Vijay Kumar Gaba

The Reserve Bank of India, in its latest policy review, refrained from making any projection for the economic growth for the current fiscal year. It however admitted that the economy may see some contraction in the current fiscal year FY21. Post announcement of economic performance data for 1QFY21 a number of agencies and brokerage firms have reduced the full year FY21e GDP contraction number to ranging from -5% to -11%. Similarly, the fiscal deficit number for FY21 now range from 6.5% to 8.5%.

Recently, the former governor of RBI, Dr. C. Rangrajan surprised the markets by stating that FY21 GDP may actually post a small growth instead of contraction. This was a clear departure from his views expressed a couple of months back.

A paper titled ‘India’s Growth Prospects and Policy Options: Emerging from the Pandemic’s Shadow’, jointly written by Rangarajan and India EY India chief policy advisor D K Srivastava noted that notwithstanding the forecasts of GDP contraction made by many national and international agencies, there are reasons to believe that the outcome may be better than these strong contractionary prospects. “We may note that some key sectors like agriculture and related sectors, public administration, defence services and other services may perform normally or better than normal given the demand for health services,” the paper said.

The view is based on the estimates that about 50% of the economy, comprising of agriculture and public administration, defence and other services has been fully operational even in the first quarter when total lockdown was in force. The paper emphasizes that measures like lower corporate tax rate, and incentives for local production may facilitate the relocation of various production platforms to India adding impetus to the normal economic activity.

This view however is not supported by many. Most analysts and economists continue to beleive that recurring local interupttions have not allowed the supply chains to start functioning normally. The mobility restrictions are still inhibiting. As per Nomura India Business Resumption index (NIBRI), the economic activity in India has reached ~77% of February 2020 level. The growth in 2QFy21 will therefore likley be still negative.

At the same time, another former RBI governor, Dr Raghuram Rajan, termed the situation of India economy as "alarming". In a post he noted that the conditions in India are worsening and the government has gfone into a shell after an initial burst. He said, he current crisis requires a more thoughtful and active government, he said, adding "unfortunately, after an initial burst of activity, it seems to have retreated into a shell." Dr Rajan exhorted the Indian bureaucracy, by saying " be frightened out of their complacency and into meaningful activity. If there is a silver lining in the awful GDP numbers, hopefully it is that." Dr Rajan further noted that "Without relief, houshold skip meals, pull their children out of school and send them to work or beg, pledge their gold to borrow, let EMIs and rent arrears pile up. Essentially, the patient atrophies, so by the time the disease is contained, the patient has become a shell of herself".

Assuming a moderate 5% yoy contraction in 2QFY21, it would take more than ~15% yoy growth in 2HFY21 to record a marginal rise in FY21 GDP. There is nothing on the ground to suggest that it is achievable. It is pertinent to note that in past 12 year, we have not recorded double digit yoy growth in any of the quarter.

Under these circumstances, I find the the estimates of the rating agency CARE more credible. The agencyy said in a recent report as follows-

"GDP growth although expected to improve in the remaining 3 quarters of 2020-21 with the graded unlocking and reopening of the economy would nevertheless be pressured given that there is no respite from the spread of the pandemic in the country well into the second quarter of the fiscal.

Consumption demand and investments which is necessary to propel the economy would continue to be tepid and is unlikely to seen a noteworthy improvement during the course of the year. Government spending would have to do the heavy lifting.

Although the higher growth in the agriculture sector and consequently rural demand would support the domestic economy it would however not be sufficient to compensate for the decline in urban demand and growth. We project the country’s GDP to contract by around 6.4-6.5% in FY21."

Many readers have asked why would Dr. C. Rangrajan, who has held prominent positions under various governments, such as Chairman of PM Economic Advisory Council (2009-2014); Member of Rajya Sabha (2008-09), Chairman of 12th FInance Commission (2003-04); Governor of Andhra Pradesh (1997-2003)etc., would make such contrarian and to some extent sensational forecast?  Well, I have views on this, but would refrain myself from sharing my views on this.

One of the most popular concept of invetsing is the "power of compounding". Almost every prominent investor and financial author has emphasized on this concept.

The principal of compounding, insofar as financial investments are concerned, works on the basis of three key factors (a) regular investment; (b) staying invested for long period; and (c) rate of compunding. To take full advantage of the power of compounding, it is therefore essential to:

(i)    Invest regularly;

(ii)   Reinvest the return on investment; and

(iii)  Try investing at the maximum possible rate of return, without of course compromising the safety requirements.

Does this imply that the concept of compunding is relevant only for investors who could "buy and hold" an investment for sufficiently long period of time?

This question is more pertinent to answer is whether the concept of compounding is relevant for stock traders also; especially when currently the markets are being dominated by the "Robinhoods" - the individuals indulging in short term (mostly daily) trading in stocks.

