Vijay Kumar Gaba

Wednesday, April 10, 2019

Heads or Tails

Some food for thought

"You have to look for teachers. If you want to be a mechanic, go hang out with mechanics."

—Robert Kiyosaki (American Author, 1947)

Word for the day

Funemployed (adj)

Without a paid job but enjoying the free time, e.g., Ask one of your funemployed friends to come along with you.

Heads or Tails

If I were a first time voter, and I am asked to choose a national party to vote for, exclusively on the basis of its manifesto, I will be left with absolutely no choice but to toss a coin — BJP if it comes Head, and Congress if it is Tail.

The recently released manifestos of both the parties sound so similar that it is almost impossible to choose one over another. After spending 6hours, trying to decipher substantial differences in agenda of two parties, I could find nothing, except stand on Art370. In fact it might be for the first time that two national parties have openly and abundantly accused each other in their manifestos.

Exasperated, I gave the exercise to my daughters aged 17 and 15, of course as a punishment for exceeding their screen time limit. Forced, they studied both the documents carefully, discussed these threadbare and came out with the following differences:

(a) The font used in both the document is different. Congress party appears to have chosen Arial in 8size with paragraphs left aligned, with some extra space in between lines to make it an easy reading. BJP on the other hand has used unconventional Century Gothic in 10 size, justified paragraphs with no space between lines, making it cluttered and tough to read.

(b) Congress has used a liberal dash of Saffron, Green, Blue and Grey to make it look inclusive and secular. BJP on the other hand has used only Saffron, with a slight tinge of green in the bottom line, to align it with Right Wing nationalism.

(c) Congress has liberally admitted to its historical mistakes and blunders. BJP has however avoided all topics where its performance could be questioned.

(d) Both the parties have claimed that their respective manifestos have been prepared in consultation with common people and experts. Naturally, the agenda must be same, as the concerns and issues of the people remain the same irrespective of the party in power.

However, a close study of documents highlights that both the parties have touched the concerns of the people only reluctantly. They have rather tried to pass their pre determined agenda for people's will.

Congress document has imposing American influence. The jargon like Homestead Act, Para State Workers, Regulatory Forbearance, High and Suatained Economic Growth, Fortune500, Scenario Planning and Strategic Future Office, etc., and commitment to ratify ILO conventions 87 & 98 (Freedom of Association and Right to Organise and Collective Bargaining) etc. clearly indicate the constitution of group responsible for drafting the Congress document.

The BJP document has vivid imprints of RSS jargon and terminology.

(e) Congress has made "Jobs" the starting point of its manifesto; whereas BJP has placed "National Security" on the top.

Barring the placement in the document, there is hardly any difference in the agenda and approach regarding national security in both the documents. In fact, in many places both the documents even use the same language. The media narrative on this issue therefore appears totally mischievous.

Admission of historical failures and blunders

The best part of Congress manifesto is that it has admitted to historical mistakes and blunders committed by various government, including Congress governments. For example consider the following:

"A basic weakness of the Indian economy has been infrastructure. Flawed design, inefficient execution, insufficient capacity and poor maintenance of infrastructure have dragged India’s growth rate down."

"Congress promises a fair deal for the crores of workers and the self-employed who toil every day in the unorganised and informal sector."

"Many years ago, Jawaharlal Nehru said, ‘Everything can wait but not agriculture."

"Our economy is still over-regulated. Structural problems remain. Government control and bureaucratic interference are aplenty. Regulators have morphed into controllers. There is growing interference by the courts in economic policies."

"Congress recognises that business—be it manufacturing or supply or trade or exports—runs best on predictable and stable laws, protection of property rights and sanctity of contracts"

"Foreign tourist arrivals in India in 2018 is estimated at about 1 crore. Comparing this number with the numbers of comparable countries, it indicates substantial under-performance."

"Congress believes that a large country like India cannot be administered by the Central Government alone. In fact, in most matters concerning the daily lives of the people, it is the State Government that is close to the people and, in some matters, it is the Local Government (Municipality or Panchayat) that is even closer to the people."

"Congress believes that we are an over-legislated and over-regulated country. Laws, Rules and Regulations have proliferated and restricted freedoms. Consequently, there are severe restrictions on innovation, enterprise and experimentation, and economic growth has suffered."

