Vijay Kumar Gaba

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.

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.