Vijay Kumar Gaba

Wednesday, August 9, 2017

Is the new normal permanent?

Thought for the day

"Every vice was once a virtue, and may become respectable again, just as hatred becomes respectable in wartime."

—Will Durant (American, 1885-1981)

Word for the day

Fructify (v)

To bear fruit; become fruitful

Malice towards none

Does India need independent Bail Courts, which would grant or refuse bail to an accused based strictly on the legal provisions relating to bail, and not on the morality of the case or socio-economic status of the accused?

First random thought this morning

The motifs used to depict India globally are mostly Mughal and British era monuments, like Taj Mahal, Qutub Minar, Red Fort, India gate, Parliament House, etc. Besides, some medieval temples and other religious places and emblems are also commonly used.

The paradox is that we are either too nationalist or too secular or too discomfited (e.g., to accept Khajuraho as our culture) to accept these symbols as our true identity.

The tragedy compounds when we find that we can hardly claim the Indus Valley civilization as our own, since most of the sites now lie in Pakistan.

Is the new normal permanent?

Professor Harold James (Princeton University, New Jersy) in his recent article, made some interesting points regarding the global financial crisis. Since I mostly agree with these points, I find it redundant to use my words for expressing these same thoughts. I am therefore reproducing Prof. James words here to express my thoughts. (All rights of Prof James acknowledged and respected)

"The legacy of 2007 is still with us. Its most devastating and destructive effect was to put a premium on unconventional monetary measures. Unfortunately, when policymakers scrambled in search of “big bazookas” ten years ago, they set the stage for the return of an old character: a strongman willing to pull the trigger.

To be sure, at the height of the financial crisis, politicians were right to conclude that they could not rely on business as usual. Central banks needed to provide liquidity on a massive scale, and governments needed to complement those monetary-policy efforts with fiscal expansion. Accordingly, China and the US, in particular, launched large-scale stimulus programs in 2008 and 2009, respectively.

.....

...overall, the response to the financial crisis was strikingly successful, and those who led it were right to pat themselves on the back for having prevented a repeat of the Great Depression. But, because unconventional policies were so effective, they are now considered appropriate and necessary responses to any problem, while constitutional safeguards are increasingly dismissed as petty bureaucratic concerns.

.....

The post-crisis view holds that a powerful leader can and should fix things by himself (strongmen are rarely women). This approach was readily apparent in the Russian government’s response to collapsing aluminum prices in 2009, when job losses and unpaid wages gave rise to large-scale protests at a plant in Pikalevo, 150 miles (250 kilometers) southeast of St. Petersburg.

When then-Prime Minister Vladimir Putin toured Pikalevo, he made a show of humiliating the plant’s owner, the oligarch Oleg Deripaska, by calling him a “cockroach.” Putin didn’t announce any new policies to help Russian workers; nonetheless, his performance in Pikalevo was hailed as a bold assertion of state power in the face of capitalist excess.

......

Strongmen tend to present themselves as being uniquely able to tackle a specific problem. For Philippine President Rodrigo Duterte, that means a “war on drugs” that has led to thousands of extrajudicial killings. Putin and Turkish President Recep Tayyip Erdoğan justify their policies in the context of fighting terrorism. And Hungarian Prime Minister Viktor Orbán has framed his autocratic behavior as a necessary response to a domestic financial crisis. By focusing on one narrow “crisis,” these leaders create a mindset in which all other problems become crises that demand immediate, effective, and unconstrained action.

Schmitt, who joined the Nazi Party in 1933, held that sovereign decision-making is the central feature of the political process. When leaders make political decisions, they are reasserting control over the concept of sovereignty itself, which has been gradually eroded and transformed through various phases of globalization."

According to Schmitt, how leaders arrive at their decisions is secondary to the fact that a decision has been made. A sovereign “needs” to act forcefully to protect particular threatened interests. Often, this entails symbolic gestures. In 1930, for example, America’s Smoot-Hawley Tariff Act singled out Swiss watches, Japanese silk products, and other nationally iconic imports.

