Vijay Kumar Gaba

Wednesday, April 20, 2016

States of the Union - 2

Thought for the day

Never be afraid to trust an unknown future to a known God.

—Corrie Ten Boom (Dutch, 1892-1983)

Word for the day

Fuliginous (adj)

Sooty; smoky, e.g., the fuliginous air hanging over an industrial city.

(Source: Dictionary.com)

Malice towards none

Shahrukh Khan claims to be the greatest patriot in the country!

Any higher bids?

First random thought this morning

Now a days it is common to watch, hear and read stories narrating how a child born in a very poor family landed a good job or succeeded in competitive examinations, etc.

Ostensibly, the objective is to highlight the social awakening and to motivate millions others who are facing similar types of socio-economic challenges. Unintended consequences are rise in fear psychosis in a section of the society that is unnecessarily feeling threatened by rise of the downtrodden.

This reminds me the most overrated Hindi movie of recent times - 3 Idiots. Whatever was the objective of that movie, it might have motivated many stressed students to commit suicide!

States of the Union - 2

Confronted with chronic and unsustainable levels of fiscal deficits and public debt regional governments have embarked upon corrective strategies to attain a certain degree of fiscal consolidation. The primary objective is to align the key macroeconomic parameters with the broader socio-economic context of respective states.

These efforts are typically driven by a rule based framework through the enactment of fiscal responsibility and budget management (FRBM) legislations. The legislations at state level are designed, keeping in view specific requirements and characteristics of the respective states.

While the fiscal rectitude shown by the states is welcome, a careful impact assessment of the mechanism employed for expenditure management is imperative.

For seizing the full impact of the fiscal consolidation, it must be made sure that it does not result in sacrificing the expenditure considered necessary for stimulating growth, and promoting larger objectives of inclusion, equality and integration of socio-economically backward population.

The study of FY15 state finances relates that there is significant variation in expenditure on social and physical infrastructure among states in terms of both composition and the level of spending. Expenditure on physical infrastructure shows greater variability, with energy being the most volatile component. By contrast, states’ spending on the social sector exhibits stability and is dominated by outlays on education.

Majority of the Non Special Category (NSC) states incurred expenditure on social and physical infrastructure (as proportion to aggregate expenditure) below the group average; indicative of the presence of sharp outliers.

Two features are noteworthy: (a) states’ spending on medical and public health has tended to exhibit a central tendency, with a greater degree of cluster around the average (NSC states) relative to expenditure on energy which is at the other end of the spectrum in terms of dispersion from the average.

At a disaggregated level, average social sector expenditure on education and health is higher among top 5 states than the other states, indicative of the impact of income levels on the quality of expenditure. In respect of physical infrastructure, expenditure on roads and bridges is highest for the bottom 7 states.

It is clear that the states in lower income brackets need to improve social sector spending, given the correlation of around 0.5 between expenditure on health and education and the human development index (HDI) of NSC states. These adjustments would enhance labour productivity and enable states to reap the benefits of the “demographic dividend”

(Source: RBI)

(Based on April 2016 report of RBI on "State Finances - A Study of Budgets of 2015-16")

Monday, April 18, 2016

Nifty: On the verge of breaking out

Thought for the day

"When a train goes through a tunnel and it gets dark, you don't throw away the ticket and jump off. You sit still and trust the engineer."

—Corrie Ten Boom (Dutch, 1892-1983)

Word for the day

Ossify (v)

To become rigid or inflexible in habits, attitudes, opinions, etc., e.g., A young man who began to ossify right after college.

(Source: Dictionary.com)

Malice towards none

There are two types of product advertisements - (a)which mention price of the product being offered; and (b) which do not mention the price!

First random thought this morning

Post the forecast of normal monsoon, Governor Rajan has hinted at possibility of further rate cuts. Infosys obliged the bulls by disappointing the naysayers. USFDA data suggested that the Indian pharma companies are doing great. The settings are perfect for Nifty to top mount 8k again, after five months.

Nifty: On the verge of breaking out

I have been insisting that Nifty has completed a market cycle in February 2016. The cycle had started in late August 2013, got firmly established in March 2014 and peaked in March 2015.

Now a sustained close above 7980-8060 range (on weekly basis) would mark beginning of a new market cycle, that shall get firmly established above 9000 level. Between 8060-9000 level we may see multiple trading opportunities.

