Vijay Kumar Gaba

Tuesday, September 20, 2016

Make growth employment elastic

Thought for the day

"Mediocre minds usually dismiss anything which reaches beyond their own understanding."

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Longanimity (n)

Patient endurance of hardship, injuries, or offense; forbearance.

Malice towards none

After Congress now SP hires an election strategist with experience of US elections!

What does this reflect?

First random thought this morning

Would it not be appropriate if someone from this side of the border also takes responsibility for loss of precious life in Uri (Jammu)?

After all some General, Minister, Politician, Bureaucrat must be accountable for the grave security lapse, especially after Pathankot had happened.

Is it too much to ask from those who routinely speak of morality, ethics, accountability and transparency in public life, beside claiming to be brave and potent enough to tackle the enemy?

Make growth employment elastic

Continuing from the last Friday (see here), in my view it is critical to take note the June 2014 working paper on Employment Elasticity in India.

In the said working paper RBI highlighted many interesting facts about the status of employment and its elasticity to the GDP growth.

In particular the change in occupation structure of the economy in past 15years is worth noting; because it helps setting up the agenda for future growth. It is important to note that one of the key promise of incumbent government is to make growth job oriented (hence inclusive) as opposed to jobless growth (therefore exclusive) growth achieved during past few years.

The working paper found that aggregate employment elasticity (change in employment due to economic growth) of Indian growth has fallen considerably in post 1991 period. In this period for every 10 per cent change in real GDP, there had been about 1.8-2 per cent change in employment. The current statistic is even poor.

Moreover, elasticity varies considerably across sectors. While agriculture has witnessed negative elasticity, services including construction have generally been employment intensive. Manufacturing employment elasticity has hovered in the range 0.29-0.33.

Within manufacturing, the employment elasticity for organized manufacturing sector based on various estimates seems to be higher, in the range 0.42-0.57 for 2000s and it has risen over the previous two decades. Given the huge productivity and wage differentials between organized and unorganized sectors, greater employment generation in organized manufacturing is crucial as it has larger multiplier effects.

Subsequent to 2011, India has seen significant moderation in its GDP growth rates. While employment numbers are not yet available for the recent years, Labour Bureau quarterly surveys as well as various private agencies’ information point towards moderation in employment generation. If these data sources are any hint, then one might see some changes in employment elasticity depending upon the relative pace of moderation in employment generation vis-à-vis growth.

The working paper suggests that going forward, it is the relative cost of capital vis-à-vis labour and the nature of investment demand that will determine to what extent growth would be job-creating.

Increased capital to labour ratio in the organised sector for a labour abundant country like India is a concern that has been well-highlighted. I have also been highlighting this rather frequently and to the annoyance of some of my government readers.

If India has to meet the demographic dividend challenge, focus should be on industries where employment elasticity is higher. On a rough basis, about 10 million people would need a job every year for the next 15 years. Finding productive jobs for such huge numbers is a big challenge, and clearly the answer lies in stepping up growth, and importantly, stepping up the employment intensity of growth....to continue tomorrow

Monday, September 19, 2016

Nifty: Down but not out

Thought for the day

We give advice, but we cannot give the wisdom to profit by it.

—Francois de La Rochefoucauld (French, 1613-1680)

Word for the day

Overweening (adj)

Exaggerated, Excessive

Malice towards none

The latest Arunachal development reflect best on who:

(a) Supreme Court

(b) Congress

(c) BJP

(d) None of the above

(e) All of the above

First random thought this morning

UP Chief Minister has reportedly offered his sulking Uncle whatever ministries, departments and power he likes. This demonstrate that the most populace state in the country has been reduced to a feudal fiefdom of a family, in a total mockery of democratic process and subversion of constitutional proprietary. Surprising the civil society, especially those who shout their throats hoarse on prime time TV shows every evening, are totally apathetic!

Nifty: Down but not out

Despite a sharp gap down opening on Monday, most benchmark indices held well and recovered almost half their losses. Nifty closed the last week with a wow loss of close to 1%. The initial surge in VIX also moderated materially in later part of the week.

The level of institutional activity was poor and volumes were below average. Market breadth does not indicate any panic or moderation in greed of the investors.

Technically, on weekly charts, NIFTY ended the week on the lower edge of the rising and contracting channel that started from end of February 2016. The channel continues to narrow further. However, any breakout (or break down) still appears some time away.

On weekly closing basis, now 8710 appears to be a strong support, however on daily basis 8606-8630 is a strong support zone. A close above 8867 this week shall neutralize the effect of last week's correction and the uptrend shall resume.

Bank Nifty appears to be losing momentum. Watch closely for a weekly close outside 19560-20340 range to decide the next course of action. Near term banks are avoidable for trading.