"The greatest challenge to free and fair elections is the Election Commission’s inability to prevent the use of black money in election campaigns and the use of inducements to influence voters."

"Denotified and Semi-Nomadic Tribes have long suffered discrimination and neglect."

Congress recognises the sexual diversity among people and promises equality and equal rotection of the laws to people with different sexual identities.

"Education is a merit good and must be available to all children as a public good."

"Schools, colleges and universities shall be, mostly, public institutions funded through public resources. Private educational institutions may supplement public educational institutions."

"It is a bitter truth that India’s environment has deteriorated. The 2018 Global Environmental Performance Index placed India at rank 177 out of 180 countries."

"It is not possible to eradicate poverty without tackling the dual threats of climate change and natural disasters. It is the poor who suffer most on account of natural disasters and climate change."

BJP has apparently not admitted to any mistake.

Over next couple of days, I shall analyze specific proposals in the manifestos of BJP and Congress, especially from impact on investment strategy view point.

Tuesday, April 9, 2019

A colossal Ponzi scheme

Some food for thought

"Be polite; write diplomatically; even in a declaration of war one observes the rules of politeness."

—Otto Van Bismarck (German Leader, 1815-1898)

Word for the day

Multiverse (n)

A hypothetical collection of identical or diverse universes, including our own.

First thought this morning

The eligibility criteria for Lok Sabha membership has been a matter of seasonal debate ever since we adopted our constitution in 1950 and became a full-fledged electoral democracy. Four issues are debated in particular— (1) Whether minimum age for contesting Lok Sabha elections should be same as minimum age for voting, presently 18yrs; (2) Should there be a minimum educational qualification criteria for members of parliament; (3) Should there be a limit on maximum number of children a Lok Sabha candidate can have; and lastly (4) Should the people with serious criminal charges be allowed to contest elections.

"Minimum educational qualification for MPs" and "criminal charges" issues are however debated more intensively around every election.

Given the state of criminal justice system in our country, the issue of "criminal charges" is difficult to decide. It appears that the best has already been achieved in this regard by prohibiting convicts of offences entailing a jail term of 2yr or more, from contesting elections for six year. The proposal to impose a life ban is also under consideration.

Insofar as minimum educational qualification is concerned, I have strong views that may not necessarily be in agreement with any side of the debate.

In my view, while it is an advantage to have knowledge of a wide variety of technical subjects to participate in the parliamentary debates and make constructive contribution, it is not at all necessary.

The primary function of a member of parliament is to represent the people in his constituency. He should know the problems, aspirations and needs of his constituents and should be able to present these to the concerned departments and insist on expeditious solutions.

The knowledge of the "system", "standard operating procedures (SoP)", and "the Constitution" is therefore must. It is therefore important that before taking oath of office, all first time elected members of parliament are required to complete a 3month intensive certification course in Constitution of India and parliamentary procedures.

I assume the people who've won elections would possess strong communication skills and fully understand the problems, aspirations and needs to their constituents. Nonetheless, it should be made mandatory for all elected representatives (not just the first timers) that before taking oath of office they attend a two day workshop in their constituency, where the district officers (administrative and police), local representatives (MLA and Local Body members), recognized trade association representatives, and active civil society members would make presentations to them about the important local issues, requirements, growth potentials and aspirations etc. The Member must be given specific goals to be achieved in his/her term as such member.

It must be made a practice that every year after the conclusion of budget session, they report back to this assembly of people, what efforts the Member made to achieve the desired goals.

I strongly believe that implementation of these suggestions would strengthen our democracy; and restore the trust and confidence of people in the "System".

A colossal Ponzi scheme

In past four years, small savings of Indian households have seen a threefold jump. From ~INR50bn in FY15, the contribution of Indian households to National Small Savings Fund (NSSF) has increased to INR157bn in FY18.

Small savings include (a) All deposits with post office; (b) Saving certificates (KVP, NSC etc); (c) Social security deposits (PPF, Senior Citizen Saving, Sukanya Smrudhi etc.)

In this context two things are important to note:

(a) The interest rates on small savings are mostly pegged to the government security of equivalent maturity. These are announced every year and are generally fixed 25bps to 100bps higher than the yield on comparable government security. In some cases, like Sukanya Smrudhi, these rates are fixed at much higher level.