Protectionism today is no different. Consider US President Donald Trump’s threat to impose tariffs against BMW and Mercedes-Benz: two high-visibility brands that one immediately associates with Germany.

....

Unfortunately, this approach has created a political environment in which established norms have been eroded, and no new norms have taken their place. The Soviet-born British journalist Peter Pomerantsev said it best in the title of his brilliant book about post-Soviet life: Nothing Is True and Everything Is Possible.

Now that crisis has been normalized as a permanent condition, we are all post-Soviet."

Yes, nothing is true and everything is possible is the paradigm of policy making and governance these days.

Back home we have seen a number of examples of this - abolition of 86% of currency notes overnight, being the most glaring one.

Now if I accept this departure from conventional economics and governance models as permanent and hence new normal, my investment strategy would also need to be overhauled.

The dilemma is should I adjust it this morning, or wait some more to see, if Keynesians rise like Phoenix and the 20th century economic and governance order is restored; or may be a still newer paradigm takes shape.

Please help me, if you would, solve this puzzle!

Tuesday, August 8, 2017

Do you want to keep riding the tiger?

Thought for the day

"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

—Will Durant (American, 1885-1981)

Word for the day

Palsy-Walsy (adj)

Friendly or appearing to be friendly in a very intimate or hearty way, e.g., The police kept their eye on him because he was trying to get palsy-walsy with the security guard.

Malice towards none

Is communism truly and totally irrelevant in Indian context?

First random thought this morning

The present standoff between Indian and China is certainly not likely to escalate into a war of any kind, but nonetheless it has reached a stage where stepping back without a face saving formula may not be feasible.

The leadership on the both sides of the border have much to lose, if they appear compromising on this territorial issue. Indian side though has more at stake since our administration has certainly overcommitted on this issue.

I hope we find some face saving escape sooner than later.

Do you want to keep riding the tiger?

The conventional wisdom says when you move up a ladder, usually the easiest, and mostly the best, way to get down is to take the same ladder on your way down. Jumping from the roof involves risk, unpredictability and uncertainty of outcome.

The same is also true for a situation when you travel to an unknown destination. The easiest and the fastest way back is the same way you took to reach the destination. Trying a new way would entail risk, unpredictability and uncertainty.

When you ride on a tiger's back, the best way is to wait and survive till the tiger dies.

To mitigate the impact of the global financial crisis a decade back, the central bankers world over created unprecedented amount of money.

The trick did work wonderfully well.

The markets got unfrozen in no time without any major collapse; 1930 like depression, that looked almost certain at one point in time, was comprehensibly averted; even the thought of hyper inflation that is classical outcome of such liquidity deluge, has not bothered many in last decade; EU did not disintegrate as many Oracles portended; peripheral European countries that were caught in the eye of the storm survived and not doing bad after all.

The conundrum, the policymakers in the developed world now face is how to unwind the liquidity that has been created in past one decade to mitigate the global financial crisis.

Well as I said, the easiest and the fastest way would be to take the same path you took to reach where you stand today.

The central banks should shrink their balance sheets in the same fashion as these were expanded.

But remember, the effort in 2008-09 was a globally coordinated one. All central banks and other policy makers worked together.

The policies have however diverged in past five years, as per the circumstances of each individual jurisdiction.

In my view, if Fed or any other central bank decides to unwind liquidity in isolation, it could be highly disruptive. The unwinding therefore should also be synchronized the way expansion was.

There could be an argument that the circumstances of each jurisdiction are different. The uneven pace of recovery, say across US, Europe and Japan, may not permit a synchronized response.

In my view, this argument does not hold good, since the growth was skewed even before the crisis. US and China were the primary drivers of the growth, while Japan and Europe were mostly lagging.

The other way is to keep riding the tiger, till either of you die.

Friday, August 4, 2017

Factroing Japan in investment strategy - 4

Thought for the day

"It's the last thing a man will admit, that his mind ages."

—Will Durant (American, 1885-1981)

Word for the day

Dorp (n)

A village; hamlet.

