the benefit of unscrupulous businessmen, has caused tremendous damage to the fundamentals of the Indian economy.

It has resulted in wasteful public expenditure, misallocation of capital, and unsustainable economic growth (that is visible mostly in the statistics). Not many social and qualitative indicators corroborate the kind of growth politicians claim to have delivered.

For years, poor and middle class households have probably funded almost the entire subsidy bill of the government through this inflation tax. Whereas it is common knowledge that large part of subsidies has historically gone to enrich a few. For records Rajiv Gandhi put it at 95%. Current claims range between 50-70%.

The best way to understand "crony capitalism", I often use the example of a typical municipal school child in Mumbai or Delhi wearing a worn necktie, torn & dirty shirts, and plastic or rubber Chappals.

Politicians and administrators have sought to achieve the equality between government and private schools by prescribing a necktie as part of uniform for poor kids who cannot even afford to wash their uniform thrice a week!

To make the matter worse the parliamentary debate is focused on “who is the supplier of the neckties” instead of “how to improve the level of education in government schools”.

The current political dispensation at the center is taking both the menace - "crony capitalism" and "crony socialism" - head on.

...to continue tomorrow

Also read

Could it be different this time - 1

Tuesday, March 15, 2016

Could it be different this time - 1

Thought for the day

"I have never made but one prayer to God, a very short one: 'O Lord make my enemies ridiculous.' And God granted it."

—Voltaire (French, 1694-1778)

Word for the day

Commodious (adj)

Spacious and convenient; roomy: a commodious apartment.

Malice towards none

"Intellectual Bankruptcy".....huum!

Should government consider making it part of the proposed Bankruptcy Law?

First random thought this morning

The monkey of Brexit has been riding the back of global financial markets for some time now. No respite is seen from this lingering worry till June.

There have been strong arguments made, both in favor and against Brexit. The June referendum might settle the matter for now.

What I fail to decipher is how Britons would overcome the lure of free ECB money and free European market that may explode with rehabilitation of millions of refugees. My vote is "nay".

Could it be different this time - 1

To the question I raised last week (see here), I want to answer like this:

In my view, Indian economy and hence the Indian financial markets (equities, bonds, currency) are on the cusp of a major transformation. A successful crossover may lead to multi decade bull market in Indian assets; whereas a failure at this juncture will push us back by a decade at the least.

The markets are certainly sensing this opportunity. But the investors remain skeptical about the chances of success given their disappointing empirical experience.

The first generation reforms that began to take shape in mid 1980s when a non-career politician (Rajiv Gandhi) and his sundry friends took over the mantle to unshackle the Indian economy from the traditional feudal lordships. The outcome was rather disappointing. The traditional feudal lords, and the new uncontrolled "whatever it takes" class of entrepreneurs overwhelmed the good intentions of inexperienced leaders.

The economy ended a happening decade in an unprecedented fiscal crisis with domestic investors badly bruised by the first major scam in the Indian financial marked bruised . I call it Reliance-Harshad phase.

The fiscal crisis of early 1990s forced Indian government to initiate next phase of reforms, including opening Indian market to foreign investors . The reforms in this phase, in my view, were hurried, reluctant, and guided purely by short term goals. The adhocism in the policy making was too palpable. The conceptual framework for inclusion and holistic growth was conspicuous by its omission in the entire "reform" narrative. The consequence was rise in income inequalities, civil unrest, and social division. Though this phase provided a good platform to take off, the Indian economy did never really took off. Despite getting a humongous opportunity in Y2K, for lack of conceptual development framework we could not make India a knowledge base economy.

The two material positives of this phase were (a) emergence of a strong middle class and its acceptance as a political influence group; and (b) beginning of a move towards devolution of greater power to the federal states and local bodies. This was the age of Maruti, Satellite Television and beginning of the end of Congress as sole custodian of Indian democracy. I call it Maruti-SEBI (an epitome of adhocism in policy making) era.

With the nuclear blast at Pokharan in 1998, India embarked on a new phase of economic policy - driven by nationalism and self-reliance. The then NDA government embarked on a ambitious credit driven infrastructure building program to overcome the impact of sanctions and global slowdown. This was a classic mistake of advancement of investment demand; that too without making any concerted effort to augment future consumption demand that would justify the so called advanced investment. The subsequent UPA governments not only continued with the mistake but made it worse through lax governance standards. Indian financial system is still bleeding from the natural fallout of this mistake.....to continue tomorrow

Monday, March 14, 2016

Rally may strengthen led by banks

Thought for the day

"Appreciation is a wonderful thing: It makes what is excellent in others belong to us as well."

—Voltaire (French, 1694-1778)

Word for the day

Psittacism (n)

Mechanical, repetitive, and meaningless speech.