I am also insisting that this cycle would be a larger cycle both in terms of time period and distance covered.

For now, there is some resistance in 7960-8060 range; but the rise in momentum suggests that overcoming this resistance will not as difficult as previously perceived.

On daily charts, I see Nifty testing 8210-8270 range being tested within next 10weeks.

Wednesday, April 13, 2016

States of the Union

Thought for the day

"Gratitude is a sickness suffered by dogs."

—Joseph Stalin (Georgian, 1879-1953)

Word for the day

Reconteuse (n)

A woman who is skilled in relating stories and anecdotes interestingly.

(Source: Dictionary.com)

Malice towards none

Kurmi for Kurmi; Koeri for Koeli; Yadav for Yadav; and Lodh for Lodh - it's like a hockey match in UP with man to man marking strategy.

First random thought this morning

The presidential election in the USA no longer seems to be a contest between the republicans and democrats. It has definitely transformed into something else.

The leading republican contender is creating fears of anarchy in many minds. The leading democrat contender is seen less as a politician and more as a woman.

The deeply sexist and racist character of white American male is out in the open for everyone to see and feel.

States of the Union

RBI recently released a report on the finances of the states of the union. The report highlights many interesting developments. The most significant been that in FY16 state finances budgeted for a turnaround in fiscal performance during 2015-16 from the deterioration that set in during the earlier two years.

The projected improvement in key fiscal indicators was led mostly by austerity (cutbacks in revenue expenditure). The capital outlays on consolidated level saw only a marginal decline.

The report highlights that the state finances have improved materially post implementation of FRBM Act. The states are now more pragmatic in handling the constraints faced in augmenting expenditure without compromising on fiscal consolidation goals.

The report also highlights that contrary to the propaganda the increase in states’ share of tax devolution from 32% to 42% of the divisible pool on the recommendation by the fourteenth finance commission actually works out to a decline in consolidated state revenues from central transfers (share in central taxes plus grants in aid) by 0.3 per cent of GDP in 2015-16, due to discontinuation of many centrally sponsored schemes (CSS) announced in the Union Budget, 2015-16.

The report also explores issues which are likely to have a bearing on the quality of states’ expenditure in the medium term; reform of state-level public enterprises, the goods and services tax and the Ujwal Discoms Assurance Yojana (UDAY) scheme.

The report focuses on state finances to assess he quality of expenditure which is key to sub-national level fiscal consolidation to reap efficiency and welfare gains while smoothing the effects of fiscal adjustment.

The quality of expenditure is at centre-stage of the dynamics of subnational level fiscal consolidation in India. Empirical evaluation indicates that expenditure on public infrastructure, human capital, science and technology can be growth and welfare enhancing by improving capital and labour productivity.

The report prominently draws attentions to the rise in revenue and non-development expenditure of the states and the consequent deterioration in the quality of states’ spending.

It is widely stated that Indian states need to prioritise expenditure on physical and social infrastructure and economise on nonessential heads. From a medium term perspective, enduring improvements in the quality of states’ finances hinges around the revival of state level public enterprises (SLPEs), improving the viability of Discoms and rationalisation of centrally sponsored schemes.

I shall discuss some key issues highlighted in the report next week.

Tuesday, April 12, 2016

I choose heart over head

Thought for the day

"The death of one man is a tragedy. The death of millions is a statistic."

—Joseph Stalin (Georgian, 1879-1953)

Word for the day

Ersatz (adj)

An artificial substance or article used to replace something natural or genuine; a substitute.

(Source: Dictionary.com)

Malice towards none

By sleeping in planes, working round the clock, and frugal eating - PM is vindicating the stance of CPM leaders that he is not PM but a RSS Pracharak.

But what's objectionable in this?

First random thought this morning

Shankaracharya of Dwaraka-Sharda Peeth has attributed the drought in Maharashtra to the worship of Shirdi Sai Baba by the state's people!

Is he implying that three Jyotirlings (Shiva), Lord Panduranga (Vishnu) and Dev Shani, who are seated in the State, are watching the people suffer and die just because some of them happen to be worshipping a noble man?

Someone please inform the Rev. Seer that Sai Baba worship in Maharashtra started more than a century ago, and in this period the region has emerged as one of the richest in the country.

I choose heart over head

In the past 10years I have tirelessly argued against the peak oil theory; though my argument is more emotional than economic.

