Vijay Kumar Gaba

Monday, June 15, 2020

Trends in Household Savings

In a recently published paper, RBI has highlighted some interesting trends in the financial savings of the Indian household. The financial savings of household are considered very important given that they are the key providers of the capital to the Indian economy. Household savings have traditionally financed the fiscal deficit of the governments and also provided a stable source of short to midterm funding to the corporates. Study of trends in household finances is therefore considered most important to understand the growth dynamics of Indian economy.

The key highlights of the paper could be listed as follows:

1. The net household savings declined to 6.5% of GDP in FY19 from 7.7% in FY18. This was mostly due to higher household expenditure and larger borrowings. In FY20 net savings have rebounded to 7.7%, mainly due to sharp decline in financial liabilities of households.

2. Gross financial assets of Indian households have declined materially in past two years.

(i) Gross financial asset of households have declined from 12% of GDP in FY18 to 10.6% of GDP in FY20.

(ii) Bank deposits of households savers have increased from 2.8% of GDP in FY18 to 3.4% of GDP in FY20; while the household borrowing from banks has halved from 2.8% of GDP in FY18 to 1.4% of GDP in FY20.

(iii) The investments of households in financial products has declined materially from 1.1% of GDP in FY18 to 0.4% of GDP in FY20. Of this the investment in mutual funds has declined by whopping 75% from 0.8% of GDP in FY18 to 0.2% of GDP in FY20.

(iv) Small savings (excluding PPF) has registered the sharpest increase. It has increased from 0.9% of GDP in FY18 to 1.3% of GDP in FY20.

(v) The contribution to life insurance has come down from 2% of GDP in FY18 to 1.7% of GDP in FY20.

(vi) The currency in hand has also halved from 2.8% of GDP in FY18 to 1.4% of GDP in FY20.

Three trends that would need a deeper analysis, based on the above set of data are (a) The efficiency of financial inclusion programs as the borrowing from banks has come down; (b) How much of the lower share in the investments in financial assets is consequence of value erosion, withdrawal for expenditure and shift to non financial assets; and (c) despite massive push fro social security from the government side, why contribution to life insurance and PPF has shrinked.

(3) The share of NBFC lending to households has fallen significantly in FY20. This read with (i) NSSO recent report highlighting that household expenditure has been rising consistently resulting in lower savings; (ii) lower social security contribution (insurance and PPF) and sharp decline in investments, highlights the rising stress in the household sector.

(4) About 76% of household credit is provided by commercial banks; and another ~10% by the housing finance companies. Cooperatives, MFIs, NBFCs etc altogether provide only 14% of the total credit to households. The low penetration may encourage investors in these institutions, but it must raise some concerns for the policymakers.

Source for all charts and Tables: RBI Bulletin June 2020

Thursday, June 11, 2020

I shall hold my horses tightly

In my April review of investment strategy, I had emphasized that "the current crisis is unprecedented in the sense that it has seriously impacted the liquidity, solvency and viability of a large number of businesses, all at the same time. The number of businesses going out of business before this crisis ends would therefore be much larger than the crises faced by global economy in past 75 years since the end of WWII.

The only way out of this crisis is to inflate a colossal bubble in asset prices, which is equally unprecedented." (for full strategy review note see here and the presentation of "the big call" could be seen here)

Incidentally, the global markets have been behaving mostly like I have been anticipating. The central bankers world over continue to inject billions of dollars in new liquidity almost every day. Consequently, the asset and commodity prices are racing to pre COVID-19 period, despite there being definite signs of recessions in the global economy. The more noteworthy part is that the markets have been largely ignoring the warnings that recession this time is not a post facto thing like on previous occassions; it is likely to be there for much longer period than earlier anticipated.

I am not competent enough to make intelligent comments on the economy and markets. Nonetheless, I do possess some wisdom collected over past three decades of investing and studying economy and markets closely. I usually find this small piece of wisdom I own, sufficient enough for making and executing an investment strategy for myself.