Malice towards none

Who should be most concerned about the success of Amit Shah's Mission 2019:

(a) Congress party

(b) Sundry socialists like Mulayam Singh, Lalu Yadav, Mayawati and Mamata Banerjee et. al.

(c) BJP's partners in NDA

(d) We the people of India

(e) None of the above

(f) All of the above

First random thought this morning

While people are busy with structural reforms in elimination of subsidy from Kerosene and LPG, no one has highlighted the following structural destruction:

The government has already allotted 2.5cr LPG connections to BPL families under the UJJAWALA Scheme. The target is to reach 5cr households by 2019. 5cr households in Indian context mean 12-15cr voters and Congress got around 19cr votes in 2009 elections.

I bet someone like Rahul Gandhi, Mulayam Singh, Mayawati, will get up someday and announce that all these households will be provided 1 LPG cylinder free every month. That is a subsidy of close to Rs1000/month to 5cr households!

Factroing Japan in investment strategy - 4

Earlier this week, I briefly highlighted (see here) the fact that the commitment of Japanese investors (both public and private) towards India is very strong and may strengthen further in times to come. This commitment certainly transcends the politics and political leaders; though the personal chemistry between leadership does provide some impetus.

Furthermore this commitment has a strong foundation at policy level (see here) and has started to reflect in action in past 5-6years only. The exposure of Japanese investors and businesses to India is still very low, when compared to other Asian countries like China and Thailand. It is therefore most likely that the role of Japanese investment in India shall grow meaningfully over next couple of decades.

In terms of Investment strategy implications, I would like to consider the following:

(a) The return expectations of Japanese investors are amongst the lowest in the world, given their domestic environment and miniscule cost of funds. Hence, their valuation matrix may be very different from, say, the aggressive American investors.

(b) While transportation equipment and infrastructure may remain a key focus area, other infrastructure areas, especially roads and power (including nuclear), may see higher participation from Japanese corporations.

(c) In transportation equipment area players like Suzuki, Honda, Toyota, Nissan and Isuzu already have sizable presence. Many of these businesses may not be available to Indian investors for investing. Investing in their Indian ancillaries may be a good idea.

(d) One area where we could see significant rise in Japanese participation is Marine transport and equipments. I shall keep an eye on ports and shipyards for strategic Japanese investments.

(e) The engineering companies like Panasonic, Hitachi, Mitsubishi, Toshiba, Sony have materially increased their presence in India in past one decade. In my view, this trend is likely accelerate in the years to come. Again since not many of these companies may be available for portfolio investing in India, I would look for their Indian ancillaries.

(f) In consumption space, premium textile and household products, packaged food (especially seafood), wellness products could attract material Japanese interest in my view.

(g) On the negative side, I would like to avoid direct exposure to most of the businesses that compete directly with the Japanese. Though Japanese are not particularly known for predatory pricing, competing with them would essentially mean lower margins and market share for Indian players, given their lower return expectations and relatively superior quality.

I might have oversimplified my thoughts here. Nonetheless, I do believe in this opportunity, and urge the readers also to explore it at their level. All thoughts, views and opinions are welcome.

May also like to read

Japan: emerging from the lost decades?

Thursday, August 3, 2017

Yet another opportunity missed

Thought for the day

"Sixty years ago I knew everything; now I know nothing; education is a progressive discovery of our own ignorance."

—Will Durant (American, 1885-1981)

Word for the day

Anoesis (n)

A state of mind consisting of pure sensation or emotion without cognitive content.

Malice towards none

If elected representatives are public servants, why the rules relating to attendance and conduct in office should not apply to them mutatis mutandis, as these apply to every other person employed in public service!

First random thought this morning

When an elected representative takes oath of the office he has been elected to, he swears by the name of God that he will perform his duties and obligations as defined by the constitution, without fear or favor and without ill-will or affection towards any one.

I want to ask, when an MP or MLA recommends someone for admission to a school or college, or railway reservation, or out of turn treatment at a government hospital, or job - does he not violate the constitutional oath and hence become liable to be disqualified?

Would the Hon'ble Supreme Court like to examine this question as PIL?