At a time when crude oil prices were flirting with US$150/bbl and experts were forecasting US$200/bbl leading to a breakdown in global economy, I wondered whether this fossil fuel has the potential to undo the progress in human civilization made over past one century.

I have always believed in the invincibility of the human race. The history of civilization suggests that human race has never accepted defeat even from the forces of nature. We have not only survived all natural disasters, endless wars, epidemics, deadly diseases, hunger, and extreme climatic conditions, but have been successful in consistently improving the quality of our life.

The crude oil therefore never appeared like a threat to me. Regardless of the doomsayers predicting peak oil and consequent catastrophe in global economy, I was always confident that we will find an alternative much before the doomsday dawns on us.

Moreover, I never had confidence in the "unity" of the global oil cartel. I was almost certain that on first sign of oversupply this cartel will breakdown and there will be scramble amongst the cartel members to sell their stock first.

It might be early to declare victory over the "peak oil threat", but the evidence is increasing and strengthening by the minute. Rising fuel efficiency, exponential increase in use of renewable (especially solar), rise in shale reserves, aging demography, and likely decade of slower growth in China, etc. all indicate towards slower petroleum demand growth.

A recent article in The Economist (see here) highlighted the problems a persistently low crude prices could cause on the Gulf States (GCC).

The first causality will likely be the consumption of luxury goods & services, that have a huge market in the middle east. Lower social sector spending and rise in taxation could follow almost immediately. Lower outward investment, poor fiscal health of smaller members, higher unemployment etc. are also easy to predict.

While it is easy to rise in civil unrest and economic distress, my emotional sense tells me that, the doomsayers on this side of the fence may also be wrong. I believe that a break in oil oligarchy and consequent economic weakness in GCC states may lead to many significant positives in the global economy.

For example, we may see some softening in religious tenets, leading to more open globalized society and less support for terrorism in the name of religion.

More eager to participate in the global economy at equal terms, the GCC states may be more open and inviting. Given the attractive location in the global trade routes and superb physical infrastructure, these countries have the potential to become center of global trade.

Monday, April 11, 2016

Nifty: Change of track might be misleading

Thought for the day

" Ideas are more powerful than guns. We would not let our enemies have guns, why should we let them have ideas."

—Joseph Stalin (Georgian, 1879-1953)

Word for the day

Contretemps (n)

An inopportune occurrence; an embarrassing mischance: He caused a minor contretemps by knocking over his drink.

(Source: Dictionary.com)

Malice towards none

A "Tea Seller", who also happens to be "OBC" given charge of BJP in UP.

Is it a co-incidence, or some kind of cantrip.

First random thought this morning

The question is not whether Gov. Rajan is some three year late in bringing QE to India, or he has done it deliberately late to maximize the impact.

The question is how far he is willing to go the full distance like ECB. A midway reversal will certainly be destructive.

Nifty: Change of track might be misleading

In past six months commodity stocks have been best performer. Stocks of companies from sectors such as metals, sugar, paper, tea, cement etc. have all recorded huge gains.

Whereas, the leaders of past many years pharma sector has been the worst performer.

Though, there has indubitably been some recovery in the prices of the commodities from the cycle lows, it is difficult to say about the demand, except in case of cement. Domestic steel sales have risen due to import restrictions, but the consumption improvement is only marginal.

Considering that both the infrastructure and consumption sector stocks have underperformed, intuitively cyclical commodity recovery stories requires more evidence to justify.

Besides, there is no evidence from global markets either that global economic conditions are improving in any material respect.

I am not jumping on to the commodity bandwagon, especially agri commodities, where a normal monsoon could be a major dampener.

I am though interested in agri input and cement stocks.

Friday, April 8, 2016

Battlefield UP- II

Thought for the day

"Men have become the tools of their tools."

—Henry David Thoreau (American, 1817-1862)

Word for the day

Vociferous (adj)

Crying out noisily; clamorous.

(Source: Dictionary.com)

Malice towards none

Nitish Kumar has taken "Bihari vs, Bahari" to new heights.

He says - consumption of alcohol is bad for health and economy, therefore he is banning it in the state of Bihar.

However, the state will keep producing alcohol and export it to other states for consumption of non-biharis.

First random thought this morning

Happened to meet a 94yr old freedom fighter yesterday. He faced atrocities of British administration, served two jail terms totaling 32months.