(Source: Dictionary.com)

Malice towards none

When morality takes over the rule of law - stars bite dust, everyone gets to play saint, mob imparts the justice, and no one is winner.

First random thought this morning

I shall be ever grateful to our hyper-enthusiastic TV news anchors and our parliamentarians. They helped generously in treatment of my addiction to the idiot box. There was a time, I would watch anything showing on TV. But no longer. My pendulum has swung to the other extreme. Now I loath to go to the rooms where TV is playing. As they say, "whatever happens, happens for the good".

Rally may strengthen led by banks

Greed being conquered by fear, time for a new beginning

In past few months, broader markets have materially underperformed the benchmark indices. In past week, there was some signs of stability in the top half of the market, while the bottom half still remains jittery. This is a sign of greed being conquered by fears and euphoria subsidizing, an essential pre-requisite for a new market cycle to begin. Save for a black swan event, we may see a new market cycle emerging in next 6months.

...led by financials

Friday, March 11, 2016

Market paradigm shifting

Thought for the day

"Social progress can be measured by the social position of the female sex."

—Karl Marx (German, 1818-1883)

Word for the day

Isonomy (n)

Equality of political rights.

Malice towards none

How and when Dr. Vijay Mallya will be suspended from Rajya Sabha and his privileges, inlcuding diplomatic passport, be withdrawn?

First random thought this morning

Reuters reported yesterday that Chinese banking regulator (PoBC) is contemplating a equity for debt swap scheme to get over the problem of burgeoning NPAs.

The move may allow indebted corporates to reduce their leverage, reducing the cost of servicing debt and making them more worthy of fresh credit. It would also reduce NPL ratios at commercial banks, reducing the cash they would need to set aside to cover losses incurred by bad loans.

Being Chinese, the plan prima facie looked like a huge ponzi; till the time I realized that it is nothing but a copy of our own SDR scheme!

Market paradigm shifting

This Wednesday, I started an exercise to understand the current pattern of market movement (see here). I earnestly believe that the global market paradigm is shifting, and India could get a much larger role to play in this shift, that is if we as a nation are willing to assume larger responsibilities.

The paradigm shift is happening regardless of our commitment. I wrote yesterday (see here) that current government, especially PM, has perhaps recognized the opportunity and committing to it.

When I say that the paradigm is shifting in global markets. I am certainly not suggesting "it is different this time". What I am essentially saying is that "it is the same as always".

I have also written this couple of times before (see here), 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 17-18th centuries and strength of US post WWII). Sometimes technology innovation (industrial revolution in Europe and US, post-war Japanese manufacturing renaissance 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 pertinent to evaluate the current transition in 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. While US has so far been successful in reigning its currency without compromising the supremacy of dollar.

In my view, demographics are playing a major role in the shift of the economic and market context this time. Most developed and even large developing countries are struggling with demographic imbalances presently. The problem is particularly severe in Europe and Japan.

In Europe on one hand population is aging fast and thus straining the fiscal and economic growth (pension, healthcare, lower income growth, low taxes and lower consumption); on the hand the mass migration to west is causing concern over change in socio-religious structure of the population (see here).

India, which has the largest pool of educated & skilled young English speaking people, may therefore be natural partner in bringing the desired demographic changes....to continue next week

Thursday, March 10, 2016

History is repeating; only it may be much bigger this time

Thought for the day

"Democracy is the road to socialism."

—Karl Marx (German, 1818-1883)

Word for the day

Rabble-Rouser (n)

A person who stirs up the passions or prejudices of the public, usually for his or her own interests; demagogue.

Malice towards none

Dear FM, if nothing else is working, trying renaming the proposed GST Act as Rajiv Gandhi GST Act (RGGA)

First random thought this morning

The famous 2014 general election win of PM Modi also popularized his designer kurtas and phoren returned PR agent cum election strategist Prashant Kishore. The day is not far when our vigilant media discovers the hair stylist responsible for the new look of Modi Ji.

It is good that PR agencies, fashion designers, hair stylists are getting their due share in Indian democracy. I hope a day will come soon when Indian politicians will publically proclaim their life partners and a victory kiss in full public view will not be a matter of blasphemy or national shame. That day, the statute book will rewrite itself and "gender equality" will no longer be a mere "intent".

History is repeating; only it may be much bigger this time

On March 09, 2009 when Nifty 2555, many were left wondering, whether it's the end of stock market investing.

Today, after seven year, Nifty is 3x, and many people are still wondering whether they should be investing in equity at all.

A Wikipedia tour of human history is sufficient to realize that the "globalization" is as old as the human race itself. Since ancient times, people (and animals) have been immigrating to far off, and often unknown, places in pursuit of water, food, congenial weather, and safety of children. The pursuit of material knowledge and spiritual elevation has also taken people to new places. In relatively recent history, people have also moved in the search of wealth and power.