I continue to believe that the inflation of bubble in global asset prices will continue. I also believe that Indian assets will participate in the global buoyancy but may not be able match the performance of its peers due to a variety of reasons. The socio-economic conditions in India are worsening at a fast pace and so far there is no hint of any reversal. At this pace, the economy may take much longer to revert to a sustainable growth path of 5-6%, than presently estimated. The rise in Indian asset prices will therefore be mostly dependent on the global events and liquidity. Hence, the volatility and risk may be much higher than usual.

In this context, it disturbs me to note that since the lockdown was implemented from 25 March 2020, the smaller companies (small cap) have outperformed the benchmark Nifty by a whopping 34%. Incidentally this is the segment of economy which is worst affected by the demonetization, economic slowdown, GST, and COVID-19 induced lockdown. The outperformance of this segment is worrisome to the extent that it is commensurate with the facts that domestic flows have receded materially and foreign flows have dominated in past 5-6 weeks. The conventional wisdom is that foreign investors usually invest in large cap liquid names. I am therefore inclined to suspect recurrence of some malpractices by the broker-promote-financier cartel.

I shall totally avoid this space no matter how much my sense of greed incites me.

Wednesday, June 10, 2020

Lower interest rates not helping the economy

In past couple of years, there has been a strong demand for cut in the interest rates. The cacophony rises multifold closer to the scheduled meeting of the monetary policy committee (MPC) of RBI. Many experts have been persistently citing lower rates as panacea for accelerated economic growth. In past five years, since July 2015, RBI has halved its benchmark repo rate 8% to 4%. Despite this we have not seen any signs of acceleration in economic growth. The credit growth has remained low and is expected to plunge to zero by end of this year; as the supply of money (deposits) continue to outpace the demand (credit)

A couple of months ago I had shared some random thoughts on the utility of lower interest rates in the current economic environment. I mentioned that "Interest rates are usually function of demand and supply of the money in the monetary system. Demand for money is again impacted by the level of economic activity and outlook in foreseeable future; whereas supply of money is mostly a function of risk perception and relative returns"...and concluded that interpreting these lower rates as supportive for growth would be a huge mistake; just as it was with lower crude prices (see here). In fact in the present circumstances, low interest rates are likely to do more harm to the economy than help it. In next 12months, there is going to be hardly nay growth in investment demand irrespective of the interest rates. However, lower interest rates may damage the consumption demand as it may lead to lower interest and rental income for consumers, negative real return for savers, worsening income inequality.

Remember, lower interest rates because demand for money is less is as bad a thing as in case of anything else." (see full post here)

Tuesday, June 9, 2020

Don't let greed or fear overwhelm you

The bench mark Nifty is trading above the psychologically important 10000 mark after three months. The benchmark had slipped below the 10k mark on 12th March 2020 exactly after two years. It last traded below this mark for couple of days in March 2018. The date 12th March 2020 is important because, this was two week before the nationwide lockdown was announced.

At that time the confirmed COVID-19 cases were less than 300; much lower than anywhere in the world, and there were no travel or business restrictions in place. The market panic was mostly due to the problems brewing in the debt and commodities markets. The earnings disappointment was persistent and economy had shifted to slow lane many quarters ago.

Obviously, the correction in Indian equities from the all time high level recorded on 20 January 2020 had started without much regard to the socio-economic displacement caused by the outbreak of COVID-19. In fact, on 23rd March Nifty closed at 7610, about 39% lower than its 20th January highest level of 12430. This was a day before the prime minister announced the total lockdown at 8PM on 24th March 2020.

Nifty has since recovered 34% from the low of 7610 on 23rd March 2020 to about 10100 odd levels yesterday. In view of this wild swing of 40% down (12430-7610) and 33% up (7610 to 10100), market participants have been overwhelmed by a variety of emotions.

