Vijay Kumar Gaba

Wednesday, July 11, 2018

Budget tourists and assembly lines

Thought for the day

"Encourage your own curiosity; pursue the problems based on that."

—James Mirrlees (Scottish, 1936-)

Word for the day

Makebate (n)

A person who causes contention or discord.

Malice towards none

Why can't BJP just accept that AK is CM of Delhi and cooperate with him to improve life of the people living in Delhi!

First random thought this morning

Adi Godrej group is reportedly opposing the proposed acquisition of their Vikhroli land for Mumbai-Ahmadabad bullet train project.

So far the opposition to the ambitious project had come from farmers and opposition parties. This is the first instance an industrialist (that too someone who always sounded highly impressed by PM Modi) has opposed the pet project of the prime minister. This may signifies either of the following:

(a) Industrialists want everything but wouldn't give away even a small piece of land lying vacant for 100years for the development of the country. or

(b) Government has totally failed in convincing people about the need, necessity and importance of Bullet train project.

Budget tourists and assembly lines

The primary idea behind the activity of trading is to let everyone do whatever they can do best.

"Trade" thus allows the people use their scarce resources in most efficient way and exchange the output of their expertise with the output of others' expertise. Trade renders every one better off, as it facilitates the most efficient exploitation of scarce resources and enables production of goods and services at lowest feasible rates.

In an ideal world, the objectives of "Trade" are hence achieved when:

(a) All owners of resources, producers of goods and services, and consumers of such goods and services are allowed to freely trade with each other; and

(b) Everyone produces as per their specialization and everyone consumes as per their affordability.

If trade is restricted, optimum exploitation of resources would not be possible, and people will be forced to do things beyond their domain of expertise. This results in (a) irrational pricing of resources, goods and services; (b) economic imbalances; and (c) dissipation of scarce resources.

The erstwhile Soviet Block, which restricted trade with the western world, is a classic example of this phenomenon. India and China also followed largely restrictive trade policies till 1980s and suffered slower growth, poverty, and high inflation. Opening of Indian and Chinese economy may have significantly helped in containing global inflation through cheaper labor and resources.

Similarly, if people are allowed to consume more than what they can economically afford, the demand-price equilibrium of goods and services will get distorted leading to (a) abnormal pricing of resources; (b) avoidable wastage of resources; (c) poor sustainability; (d) frequent financial crisis; and (e) socio-economic inequalities.

The sub-prime crisis that rattled the global economy a decade ago is a classical example of this "eating more than you can digest" phenomenon.

I also see consumption of fossil fuel by Indians as a reflection of consuming beyond affordability. Had successive Indian governments since independence, focused on harnessing the abundantly available solar, wind, and hydel sources of energy, rather than over relying on imports of fossil fuels, the trajectory of Indian economic development could have been very different.

Similarly, constricting free trade in agri produce and making the farmers dependent on subsidies and loan waivers etc. is another trade distortion that may have seriously hindered India's position in global trade, besides introducing serious discrepancies (almost irreparable now due to political compulsions) in the socio-economic structure of the country.

The short point I would like to make is that to increase its share in global trade to a respectable level (say 5%) from the current ~2%, India needs to focus on its core strengths and expertise.

If someone asks me "what are the 10 key strengths of India" in socio-economic context, I would list the following:

Food
Languages
Religion & Mythology
Spiritual knowledge
Traditional arts
History & culture
Variety of beautiful landscapes
Hard working people with better than average IQ
Abundant sunshine and water flowing through rivers
Second largest pool of arable land

As a minister for trade and commerce, I would therefore focus on these strengths to increase my share in global trade, rather than simply importing crude oil and exporting petroleum products; or importing raw diamonds and bullion and making jewelry as per the specification and designs provided by foreign buyers; or providing a base to foreign manufacturers for assembling mobile phones or motor vehicles from mostly imported parts; or worst be contended with small number of low budget foreign tourists!

