Vijay Kumar Gaba

Friday, September 15, 2017

Whose history is it anyways!

Thought for the day

"The wise man does not rest by the roadside inns."

—Swami Sivananda (Indian, 1887-1963)

Word for the day

Gramarye (n)

Occult learning; magic

Malice towards none

PM Modi invited his friend Shinzo Abe directly to Ahmedabad, to keep him away from RaGa's charm!!

First random thought this morning

"Human nature will not change. In any future great national trial, compared with the men of this, we shall have as weak and as strong, as silly and as wise, as bad and as good. Let us therefore study the incidents in this as philosophy to learn wisdom from and none of them as wrongs to be avenged."

Abraham Lincoln (in the context of The American Civil War of 1861-1865)

Whose history is it anyways!

A couple of days ago, the deputy CM of UP Shri Dinesh Sharma reportedly emphasized that Mughal emperors were not our ancestors but looters and the Uttar Pradesh government would change the syllabus accordingly to reflect this fact.

"Mughal rulers were not our ancestors but looters. We consider Mughal rulers who did wrong acts as looters. Those who have done good work, we praise. Babar and Aurangzeb were looters. We do not oppose Bahadur Shah Zafar as he extended support to Mangal Pandey," Sharma told reporters here.

He reportedly said the government planned to bring "necessary changes" in the school syllabus. "If Akbar had done any good work, it will remain in pages of history. It will be historians who will decide what place Akbar gets," he said.

"A culture where a son kills his father for the throne or the hands of Taj Mahal builder are chopped off cannot be our culture. Our culture honours artistes and scientists. Dr APJ Abdul Kalam is credited for the successful nuclear test, and we honored him."

As per media reports, the UP CM Yogi Adityanath had also stated in May that Akbar, Aurangzeb and Babar were invaders and that the problems of the country would disappear after the truth is accepted. He had in the same event also called Maharana Pratap, Guru Gobind Singh and Chhatrapati Shivaji role models.

Recently, Maharashtra state board had removed a chapter on the Mughals from its class VII history books.

These recent assertions of BJP leaders have been mostly seen from the prisms of secularism vs. communalism, bigotry vs. nationalism, majoritism vs. inclusiveness.

The critics have highlighted this as a dangerous trend and attack on the very core of the pluralistic and diverse Indian society. In their view, this could damage the social fabric of the country beyond repair thus endangering the integrity of the country itself.

The supporters are terming it as renaissance of sorts, whereby all malefic distortions, digressions and misconception created by the left leaning elite about great Indian history would be corrected, ending the whole debate over secular vs. communal divide and great Aryan invasion theory. In their view, these corrections should pave the way for holistic progress of the country.

In my view, the debate suffers from myopia aggravated by deep prejudices, insecurities and complexes. Hence, I find this debate at political level totally frivolous and avoidable.

Usually, I would not bother about issues which in my view are rather frivolous to the present day socio-economic context. But given the intensity of the debate and potential economic fall outs that it could have, I need to review my investment strategy in this light....to continue

Wednesday, September 13, 2017

Red flags - 6

Thought for the day

"Desire is poverty."

—Swami Sivananda (Indian, 1887-1963)

Word for the day

Antinome (n)

A logical contradiction. Something that is contradictory or opposite to another.

Malice towards none

Our TV journalist are certainly far superior investigators than any of the government agencies. They can solve most of the crimes within hours.

Sir Sherlock Holmes would be truly proud of them!

So are we!

First random thought this morning

This we all know that most Socialist leaders in the country have come from very humble socio-economic background. For example, MSY was apparently a school teacher and Lalu Yadav was a clerk in Bihar Veterinary College.

What business did these socialist do, besides full time politics, to amass such tremendous wealth in past 3 decades?

Why should it take 10-15yr for enforcement agencies to find the source of their wealth? I guess a trainee accountant can work backward 30yr from the IT returns and bank accounts and tell you the whole story in less than two months.

Red flags - 6

Political stability, or otherwise, has been one of the most regular argument for investing or not investing in Indian equities over past three decades. Though there is not even an iota of evidence to suggest that the form (minority or majority), constitution (single party or multi party coalition) or ideology (left, right or center) of the government has any profound impact of the direction of economic policies or market returns.

The market in fact performed best during the periods when there were minority governments at the center, that is, 1989-1991, 1991-1996, 1998-1999. Most radical reforms were done during minority government rules (in case you have forgotten all the dream budgets of 1990s.