There are many who got panicked in March, when the market was in a free fall with little signs of the socio-economic (viz., lockdown) disaster that was to follow. In panic, they liquidated their equity and debt positions and moved to cash. Many of them canceled their SIP mandates. The up move that followed was swift and inexplicable. Most found it to be a dead cat bouncing around and ignored. Disbelief and regret are the feelings dominating their sentiments presently.

Then there are others who were already sitting on cash waiting for a major correction to buy equities. At peak of 12400 they were praying for sub 10k levels to rebalance their portfolios by increasing the weight of equities. At sub 8K level they revised their entry target to sub 6000 level. These people are overwhelmed by the feelings of disbelief and denial. They continue to believe that this up move is unsustainable and Nifty must make new 2020 lows in anytime soon.

If someone asks me, I would suggest the following. Though this may sounds cliché and unexciting, this is what eventually makes a good investor out of you.

(a) Define your asset allocation carefully and follow it religiously. By your intelligence you can identify great investment ideas and earn huge profits. But asset allocation discipline will make you retain and enhance those profits.

(b) It is easier said than done, but don't allow the sentiments of greed and fear overwhelm you. A moderate amount of both sentiments is good because that will allow you to avail opportunities and avoid disasters. But excess of any one is undesirable.

(c) Indian economy shall remain stuck in slow lane for many more quarters. The aggregate corporate earnings shall reflect this reality, as has been the case in past many years. However there are some businesses which are doing very well and may continue to do so. Focus on these businesses rather than bothering too much about aggregate numbers or benchmark indices.

(d) SIP is usually done to take advantage of sharp market declines. Cancelling mandates at lower level defeats the very objective of SIP.

(e) In strict technical sense the present up move has some more distance to cover, before it pauses to think about retracements. But this all is a jargon for very short term traders. Investors need not care about this.

Friday, June 5, 2020

Focus on strengths

Unpredictability has been one of the key characteristics of the incumbent Indian government ever since it assumed office in May 2014. The government, especially the political leadership, has taken numerous decisions that have surprised most of the citizens and global observers.

Overnight decision to replace all large currency notes in circulation (demonetization); surgical strikes in PoK; air strikes in Pakistan territories; abrogation of article 370 of the constitution and bifurcation of the state of Jammu & Kashmir to carve out Ladakh as a separate union territory; criminalization of the practice of triple talaq; amendment in the citizenship law; abolition of planning commission; restructuring of corporate tax rates; and most recently the decision to impose a total lockdown in the country to control the spread of COVID-19 virus etc are some of the examples of unpredictable decision making.

The tendency to surprise the stakeholders has not remained limited to the powerful political establishment alone. Bureaucracy has also borrowed abundantly from their political master. It has been issuing administrative orders, which have been often described by the stakeholders as "draconian" and "incongruent" the stated policy objectives of the government.

Under these circumstances, attracting major new foreign investment could be a challenging task. Many global businesses are certainly lured by the size and potential of Indian markets, availability of skilled worker at comparatively lower cost; improving physical infrastructure and abundance of natural resources. However, unpredictability of policy; corruption, law & order issues; judicial overreach (in recent years); and dogmatic bureaucracy have so far kept them from making larger commitments.

In past few years, thus, the FDI in India is mostly focused on stressed infra assets (roads, airports, renewable energy, etc); digital platforms; services like telecom and retail, and assembly plants for electronics and furniture etc. Investment in IT, automobile & pharma sector that started in 1990s has mostly saturated and new investment now is just a trickle.

Over the years, India has been turned into back office and assembly line of the global corporations. Many of these businesses shall lose their relevance in the emerging world driven by artificial intelligence, dematerialized transactions, and xenophobic nationalism.

The rising unpredictability of policy is making even the current flow of investment, which is much below the potential of Indian economy, uncertain. Many global banks having their mission critical back offices in India are wondering whether they should work on alternate plans, given the onerous lockdown conditions. God forbid, if the second wave of COVID-19 hits, as many experts are emphasizing, and another round lockdown becomes necessary, these contemplations may certainly be brought to drawing boards.

