Wednesday, September 5, 2018

What does it mean?


Some food for thought

Accept everything just the way it is.

—Tao proverb

Word for the day

Scry (v)

To use divination to discover hidden knowledge or future events, especially by means of a crystal ball.

 
First random though this morning

Owning our mistakes and inadequacies, and seeking forgiveness is one of the quintessential elements of Indian ethos. Allowing for mistakes, accepting inadequacies of others, forgiving, affording a chance for redemption of mistakes and fulfillment of inadequacies is also an equally important element of our ethos.

Any person, who seeks to be governor or administrator of Indian society, needs to fully assimilate and imbibe our ethos.

Unfortunately, none of the people responsible of governance presently appears to have imbibed this very critical aspect in their individual or social character.

The leaders and supporters of ruling parties claim no mistake or inadequacy on their part. The leaders and supporters of the opposition parties see nothing good in the people responsible for governance, and are absolutely unforgiving for mistakes and inadequacies.

The situation is slightly better in case of administrators, but only slightly. Not many administrators are generally seen trained to comply with Indian ethos in performance of their duties.

This phenomenon is bothersome and to some extent frustrating.

The point to ponder is "whether it is the time for a cultural renaissance in our society, or we should accept the evolution (or degeneration if you like that way) of the socio-political narrative as it is, and move forward with modified expectations."

#NOTA

Chart that caught my attention yesterday
 

What does it mean?
We are yet to get enough evidence to make an assessment of the success or otherwise of the 'Make in India" policy. However, some evidence is emerging to show that 'Buy American and Hire American" policy of President Trump might have already begun to jeopardize our interest.

As per some latest reports (see here) An analysis shows denial rate for H-1B visa increased 41% in the last three months of 2017, compared with the previous three months. This is a worrying sign for all, the overseas companies using H1B VISA to undertake job contracts in USA; the workers who aspire to work with employers in USA; and the US corporations which thrive by hiring the best available talent globally.

I don't know how this would impact political fortunes of Trump, but I am very confident that all endeavor to close borders to foreign capital, trade, resources etc. will fail eventually.

In the post cold war era, the world has invested only in technologies that reduce or eliminate the boundaries of time & distance; bring people closer; and rule out the probability of any major war breaking out. This gigantic effort and investment cannot fail. At least, I would not like to fathom this probability.

Back home, the 1QFY18 GDP data has surprised many.

Skeptics are highlighting the discrepancies, citing poor base and doubting the sustainability of this trend in the subsequent quarters.

The hopeful are picking up several green shoots, arguing in favor of the sustainability of the trend and building a strong case for robust economic revival in next many quarters.

A large number is however sitting on the fringes and waiting for further evidence to emerge before they accept or reject the complete economic revival theory. For now, I am in this camp, not leaning towards any extreme.

There are many data points that are keeping me from taking a clear stand. For example, consider the following:

(a)   Despite official claims of material recovery in economic activity and better tax compliance, the tax buoyancy is not visible in data.

The GST collections continue to remain materially below the budget estimates. In first four months of FY19, the average GST collection is ~INR950bn, against BE of ~Rs1.04trn. Moreover, the average GST revenue per filing has declined sharply from ~Rs1,72,500 in March 2018 to Rs1,40,300 in July.

Considering the large scale disruptions caused by widespread floods, it is unlikely that August-October collections will pick up materially from the current run rate.

(b)   The number of Income Tax filings has seen sharp rise in FY18. However, the growth is so far not reflected in the amount of tax collected. As per recent CBDT data, reportedly the personal income tax has grew only 6% in April - August 2018 period, as compared to the previous year. The corporate income tax has seen just 1% growth.

If accept the ~11% nominal GDP growth figure and juxtapose that to revenue collection data, and try to draw any conclusion, it would be a complicated a task.

Does it mean that growth is mostly coming from social sector which may not have direct correlation with revenue generation? or

Does it mean that inflation is eating into household income much more than what official figures are showing? or
Does it mean that the government's claim of huge growth in MSME (where the tax incidence is nil or very small) due to its schemes is correct? or
Does it mean many other things?

The currency and bond markets are extrapolating this revenue short fall and rising pressure to cut duties on petroleum products to mean a sharp fiscal slippage. Even though there is literally no evidence to suggest that the government would give in to the pressure of reducing taxes on petroleum products.



Nonetheless, the markets are tense and inclined to ignore most positives this morning.

 





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Tuesday, September 4, 2018

Why this Kolavari di over INR

Some food for thought

"Anger and intolerance are the enemies of correct understanding."

—Mahatma Gandhi (Indian leader, 1869-1948)

 

Word for the day

Nepenthe (n)

Anything inducing a pleasurable sensation of forgetfulness; especially of sorrow or trouble.