(b) The net collection in small savings is used to buy the securities of the state government, where these savings are collected. The receipts of NSSF from redemption of state government securities are used to buy central government securities.

Thus, small savings are very important source of financing fiscal deficit. Though these funds are shown as a liability of the central government, no provision in budget is made for repayment of these funds. In that sense it is like a colossal Ponzi scheme in which all redemptions are met only through fresh deposits.

A related interesting trend is the changes in the ownership pattern of government securities (Gilt) in past few years.

Since FY12, the share of commercial banks in ownership of Gilt has declined from 54% to 40% in September 2018.
RBI has also reduced its holding of Gilt materially. At the end of FY15 RBI owned 14% of outstanding Gilt. The holding had fallen to 7% by September 2018.
Since FY15, foreign institutions have also cut their holding by 50%, from 4% in FY15 to 2% in September 2018.
The contribution of small savings (MFs, Insurance, NSSF, PPF etc.) has grown materially since FY12.

Friday, April 5, 2019

Ultra Virus MPC

Some food for thought

"An appeal to fear never finds an echo in German hearts."

—Otto Van Bismarck (German Leader, 1815-1898)

Word for the day

Hamartia (n)

The character defect that causes the downfall of the protagonist of a tragedy; tragic flaw.

First thought this morning

From the campaign of both the national parties, it appears that both have made 2004 elections as their primary reference point.

In 2004 BJP ran a blitzkrieging "India Shining" campaign to highlight the infrastructure development and nuclear power status earned in 6years of Vajpayee regime. However, the campaign eventually proved to be a disaster for BJP, as it impressed only middle class urban voter and did not resonate at all with the rural voters. Though, Vajpayee was a very popular PM across the country, and even across the border, the rural population failed to connect with the campaign based on investments in roads, ports, telecom, civil aviation, railways etc. They were easily lured by the socialists, communists and Congress with the promises of immediate payouts. Congress was not only able to form government with socialists (SP, RJD, BSP) and communists, but ran it quite successfully for full five year term.

Learning from the mistakes of 2004 India Shining campaign, BJP is trying hard to stay connected with the rural population through a variety of schemes, promises and actual cash payout under PM Kissan scheme.

For urban middle class, dismayed by Demonetization, higher incidence of taxes, poor employment opportunities, BJP is trying to compensate with a heavy dose of patriotism. The party is leaving no stone unturned to convince them that nation's security is threatened by external forces and their "sympathizers" within the country; and therefore middle classes need to make sacrifice in national interest. BJP is also forcefully selling TINA, disparaging and deriding opponents as "incompetent", "anti national", "corrupt", "anti poor", "dynast", "communal", "pretentious", "threat to nation", etc.

On the other hand Congress is trying hard to emerge from abyss. It's campaign is prima facie based on the premise that like 2004, BJP is failing in connecting with rural voters, It is taking the moral high road with promise of an inclusive development agenda. It has apparently engaged a variety of experts to draft its manifesto for 2019 election.

The media reports suggest that Mrs. Sonia Gandhi was "displeased" with Congress President Rahul Gandhi's picture on the cover page of the manifesto. The media mangers of Congress apparently want to convey to the allies, potential allies and voters that Rahul Gandhi's candidature for PMship is not a done deal yet and Congress may opt for an "independent" technocrat (like Dr. Manmohan Singh in 2004) if it is elected to power. The name of Dr. Raghuram Rajan is being deliberately pushed on social media to let people draw ideas and notions.

Whether these strategies will work or not, we would know only on 24th May. But, if you want to wager, the chances of Congress getting more seats than BJP this time are zilch, in my view.

Ultra Virus MPC

Obliging the consensus, the Monetary Policy Committee of RBI (MPC) eased monetary policy further by cutting policy rates by 25bps and retained "neutral" monetary policy stance. The rate cut was approved by a 4:2 majority decision, like in February 2019.

The primary argument for cutting rate is the "need to strengthen domestic growth impulses by spurring private investment which has remained sluggish".

The following points in the policy statement are worth noting:

(a) The MPC statement reads, "These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth (emphasis supplied)."

