(A couple of years ago, one central minister got confused between Isaac Newton and Albert Einstein and erroneously attributed theory of gravity to Einstein. The Enforcement Directorate of Social Media (EDSM) immediately took cognizance of the mistake and forced the minister to correct his mistake. The minister in reference also happened to be a Chartered Accountant by professional qualification, like me. It is reasonable to believe that the minister, like me, does not understand the nuances of the theory of relativity and laws of motion, and got confused. Nonetheless, learning a lesson from that episode, I want to upfront clarify that my knowledge and understanding of the theory of relativity and laws of motion is zilch. Any references to relativity and gravity herein is just plain English and should be read as that only.)

My investment advisor often motivates me to invest in stocks having “valuation cheaper than the industry average or significant valuation discount to the industry leader”.

One of the most common investment advices I get from investment gurus is “invest in quality only”.

I have observed that the most common portfolio evaluation tool used by the market participants is “returns relative to the benchmark”. This benchmark could be an index, returns made by some famous large investor, returns made by a friend or family member, etc.

“Relativity” is thus an important driving force of the investment strategy.

“Mean reversion” or the gravitational pull & push of averages is one of the strongest premises in the financial analysis, especially in the context of investment timing and forecasting prices. The entire spectrum of technical studies of trends in prices (technical analysis); future valuation forecasts (long term average of valuations; standard deviation of valuation parameters etc.); and even earnings forecasts use the “gravitational pull towards mean” as a key control point in their operation.

I think there is a need to reimagine the application of the concepts of “Quality”, “Relativity”, and “Gravity” to the businesses of equity research, investment advisory and portfolio management.

Quality is good as a noun

"Good is a noun...Good as a noun rather than as an adjective is all the Metaphysics of Quality is about. Of course, the ultimate Quality isn't a noun or an adjective or anything else definable, but if you had to reduce the whole Metaphysics of Quality to a single sentence, that would be it."- Robert Pirsig in Lila: An Inquiry into Morals

Honestly, how many of us could tell “who is Kevin Mayer?” without taking the help of St. Google. A mention of Usain Bolt though may ring many bells. If I mention both names together, most may deduce that Kevin Mayer is also a sportsperson.

Kevin Mayer is the world champion of Decathlon, a discipline involving ten track and field competitions. On the other hand Usain Bold is champion of short distance running (100m and 200m). If someone asks me “who is better athlete Kevin or Usain?”, my answer would be “it depends from which vista point I am looking at them!”.

If I am primarily looking for momentary thrill, excitement and/or extreme competitiveness in sports, I would say Usain Bolt is better, because his performance sharply raises my adrenalin level, brings me to the edge of my seat, gives me Goosebumps for 10 to 20 seconds, and then I can go back to my regular work. I would also enjoy seeing someone winning with extremely thin margin (fraction of a second) and may derive some motivation to be highly competitive in my life.

However, if I am looking for an example of stamina, endurance, consistency, multi-dimensional talent & skills, I would prefer Kevin. His performance guides me to adopt a balanced approach in life; as it shows that you do not have to win all the games to be a winner in life. He could still be a winner by a large margin, even if he performs well in 6 out of 10 events of the decathlon.

Now apply this analogy to some popular comparisons in stock market, e.g., Hindustan Unilever & ITC and HDFC Bank and Kotak Bank!

The stock of a company does not necessarily become “quality” if it is “relatively cheaper”; or it has given “relatively better returns” over past few years.

I may prefer to invest in a company that has a sustainable business model; its stock has given 10% CAGR over past 20years, with low volatility, simply because I can plan my finances with this investment much better.

Someone else may find quality in a cyclical business that has just entered an upcycle. The stock of this company may have given 12% CAGR over past 20years , but with much higher volatility and unpredictable dividends.

The point I am trying to make here is that “quality” in relation to investments, like anything else in life, should not be considered in relative terms. The quality of a portfolio of investments should be absolute and in congruence with the underlying investment goals.

If my investment goal requires my equity portfolio to grow by 10% CAGR over next 20years, the quality for me would mean the portfolio of stocks which have high probability of growing 10% CAGR over next 20years. Performance of Nifty/Sensex; performance of competitors; performance of other sectors and markets; performance of alternative assets over this period should be mostly irrelevant to me.