Tuesday, July 10, 2018

High street or flea market

Thought for the day

When things begin to go bad, the perception of people makes it worse.

—James Mirrlees (Scottish, 1936-)

Word for the day

Ullage (n)

The amount by which the contents fall short of filling a container, as a cask or bottle.

The quantity of wine, liquor, or the like, remaining in a container that has lost part of its contents by evaporation, leakage, or use.

Malice towards none

If the government can convince that "nominal growth" is the "real growth", and raise inflation to 6%, we will definitely have sustainable double digit growth.

First random thought this morning

While 24X7 news channels are scaring people by showing images of furious floods across the country, the official IMD data indicates that about 50% of country has received normal rains so far this season. The rest of the areas are either dry or inundated. As the monsoon progress has slowed considerably, last week, only about one third of the country received normal rainfall, while another one third was mostly dry.

The statistics however tells that the rainfall so far has only been 7% less than the long term average.

How does one decide if monsoon is good, normal or poor?

High street or flea market

In past many decades, cheaper labor has been at the core of Indian exports competitiveness. The traditional engine of Indian export growth, e.g., textile, gems and jewelry, ITeS, banking services, CRAMs, etc. have all been mostly running primarily on the fuel of wage rate arbitrage.

Though it would be foolish to deny the specialized skills and expertise of various businesses, but I must say that the primary driver of export growth has been the availability of abundant skilled labor at much cheaper rates.

Engineering exports, especially automotive sector exports, could be marked as exception. Perhaps because the development and growth of this sector has been primarily driven by companies from developed countries, especially Japan and Germany, known for manufacturing prowess and process orientation. These foreign OEMs have successfully introduced best practices, processes and work culture in their Indian operations, besides investing in local enterprises to make them competitive enough to become their global partners. Otherwise, consider the following:

(a) How many Indian brands do you find in top 100 global apparels brands? How many Indian textile designers are known globally? Though a number of Indian textile manufacturers like Arvind Mills, figure in the list top 100 textile producers of the world.

(b) How many Indian jewelry designers are there in top 100 globally? Though, India is one of the largest manufacturers of jewelry products in the world.

(c) India is widely considered as the IT powerhouse of the world. How many Indian IT products and innovations could you recall?

(d) We have a fledgling CRAM industry that does research function for almost all renowned global pharmaceutical innovators, on contract basis. But how many "New Drugs" have been innovated by Indian companies in past seven decades?

(e) Indian bankers and technology professionals manage operations (both front desk and back end), of global banking giants. But how many Indian banks figure in top 50 global banks list?

(f) Despite being surrounded by hostile neighbors ever since independence, India is still one of the largest importers of arms and ammunitions. We figure nowhere in the global list of arms suppliers.

The point I am trying to make is that innovation, advanced technology, branding, niche marketing and high value addition has been mostly missing from the Indian export enterprise. We have either been a low cost, faceless contract manufacturer for the rich of the world or a flea market selling spurious goods to the poor of the world. This needs to change, and change fast, if we need to turn trade balance positive on sustainable basis....to continue

Friday, July 6, 2018

Focus on strengths

Thought for the day

"Shadow owes its birth to light."

—John Gay (American, 1685-1732)

Word for the day

Debonair (adj)

Courteous, gracious, and having a sophisticated charm.

Malice towards none

While in Delhi, Congress leaders, especially P. Chidambaram, are clamoring for reduction in taxes on fuel, their government in Karnataka has announced 2% hike in tax rates for petrol and diesel.

First random thought this morning

Tata Nano was once hailed as revolution by many. It was celebrated as the best example of Indian Jugaad (low cost innovative solution); and marketed as most affordable mobility solution for rising middle class of India.

After a massive controversy was raised in West Bengal, the original location for Nano's production, the plant was shifted to Gujarat near Ahemdabad. The then Gujarat government marketed it as harbinger of its business friendliness.