VP Singh with socialists like Madhu Dandwate, Janeshwar Mishra, George Fernandes in his cabinet, pursued basic reforms like free trade, a floating exchange rate, deregulation and macroeconomic stability started by preceding Congress Governments, before Mandir & Mandal undid him.

With less than 150 Lok Sabha seats, the socialist Chandershekhar government in 1991 originated the idea of disinvestment in PSE with the stated objective to “broad based the equity, improve management and enhance the availability of resources for these enterprises”.

NF government (1996-1998) led by Deve Gowda had Communist Party of India as one of the constituents, and 1996 dream budget of P. Chidambaram is still celebrated as a watershed in market history of India.

The NDA-II government led by A. B. Vajpayee with 182 Lok Sabha seats and minuscule representation in the Rajya Sabha added the term privatization to disinvestment policy in 1999. This government bravely and rightly focused more on "Divestment of Monopolies" as against mere "Disinvestment of Minority stake in PSEs". The government sought to divest its monopoly over core businesses like ports, airports, coal, power, oil and gas exploration and production, roads, mobile telephony, data transmission, etc.

UPA-1 government that was supported by communists opened up Indian economy like never before.

Whereas the Rajiv Gandhi government with unprecedented majority brought the economy to the brink of default while people were kept busy with Bharat Mahotsavs.

The point in brief is that I would give no weightage to political stability in my investment strategy for Indian equities.

Tuesday, September 12, 2017

Red flags - 5

Thought for the day

"Thinking of disease constantly will intensify it."

—Swami Sivananda (Indian, 1887-1963)

Word for the day

Vamoose (v)

To leave hurriedly or quickly; decamp

Malice towards none

Will nature's fury and fire make Trump rethink his stance of Paris deal?

First random thought this morning

People arguing for TINA favoring Shri Narendra Modi in 2019, appear totally convinced about the inability of Shri Rahul Gandhi and other Congress leaders to lead an effective government. Incidentally, most of these people also strongly believe that the UPA government was controlled and directed by the Gandhi family from behind the curtains.

Keeping the errors of omission & commission and multiple acts of corruption committed by various individuals aside for a minute, I would like to know what Policy Disaster was committed by the UPA government controlled and directed by the Gandhi family.

If you can't cite any meaningful policy mistake, then logically you should be afraid of the ability of Gandhi family rather than celebrating their inability!

Red flags - 5

I had perhaps quoted this before also. Regardless, I find it extremely pertinent to draw notice of my readers to the following discourse from Unlearning Economics.

"First, something which is expected to do a certain job - whether it's an economic system or the economists who study it - is expected to do this job all the time. If an engineer designs a bridge, you don't expect it to stand up most of the time. If your partner promises to be faithful, you don't expect them to do so most of the time. If your stock broker promises to make money but loses it after an asset bubble bursts, you won't be comforted by the fact that they were making money before the bubble burst. And if an economic system, or set of policies, promise to deliver stability, employment and growth, then the fact that it fails to do so every 7 years means that it is not achieving its stated objectives. In other words, the "invisible hand" cannot be acquitted of the charge of failing to do its job by arguing it only fails to do its job every so often.

Second, the argument implies there was no causal link between the boom and the bust, so the stable period can be understood as separate from the unstable period. Yet if the boom and the bust are caused by the same process, then understanding one entails understanding the other. In this case, the same webs of credit which fuelled the boom created enormous problems once the bubble burst and people found their incomes scarce relative to their accumulated debts. Models which failed to spot this process in its first phase inevitably missed (and misdiagnosed) the second phase. As above, the job of macroeconomic models is to understand the economy, which entails understanding it at all times, not just when nothing is going wrong - which is when we need them least.

As a final note, I can't help but wonder if this argument, even in its general political form, has roots in economic theory. Economic models (such as the Solow Growth Model) often treat the boom as the 'underlying' trend, buffeted only by exogenous shocks or slowed/stopped by frictions. A lot of the major macroeconomic frameworks (such as Infinite Horizons or Overlapping Generations models) have two main possibilities: a steady-state equilibrium path, or complete breakdown. In other words, either things are going well or they aren't - and if they aren't, it's usually because of an easily identifiable mechanism, one which constitutes a "notably rare exception" to the underlying mechanics of the model. Such a mentality implies problems, including recessions, are not of major analytical interest, or are at least easily diagnosed and remedied by a well-targeted policy. Subsequently, those versed in economic theory may have trouble envisaging a more complex process, whereby a seemingly tranquil period can contain the seeds of its own demise. This causes a mental separation of the boom and the bust periods, resulting in a failure to deal with either.”