Relativity may not always apply to stock analysis

There are many models to evaluate the fair value of a business, e.g., discounted cash flow method, earnings multiplier; revenue multiplier; replacement value; liquidation value etc. In practice it is seen that each business has some peculiarity and applying a standard text book valuation method may not be most appropriate way to find its fair value. Analysts accordingly modify the standard methods as per their understanding of the business.

Comparing the relative valuation of two businesses therefore may not be appropriate in most cases. Nonetheless it is common to evaluate businesses on relative valuation basis. The worst part is that analysts use different methods to find the fair value of a business, in accordance with the size, capital structure, off balance sheet items (eg., hidden assets or contingent liabilities) etc.; but often a common parameter is used to assess the relative valuation of two or more such businesses.

Imagine three pharma companies – one is a large diversified drug producer with presence in 40 countries; manufacturing branded generics and formulation; has a decent portfolio of specialty drugs and has a strong research capability for new molecules; second is a midsized CRAM service provider to foreign companies and third is a small domestic branded generic manufacturer with no export revenue. Would it be appropriate to compare these three businesses on the basis of PE Ratio; EV/EBIDTA; book value or dividend yield basis?

The businesses like depository services, stock brokerages, and asset management mostly collect the revenue upfront. The working capital requirement for these businesses may be negative or negligible. Comparing these businesses with NBFCs, which have a significantly different business model, risk profile and cash flows, may be highly inappropriate.

Notably, the global valuation guru Aswath Damodaran, calculated the fair value of the recently listed food delivery business Zomato to be Rs40.79 against the IPO price of Rs76 and listing price of Rs116. More than half the shares issued in IPO exchanged hands on the day of listing; implying that a large number of discerning investors were willing to pay 2.5x to 3x of fair value assessed by the guru. The quality and fair valuation obviously has different connotation for the guru and the market participants.

 Gravity does not work in many cases

The mean reversion or gravitation pull & push for stock prices and valuations has not worked in a large number of cases. In past one decade, the prices of stocks like Asian paint, Pidilite, Dabur, etc., have consistently defied the gravitational pull to mean. Similarly, there is of dearth of stocks that have defied gravitational push to mean despite much desire of the market participants. Most notable examples of such stocks include ADAG stocks, JP Group stocks, Suzlon (all part of Nifty in 2008-09). In some cases however, gravitation force has worked just fine, e.g., PSU Banks.

To conclude, in my view, individual investors must focus on “quality” of their portfolio in absolute terms not in relative proportion; set investment goals as per their social, personal and financial conditions; and evaluate performance of their portfolio in terms of congruence to their investment goals. This shall make their job much simpler.

 The yields curve in India has been moving higher for past few months, despite the efforts made by the Reserve bank of India to anchor the benchmark yields at lower levels. In past one year, the RBI has used most of the arrows in its quiver to manage the bond yields, apparently with the three targets in view – (a) to help the government fund its fiscal expansion at reasonable rate; (b) to keep the financial markets calm in the times of adversity; and (c) to keep the rate environment supportive of growth.

However, last week the RBI appears to have changed the trajectory of its policy by accepting higher coupon (6.10%) for the new benchmark security (6.10GS2031). This move is widely expected to result in India’s yield curve inching little higher, and perhaps flattening a bit.

The debt market traders have largely seen the latest move of RBI as the rise in its tolerance for higher yields. Though the governor has maintained that RBI is committed to keep the borrowing cost for the government under control, and focusing on the benchmark 10 year yields for yield directions alone may not be appropriate.

The minutes of the last meeting of Monetary Policy Committee of RBI clearly stated that “all members of the MPC unanimously voted to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward”. The governor specifically stated that “At this juncture, providing a policy environment supportive of sustained economic recovery from the second shock of the pandemic is necessary.” It would be reasonable to infer that there is no certainty about the next move of the MPC on policy rates. If required it could be a cut also.

The global trends in bond yield have been providing mixed signals. Despite, the concerns expressed by the top central bankers about the rising inflationary pressures, the bond market have remained generally buoyant. People’s Bank of China has in fact went ahead and cut the key reserve ratio, committing to the growth disregarding the inflationary pressures.

In the year 2021, so far seven major central banks have effected change in their policy rate; out of which six (Brazil, Czech, Hungry, Mexico, Russia and Turkey) have hiked the rates and only one (Denmark) has cut the rates.