In June 2018, Tata Motor produced just one (and perhaps the last) unit of Nano. Management experts will perform the autopsy to find out what went wrong and management students will be taught how not to do things.

Focus on strengths

As I mentioned yesterday (see here), the government has been repeatedly stating that increase the domestic production of energy and electronic products to substitute import.

The government has placed significant focus on renewable sources of energy, especially solar, and incentive for producing electronics products within the country under Make in India program.

There have been some notable achievements in these areas in recent years. For example consider the following:

FDI grew 4.4 times in Electronics & IT sector- from $2.77 billion (2011-14) to $12.24 billion (2014-17)
1.9 lakh crore of electronics products manufactured indigenously in 2014-15.
Highest ever wind power capacity addition of 3,300 MW in 2015-16.
140% increase in solar power capacity addition during 2014-16 as compared to 2012-14.
34 solar parks of aggregate capacity of 20,000 MW sanctioned for 21 states.
31,472 solar water pumps installed in 2015-16, highest ever since 1991.

I believe that “roof top solar panel” has the potential greater than what has been seen in the mobile telephoney in past 15years. The government has been giving decent cash subsidies for installation of solar panels and roof top solar is gaining momentum in many states, but still it is not being done on mission mode. This needs to be transformed into a peoples' movement to accelerate the outcome.

A change in housing policy to mandatory accommodate the solar panels in all new building designs, especially in affordable housing projects, may help to great effect in my view.

Reducing energy intensity of water and developing a world class public transport infrastructure on priority basis, especially in tier II and III cities, and strict legal enforcement of energy efficiency are two other steps that are urgently needed to reduce the reliance on energy import. (Also read here)

Insofar as increase in the production of electronic goods in India to substitute the import is concerned, I totally differ from the Make in India approach taken by the government.

So far whatever actual investment or planned investment in electronic production I have heard is mostly in assembly lines with low value add products like plastics sourced from India. The key components like semi conductors, micro processors, memory chips etc. are all still imported. With this practice, not much help could be expected on trade balance in my view.

Establishing highly capital intensive integrated manufacturing facilities for electronic products within the country may not be a good idea after all. Especially, when significant capacities are available globally to cater to the Indian demand,

If we consider the high and still worsening obsolescence rate in technology and need for heavy recurring investment in new technologies and upgrades, this becomes even more avoidable. Imagine, a US$20bn manufacturing business suddenly going out of business due to technology obsolescence!

The better idea would be let Indian entrepreneurs to lease manufacturing facilities in Asian countries, produce their and import into India.

The government should rather focus on, in partnership with industry, investing in development of new technologies. It should make provision for training of millions of young IT professionals, who can then serve the global industry and earn enough foreign exchange to pay for import of mobile phones and television sets.

The emphasis should be on building on our strengths (manpower) rather than wasting scarce resources on building vulnerable and redundant factories.

...to continue on Tuesday

Thursday, July 5, 2018

Managing trade balance

Thought for the day

"Those who in quarrels interpose, must often wipe a bloody nose."

—John Gay (American, 1685-1732)

Word for the day

Fizgig (n)

A type of firework that makes a loud hissing sound.

Malice towards none

Is Arun Jaitely batting for dilution of "Prevention of Corruption Act", or just suggesting some corrective amendments?

First random thought this morning

The world is anticipating serious trade disruption, that may potentially lead to a recession. It that does happen, emerging markets will be badly affected. In spite of whatever, NITI Aayog and other experts feel, India may not be insulated from a global contagion.

Domestic situation not looking great either. Fiscal management requires day to day monitoring. CAD is expanding. INR and yields conditions worsening.

Amidst all this, no one knows who is FM of the country. The Finance Ministry website says, its AJ whereas people believe its PGl!

Managing trade balance

India imported over US$444bn worth of goods in 2017, i.e., a per capita import of appx Rs24,000. This is about 22% of annual per capita income.