Unfortunately, we have so far failed in attracting any meaningful foreign investment in social infrastructure like education, healthcare, skill development, water, sanitation, traditional food, promotion and development of local culture & languages, etc. - the things that will make India a self reliant and developed economy. Investments in these areas will be India specific, profitable, and sustainable for long duration. The employment opportunities in these areas will be far greater, rewarding and sustainable as the local people will be engaging in these activities from the position of their strengths. A cursory stroll through YouTube will show you thousands of young and middle aged housewives, from small towns and metropolis alike, sharing their culinary skills with the people. Many of these women are celebrities in their own right followed by thousands of enthusiastic cooks. There are thousands of household women entrepreneurs who supply homemade lunch Tiffin to office goers and hostel residents.

Investing in these experts of local cuisines could be far more rewarding & sustainable than investing in a food delivery platforms and junk food outlets.

Thursday, June 4, 2020

Bits and pieces policy changes may not yield desired results

The government has announced a spate of policy measures to put the economy back on the growth path. The measures and intent to encourage manufacturing in the country is however the most publicized and discussed about policy initiative. It is a clear departure from the extant policy of global cooperation and using bilateral and multilateral trade agreements to benefit from the resources and manufacturing prowess of partner countries ,

So far, we have not seen a comprehensive policy framework for the policy initiative. The basic principle of management would guide that to execute such a major policy intuitive, which may have significant impact on the lives of 140cr people, the planners must first lay down a detailed conceptual framework, which defines in very unambiguous terms, at least the following:

(a) The need for such policy initiative; especially the circumstances that have necessaitated the significant change in the policy direction and intent;

(b) The objectives of the proposed policy initiative, especially specifying how the various stakeholders would specifically benefit fro the change;

(c) The deliverable goals of the policy initiatives, clearly defining the quantitative and qualitative target and timeframe for achieving the specified targets;

(d) Strategy to meet the objectives and goals, clearly defining the legal, regulatory, administrative, procedural, social and behavioral changes that would be prerequisite and/or desirable for achieving the objectives and goals of the policy initiatives; how the government proposes to implement these changes and what could be the hindrances in implementing these changes, etc.

(e) The programs that would be implemented for achieving the objectives & goals; the budget for these programs, executing and controlling authorities and review mechanism;

(f) The cost and benefit analysis of the proposed policy shift; specifically outlining the exit conditions and costs should the changes are found to be not working as planned.

The incumbent government had initially proposed the policy change to promote local manufacturing under its "Make in India" initiative in 2014. In six years, the government has not presented any comprehensive conceptual framework for it; though the NITI Aayog has issued some broad vision documents. There have been many scattered efforts to encourage investment in manufacturing sector, ) most prominent being the restructuring of corporate tax rates), and cluster development; we have not seen any a coordinated effort that would be usually needed for such a massive policy paradigm shift. To the contrary there have been many disparate actions by different organs of the government, defeating the very purpose of the policy itself.

The recently issued draft directive to ban production, transport sale and import of 27 popular agro chemicals is just one point in case. Significant capacities for these chemicals have been built in past few years only. The totally arbitrary decision to suddenly put a blanket ban on these products does not augur well for the policy intent of the government. Similarly, recently a circular was issued to ban sale of 1026 products which are imported in Semi Knocked Unit (SKU) condition in the police and para military canteens. The circular was withdrawn in couple of days. Apparently, two departments of the same ministry were not talking to each other on important policy issue.

Various organs of the government are giving different explanation of the policy intent itself. "make in India"; "Make for India", Make in India for the World", Self Reliance"; "India as a hub of Global Supply Chain" are some of the popular connotations. This does not show that we are going to have a paradigm shift in policy; may be just few bits and pieces here and there.