The US Federal Open Markets Committee (FOMC) has indicated that its next move could be a hike; though it not happen in next twelve months at least. The European Central Bank (ECB) signals are though mixed.

What does a tolerant RBI mean to markets?

In recent months, the inflation in India has mostly remained above the RBI’s tolerance range. The MPC committee has repeatedly reiterated that for now the growth remains a priority. Nonetheless the rising price pressures do find a strong mention in MPC commentary. Inflation has persisted above RBI’s base target of 4% for more than a year now. For FY21 as a whole, it has remained above the tolerance range of 4%+/- 2%.

The fiscal expansion in the wake of economic crises that emerged due to the pandemic is yet another cause of worry for the monetary managers. S&P Global has estimated that for FY22 the fiscal deficit of India may remain elevated at 11.7% of GDP. This is much beyond the limits envisaged under the Fiscal Responsibility and Budget Management Act (FRBMA). It is pertinent to note that for FY21, the general government fiscal deficit of Indian government amounted to 13.3% of GDP (S&P expects it to be 14.2%). Obviously, the fiscal pressures may also be weighing on the RBI mind.

In recent months there have been many occasions when the RBI auction of government securities has devolved on the primary dealers.

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(a)   RBI is not getting enough demand for the benchmark 10yr securities at 6% or lower coupon.

(b)   RBI is finding itself behind the curve, since it effectively enhanced its tolerance to inflation, without making corresponding adjustment to the bond yields.

(c)    RBI is preparing the markets for the likely global monetary tightening. Even though the large global central bankers may not cut the policy rates in next twelve months, there are decent chances that they taper their bond buying program, leading to unwinding of some of the USD and EUR carry trade. A higher yield could be a good incentive for global investors to stay put in Indian gilts.

(d)   After accepting higher yield for benchmark 10yr securities, RBI may also desire a little flatter yield curve, which means rising yields at the middle of the curve. This may be desirable considering that the steeper yield curve may be acting as a disincentive to raise long term funds.

What could be the trade?

One of the obvious trades would be to increase the duration in debt portfolio to protect it from flattening of yield curve.

The other trade would be to invest in dynamic bond funds (debt counterpart of the Flexicap equity funds).

Insofar as the equity market is concerned, theoretically equity valuations ought to respond negatively to the rising yields. But in practice the correlation is not seen to have worked in many instances.

Theoretically, the higher bond yields should result in higher opportunity cost for owning equity. The probability of lower future return would make the trade relatively less profitable resulting in investors moving more allocation to the bonds. However, this may not work in the present circumstances due to a variety of factors. For example—

·         The yield curve is too steep presently to have any meaningful impact on the equity traders’ opportunity cost.

·         Even at the 5-6yr maturity, the real yields continue to be negative, whereas the equity returns are projected to be decent for next couple of years at least.

·         Higher benchmark yields are not likely to transmit to the lending rates in a hurry, given the poor credit demand and massive accumulation of reserve money with the banks.

·         The leverage in the equity markets is significantly lower as compared to previous rate cycles. Any large unwinding is therefore unlikely in the short term.

·         Despite the acceptance of higher benchmark yield, RBI remains committed to support the growth. Since the growth is not likely to reach the desired levels anytime soon, any meaningful tightening by RBI is highly unlikely, notwithstanding the pricing pressures.

The market has read this very well and refused to react negatively to higher yield. It is reasonable to expect that this status quo may prevail.

Is RBI running behind the curve?

The more pertinent question however is “whether RBI is running behind the curve and the economy will have to pay for this lag later in the day?”

In my view, the historical evidence indicates that most central banks usually like to remain behind the curve rather than jumping the gun. There are very few instances in the history of RBI when it has preempted the inflation and hiked beforehand. I will therefore not be unduly worried about RBI running little behind. Besides, RBI would not like to relive the experience of 2011 when the rates were hiked prematurely and the required a hasty retreat.

It is true that RBI will need lot of luck with inflation in next couple of years. The premise that “inflation is transitory” and pressures will ease as the global economy opens up more in next 6-9 months, must come true to make RBI’s task easier. Else, we shall be ready for an undeniable “Stagflationary” phase in the economy. Remember, the Indian economy is already facing a sort of stagflation, but it has been mostly denied.

What the Global trends say

Last weekend, Peoples Bank of China (PBOC) surprised the market by cutting the reserve requirement ratio (RRR) for all banks by 50 bps, releasing around 1 trillion yuan ($154 billion) in long-term liquidity. The analysts widely view the move as an attempt to sustain the post pandemic growth momentum which had shown some sign of fatigue in recent data.