Exports from India during the same year totaled US$298bn. i.e. per capita exports of Rs16,000. This is about 14% of annual per capita income

In past more than one decade, the share of India in overall global trade has been mostly stagnant below 2.5%, a rather unacceptable number for the third largest global economy in PPP terms. Since 2011, exports have remained close to US$300bn, briefly falling to ~US$265bn during 2015 and 2016.

India imports ~58% of its requirements from Asian trade partners. EU at ~18% and North America at ~8% are other major trade partners of India.

Traditionally, energy and precious metals & diamonds constituted a dominant part of India's import basket. But in recent years, electronics (phones, TV, solar panels, & computer parts etc.) have become significant part of India's import basket.

As per a Bloomberg report (see here) "The relentless rise in purchases of smartphones, TVs and other goods have made electronics India’s second-biggest import item after oil, and is pushing the nation’s trade deficit wider.

There are five challenges before the government, in my view—

(a) To increase the domestic production of energy and electronic products to substitute import.

(b) To make Indian exports more competitive.

(d) To diversify trade to non-traditional areas.

(e) To maintain trade balance with most trade partners.

I would like to share my random thoughts of these five challenges in next few posts.

Wednesday, July 4, 2018

What are you scared off?

First random thought this morning

A portion of the railway foot over bridge in Mumbai collapsed in Mumbai. Last year also a bridge had fallen in Mumbai.

It is totally unfortunate to note that the concept of preventive maintenance to the civil structures is still not very popular in India. At the core of this apathy is perhaps our total disregard for the value of human life and right to people to live with dignity.

Thought for the day

"Fools may our scorn, not envy, raise. For envy is a kind of praise."

—John Gay (American, 1685-1732)

Word for the day

Kakaesque (adj)

Marked by a senseless, disorienting, often menacing complexity:

Malice towards none

Delhi government wants to teach happiness to school children!!

What are you scared off?

A chance conversation with a reputable fund manager and a small group of businessmen was quite perplexing. They discussed the political scenario at length. In the view of the said fund manager, PM Modi getting reelected to the office in 2019 is a key risk to the Indian financial markets, especially equities. The businessmen mostly nodded in agreement.

When I asked, "is there any substantive evidence to establish that full majority governments have performed better than the minority governments or coalitions with numerous parties having divergent agenda?", no satisfactory answer came through.

I realized that this thought is in fact be bothering many market participants. In recent months some prominent global fund managers, brokerages, and business advisory firms have also highlighted PM Modi not getting reelected would be a key risk to Indian equities.

To my knowledge, no one has so far specified any substantive reasons for this fear and concerns. I am afraid to say this, but unfortunately, this view is mostly driven by deep prejudices, ignorance and arbitrariness.

For example consider this—

Resolution of Satyam Computer has so far been one of the best examples of efficient government intervention in resolving the cases of corporate fraud and misgovernance. The intervention was swift, effective and acceptable to most stakeholders.

Do you remember who steered the Satyam resolution from government side?

Prem Chand Gupta, a minister from Lalu Yadav's RJD quota in UPA-1.

In the memories of the current generation name of APJ Abdul Kalam is etched in indelible ink. He inspired the young and old alike. It would not be an exaggeration, if I say that APJ is in the same league as Mahatma Gandhi, insofar as commanding the reverence of common people is concerned.

Do you remember who was one of the key instruments in APJ's election as the President of India?

Mulayam Singh Yadav, who broke ranks with the united opposition (People's front) in supporting NDA's nominee APJ Abdul Kalam.

On my recent visit to UP, I enquired from people about the law and order situation in the state. Almost everyone agreed that law and order situation in UP was much better during the Mayawati's tenure as CM.

Sharad Yadav, Omar Abdullah, Mamta Banerjee, Nitish Kumar, Ram Vilas Pawan, et. al. handled key ministries during AB Vajpayee led NDA's regime and there are no exceptional complaints of inefficiencies and corruption!