In his recollection, he had never chanted "Bharat Mata ki Jai", during his nine years of fight for freedom. He does not recall any of his colleagues in freedom struggle chanting it either. "Vande Matram", Hindustan Zindabad, and "Jai Hind" were popular slogans. He even insisted that the term Bharat was normally used by big leaders and elite; commoner preferred Hindustan.

Battlefield UP- II

Though the market has perhaps learned to live with the lack of political consensus on vital economic issues, there still survives a hope of ruling NDA strengthening its position in the Rajya Sabha in next two years. The state assembly elections of UP, due in March 2017, are vital for this hope to sustain as the state sends maximum representatives to the upper house. Besides, the outcome of these elections will also set tone for the 2019 general elections. From this viewpoint it is pertinent for investors to keep a close watch on this critical election.

As I mentioned yesterday (see here), commensurate with the critical importance of the state election, the election campaign has already started, and it is going to be a long, intense, acrimonious, and arduous campaign.

From political viewpoint, the following characteristics of the campaign so far, are noteworthy.

(a) Unlike most other states of the union, the campaign in UP is still not clear about the primary contest. It is not easy to judge whether it is "Mulayam vs. Modi"; or "Akhilesh vs. Mayawati"; or "Mulayam vs. Mayawati"; or "Development vs. Secularism/Castism"; or "Hindu vs. Muslim"; or "Tolerance vs. Intolerance"; or something else.

While the primary plot is not yet defined, some secondary plots are being discussed prominently, e.g., "Yogi Adityanath vs. Azam Khan"; Amit Shah vs. "Prashant Kishore"; etc.

(b) BJP has once again failed to set the agenda for election. It will therefore be responding to the development agenda set by the ruling SP, or worse, the casteist agenda of the primary contender BSP.

Remember in Bihar also, Nitish Kumar had set the development agenda, and BJP was left fighting the Lalu Yadav's secularism.

(c) The incumbent Chief Minister Akhilesh Yadav clearly holds the advantage. None of the opposition parties appear forcefully targeting him. They are aiming the patriarch Mulayam Singh or the fringe character Azam Khan. The blame for poor law and order conditions is also mostly shared by other members of the Yadav clan.

(d) RSS and VHP are trying hard to rake up the issue of Ram temple. The issue however, does not resonate with the people of the state at all. Like the reservation quote of RSS chief during Bihar Election, it is more likely to work to the disadvantage of BJP.

(e) The state unit of Congress is mostly dysfunctional. Save for a pre election alliance with BSP, it is highly unlikely that it will even get 10seats, i.e., despite PK.

The first round of campaign is therefore clearly going to the ruling SP. These are however early days. I promise to come back to my readers with more inputs later in the year.

Thursday, April 7, 2016

Battlefield - UP

Thought for the day

"Many men go fishing all of their lives without knowing that it is not fish they are after.

—Henry David Thoreau (American, 1817-1862)

Word for the day

Cupidity (n)

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

(Source: Dictionary.com)

Malice towards none

Rakhi Sawant: Ban ceiling fans to stop suicides.

Rahul Gandhi: Congress is fighting a war of ideology.

First random thought this morning

Increasingly, India is finding place in high opinion of global decision makers. After a really long period, global decision makers are enthusiastic about India.

Some may like to split the credit between PM Modi's unprecedented & audacious marketing efforts, and TINA factor (given the poor conditions in other larger emerging markets especially China); while the others believe, it's just that the TIME of India has arrived. Rest everything is just a quirk of fate.

You may chose your reason, but do believe that it may actually happen this time.

Battlefield - UP

My colleagues travelled through the state of Uttar Pradesh during past two weeks. They covered nine out of the eighteen divisions of the state, covering mostly western and central parts of the state.

The objective of the trip was to assess the economic conditions of the state and political mood of the people.

I would like to share some key points of their assessment with my readers.

The State is fast getting into election mode. It appears that the campaign for March 2017 elections will be hard, arduous and intense.

The ruling Samajwadi Party has taken a clear lead in the campaign. The indications so far are that the incumbent Chief Minister is seeking re-election on the basis of delivery on development agenda. The usual secularism and caste based issues are presently being raised only by the principal opposition party BSP and Congress which is a marginal force in the state.