As per the UBS EM strategist, "China was first in, first out (with COVID policy support) - it effectively started tightening (monetary policy) in Q3 last year - so now it is possible that the message is, if you are thinking about global significance, that the PBOC is showing that economies are still somewhat fragile and inflation is not likely to be too damaging over the medium term."

The Researach Analysts at Ashmore Group, London feels “The 50-bps cut in reserve requirement ratio came slightly earlier than most expected. China is likely to ease monetary policy via RRR cuts and OMO operations in order to allow for more local government bond issuance. This will support strategic infrastructure investment such as railways and 5G rollout. We expect fiscal policy to remain focused on specific sectors most affected by the pandemic like small companies. We also expect macro prudential tightening on the property market to remain in place.”

US yields are now at 2% or below across maturities and appear falling towards lows seen 6 months ago. Obviously the market does not believe that Fed would actually care to hike rates earlier than 2023. The market consensus also seems to be concurring with the Fed’s view that inflation is transitory and passé by end of 2021.

The Minutes of the recent FOMC meet suggest that while tapering of QE is on the table, but few Fed members are in a rush to actually do it. The statement read “The overall mindset was tilted towards patiently watching the progress of the economy and labor market, and providing ample adjustment time to the markets. Given the current condition of the labor market and the inflationary pressures, we reiterate our view that tapering could start early next year with the announcement coming in August-September 2021.”

Many analysts are sensing an economic signal from the plunging yields in US, with the simultaneous surge in the dollar. The evidence is rising that the reflation trade may be getting unwound.

There are some dissenting voices, like an analyst at Bridgewater Associates’, who believes that “Bond markets are sending a clear message that inflation is transitory but investors should prepare for the possibility that they're wrong”.

Bill Blain (morningPorridge.com) was even more candid. He writes, “The brutal reality is the Central Bankers, who are all honourable men and women, understand the levers they pull no longer function as they once did. Why? Well, these honourable men and women have broken the system as a consequence of their actions. Oops. Now they have no choice but to follow.. which means trouble ahead until the global financial system can be resolved.”

“Most of the market is fixated on what the S&P does this afternoon, what new high the NASDAQ will make this month, or where Amazon is going to top this quarter. They have the vision of a blind man when it comes to anything much beyond the end of their one-year time horizon. Even the bond market seems blind.”

In the meantime, fissures have emerged in the ECB’s unity over inflation target. As per media reports, “European Central Bank unity on its inflation target could dissolve into division as early as next week when policymakers meet to discuss changing its guidance on raising interest rates.”

“In its recent policy review, ECB has set 2% as the inflation target and will allow overshoot of this target as necessary. This marks a change in long established stance –since 2003, ECB has kept an inflation policy stance of “below, but close to 2%”. The recent surge in cases across Europe, if uncontrolled, could throw off Eurozone from recovery path and continuation of QE will be key.”

While discussing the present state of affairs in the markets, especially the valuations, two statistical parameters are used most often – (1) The price to earnings (PE) ratio of the benchmark (e.g., Nifty50) and (2) the market capitalization to GDP ratio (popularly known as Warren Buffet indicator).

Both these indicators may soon lose their relevance, particularly in the context of Indian markets.

In next couple of years a large number of new economy stocks may get listed. Many of the new economy stocks that listed earlier may get included in the benchmark indices. Obviously, the old economy stocks, especially PSU and cyclical commodity stocks will pave the way for these new economy stocks. The point here is that the new economy stocks are valued at multiple of revenue not profits.

For example, it is expected that in the next Nifty reshuffle Avenue Supermart (198x PE) or Info Edge (500x PE) may replace Indian Oil Corporation (5x PE). This will obviously inflate the composite valuation of Nifty in PE ratio terms. At some point in time Reliance Retail (100x PE), Reliance JIO (150x PE), Zomato (200x PE), PayTM (150x PE) Indiamart Intermesh (80x PE) etc shall find place in the benchmark index at the expense of Coal India (7x PE), BPCL (8x PE), NTPC (7x PE), Power Grid (9x PE). Assessment of market valuation through Nifty PE ratio would become totally meaningless at that point in time.