First random though this morning
Police action against five popular activists with conspicuous left leaning has once again triggered a national debate about the freedom of expression in the country. This time even the Supreme Court of India has joined the debate by aggressively warning the establishment against suppression of thoughts. Liking the situation to a pressure cooker, the apex Court warned that blocking the vent, would cause the cooker to burst.
The political establishment optically appears vertically divided. The media and herds on social media are sparing no effort to show to which side their allegiances stand.
In all this cacophony, one of the basic maxims inherent in Indian ethos is totally lost. Our sages always preached that "action speaks louder than words". Even Gandhi Ji said "action expresses priorities".
The fact is that since 1975 at least, when Mrs. Indira Gandhi imposed emergency in the country, politicians in power have always been suppressing the voices that do not concur with them.
The fact is that the Congress led UPA government had also taken stern action against these very activists. Rajiv Gandhi brought draconian Postal Bill and suppressed Indian Express. Manmohan Singh oversaw incarceration of many right leaning activists.
This on one hand exposes the hypocrisy of the Congress Party, in criticizing the Modi government. On the other hand it leaves the whole debate redundant. If we consider the actions, not words, there is not an iota of difference between all political parties in the country. The dissent has no place. The lesson of tolerance to divergent view preached by Buddha, Nanak, Gandhi was lost many decades back.
Regardless, if anyone of these activists, or any other activist for that matter, is found guilty as charged, he/she must be given the maximum punishment possible under the law of the land.
Chart that grabbed my attention yesterday
 

Why this Kolavari di over INR

The Indian Rupee has been weakening continuously for past several months. INR weakness has been a matter of debate in all spheres - economic, political, social and markets.
For a change, the response of the participants in financial and other markets has only been the rationale one. Market participants have understood that over a medium term value of Indian currency vis-á-vis other currency is primarily determined by the inflation differential.
However, in very short term, the exchange rate of currency is usually determined, like any other commodity, by the forces of demand and supply. If demand of USD by INR owners is more, INR would weaken, and vice versa, in short term.
While the stocks of companies from sectors like IT and Pharma, which have substantial export earnings, have gained post sharp INR depreciation, the importers & USD borrowers have not seen any major sell off.
India being a developing economy:
(a)   runs a larger budget deficit to sustain social sector and support investments in core sectors; and
(b)   runs a trade deficit as depends on imports of many commodities (especially energy) and technology;
(c)    tolerates higher Inflation as a necessary evil, as it motivates investment.
It is therefore natural for INR to depreciate in medium to long term against the currencies of economies which are struggling to create nominal inflation in their economies.
INR depreciation or strength is not a matter of debate or concern for an investor like me. It might impact a company's balance sheet as its assets and liabilities get repriced in local currency terms. But if the company is fully hedged against the foreign currency fluctuations, which every good company does, the impact is only notional, though it cause some cash flow mismatch and working capital issues in the short term..
In terms of profit and loss account, the impact is usually seen to last for one to two quarters only. Normally, the contracts get renegotiated and repriced to account for the sustained exchange rate differentials.
In today's competitive world, where flow information is very fast, unhindered and democratic, even sustaining relative exchange rate advantages over competing currencies is difficult and unsustainable.
So I find the best way to deal with the short term exchange rate fluctuations is to ignore it.
The politicians are same everywhere, and they strongly believe that they can fool all the people all the time. Them making a political point over currency weakness is meaningless and needs to be ignore totally.
The economists behavior is however somewhat surprising. The "official economists" are maintaining that INR has actually not weakened. It is the USD which has gained strength. Now whatever it means, it is sufficient reason to ignore such economists.
The "opposition economists" seem to fully understand that INR depreciation is a very normal economic phenomenon. But they are still holding the ruling dispensation responsible for this, since the Prime Minister had done the same, when BJP was in opposition. Why would you bother to hear them.
In the social sphere (where people select which message to forward and promote based on their political and religious allegiance and not based on the correctness, appropriateness, or relevance of the message), the weakness of INR is a matter of intense activity. Warriors from all three sides (BJP, Opposition and NOTA) are incessantly forwarding whatever is being provided to them by their favorites.
I must admit some of the messages are truly funny and make you LoL for a minute. Bothering about these beyond that one minute does not make sense, in my opinion.
To sum up:
For a businessman INR fluctuation is a short term management issue. Most of the businessman understand and would have accounted for gradual INR depreciation in their business plans and therefore not a business or existential crisis.
For a central banker, any disorderly change in the currency exchange rate could be a matter of serious concern, as it impacts current account balance. It may also have a bearing on the reserve position thus impact the external stability 9or otherwise) of the country. All orderly movements, depreciation or otherwise, are routine and should not bother the central banker.
For others, it is not more than India losing to England in a test match in England. They feel intensely about it only till the time their breakfast is not served, the next morning.
As an investor I would never invest in a business that is rattled by exchange rate fluctuations; or gets too enthusiastic by it, for that matter.


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