Now let's examine the current Indian economic narrative in this context.

First, it is an undeniable fact that the long term growth trend of Indian economy has been on the decline since the global financial crisis. We have seen a marginal recovery since FY13 (some of it could be contributed to the change in data series), but the trajectory of long term growth trend is now plateauing.

There is one strong argument that the current stagnation in growth trajectory is due to a number of economic reform that would result in accelerated growth in not very distant future.

In particular, reforms like GST, RERA, Bankruptcy Code, greater Financial Inclusion, and Digitization of Payments, are cited as watershed in Indian economic history.

I have no doubts whatsoever about the importance of these reforms. These reforms were indubitably necessary for supporting a higher growth trajectory. But I find the argument that these reforms per se would accelerate the growth somewhat fallacious. For example, consider the following:

(a) GST is conceptually designed to improve "ease of doing business", enhance scalability of businesses through uniformity and standardization, and enforce compliance. There is nothing to suggest that GST will lead to higher demand (consumption or investment), better physical or social infrastructure, more jobs, or even better profitability of businesses. If at all, it may result in higher net incidence of taxation on businesses and people. How does GST per se causes higher growth?

(b) RERA per se cannot generate demand for housing.

(c) Bankruptcy Code may accelerate NPA resolution. But how would it improve banks' capital adequacy or prevent accretion of future NPAs!

(d) Similarly, Financial Inclusion and Digitization Payments are enabling conditions, not necessarily growth accelerators.

For my investment strategy, I would therefore overlook the argument that "these reforms slowed down the growth and these reforms will only accelerate it in future".

Also read the following:

Friday, September 8, 2017

Red flags - 4

Thought for the day

"I'm nobody, who are you?"

—Emily Dickinson (American, 1830-1886)

Word for the day

Serotinal (adj)

Pertaining to or occurring in late summer.

Malice towards none

Few of us would believe that Pakistan can mend its ways and become a responsible nation.

So, what you think is the meaning of all this censuring by global powers.

First random thought this morning

My personal assessment is that not more than a few million Indians out of 1.3billion would have heard about Gauri Lankesh before she was brutally killed. Still the country appears divided in condemning this cowardly act.

Unfortunately, the people apologizing for the killers are in overwhelming majority, while those strongly condemning it are mostly from her own fraternity. But this is not the point here.

My point is that 'We vs. They" syndrome that is dividing Indian society on almost every issue now a days could bring disaster of unfathomable proportions, if not tackled on priority basis.

Red flags - 4

India's balance of payment situation has seen marked improvement in past four years. Consequently, India's external sector resilience has improved materially since FY13. As at end of FY17, RBI's India External Sector Resilience Score stood at 1.89 from 1.54 as at end of FY13.

However, this score continues to be materially poorer than 3.68 recorded in September 2008, just before the Lehman Bros collapse triggered the global financial crisis. For example, the bottoming out of international prices of major commodities in 2016 have already eroded gains in India’s terms of trade vis-à-vis the preceding two years. Also, the current account is being negatively impacted by the lower order of net receipts from services and remittances as well as higher outgo on income payments during 2016-17.

In the RBI assessment,

"If terms of trade gains turn unfavourable in tandem with projected higher international commodity prices and the global demand conditions do not improve enough to support export volumes, CAD could increase due to a widening of the merchandise trade deficit. In fact, based on data for 1980-2016, it is estimated that a one per cent positive shock in terms of trade reduces India’s CAD by 0.03 per cent of GDP. Secondly, India’s software exports – a major source of fi nancing merchandise trade defi cit, face heightened uncertainty from protectionist policies being envisaged in advanced economies, especially with regard to H1B visa in the US, which may stress the current balance of payment (BoP). Thirdly, the short-term outlook for remittances fl ows to India largely depends on income conditions in source countries, especially the Gulf region which is facing low growth and undergoing fiscal consolidation, even though the assessment of the World Bank (2017) is more optimistic on this count. Finally, robust FDI infl ows which were at the forefront in fi nancing CAD in the previous three years, entail servicing through higher income payments which could have implications for CAD."

As per a recent UBS report, While external debt increased US$62bn between FY13-FY17, FX reserves rose US$78bn during the same period, indicating that external buffers are being created. FX reserves cover 78% of external debt as of FY17, up from 71% in FY13 but down from 138% as of FY08 (before the credit crisis). Import cover for reserves stood at 11 months as of FY17, much better than the 7 months in FY13 but still below the peak of 14.4 months in FY08.