I beleive that compunding does work for the day traders and short term traders also. In fact it works more hard for them as it impacts them on both the sides, i.e., in gains and in losses. For example, consider the following:

(a)   If you buy a tocks Rs100 on Monday and it rises 10% on Tuesday, the gain is rs10 and the closing value would be Rs110. If the stock rises 10% again on Wednesday, the gain would be Rs11 (10% of Rs110) not Rs10. And so on.

(b)   If a trader buys a stock on Monday at Rs100, and it rises by 10% on Tuesday, the gain is Rs10. However, if it falls 10% on Wednesday, the loss will be Rs11 and not Rs10.

(c)    If a traders buys a stock at Rs100 and it falls by 25%, the value of the stocks wouild be Rs75. It would now need 33% gain in stock price for the trader to recover his cost. If the fall is 50%, the gain required to break even would be 100%.

If you find it too simple and nothing much to bother about, add the transaction cost to these examples. In case of traders, the transaction cost of aposition compunds witrh every trade. This is the most ruthless element of the entire trading process. It does not care if the trader is making or losing money. It just keeps gnawing on the capital of the trader with each trade he executes. To under stand the magnitude of this consider this example.

A trader pays 0.2% for a delivery settled trade. The total transaction cost, including l;evies and other charges would come to appx 0.4% in his case. If he rotates his position five time in a month, assuming there is no net change in the price of stock he would have paid 4% as transaction cost only, i.e., massive 48% per annum. If he repaets this feat for one full year, he woould have lost 48% of capital in transcation cost only.

The case would be worst, if he is trading by using margin financing. The cost of margin financing (ranges efectively between 12% -30%) also keeps compounding each day. In many cases the etire capital of traders gets eroded just by transaction cost and margin interest.

It does not stop here. There is another devil eyeing the capital of the trader. If the trader sticks to a losing position for over one yyear and then switches to another "rocket", which would give enough return to make for the losses of the dud, the finance minister may not spare you. The losses of "dud" in this case would be long term and gains of "Rocket" would be short term. The trader will end up paying 15% tax on these gains!

Two inquisitions from readers in past one week have kept my mind occupied for most of the week. The questions are not new; rather these are the most routine questions I get from readers (usually small individual investors). I have answered it many times. But still I keep getting it repeatedly, even from the same people. This makes me wonder why do we investors refuse to learn the art of investing, despite an abundance of wisdom easily available for free on the internet and our own experiences!

The inquisitions were:

(a)   Yes Bank is down more than 95% from its 2018 peak. How much more it can fall? Can I buy this?

(b)   ITC is up more than 40% from its recent lows. Should I buy it or wait for correction?

Well, I cannot comment on stock specific queries. But let me answer it the following way. Please note that this is only for illustration purposes and not an investment advice.

(a)   15yrs ago, Suzlon Energy Limited, a renewable energy major, emerged as one of the top stocks in the country. It was included in Nifty. The promoter appeared on front pages of all magazines as one of the richest persons in the country. He was termed as true visionary and a potential global corporate leader. The stock touched a high of Rs450 (adjusted for all corporate actions) in January 2008, before falling by 50% in next two months. The question was how low it can go. It's already down 50%. It fell 30% from the March 2008 level in next four months. The question was asked again. The stock fell more than 70% from July 2008 level in next four months. In 10months the stock was down over 90% from the January 2008 peak. The question was not even more forceful. 12 years later, the stock is further 90% from the November 2008 level.

Without commenting on the merits or demerits of Suzlon Energy Limited, I just want to highlight that "it's down 50% from top" can never be an argument for buying a stock.

(b)   The stock price of Pidilite was around Rs90 in January 2008. By then it had appreciated close to 100% in 7months. Someone was reluctant to buy it just for this reason. The company was undergoing transformation at that time. The older generation had already paved the way for the new generation. In next five years, it appreciated by over 200%. The question however remained - "it's up so much, should I wait a bit?" In next five years it gained 400% from 2013 level to reach Rs1200 level. To top this, it has gained another 40% in next 2years.

Again, no comments on the merit or demerits of investing in Pidilite. I just want to highlight that "it has already risen so much" can never be an argument against investing in a stock.

The economic growth in first quarter of current fiscal year (FY21) contracted ~24% as compared to 1QFY20. The data released on Monday evening was not shocking as this quarter was impacted by the total lockdown of economy to mitigate the impact of COVID-19 pandemic. However, it was surprising to the extent that it surpassed all the worst case estimates and is the worst economic performance amongst all major global economies.

The sharp economic contraction has come after a sustained economic slowdown over past four years. The investment activity and new employment creation has virtually collapsed in post demonetization (November 2016) period. The household savings, which traditionally cushioned the fiscal profligacy of governments, have declined sharply and rate of incremental rise in per capita income has also declined. The wealth and income inequalities have seen sharp rise causing widespread civic disquiet in the country. The stress on financial sector is not easing materially despite a number of measures taken to this end.