Yet another opportunity missed

The decision of Monetary Policy Committee (MPC) of RBI to cut policy rates by 25bps is on the expected lines. In fact MPC was left with little choice after the largest Indian bank, State Bank of India, decided to cut savings rates that impact close to 330 million savings account, a couple days ago.

Given that SBI touches maximum number of poor households, and account for the largest number of marginal savings account, the decision to cut savings rate must not have been without strong reasons.

In my view, through this move the government has decided to lead the monetary policy. It would therefore be reasonable to expect that lending rate cut, may be little aggressively, will follow. Given the stature of SBI, most other banks may have to follow the move.

Though I will not go full length and question the legitimacy of MPC itself, under the given circumstances, it is certain that the government is more committed to growth rather than inflation at this point in time.

The difference of opinion between the government and MPC on the monetary policy stance is welcome. MPC not listening to the government is also a healthy sign.

But the problem is that this tussle between MPC and the government will likely erode the predictability and data dependability of the policy. This is something that may not be desirable for anyone.

Coming back to the MPC policy statement, I find the following worth taking a note, in India's context:

· A normal and well-distributed south-west monsoon for the second consecutive year has brightened the prospects of agricultural and allied activities and rural demand.

· Industrial performance has weakened in April-May 2017. This mainly reflected a broad-based loss of speed in manufacturing. Excess inventories of coal and near stagnant output of crude oil and refinery products combined to slow down mining activity. For electricity generation, deficiency of demand seems to remain a binding constraint.

· The weakness in the capex cycle was also evident in the number of new investment announcements falling to a 12-year low in Q1, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.

· The 78th round of the Reserve Bank’s industrial outlook survey (IOS) revealed a waning of optimism in Q2 about demand conditions across parameters, and especially on capacity utilisation, profit margins and employment. The manufacturing purchasing managers’ index (PMI) moderated sequentially to a four-month low in June and the future output index also eased marginally.

· Surplus liquidity conditions persisted in the system, exacerbated by front-loading of budgetary spending by the Government.

· Merchandise export growth weakened in May and June from the April peak as the value of shipments across commodity groups either slowed or declined. By contrast, import growth remained in double digits.

· Business sentiment polled in the manufacturing sector reflects expectations of moderation of activity in Q2 of 2017-18 from the preceding quarter. Moreover, high levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment.

· With the real estate sector coming under the regulatory umbrella, new project launches may involve extended gestations and, along with the anticipated consolidation in the sector, may restrain growth, with spillovers to construction and ancillary activities. Also, given the limits on raising market borrowings and taxes by States, farm loan waivers are likely to compel a cutback on capital expenditure, with adverse implications for the already damped capex cycle.

· External demand conditions are gradually improving and should support the domestic economy, although global political risks remain significant.

· While inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.

· There is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all.

· Keeping in view these factors, the projection of real GVA growth for 2017-18 has been retained at the June 2017 projection of 7.3 per cent, with risks evenly balanced.

Broadly, MPC did see material slowdown in growth momentum. It did recognize the need for reinvigorating private investment, especially in view of the rising fiscal constraints on state government due to loan waiver and pay commission payouts.

MPC did also note that some of the upside risks to inflation have either reduced or not materialised.

MPC also recognized that the global rates may move higher as central banks reverse some of their ultra loose policies. This implies that MPC must have discussed that there may not be much scope to cut rates later.

But still in its wisdom, MPC decided by a majority decision to cut the rates by 25bps.

Wednesday, August 2, 2017

Factroing Japan in investment strategy - 3

Thought for the day

"Moral codes adjust themselves to environmental conditions."

—Will Durant (American, 1885-1981)

Word for the day

Ergate (n)

A worker ant.

Malice towards none

NiKu's mantra of success - "If you can't beat NaMo, join him."

First random thought this morning

30 members, including some senior ministers, of Rajya Sabha belonging to the ruling NDA were found absent from the house when an important legislation relating to backward classes was being discussed and put to vote. Consequently, the opposition Congress was able to push through some amendments. This absenteeism happened despite specific directions from the prime minister.