With people, also immigrated their knowledge, food, life style, traditions and prejudices. The global growth was therefore faster, more symmetrical, and definitely development and growth oriented. The quality of human life improved dramatically each century till the end of 19th century.

Though the concept of travel permission and documentation is known to have existed since long, it was not till WW1 that it became restrictive. The history would suggest that most modern day fundamental scientific inventions were made in pre war era. In post war period the scientific developments have been more oriented towards defence (including internet and means of transportation), offence and disease control.

The modern day concept of Nationalism (restrictive immigration of knowledge & people) has not helped anyone but a handful of people endowed with leadership qualities who chose to become political or military leaders. The global growth therefore has been slow, asymmetrical and often harmful to the humanity in general.

The evolution of modern day mathematics, and therefore, other branches of scientific enquiries, are a classic example of collaborative research, enabled through free movement of people and knowledge. The concepts of zero and decimal conceived in Indian sub-continent travelled unhindered to the western world via Arab mathematicians and laid foundation for modern economics, mathematics, physics, astronomy, aeronautics, etc.

The entire north American continent is outcome of mass immigration of people from various parts of the world. Regardless of the repeated political rhetoric no one has ever tried to stop foreign knowledge and resources entering US borders. That is the strength of the US economic and political model. Trust me, no one (including Trump and Hillary) is even dreaming of closing US borders to foreign knowledge, workers or money.

The mass immigration that we are witnessing in Europe today, may be similar to what happened, more recently, in Europe during 8-12th century, and during 16-18th century in the USA, Asia and Indian subcontinent. It is bound to have significant economic ramifications - mostly positive.

The Congress style of Nationalism has perhaps irreparably damaged largest pool of knowledge, skills and other valuable resources. by making India a closed economy in post independence era. It needs to be immediately deserted and buried forever. The world is presenting a humongous opportunity that comes once in many centuries. VISA restrictions are easing worldwide. Global capital is looking for avenues where it can earn some nominal return. In my view, the whirlwind global tours of PM Modi should be evaluated in this context.....to continue tomorrow

Wednesday, March 9, 2016

Tippy Tippy Tap - What color you want?

Thought for the day

"History does nothing; it does not possess immense riches, it does not fight battles. It is men, real, living, who do all this."

—Karl Marx (German, 1818-1883)

Word for the day

Sylvan (adj)

Of, relating to, or inhabiting the woods.

Malice towards none

Want freedom from traffic jams - call the FM to your area and keep him stuck in jam for two hours!

First random thought this morning

Since Kanahaiya Kumar and Richa Singh have taken over the headlines, the common man is being seriously deprived of the "real" news, e.g., Why did Anushka and Virat break up? Why did Ranbir and Katrina break up? Why Aamir Khan has been chosen as brand ambassador for irrigation department of Maharashtra? Why Salman and Shahrukh have crossed swords again?

By the way, do you know the viewership statistics of the latest videos of RaGa, NaMo and KK's on Youtube?

Tippy Tippy Tap - What color you want?

Traditionally, the divergence of global markets from the real economic conditions is usually followed by a sharp correction that leads to convergence of realty with hopes.

I have not been able to derive a pattern in such corrections. But sentimentally I feel that the correction are sharper and more painful when hope runs much ahead of ground realty. Many more people lose money in this correction as compared to the people who earn supernormal profits during the course of divergence.

The sharp fall in stock prices during past six months was clearly a case of reality whipping the hopes. The correction has been sharp and painful. It will quite some time before investors' sentiments recuperate.

In the reverse case, i.e., when real economy does much better than the markets, the corrections are protracted and less euphoric. Few people participate in the up move. A majority of investors join the party late, usually when all the fruits have been plucked by smart investors. What is left is either few scarred fruits at the top which are risky to pluck or the overripe rotting stuff scarred all around.

The rally in Indian stocks from 2003 to 2006 was a classic example of this instance.

The key point to ponder this morning is what pattern market is forming today!

(a) Is market sensing an imminent economic recovery, which many investors are unable to anticipate; and hence the shallow rally from the recent lows may gradually strengthen further in next 6months, before investors' sentiment improve and they jump in to participate? and/or

(b) Have global investors started to see India separately from the entire emerging world, in view of its stronger macro fundamentals, and hence Indian assets (INR, Equities and Bonds) are witnessing a stronger interest from global buyers? Or

(c) The global economy is expected to remain in slow lane for at least another 12months. China has already started working with lower (6-6.5%) growth estimates. Japan and Europe have remained on the brink, never really looking like recovering from recession post 2008-09 global crisis. US growth has remained feeble ever since post recession and not likely to log a rate over 3% in next 12months or so. Despite that commodity prices have surged in past one week at most frantic pace in recent history. Brent crude has jumped over 42% since lows of 20th January 2016. Copper and Iron Ore are not behind.