The primary contender, BJP appears confused about the issues. Whereas the central leadership wishes to continue with the "hope and fear" startegy of the Bihar election — hope of faster economic development and fear of jungle raj — the local leadership is highly skeptical of these twin issues. The local leadership is more excited about the communal polarization as primary election strategy.

Unlike SP and BSP which have well defined state leadership , both BJP and Congress are struggling with local leadership issues. It is common to hear the names like Shiela Dixit and Uma Bharati as probable CM candidates.

The state administration is deeply divided on caste line in their political support. But the ruling party could have marginal lead in this area.

Though a division on religious lines is visible across the state, but it may reflect in terms of votes only in upper class Hindu voters. Any polarization strategy therefore may not be materially effective.

We shall be conducting an extensive survey of the state later in the year to assess the situation of various parties.

Insofar as the economic conditions are concerned, the following observations are noteworthy.

(a) There is remarkable acceleration in the execution of construction projects, especially roads and public works. The incumbent chief minister seems to personally engaged in the development endeavor and successfully exploiting the central assistance to the state.

(b) The rural sector is economically stressed due to consecutive poor monsoons. But surprisingly, they are not annoyed with the state administration.

Wednesday, April 6, 2016

Rajan brings QE to India

Thought for the day

"To a philosopher all news, as it is called, is gossip, and they who edit and read it are old women over their tea."

—Henry David Thoreau (American, 1817-1862)

Word for the day

Pugnacious (Adj)

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

(Source: Dictionary.com)

Malice towards none

CPM almost ended UPA-I by withdrawing support over civil nuclear deal.

A. Raja and Kanimozhi of DMK dented the image of UPA-II government so badly that Congress is reduced to just 44 MPs in Lok Sabha.

Now Congress is joining these forces as minor partner in state polls.

Rahul Gandhi was talking about some ideological warfare in Assam!!!

First random thought this morning

A large part of foreign investments in India comes through "tax friendly" jurisdictions like Mauritius. We all know it well that not all this money is dirty.

Likewise, many Indian businessmen may have invested money overseas by routing it through "tax friendly" jurisdictions like BVI. Not all this money is illegal.

So why are we so excited over Panama leaks? Are we further degenerating into an agitating society, from an argumentative one?

Rajan brings QE to India

Governor Rajan once again performed a perfect balancing act. He pleased almost everyone - the bankers, the government, the traders and the analysts.

Like before, there were many things which were not said in the policy statement made by the governor but were too obvious for anyone to infer. Some of the more prominent "between the lines" things were as follows:

(a) The governor Rajan added his two cents to the global QE program by announcing reversal of RBI's stance on market liquidity.

It is important to note that for some time now RBI has kept the system liquidity in deficit mode, with an average liquidity shortfall equivalent to one per cent of banks’ NDTL. The rationale has been that the banking system would borrow from RBI liquidity facilities, ensuring that the repo rate become the effective ST money market rates.

Reversing this stance, RBI has now announced that it will bring the system liquidity to neutral position within a year. This could be done through open market purchases of government securities and foreign currency.

This should ensure that (i) the NRI deposits raised in 2013 and due for redemption later this year are redeemed without any material impact on INR exchange rate; and (b) the additional government borrowing for meeting pay commission and OROP payments and public investment happen at reasonable rates, without disturbing the bond market much.

What it also means is that RBI is now more confident of the effectiveness of the policy rates, which in its view are now trending down.

(b) RBI is also quite realistic on inflation targets and anticipates supply side constraints to prevail, despite good monsoon and continued global deflation. It may be a good news for corporates as pricing power may return to them soon.

(c) Despite all political rhetoric, RBI has been realistic on growth projections. The governor has maintained that the growth will remain close to 7.5% even next year, assuming a normal monsoon.

This means that RBI believes that the higher public sector investment demand (defence, railways, roads, et. al.), and private consumption demand (pay commission, OROP, good monsoon) will just be enough to compensate for the poor external sector demand.

(d) The effective easing is much higher than the headline 25bps cut in repo rate. MSF rate has been effectively cut by 75bps and reverse repo is higher by 25bps. Also there is an effective concession of 5% in net daily CRR obligation. This shall bring the overnight and short term rates materially lower, thus transmitting the easing almost immediately.

(e) RBI has virtually announced OTC new bank licenses. The market in past has given huge premium to the likely candidates for new license. That anomaly now ends