The Monetary Policy Framework Agreement between the Union Government and RBI, signed on 20 February 2015, made inflation targeting and achieving price stability the responsibilities of RBI. The framework was given a statutory sanction through amendment in the RBI Act of 1934 through the Finance Bill of 2016.

MPC was established under this framework, with an exclusive objective of inflation targeting.

As per this framework, "Supporting growth", is certainly not one of the functions of RBI. The act to cut rate to "support growth" could therefore be termed as "Ultra Virus"!

However, since acting Ultra Virus by RBI is seen as something "routine administrative issue" by the finance minister and RBI governor, we shall not discuss this matter any further.

(b) MPC acknowledged that easing stance of central bankers is driving financial markets around the world:

"Financial markets continued to be driven by monetary policy stances of key central banks and movements in crude oil prices. In the US, the equity market witnessed some selling pressure in the last week of March on weak economic data. Equity markets in EMEs gained, benefitting from country-specific factors and easing of global financing conditions. Bond yields in the US softened, slipped into negative territory in Germany and dipped further into negative territory in Japan as central banks signalled softer stances. Bond yields in most EMEs have been falling in tandem with those in AEs and on the improving inflation outlook. In currency markets, the US dollar has traded with an appreciating bias in recent weeks. EME currencies have traded with a depreciating bias on country-specific factors and on fears of a weakening economic outlook in China.

However, there is nothing in the policy statement to indicate that RBI is worried about a bubble like situation developing in global financial markets. We do not see any urgency to take some precautionary steps like tightening credit for personal loans etc.

Would be interesting to read the minutes of the MPC meeting to find whether Holding rates now to keep some dry powder in case need for larger stimulus arises, like 2008, was discussed by the members.

At 6%, with core inflation close to 5.4%, the scope for further cuts may not be material.

(c) Though the current rate of inflation is well within the RBI target range, the MPC statement offers many clues that inflation may not sustain at these levels. For example, consider the following:

"According to the National Oceanic and Atmospheric Administration (NOAA) of the US, El Niño conditions strengthened during February 2019, which may affect the prospects of a normal south west monsoon."

"Retail inflation, measured by y-o-y change in the CPI, rose to 2.6 per cent in February after four months of continuous decline. The uptick in inflation was driven by an increase in prices of items excluding food and fuel and weaker momentum of deflation in the food group. However, inflation in the fuel group collapsed to its lowest print in the new all India CPI series."

"CPI inflation excluding food and fuel declined to 5.2 per cent in January, but rose to 5.4 per cent in February."

"The inflation path during 2019-20 is likely to be shaped by several factors. First, low food inflation during January-February will have a bearing on the near-term inflation outlook. Second, the fall in the fuel group inflation witnessed at the time of the February policy has become accentuated. Third, CPI inflation excluding food and fuel in February was lower than expected, which has imparted some downward bias to headline inflation. Fourth, international crude oil prices have increased by around 10 per cent since the last policy."

"Taking into consideration these factors and assuming a normal monsoon (emphasis supplied) in 2019, the path of CPI inflation is revised downwards to 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced."

(d) MPC noted that the global economic activity has slowed down considerably since its last meeting in February 2019; and the central bankers have therefore turned dovish.

"Since the last MPC meeting in February 2019, global economic activity has been losing pace. In the US, the subdued performance in the final quarter of 2018 appears to have continued into Q1:2019 as reflected in declining factory activity. The Euro area slowed down in Q4:2018 on soft domestic demand and contracting manufacturing activity."

"Economic activity also slowed down in some major emerging market economies (EMEs). The Chinese economy decelerated in Q4:2018 on subdued domestic and global demand impacting industrial activity."

(e) India GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

Beyond the near term, several uncertainties cloud the inflation outlook. First, with the domestic and global demand-supply balance of key food items expected to remain favourable, the short-term outlook for food inflation remains benign. However, early reports suggest some probability of El Niño effects in 2019.

Should there be a swift resolution of trade tensions, a pick-up in global demand is likely to push up oil prices. However, should trade tensions linger and demand conditions worsen, crude prices may fall from current levels, despite production cuts by OPEC.

Financial markets remain volatile reflecting in part global growth and trade uncertainty, which may have an influence on the inflation outlook.

The fiscal situation at the general government level requires careful monitoring.