So, is the sharp rally in March is just a caper in a longer bear market?

Would be glad to have readers' thoughts on this. I shall be sharing my thoughts on this later this week.

Tuesday, March 8, 2016

Nifty: All star aligned for an up move

Thought for the day

"There is a specter haunting Europe, the specter of Communism."

—Karl Marx (German, 1818-1883)

Word for the day

Factotum (n)

Any employee or official having many different responsibilities.

Malice towards none

Brent Crude is up staggering 41% since the low recorded on 20th January this year.

The domestic petrol prices are down by over Rs3 during this period.

First random thought this morning

In a series of media interviews post his release from jail, a soft spoken Kanhaiya Kumar (KK) evoked emotions by playing a perfect victim; with a conspicuous glee on his face already declaring a victory.

I find him "not honest to himself", "no icon", a sequel to Arvind Kejriwal (AK) may be, but "no JP or Lohia".

Nifty: All star aligned for an up move

After almost six months, daily, weekly and monthly charts are aligned for a move of the similar magnitude in the same direction. Nifty faces a credible resistance in 7600-7610 range. A sustained cross over may see Nifty crossing 7900 in next following 7weeks.

Friday, March 4, 2016

Care 'bout elephant sitting right next to you!

Thought for the day

"An intellectual hatred is the worst."

— W. B. Yeats (Irish, 1865-1939)

Word for the day

Supercilious (adj)

Haughtily disdainful or contemptuous, as a person or a facial expression.

Malice towards none

The evidence emerging from Haryana strongly suggests a total breakdown of constitutional machinery during recent RIOTS in the State.

If this is not a fit case under Article 356 for imposition of president rule, then there could never be any case for its use.

First random thought this morning

In past few years, an overwhelming large number of Indian politicians have demonstrated their disregard for the democratic institutions, most notably, the Parliament & various State Assemblies, the Judiciary, the CAG, and office of State Governors.

It is critical to stop here and examine whether only a certain class of elected representatives have lost faith in the working of democracy in India, or it is reflection of a perception prevailing in a broader section of the Society. For without solving this conundrum, we might not be able to move forward.

Care 'bout elephant sitting right next to you!

In past couple of days many of my regular readers have criticized me, rather uncharitably, for two things - (a) unduly appreciating the Union Budget for FY17 and (b) digressing from the market to muddy field of politics.

The common points of criticism are - "why should an investor take a hard stand on any politician?"; and "how do I care so much about decades, when all that matters is what the market will do between 9:15AM to 3:30PM today?".

My critics are not wrong. But neither am I. It's only matter of different approaches to achieve the same goal.

I have stated it twice before. I am reiterating it. There are people who live life as a series of discrete days. It's not me. I see life as a continuous time series. I do not assign much importance to the discrete days, like last or first days of months, quarters, and years, in the infinitum of time. The random data points published on these days also do not bother me much. These data points, including daily stock prices, monthly sales and production numbers, quarterly profits, are relevant to me only if they form a easily discernible pattern in a secular trend.

I bother more about the secular trends and not random digressions. And I have no hesitation in saying that the secular trend in Indian equities is definitely UP. Rest all is merely matters of discussion.

Now coming to the specific points of criticism.

I am not unduly appreciating the budget presented by Mr. Jaitely last Monday. I am truly happy. I have been frequently saying that the Indian economy and hence the corporate India can grow to their potential only if the growth becomes more inclusive. With 5% people earning, saving, investing , consuming and 95% just surviving, the economy can grow only at the conventional Hindu Rate of growth. We need at least 75% people participating in the growth process, to grow at the desired double digit pace.

To achieve this, the government need to become an enabler and not just continue to remain a provider. The finance minister, through his latest budget presentation, has made a statement of intent to this effect. The corporates, and the middle classes which will produce the largest number of entrepreneurs through such enablement, will benefit the most from this change. All the investors in Indian market should be rejoicing this, like me. Bothering about a few pennies in extra taxes would be like missing the big elephant sitting right next to you.

I care least for the dividend tax, knowing fully that only 10-15k people in a country of 1.30bn would be marginally impacted by this provision.

Insofar as coming down hard on politicians is concerned - I may clarify that I did not make any political point yesterday. I see a huge transformative global economic trend in that. This shall have serious investment implications, in my view. I had written about that couple of years back also. I will explain again, in some detail, next week.

My greetings to all the readers on the pious occasion of Maha Shivratri,