Friday, September 16, 2016

Case of misplaced priorities

Thought for the day

" It is utterly false and cruelly arbitrary to put all the play and learning into childhood, all the work into middle age, and all the regrets into old age."

—Margaret Mead (American, 1901-1978)

Word for the day

Pulverulent (adj)

Covered with dust or powder.

Malice towards none

Every politicians is busy telling us our problems!

No one is suggesting solutions(:

First random thought this morning

Visited a government hospital in Delhi yesterday. The condition of poor patient there was really appalling. The medical staff was highly stressed and exasperated. Non-medical staff was mostly unhelpful and exploitive.

This reminded me what I wrote last year at this time. Most of Delhi government & civic administrators, and many of Central leaders residing in Delhi (including PM himself) claim to come from modest socio-economic background. If true they must understand and feel the plight of these poor patients and work proactively to help them. But this does not seem to be the case.

Case of misplaced priorities

The recently released report on Sixth Economic Census (2013) in India is quite revealing in more than one sense. For, it shatters many myths and official claims and depicts the true state of affairs. The report also highlights some of the famous schemes of the incumbent government might be misdirected.

As per the report, there are 58.5mn business establishments (excluding public administration, crop production & plantation, defense and compulsory social service activities) operating in the country. Of these ~96% establishment were privately owned while just ~4% were government owned. These establishments employ 131.29mn people (52% in rural areas and 48% in urban areas).

· About 60% these establishments are in rural areas while about 40% operate in urban area.

· About 78% establishment are engaged in non-agriculture activities, while ~22% are engaged in agricultural activities (excluding crop production and plantation).

· During the 8yr period between 2005-2013, the business establishments have grown by ~42% from ~41mn to ~58mn. In this period agriculture establishment grew ~116% while non-agriculture establishment grew ~29%.

· Out of total ~58mn establishments about ~72% were Own Account establishment (meaning with no hired worker). These Self Owned Establishments (SOEs) grew 56% during 2005-2013. About 63mn people (48% of total employed people) are employed in these SOEs.

· About 96% establishment have less than 5 workers. Another 3% have 6-9 people employed.

· The government or public sector employs only 7% people. 79% people work in proprietary establishments. Organized private and cooperative sector employs 14% people.

· About 36% of business establishment were operated from the home of the Self Owner, while another ~18% are operated from outside the home without any fixed structure.

· Livestock accounted for ~87% of the agriculture activity.

· Retail trade (~35%) and Manufacturing (~23%) were dominant non-agricultural activities.

· About 74% business establishments are owned by Hindus and ~14% by Muslims.

· Out of 1.87mn handicraft/handloom establishments, employing 4.2mn people, 79% were family affairs without any hired worker.

...to continue next week.

Thursday, September 15, 2016

Bank on Banking - 4

Thought for the day

"Always remember that you are absolutely unique. Just like everyone else."

—Margaret Mead (American, 1901-1978)

Word for the day

Phalanx (n)

A number of individuals, especially persons united for a common purpose.

Malice towards none

The game of mudslinging between AAP and BJP is no longer funny!

First random thought this morning

It is the nth time we are witnessing violence and disruption to the public life due to the dispute over the Cauveri water. The dispute over Satluj Yamuna Link (SYL) is also far from resolved, as Haryana and Punjab governments are sleeping over it. Nonetheless, given the current Punjabi non-Punjabi equation in Haryana, politicians like Arvind Kejriwal may ignite it anytime.

Similarly there are many unresolved issues between various states and the center and states. It is just like the situation in various courts in India where millions of cases are pending for decades.

The point to ponder over is - As a society, are we too afraid to seek closure of issues for fear of an adverse outcome?

Bank on Banking - 4

At present, (a) high incidence of non-performing assets (NPAs), (b) inadequate capital for growth and (c) poor credit demand are three primary concerns for the public sector banks. Besides, the rising competitive intensity from private sector peers is also clouding the outlook for growth of PSBs.

I am not sure whether the current prices of all PSBs are adequately factoring in these concerns. But I am getting increasingly confident that these concerns shall fade in next couple of years.

The reason for my confidence are simple, intuitive and arguable. If someone wants to contest, I have absolutely no problem in listening to their viewpoint; though I am in no mood to concede my ground on this.

The accumulation of NPAs in PSBs over past one decade is consequence of three factors - (i) Large scale corruption; (ii) Error of judgment on the part of bankers and/or entrepreneurs; and (iii) prolonged decline in economic cycle.

In my view, the corruption through connivance of unscrupulous businessmen, bankers and politicians has diminished considerably in past couple of year. The things should improve further in next couple of years.