The moot point is that should these MPs be punished the same way, as any other public servant would be, in case he knowingly and willfully remains absent from office when an important agenda is being discussed. Or if a senior police officer enjoys dinner at home when riots break out! Or 'we the people' should also not take PM seriously.

Factroing Japan in investment strategy - 3

The Policy Council of the Japan Forum on International Relations (JIFR) noted the following its September 2007 recommendations:

· India's rapid economic growth is attracting worldwide attention. Many countries are keen to strengthen their ties with India, with a population of 1.1bn the world's largest democracy and. like China, one of Asia's most important countries. From a geopolitical point of view s well, India has great strategic importance, located in the middle of what the Japanese government calls the "Arc of Freedom and Prosperity".

· Japan and India have deep ties, with roots extending far into the past, and today e two countries share many strategic interests. Now that India's global presence is growing, the two countries need to deepen their ties to spur prosperity in an Asia that is moving towards regional integration.

· Strengthening Japan-India ties depends on private sector business activities. The Japan-India relationship can be suitably enhanced only if trade and investment are increased far above their present levels.

· Japan and India share many strategic interests and a number of common diplomatic objectives.

· One prerequisite for enhancing Japan-India business ties is diversification of trade and investment. Most direct investments made in India by Japanese corporations are in the area of transportation equipment manufacturing., indicating a remarkable lack of diversification. Furthermore, the majority of those investments are to promote sales within the Indian market, and this inhibits diversification in India's foreign trade structure.

· In addition, Japanese investments should be made in various parts of India. Most Japanese investment in India has been concentrated in the Delhi capital region, because that is where many companies affiliated with Suzuki and Honda established operations in 1980s abd achieved considerable success.

· Promising areas for Japanese investment in India include general and industrial machinery, processed foods, everyday items such as sanitary goods and cosmetics, chemical products, pharmaceutical, retail markets, distribution, real estate, infrastructure, finance and software development.

· Another area worth considering is investment by Japanese financial institutions in the infrastructure funds of Indian financial institutions.

· Prime Minister Singh's visit to Japan near the end of 2006 formed the backdrop to an announcement that bilateral leadership-level consultations would be held annually, and that annual summit level meetings would be held in the respective capitals.

· Japanese corporations should adapt their business strategies to realities in India

· Japan's financial sector would benefit most from India's IT expertise. Instead of coddling their affiliated IT companies and client hardware companies, Japanese financial institutions should develop open IT systems and outsource some of their business to Indian software related companies. Japanese manufacturing sector should too make use of India's IT expertise.

· One of the most effective ways to promote human interaction is to greatly increase the number of Indian students studying in Japan. Bilateral government arrangements encouraging the employment of Indian exchange students in Japan should be augmented. Other possible approaches include Japanese universities promoting themselves in India to attract more students, and Japanese companies conducting hiring campaigns in Indian universities.

The events post these recommendations in 2007 indicate that these recommendations have been accepted and being acted upon.

The Indo-Japan relations have grown. The area of Japanese investments has moved much beyond Delhi NCR region.

Japanese companies have invested in building India's infrastructure. Metro Rail Projects, Dedicated Freight Corridors are some signature projects.

Japanese transportation equipment companies like Suzuki and Honda have greatly enhanced their commitment to Indian markets by larger investments in their local manufacturing units. Furthermore, they have increased the scope of these units beyond India's local markets to other parts of Asia and Africa.

Besides we have material rise in commitment and investments of other equipment makers like Hitachi, Toshiba, FCC etc.

Besides, investments have been made in logistic (Gati Ltd); Pharma (Deep Care), Consulting (New Era India, Alp Consulting), IT Services (Accel Frontline, Micro Clinic) Stationary (Camlin) and Telecommunication (Inmobi tech)

The most notable growth has occurred in financial and retail sectors. The corporations like Nippon, Softbank, Nomura, etc. have made significant investments in financial services, Financial technology services and ecommerce retail ventures.

Between 2008 and 2014, Japanese corporations made about 180 M&A deals in India (including minority stakes, joint ventures, acquisitions and increase in shareholding).