To me the data is worrisome on many counts. For example—

(b)   The government seems to be in denial mode still. The economic manager of the government like Chief Economic Advisor of PM, Principal Economic Advisor of FM, Finance Minister, Commerce Minister et al, are still talking about a "V" shaped recovery, refusing to accept the broken supply chains and diminishing demand.

The suggestions like make toys and export Kohlapuri chappals sound totally incongruent. Indian manufacturers have not invented any toys or video games since Indus Valley civilization. Our traditional toys made of earth and wood are all inspired by the ancient toys; while the modern (even soft toys) toys are all poor copies of the "imported" toys. Building capacities that can produce modern toys at rates competitive to Chinese imports would need massive investment. Is it desirable to do so, when the trend is moving towards digital games?

The Kohlapuri chappal trade is facing multiple problems due to issues with bovine leather availability. The minister wants $1bn worth of annual exports of Kohlapuri chappals; which comes to ~2lac pair of chappals every day (assuming average price of $15/per pair). A tough ask by any standard! (see here)

The vision and experience needed to accelerate growth while facing the challenges of sustainability, survival, equity, capital scarcity, fiscal discipline, etc is certainly lacking. And that is worrisome.

(c)    The growth has been on the decline for past 4years now. Notwithstanding the claims made by the government and political parties, we have not seen much progress on socio-economic equity aspect. However, no one has accepted accountability for the inadequate and misdirected policy response. This lack of accountability is in a democracy is also worrisome.

(d)   The federal structure of the country has got severely damaged in past few years due to rise in mistrust between the ruling and opposition parties. Under these circumstances, forming consensus on any issue of national importance appears difficult. This is worrisome.

(e)    The rising incidence of unemployment and unemployability amongst youth is leading to rise in instances of crimes like theft, looting, kidnapping for ransom, mugging and even rapes etc. This restricts the mobility of people, especially women, having serious economic implications. This is worrisome.

Many years ago Mr. Kishore Biyani started the business of organized retail of readymade garments. Few years later he expanded his offering to groceries, electronics, furniture, ethnic crafts etc. He grew fast through organic and inorganic methods. He brilliantly assessed the markets and conceived the business formats to suit those markets. Established good quality stores across the country and gave organized retail a strong foothold in the country, before the likes of Tata, Birla, Goenka, Damani and Ambani entered in the fray. However, business of Mr. Biyani always remained in stress. Lot of hopes were raised when he reorganized his business post global financial crisis by selling his flagship Pantaloon format to Birla and rechristened his business group as Future Group. However, as I understand, inventory and financial mismanagement always kept the group under stress.

For some years it was very clear that Mr. Biyani will have to materially dilute his stake in the group to mitigate the corporate and personal stress. The deal with Prem Ji Investment and Amazon Inc provided a glimmer of hope that Mr Biyani may resurrect and continue to be a dominant force in the promising Indian organized retail market. However, the denouncement that came over last weekend was not expected.

Mr. Biyani has been forced to out rightly sell a substantial part of his retail, logistics and real estate (warehousing) business to the mighty Reliance Industries. The wording of the statement made by Ms. Isha Ambani, Director of Reliance Retail - the entity which has agreed to acquire the business of Biyani's Future Group, succinctly summarized the situation and the circumstances of the deal.

Ms. Ambani said, "Pleased to provide a home to the renowned formats and brands of Future Group. Hope to continue the growth momentum of the retail industry with our unique model".

To me this statement implies two things:

1.    The Future Group under the stewardship of Mr. Biyani had become directionless like an orphan child. The Reliance has obliged by adopting it and providing a shelter. Obviously the Future Group's brands and reputation will be obliterated in next few years.

2.    Reliance believes that their "Unique Model" is the best way to grow retail industry in India.

I first did my monthly grocery shopping from Big Bazaar (BB) 17yrs ago. Since then I had been visiting BB once every two months. It has mostly been a pleasant experience. The stores have been consistently improving in terms of ambience, layout and offerings. The places have always been clean, well lit, and well organized. The people there have been mostly trained, active and willing to help the customers. The pricing has been competitive. The quality (even of house labels) of the goods and the variety also has been mostly good.

To the contrary, the Reliance Retail stores have usually provided the worst possible shopping experience. I have one Reliance Fresh store very close to my home. I sometime go there for picking up a thing or two. The place is dirty, disheveled, badly lit, and unorganized. The people there are poorly trained and mostly uninterested. The quality of merchandize is poor, especially the "house labels"; and the variety is limited. I am confident that many readers will agree with me on this. The same thing is mostly true with Reliance Jio stores and services also.

If this "unique model" is applied to Big Bazaar, I will have to certainly find a new place for my bimonthly outing to buy grocery and conduct a market survey.

Given the size and reach of the Reliance Retail post consummation of the deal, it is obviously a potential threat for many regional and local organized retail players. More so, considering that many retailers are already in distress due to extended lockdown.