Error of judgment relating to incremental demand for services and infrastructure led to huge accumulation of unserviceable debt in sectors like power, roads, steel etc. The case is reversing now. Market driven pricing of natural resources - minerals, airwaves etc., in future shall remove another area of speculation in future earnings prospects that has misguided the judgment of lenders and businessmen in past.

The economic cycle recovery globally has remained feeble since bottoming in 2010-2011. India is no exception. There is little sign that broader economic recovery will accelerate anytime soon. However, a sustained 7% growth over next couple of years shall generate enough business for banks as (a) consumer and farm sector demand strengthens; (b) balance sheets of many corporates is repaired making them eligible for new projects and credit; (c) lending rates moderate; and (d) financial inclusion efforts of the government start yielding tangible results.

Insofar as the rising competitive intensity is concerned, it shall certainly be a matter of concern for the investors in PSBs. Given their bloated and inefficient cost structures and operational inflexibilities vs. their private sector peers, it is likely that they may lose market share over next few years.

In my view, given their reach, fast expanding market and recent efforts to improve operational matrix, the top five PSBs may not be impacted materially by the competition in medium term. Acceleration in the efforts to consolidate PSBs will also add to their strength.

Insofar as valuation is concerned, I feel that the wide gap between the private banks and large PSBs may not be sustainable. Though I am not sure how it will be bridged, e.g., (a) steeper rise in valuation of PSBs; or (b) steeper fall in valuations of private banks and NBFCs. As a strategy therefore, I am inclined to buy top PSBs on all declines.

Also read:

Bank of Banking - 1

Bank on banking - 2

Bank on Banking - 3

Wednesday, September 14, 2016

Show me a miracle!

Thought for the day

"Man's role is uncertain, undefined, and perhaps unnecessary."

—Margaret Mead (American, 1901-1978)

Word for the day

Lucida (n)

The brightest star in a constellation.

Malice towards none

In a democracy, why an elected representative helping a citizen should be a NEWS?

Ain't that a total failure of our democracy?

Would someone mind informing this to the paean singers and cheer leaders at Raisina Hills and Ashok Road!

First random thought this morning

BJP has reportedly decided to go with PM Modi as its mascot in UP elections.

It's a pity. This state gave the party more than one fourth of its MPs in 2014 elections, and still the party does not have a local face to show to the people.

Show me a miracle!

Last week Mother Teresa was declared a saint. The church said that she fulfilled the condition of doing two miracles to attain sainthood. Regardless of the controversy around the miracles of the Mother as claimed by her order Missionaries of Charity, she is now a Saint forever.

The intense debate that has been going on in the world about according the status of science to Economics is no less than the process of canonization of a catholic saint.

The proponents claim the economics to be the youngest discipline of science, but a science nonetheless. Whereas, the opponents seek the evidence (read miracle), that has been elusive so far.

I am writing this because, the events of past one decade make me firmly believe that at best Economics is witchery used by politicians to impress upon their respective constituencies the need and urgency to afford them the power to run the state. The students and practitioners of Economics take side of the politician they like best.

The abject failure of so called "non-conventional" monetary policies used in past one decade in stimulating economic growth, challenges the claims of the ability to predict the likely behavior of consumers and markets on the basis of past data and trends. In hindsight it looks a farce. It's like a person riding on tiger's back claiming a victory over the tiger.

The conduct of central bankers, economists and governments, in past one decade in particular, makes it palpably evident that the concept like objectivity, data dependency, predictability, etc. have nothing to do with the economics.

US Federal Reserve is a classic case in this point.

The fact is that the market driven rate (LIBOR, etc.) have diverged too much from the policy rate. This may have created unusual arbitrage opportunities distorting the normal operations of the global financial market. This is an anomalous situation and needs to be corrected at earliest. The FOMC of the Federal Reserve is seeking a political correct reason and timing to bridge this chasm.

The effort to make this simple decision look like a major economic event driven by arduous study and analysis of data and evidence seem ludicrous. In the process, not only the US Federal Reserve but central bankers as an institution, are losing credibility.

Instead of bringing a higher degree of predictability to the markets, the conduct of central bankers may be causing just the opposite. The traders are naturally roiled. Many investors may also not like the avoidable volatility in the economic environment.

Insofar as I am concerned, I am not planning to stay awake till midnight on 22 September, to hear what Yellen has to say. Status quo or 25bps hike makes no change to my investment thesis. For, I am convinced that the global cost of capital needs to rise to rational levels to stimulate the virtuous cycle of economic growth.

Monday, September 12, 2016

Nifty: Choppy season ahead

Thought for the day

"We have nowhere else to go... this is all we have."