I. K. Gujral who ran a government with handful of MPs, is still respected as honest and good PM. Whereas there are few who remember Rajiv Gandhi (who had brute majority of 414 MPs) as a great PM!

What I am trying to say is that with her 1.3bn children Mother India is far stronger than a few politicians.

Enterprise of the millions of Indians forms core of the Indian economy. Few good politicians can perhaps enhance their capabilities and output a little. Many bad politicians can perhaps slow them down a bit. But no party, individual or group of individuals could stop them.

The worries over who is and who is not prime minister in my view are mostly unwarranted.

If market does correct materially only due to this reason, I would take it as a massive opportunity to avail maximum possible leverage and buy Indian equities.

Tuesday, July 3, 2018

Celebration for vanity sake

Thought for the day

"On the choice of friends, Our good or evil name depends."

—John Gay (American, 1685-1732)

Word for the day

Buttery (adj)

Like, containing, or spread with butter.

Malice towards none

Why both Ex Finance Ministers are trying so hard?

First random thought this morning

Another overloaded bus has fallen in deep gorge in Uttrakhand, claiming about 50 precious lives. Anyone who has travelled to hills of Uttrakhand and Himachal Pradesh by road is well aware that most of the public busses, autos, and taxis run overloaded there. Speeding and driving under influence of alcohol is also not uncommon.

The point is "why the enforcement agencies who allow this life threatening practices to continue for a small gratification and elected representatives (including ministers) who ignore such practices to please the strong transporter lobby should not face serious criminal charges for each such mishap.

Celebration for vanity sake

One of the "important" things that kept middle class of India busy in past few days is the engagement party of Akash Ambani, elder son of the richest Indian Mukesh Ambani. The rich and famous of India also appeared vertically divided last week. On the right being the people who got an invite to attend the gala event; and the left being the people who the Ambanis chose to ignore!

I fully appreciate that it's totally a personal matter of the family and no one has any business bothering about this.

Nonetheless, as an investor, who seriously believes that social narrative is as important for sustainable growth of the economy, as the economic and financial narrative, I must say that such events do bother me a lot.

In my numerous travels across the length and breadth of country, I have witnessed a number of family functions like wedding, birthday, anniversaries, etc. Most of the functions in middle, lower middle and even poor families are deeply inspired by Bollywood movies and publicized events of the rich and famous.

Under tremendous social and peer pressure, people are compelled to emulate the movie sequences and the indulgence of rich, regardless of their affordability quotient.

As I have highlighted many time before that a large portion of the rural debt is actually related to the spending on functions at birth, marriage, and funeral (see here and here).

It would be interesting to study, how much this non-essential and mostly frivolous spending contributing to the growth in personal credit, especially consumer funding NBFCs and micro finance institutions.

People are spending on motor bikes, smart phones, SUVs, tractors, wedding & birthday celebrations, compromising on food, health, education & training, and shelter needs.

This is raising three damaging trends in the socio-economic milieu of the country:

(a) Even the people who are better off in absolute monetary terms frustrated and cynical than ever.

(b) There is an increasing tendency to depend on the State for meeting basic needs.

(c) The consequent financial stress is gnawing into traditional Indian ethos, where defaulting on debt is considered one of the greatest sin. These days it is not uncommon to see people not only willfully defaulting on loans but also encouraging others to do so.

Insofar as Ambanis are concerned, I am no one to offer any advice. But I personally would have been delighted if they had set an example for common Indians, who eagerly look forward to them for inspiration. A simple marriage in a temple, with 25 guests, would have been remembered much longer (and proudly) than the one they may be planning. Otherwise, very few remember the Lakshmi Mittal's daughter's Rs2.5bn marriage or the obscene extravaganza of Subrat Roy's son wedding.

(Also read Give them dignified life; and death)