The Warren Buffet indicator has already become less relevant in the case of Indian markets, in my view. This indicator completely ignores the rise in private equity investments. In Indian context for example, the equity investment in self owned enterprise and home equity has risen sharply in past one decade, as compared to the decade prior to that. Besides, the size of unlisted private businesses has increased significantly. Factor in the estimated market value of Amazon India, Vodafone India, PayTM, FlipKart, Honda India, Hyundai India, LG India, Samsung India, Apple India, etc. and you will find this ratio running much higher than what the present statistic might suggest.

So the present argument that Indian market is “expensive but nowhere closer to bubble territory” based on historical PE ratio trends, may become totally redundant. The market participants might have to evolve new parameters for valuing the market that would be appropriate in the evolving scenario.

Till then, Nifty50 is trading above 1SD 12 month forward PE and GDP to market cap has crossed the threshold of 100%.

 Three decades ago, on 24th of July, 1991, when Pallath Joseph Kurien, Minister of State for Industry in Government of India, tabled the New Industrial Policy (NIP) in the Lok Sabha, not many would have realized how big was the moment in the socio-economic history of Independent India. After six years of preparation and facing political challenges, the new policy, which sought to end the Nehruvian Socialism in the country, finally saw the light of the day.

The process of economic reform was set in motion by Vishwanath Pratap Singh, the finance minister in the government of Rajiv Gandhi (1984-1987). It gained further impetus when Ajit Singh, the MIT educated, tech savvy industry minister of National Front’s government assumed the charge (1989-1990).

The original draft of NIP was prepared by Amar Nath Verma (then Industry Secretary) and Mohan Rakesh (then Chief Economic Advisor to Industry Minister Ajit Singh) in 1990. The proposal to radically reform the industrial policy of India were patronized first by Ajit Singh & Vishwanath Pratap Singh (1990), then by Yashwant Sinha & Chandrashekhar (1991) and finally by Manmohan Singh and Pamulaparthi Venkata Narasimha Rao (1991).

The NIP was followed by supporting reforms in the financial sector and fiscal policy. The committees set up in 1991 under the chairmanship of Raja Jesudoss Chelliah and Maidavolu Narasimham for Tax reforms and Financial Sector Reforms respectively. The recommendations made by these committees and several follow up committees like Narsimhan Commmittee 2.0, Shome Panel, Kelkar Task Force etc. have formed the basis of the economic and fiscal reforms in the country in past three decades.

Indubitably, we have travelled a long distance from 50% corporate tax rate to in 1990 to 25% in 2021. The journey in indirect taxation has been even more spectacular. From a multitude of classifications and tax slabs in 1980s, we have achieved minimum number of tax slabs and a single Goods and Services Tax (GST) in three decades.

Financial sector has also seen a metamorphosis in past three decades. Capital controls have been materially relaxed. A developed national trading & settlement system for financial instruments has been established. Foreign trade is materially deregulated. Financial inclusion has progressed materially with liberalization of banking, insurance and pension sectors. After initial hiccups, the Insolvency and Bankruptcy Code is now evolving fast.

The work of reforms though is still in progress and we have many more miles to cover. The reforms in two key sectors Agriculture and Industrial Labor have started by passing key legislations in 2020. The government has also outlined a clear policy on disinvestment of public sector enterprises. From the legacy process of reforms, The Direct Tax Code, The Indian Financial Code, Development of Retail Debt Market, Land Reforms, GST rates rationalization and coverage expansion, etc. are some of the areas where progress is still needed.

In recent years an entirely new economic development paradigm has emerged globally. Sustainability and Tech driven trade and commerce have emerged as the most dominant global socio-economic trends. India has the opportunity to adapt to these trends early by implementing a futuristic policy framework. The progress made so far appears patchy and reluctant. Comprehensive and constitutionally enforceable policies for sustainable development and digital commerce (including currencies) need to be evolved and implemented earnestly, at the earliest.

Backdrop of 1991 reforms

The reforms in 1991 were neither ushered voluntarily, nor enjoyed wider support. These were rather necessitated as the socio-economic milieu of the country had reached the brink of disaster. Four decades of pseudo-ness in post-independence policies had introduced numerous distortions in the society and economy.

The pseudo socialist model of development adopted post-independence in fact perpetuated the colonial feudal model. The private sector monopolies were protected through licensing controls & state patronage, and hugely inefficient public sector monopolies were created. Even implementation of Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Acts in 1972, were misused to perpetuate the dominance of already well-established industrial families.

