Vijay Kumar Gaba

The last weekend was unusually hectic for most participants. Friday evening, the market regulator issued fresh guidelines for asset allocation by the mutual fund schemes operational under the "multicap fund" category. The guidelines specify that these mutual fund schemes must allocate at least 25% of assets under management to each of large cap, mid cap and small cap category of stocks. SEBI also directed that the minimum equity allocation of these funds shall be 75% (presently 65%) at any given point in time. The mutual funds are required to comply by these directions in six months, i.e., by February 2021. SEBI further clarified that these guidelines have been issued further to the guidelines regarding categorization and rationalization of Mutual Fund Schemes issued in October 2017.

It is pertinent to note that as per SEBI directions, top 100 listed companies in terms of market capitalization are categorized as Large Cap. Companies ranked 101 to 250 are categorized as Mid Cap and the others come under small cap category. As such, NMDC is 100trh ranked stocks with Market of Rs27500cr; P&G is 250th ranked stocks with Rs8100cr market cap. So stocks below Rs8100cr market cap are small cap stocks.

Over weekend most of the brokerages and AMCs came out with their views on the proposed changes. The brokerages' reports were mostly focused on two aspects" (i) how much money will have to be reallocated from large cap to mid and small cap stocks to comply with these guidelines; and (ii) which are the stocks that could see higher demand due to this reallocation exercise and what is the trade opportunity in this. The AMCs mostly focused on highlighting the challenges in compliance.

I am sure that any guideline followed or not followed by mutual funds has any bearing on my investment process or investment strategy. Given the past track record of a large majority of Indian mutual funds, I do not draw any comfort from the due diligence done by mutual funds as to the quality of any business or credibility of any company (and management).

I do not find any substance in the argument of higher demand from mutual funds leading to sustainable re-rating of a stock. We all have seen in recent past, the high MFs holding into a small cap stock is a two edged sword. In the good times, the stocks run up sharply; and when the tide recedes the losses are also overwhelming (remember 8K Miles, HEG, Graphite, Eveready etc.) Even the best of the fund managers have lost huge money in stocks like JP Associates, HCC, NCC, Jet Airways etc. In the present times also I find many mutual fund schemes holding commodity (including chemicals) stocks where the companies have seen sharp rise in earnings due to temporary commodity price cycle. We shall see a repeat of HEG & Graphite in these stocks in 2021 for sure.

Another thing I am missing is that no one has dared question the validity of the rationale and authority behind the October 2017 and the current circular of SEBI. In my view, the following questions need to be asked to SEBI:

1.    Why AMFI does not have an SRO status? As a signatory to IOSCO charter, it is responsibility of SEBI to promote self regulation in securities market. It is 28years since private mutual funds were allowed in Indian markets. The industry has grown materially in past 10years. Why SEBI is not able to persuade AMFI to become an SRO?

2.    A mutual fund investment is a contract between an investor and AMC. The Key information Memorandum (KIM) is an essential part of this contract. SEBI forcing MFS o change KIM for the investments already made may not be good as per the law of contracts.

3.    Fund management is not one of the various businesses of SEBI. Why it is not left to AMCs? In case SEBI finds that AMCs are indulging in unfair practices or their conduct is prejudicial to the interest of investors or securities' market, it has enough powers to reprimand and punish the respective AMC, including cancellation of its registration.

The precipitous fall in 1QFY21 GDP has attracted attention of most people. The economic managers of the government have sought to pass 23.9% yoy contraction in real GDP as an exceptional event which is direct outcome of the global lockdown due to outbreak of COVID-19 pandemic.

Indubitably, the contraction is a non recurring event and may not be a trend beyond FY21. Nonetheless, adjusted for lockdown also, the current slowdown does not appear be entirely cyclical. It certainly has some element of structural weakness in the economy.

I have highlighted this issue earlier also. In my view, the fall in nominal GDP is more worrisome than the real GDP. This fall has been more consistent and sharp in past 7 years. The nominal GDP growth rate has almost halved during FYFY13 and FY20.