Indubitably, the capital flows has been strong conditions for FDI flows have improved materially in recent years. Nonetheless, a reversal in loose monetary policies by the central bankers in advanced countries and consequent rise in bond yields could reverse some of portfolio flows.

The global oil markets have remained stable for many months. The consensus is now in favor of global crude oil prices stabilizing at levels above the current levels. A sharper spike though could impact India's current account materially.

Thursday, September 7, 2017

Red flags - 3

Thought for the day

"It is better to be the hammer than the anvil."

—Emily Dickinson (American, 1830-1886)

Word for the day

Bicameral (adj)

Government. Having two branches, chambers, or houses, as a legislative body.

Malice towards none

How long Hindi-Chini bhai bhai bonhomie will last after BRICS summit?

First random thought this morning

A recent report suggest that presently economic inequities in India are highest in almost in a century. The report also highlights that the economic inequalities reduced consistently between 1920-1980, with the share of top 1% population in total income falling from over 20% to 6%. From 1980 onwards the share of top 1% had again climbed to over 20% in 2014.

1977-1980 is a key period in Indian political history. This is the time when the hegemony of Congress party was first defeated by a coalition of motley opposition of right-center-left ideologies. Since then it had been a consistent struggle between Congress and others, until May 2014, when BJP won a decisive mandate. Corruption rose to perilous proportions in this period.

It would be interesting to see if BJP hegemony reverses this trend in rising inequalities by curbing corruption. In hindsight DeMo might come out to be the water shed in Indian economic history, success or failure either way.

Red flags - 3

Fiscal consolidation has been one of the remarkable effort of the government in past three years. Since FY14, the gross fiscal deficit of the central government has fallen from 4.5% to 3.2% of GDP (FY18BE).

The improvement in fiscal expenditure seems to have come entirely on account of cut in Revenue expenditure. The government revenue expenditure has fallen from 12.2% of GDP in FY14 to 10.9% in FY18BE.

There has been no change in net tax revenue (though gross tax revenue has increased from 10.1% in FY14 to 11.3% in FY18BE), non-tax revenue, and capital expenditure.

In my view, the fiscal improvement might have already peaked.

I feel, any further rise in incidence of tax could be seriously counterproductive for growth, especially private consumption growth. Incrementally the growth in tax revenue may moderate considerably as compared to past three years.

Similarly, the rate of government revenue expenditure curtailment may also have peaked. Going forward we may actually see some rise, given the forthcoming general elections.

Given that petroleum subsidies have been mostly rationalized and farm subsidies are getting rationalized fast, the incremental rate of subsidy reduction may also likely moderate.

Stagnant capital expenditure also does not augur well for any acceleration in growth, especially given that scope for any major spike in budgetary allocation for capital expenditure is limited. Compensation to states for GST, elections, lower incremental receipts from auction of spectrum etc. may also constraint the government capital expenditure.

In view of this it is difficult to expect any major increment in support for bullish market argument from fiscal side. For all, it may actually weaken a bit next year.

Also read the following:

Red flags - 1

Red flags - 2

Tuesday, September 5, 2017

Red flags - 2

Thought for the day

"Old age comes suddenly, and not gradually as is thought."

—Emily Dickinson (American, 1830-1886)

Word for the day

Narcotize (v)

To make dull. Stupefy

Malice towards none

When will our studio experts accept that predicting Modi's actions is not their domain!

First random thought this morning

In fact, I do not find anything worth bothering, losing sleep or being elated about the recent cabinet reshuffle. But there is so much of analysis and commentary over it that I almost feel compelled to have a publically stated view on it. So here it is:

I find the portfolio allocation inappropriate. For example, Coal is perhaps the largest customer of railway. Same person holding both the portfolio is a clear conflict of interest. Similarly, energy is a key sector for growth, and neither we have an integrated ministry, nor a full time minister for Petroleum & gas, coal or renewables.

Red flags - 2

One of the primary arguments in favor of underlying strength and resilience of Indian economy is the structural change in inflation trajectory.

The most popular argument is that in past decade or so, the supply side constraints that historically hindered the growth cycles of Indian economy have mostly dissipated.