The point I am trying to make is that Japanese commitment to Indian economy is a mutual necessity and part of a long term strategic plan. It transcends political parties and political leaders.

The action so far is miniscule, if we consider the potential. There are enough indications that this engagement is going to rise exponentially. It is therefore important investment strategies and technical market studies include this factor as a critical one, in my view.....to conclude on Friday

Tuesday, August 1, 2017

Factroing Japan in investment strategy - 2

Thought for the day

"I am not against hasty marriages, where a mutual flame is fanned by an adequate income."

—Will Durant (American, 1885-1981)

Word for the day

Variegated (adj)

Varied in appearance or color; marked with patches or spots of different colors.

Malice towards none

Some present day politicians remind me of a short story by legendary Khuswant Singh, titled "Princess of Kahin Nahi" (The princess of nowhere)!

(You can read the story here)

First random thought this morning

This morning, leaving apart some understandings at the local level, an united national opposition to the marching BJP looks like a mirage.

Shrewd politicians like Amit Shah and Narendra Modi would be fully aware that the Congress Party and the degenerated socialists are opportunists and fast losing popular support. They are taking full advantage of this.

Arvind Kejriwal must be ruing his impatience. Has he controlled his larger ambitions and waited for the right time (which may be coming in next 12months), he could have easily emerged as the fulcrum of opposition unity. Alas! he exposed his limitations too soon and too much.

Factroing Japan in investment strategy - 2

The Japanese demand for Indian assets is so strong that assets of Nomura Holdings Inc.’s India equity fund quadrupled to almost 400 billion yen ($3.6 billion) in just the past year.

Another fund, Sumitomo Mitsui Asset Management Co.’s Indian bond fund, co-managed with Kotak Mahindra AMC, took in a net 24 billion yen ($214 million) from December through June, lifting total assets to about 87 billion yen as of July 10.

Japanese investors' portfolio investments in Indian stocks and bonds stood at $13 billion at the end of June 2017. As I mentioned yesterday (see here) the process that started a decade back in September 2007 has begun to gain significant momentum. A bilateral free-trade agreement, signed in 2011, is heralding a new phase in crossborder trade and investment.

In a recent press interview, the Japanese Ambassador to India Kenji Hiramatsu said, "We have already signed the Comprehensive Economic Partnership Agreement (CEPA)." he further added that "many companies are shifting their operation bases or manufacturing bases to India and they are producing their products here and selling them in the Indian market. Also they are developing industries or local part industries, as in they are making spare parts and not importing from Japan. It means that we are not only talking about the bilateral trade figure but in a wider context. Also I would like to say that the products that are produced here are exported to Japan, and some to the wider global market including Africa, Middle East and other neighboring countries, so Japanese companies are looking not only at the Indian market but also at the regional and the global market."

Japanese firms’ did not start the process of buying assets in India on a happy note. The ill-fated purchase by pharmaceutical company Daiichi Sankyo in 2008 of Ranbaxy proved to be a major sentiment dampener. NTT’s loss-making joint venture with Tata Group also did not end on a happy note. Nonetheless, these disappointments did not deter Japanese investors. M&A is picking up. As per available data Japanese companies made some 46 acquisitions (including minority stakes and joint ventures) in India in 2014, up from just 23 in the previous year.

To put things in perspective, as of 2015, close to 1000 Japanese firms had reported some kind of operation in India. This compares with 1400 firms in Thailand and close to 2500 in China. Till 2014, India accounted for only 1% of the outbound FDI from Japan, and less than 1.5% of Japanese exports.

In 2015, Japanese prime minister Shinzo Abe promised to double both Japan’s investment and the number of Japanese companies operating in India within five years, targeting ¥3.5trn (US$33.6bn) of private and public financing.

This needs to be understood in the context of (a) rising tension between Japan and China; (b) India promising to be remain fastest growing economy; (c) India offering a stable macro environment with a high yield differential compared to most of the developed world; and (d) traditional Indo-Japan cultural and religious ties.....to continue tomorrow.