For common man nominal GDP is more important because lot of variables like effective taxation, budgetary allocations for development and social welfare, subsidies, salaries of public servants, etc are calculated as a factor of the nominal GDP. Lower nominal GDp essentially means, lower income for people and lower tax revenue for the government.

For example, the sharper fall in nominal GDP has resulted in sharper rise in effective rate of indirect taxes; which impacts the common people more, resulting in increase in income inequality and social injustice.

 

Moreover, the public expenditure which has been supporting the GDP for past few years, will be constrained due to lower nominal GDP and therefore lower tax revenue. For key parameters of fiscal health, e.g., government borrowing, fiscal deficit etc., also nominal GDP is the denominator. A lower denominator would make fiscal health look weak even if deficit and borrowings remain the same in absolute terms.

Some other pointers to the non cyclicality of the GDP slowdown could be listed as follows:

• Sales of commercial vehicle recorded negative growth in most of the previous 6 quarters. It continues to remain negative.

• Cargo and passengers handled at Airports recorded negative growth even in the 1QFY20.

• Manufactured product inflation has been below 2% for most of previous 6 quarters. This highlights lack of pricing power with the manufacturers. When juxtaposed with persistently low capacity utilization, it indicates that the pricing power may not return anytime soon and nominal GDP growth rate may continue to slide.

• Even after 22years of NELP, we have not been able to significantly ramp up the local production of crude oil and natural gas. Even the coal imports have not seen any meaningful reduction.

  

 

A few weeks ago, National Statistical Organization (NSO) released results of two important social sector surveys, i.e, Health and Education. The surveys conducted as part of 75th Round of Natinal Sample Survey (NSS) between July 2017 and June 2018, highlight some very important trends in household expenditure on Helath and Education. The key findings of the surveys are listed below:

State of "Healthcare" in India

• About 7% of rural population and 9% of urban population reported suffering from some ailment during the 15days reference period. 28% of people in 60yr+ category 11% in 45-59yr category reported ill.

• Since 2014, there has been a marked decline in number of people suffering from anemia and tuberculosis.

• About 3% of population required hospitalization in past 365 days. The rate of hospitalization was much higher (8.5%) in case of people above 60yr of age. On an average, about Rs. 16,676 in rural India and Rs. 26,475 in urban India were spent on medical expenditure for hospitalization.

• About 42% of population availed treatment in Public hospitals, 55% of population availed treatment in Private hospitals and 2.7% of population availed treatment in Charitable/ trust/ NGO-run hospitals.

• 95% of patients preferred allopathic treatment.

• About 14% of the rural population and 19% of the urban population had health expenditure coverage. Among them, about 13% of rural and 9% of urban population were covered by Government sponsored health insurance.

• Rural households primarily depended on their ‘household income/savings’ (80%) and on ‘borrowings’ (13%) for financing expenditure on hospitalisation. Dependence of the urban households on their ‘income/savings’ was slightly more (84%) for financing expenditure on hospitalisation, than on ‘borrowings’ (about 9%).

• In rural areas, about 90% childbirths were institutional (in Government/private hospitals) and in urban areas it was about 96%. Among women in the age-group 15-49 years, about 97% of women took pre-natal care and about 88% of women took post-natal care.

• Surgery was done in about 28% of hospital childbirths in India. In Government hospitals only about 17% of childbirths were surgery cases and, in Private hospitals about 55% of childbirths were surgery cases.

• In rural India, only about 28% (48% male and 10% female) aged persons (60yr above) and in urban India 33% (57% male and 11% female) aged persons are economically independent. The dependent aged persons are mostly supported by their own children (79% rural and 76% urban) or spouse.

• About 59% of boys and 60% of girls at all-India level had been fully immunised (i.e., received all 8 prescribed vaccinations). About 95% of children in rural India and 86% of children in urban India had received any vaccination from Government/ Public hospital (including HSC/PHC/CHC/Aganwari centre/mobile medical unit).