In most of the previous growth cycles, the rising demand was almost immediately met by high inflation (due to supply constrained) and therefore higher rates. The growth cycles were thus curtailed to 3-4yrs in most cases. The popular argument is that huge capacity addition in past decade or so has obliterated this phenomenon structurally. Large capacities built in core sectors like cement, steel, power, roads, refining, etc., which mostly lie unutilized presently, shall make sure that inflation and therefore higher rates, do not kick in early in the growth cycle; and therefore the next cycle could be longer, steeper and more resilient.

By this popular argument, the prevalent high real rates are not justified and should ease materially - leading to a sustained demand growth cycle over next many years.

To me, broadly the argument sounds valid, but not very exciting; that is If we factor in other structural and cyclical changes also. For example consider the following—

(a) The benefits of capacity addition in manufacturing might get materially neutralized by some structural adjustments in the cost structure of the producers. Rise in cost of compliance, labor, natural resources, etc. may add materially to the pricing pressures.

(b) The efforts made by the global central bankers in past one decade to ease disinflationary pressure seems to have begun yielding results. The inflation thus created shall be imported into India, especially if lower rates force depreciation of currency.

(c) Capacity addition in agriculture is still quite inadequate. Rising urban wage structure and farm subsidy rationalization shall also eventually reflect in farm prices. Volatility apart, we may see a structural upmove in farm produce prices.....to continue tomorrow.

Friday, September 1, 2017

Red flags - 1

Thought for the day

"It is my ambition to say in ten sentences what others say in a whole book."

—Friedrich Nietzsche (German, 1844-1900)

Word for the day

Lineament (n)

A feature or detail of a face, body, or figure, considered with respect to its outline or contour, e.g., His fine lineaments made him the very image of his father.

Malice towards none

FM is absolutely right in saying that the people do not understand the objective of Demonetization.

By the way I forgot, what was that objective?

First random thought this morning

Albert Einstein once famously said, "A person who never made a mistake never tried anything new". Napoleon Bonaparte cautioned, "Never interrupt your enemy when he is making a mistake." And Bapu said, "A full and candid admission of one's mistakes should make proof against its repetition."

I am sure the incumbent government has tried many new things and made some mistakes. The opposition has repeatedly interrupted the government when making mistakes. The government has not admitted to any of its mistakes, and therefore it's ok to expect a repetition.

Red flags - 1

The recently issued Annual Report of RBI, succinctly sums up the macro conditions of the country:

"In the midst of global slowdown accentuated by the vicissitudes of financial markets and the transient impact of demonetisation, the Indian economy turned out resilient, marked by both internal and external stability. While economic growth moderated in 2016-17, there were visible signs of improvement in macroeconomic fundamentals – low inflation, and modest current account deficit and fiscal deficit. Going forward, even as the recent launch of the Goods and Services Tax (GST) gains traction across the country, strengthening fiscal consolidation, particularly at the sub-national level; reviving bank credit, and bringing investment back on rails, remain a challenge."

There are simply too many red flags to be ignored.

First, in my view, proving the resilience of the Indian economy against the global economy, by arguing that we are still growing faster than others has little meaning.

In my view, if the world was an airport, the Indian economy is presently on the runway, taking off. Other economies which are resting at their respective bays, waiting for their turn to takeoff, or taxing towards the runway can afford to stop, slowdown or modulate their speed. But our economy having started to takeoff has only one legitimate option - to accelerate. Any push on the brake pedal at this stage would put the passengers (Indian citizens) in grave danger.

Secondly, the resilience of the economy has to be tested in the context that Indian economy has not seen any contraction since FY80. In these 37yrs we have seen it all - extreme political uncertainty, near default, extreme inflation and interest rates, severe droughts, two Iraq wars and consequent spurt in energy prices, war at Kargil, multitude of scams, at least three major financial market collapses (1992, 2000, 2008), years of insurgency in Punjab, J&K, North East, Central India, two very popular prime ministers brutally killed, extreme controls (FERA, CCI, MRTP) to liberalization, transition from CCI to SEBI and free pricing of IPOs, VAT, LERMS, FEMA, shift from MRTP to CCI, transition to WTO, and many other such events.

The resilience in Indian context therefore has to be tested on the parameter that whether we can grow higher even if there is a temporary disruption or global economy is not supportive.

Thirdly, the whole construct of Indian economy growing at the fastest pace and being resilient seems to be building mainly around five key premise - (a) Lower inflation; (b) strict fiscal discipline; (c) improving current account deficit; (d) reforms like GST, RERA, Bankruptcy Code, Financial Inclusion, digitization, etc.; and (e) political stability.

I would like to share my thoughts on these issues with the readers.

....to continue next week.