—Margaret Mead (American, 1901-1978)

Word for the day

Corybantic (adj)

Frenzied; agitated; unrestrained.

Malice towards none

Was including river water in List II (State List) under Article 246 of the Constitution a big mistake?

First random thought this morning

For the first time I travelled to Mumbai from Delhi was in 1992. Civil aviation sector was just opened to the private competition. The price I paid was Rs3493 one way. The one week advance fare on the same sector today is less than Rs2500. Air India is competing with Indian Rail!

Inflation has certainly missed few corners of the economy.

Nifty: Choppy season ahead

Despite a nervous end to the last week, Nifty managed to record its third highest weekly close and second highest weekly average traded value, ever.

ECB staying put and increasing chances of Fed acting to hike rates by 25bps at next week FOMC, should be a good news in a normal market as it signifies normalizing economic conditions. However, considering that global bond markets have been unusually complacent and aggressively leveraged - the rush to take shelter could end up in stampede (not a base case).

The mood in Indian equity markets this morning is certainly somber. Motivated by persistently lower implied volatility, traders running higher than usual positions are naturally jittery. The off loading that commenced on Friday, might continue this week.

In strict technical sense, benchmark indices are not showing any signs of collapse as yet. Any correction therefore is an opportunity to buy.

Regardless, technically speaking, Nifty is poised to move past 9000 mark sometime in next 7 weeks. Only meaning full resistance now exists around 8990 level. A strong support has developed in 8606-8630 range.

On bank Nifty, a good support has developed in 19340-19400 range. However, the strong support remains at 18600 level.

Friday, September 9, 2016

Bank on Banking - 3

Thought for the day

"Apartheid does not happen spontaneously, like bad weather conditions."

—Jonathan Kozol (American, 1936)

Word for the day

Nodus (n)

A difficult or intricate point, situation, plot, etc.

Malice towards none

If surge pricing by app based taxi operators is unacceptable; how could Indian Rail could be allowed to use it?

First random thought this morning

PM Modi is gaining in international popularity ratings with every flying mile he earns. His party, BJP, though is not able to match his steps. The party in fact may be losing some of its core support bases - Traders, small businesses, security forces for example.

In six months we would enter the election phase that shall continue till the 2019 general elections. A loss in UP & Gujarat could hit the party badly.

The question is should PM & FM make a mid-course correction in their policy focus for electoral considerations or continue with their long term strategy?

Bank on Banking - 3

In order to stabilize the collapsing currency and support the precarious current account position in the summer of 2013, the then RBI governor took a number of steps. The most famous amongst these measures was a swap deal on FCNR deposits whereby the RBI had opened a window to the banks to swap fresh FCNR dollar funds, mobilized for a minimum term of 3yrs at a fixed rate of 3.5%pa for the tenor of the deposit. The swap window was opened from September 2013 to December 2013.

Most banks offered 4.77% interest on fresh 3yr FCNR deposits. The cost of these funds to Indian banks was thus around 8.27% (4.77% interest and 3.5% swap cost).

Smart NRIs and foreign banks sensed this big opportunity and pumped more than US$34bn in Indian financial system. Most of this money was borrowed at less than 1% interest from foreign banks.

These deposits are now due for repayment. There is a sense of worry of that outflow of such a big amount in such short period of time will be disruptive for Indian financial markets - bank liquidity, bond yields and currency.

In my view, there is absolutely nothing to worry on this account, for the following simple reasons:

(a) The event was known 3yrs in advance to everyone. RBI has assured time and again that it has made adequate arrangements to provide the required foreign currency to respective banks for honoring their repayment obligations. It is public knowledge that RBI has enough ready forex and fully covered swap positions also.

(b) Banks who prepare their balance sheet on weekly basis have known this outflow 3yrs in advance and would have prepared well for it.

(c) The current rate of 3yr USD FCNR deposit offered by SBI is 2.11% p.a. and the current cost of 3yr swap is around 4% p.a. For EUR and JPY the interest rate is materially lower. The rate offered on a 3yr INR deposit is 7%.

The banks therefore could easily accept new deposits or offer to renew these deposits at much lower rates, provided they need this money to meet the credit demand.

The lending rates in US and Europe are much lower and liquidity much higher as compared to 2013. So for foreign banks and NRIs it will still be profitable to renew these deposits.

(d) Insofar as the bank's liquidity positions is concerned - the fear may be unfounded. RBI has many tools to infuse liquidity in the system. Increasing LCR, reducing SLR & increasing OMO are only few to name.

(e) Bond yields have moderated materially in past six months. If the spectrum auction and disinvestment program goes as per the budget, the yields may actually fall further. Irrespective of the 25bps hike by US Fed, the yield differential between Indian and other bonds is too high to sustain.