Household expenditure on Education in India

• Average household size in India is 4.3 (4.5 in rural areas and 3.8 in urban areas). Average no. of persons aged 3-35years per household was 2.4.

• Literacy rate among persons (aged7 years and above) in India is about 77.7%. Literacy rate is higher in males (84.7%) vs female (70.3%).

• ~32% of rural youth (15yr and above) and 14% of urban youth is still illiterate. Only ~6% rural population and ~22% of urban population is graduate or higher degree.

• In rural areas 92.7% of households and in urban areas, 87.2% of households reported availability of primary school within 1 km from the house. While only about 38% of rural households compared to around 70% of urban households reported secondary schools within such a distance.

• In rural areas 46.1% of males and 40.7% of females in the 3-35years age-group were currently attending educational institution. In urban areas these percentages were 46.7% and 42.6% respectively for males and females.

• 96.1% of students were in general education and remaining were in technical/professional education. Among the male students pursuing technical/professional education, 41.6% were pursuing engineering compared to 28.2% among the female students and 4.9% of the male students were pursuing medicine (which includes nursing) compared to 13.8% of the female students.

• In rural areas, 44.2% of the students at pre-primary level, 73.7% at primary level, 76.1% at upper primary/middle level, 68.0% at secondary & higher secondary level and 49.7% at graduate and above level attended Government institutions, while in urban areas, 13.9% at pre-primary level, 30.9% at primary level, 38.0% at upper primary level, 38.9% at secondary& higher secondary levels and 41.0% at graduate and above levels attended Government institutions.

• 77% of the students studying in Government institutions were receiving free education (nearly 81% in rural areas and 62% in urban areas). Percentage of students studying in private unaided institutions and receiving free education was nearly 2% in rural areas and 1% in urban areas.

• Nearly 14% students attending formal education received scholarship/stipend/ reimbursement for different level of current attendance.

• Average expenditure (Rs.)per student incurred during the current academic session for basic course was nearly Rs.8,331 for general courses, Rs.50,307 for technical/professional courses.

• Nearly 20% of students attending pre-primary and above level (21% of males and 19% of females) were taking private coaching in India. Incidence of taking private coaching was maximum at secondary level. (31% of male students and 29% of female students).

• Average expenditure in the current academic session for studying medicine in was Rs.31,309 in government institutions, Rs.1,01,154 in private aided and 94,658 in private unaided institutions. For engineering course, the expenditures were Rs. 39,165, Rs. 66,272 and Rs.69,155 in government, private aided and private unaided institutions respectively.

• Percentages of persons in the age group of 3-35 years dropping out of studies were nearly 14% in rural areas and 10% in urban areas. Among the ever enrolled persons of age 3-35 years, nearly 41% of males and 40% of females were not currently attending education in rural areas.

• Nearly 4% of rural households and 23% of urban household possessed computer.

• Among persons of age 15-29 years, nearly 24% in rural areas and 56% in urban areas were able to operate a computer.

• Nearly 24%of the households in the country had internet access in the survey year, 2017-18. The proportions were 15% among rural households and 42% among urban households. Nearly 35% of persons of age 15-29 years reported use of internet during the 30 days prior to the date of survey.

Observations

1.    The rural-urban and gender divide is still meaningful in the area of education and healthcare.

2.    The dependency ratio is very high for the aged. The social security penetration is abysmally low.

3.    Health insurance coverage continues to be low; thohg some improvement has been seen in past 5 years.

4.    At ~60%, immunization program coverage is very low.

5.    The traditional medicine system of India has lost its relevance.

6.    The average household size in urban India has fallen from 5 to below 4. One child is becoming a norm.

7.    Only ~4% students are taking professional/technical education.

8.    At secondary level, more than 60% rural children have to travel more than 1km to go to a school.

9.    Despite, more than two decades of total literacy mission, one third of rural youth are still "illiterate".

10.  Only one fourth households in the country have internet access. In rural areas the internet access is limited to just 15% of households.