The entire development paradigm was designed to focus on the weaknesses (risk capital and technology) of the country. The strengths of the country (food, art, culture, religion, languages, etc.) were undermined and allowed to dissipate easily. The effort of the government was on discouraging and regulating consumption, rather than increasing production and productivity. Industrial and scientific knowledge and technologies were mostly imported. The term “imported” became synonymous with quality and prestige and “local” became a derogatory reference. Even to date, many companies of old era proudly include “imported” or “foreign” technology in their promotion campaigns.

The backdrop of 1991 reforms was set by convergence of many social, political and economic factors.

Firstly, the country was witnessing unrest on many counts, most notably - Implementation of Mandal commission and Ram Mandir movement had become major socio-political issues.

The Congress leader Rajiv Gandhi had just been killed by Sri Lankan Tamil suicide bombers. Regional socialist parties had risen to capture power in the Congress strongholds UP and Bihar. Having permanently lost West Bengal and Tamil Nadu earlier, the Congress party’s popular support was shrinking to a few states in central and western India.

The collapse of USSR and Berlin wall meant realignment of global order. The non-aligned India, which was in fact closer to USSR, was left vulnerable on many counts, especially geopolitical support and crucial defense technologies.

In the post emergency era, the efforts of various governments to catapult India to higher growth rate through fiscal expansion had culminated in significant balance of payment crisis. The ten years of fiscal expansion did manage to break the vicious cycle of the Hindu rate of Growth (3-4%). Briefly a higher growth rate (7.6% average during 1988-1991) was also achieved; but it was not sustainable for obvious reasons. The gulf war and two years of severe droughts further aided to the economic woes.

The multitude of crisis pushed the policy makers to adopt a pro market approach. The Congress Supported minority government of Chandrashekhar sought IMF help and committed to a radical reform in fiscal policy and industrial policy. A roadmap was prepared for disinvestment of PSEs, fiscal reforms and implementation of NIP. However the government fell days before the finance minister Yashwant Sinha could present, what could have been the first dream budget of Independent India.

Impact of reforms

There is little argument over the fact that the economic and fiscal reforms initiated in 1991, India were inevitable. These reforms did help in bringing the Indian economy back from the brink of disaster; even though the adequacy and efficiency of reforms has remained a matter of intense debate ever since.

Three decades of reforms have resulted in many structural changes in Indian economy. The contribution of agriculture has reduced to about one sixth, while services now contribute more than half of the GDP. The structure of foreign trade has also changed in favor of manufactured goods and services. The balance of payment has remained robust. We have faced three global crises (2000, 2008, and 2020) without an iota of problem.

Financial markets have remained an example to the world. India has perhaps been the only major global financial market that neither shut down nor imposed any trade restrictions during 2000 and 2008 market crisis.

Positives

In my view, the 1991 reforms made three most important contributions to the Indian economy:

1.    The process of reform dismantled the pseudo socialist mindset of the policy makers; unleashing the private enterprise which had remained constricted since independence. Consequently, the minority socialist government of United Front in 1996-1998 presented the second dream budget. Another minority government supported by socialists (NDA 1998-2004) divested numerous government monopolies like coal, ports, mobile telecom, roads, power, airports, etc. without much trouble. The response to global sanctions post 19998 nuclear test was not lower spending, but larger capex on building local capacities. The UPA-1 government supported by communists made a nuclear deal with USA and UPA-2 allowed foreign capital in retail trade. The final epithet of older policy regime was written by NDA-2 with dismantling of planning commission; permitting off the shelve banking licensing; and move to privatize two PSU Banks (NDA-3).

2.    Shifting of policy focus on increasing production & productivity rather than constricting consumption. This allowed the Indian businesses and consumers to globalize; aspire more and achieve more. We could become part of global alliances and treaties without much resistance. We could set up large scale capacities in automobile, pharmaceutical, textile, space technology, civil aviation, ITeS, and housing etc. Private enterprise could attract significant capital from global investors.

3.    The horizons of the entrepreneurs expanded materially. The post reform generation of entrepreneurs was not infected by the traditional constraints. The new generation could think about globally competitive scale. They were not constrained by traditional characteristics like complacency, frugality, austerity, contentment etc. Targtes were now being frequently expressed in “Billion dollars” terms rather thn millions. Dreams not only became larger but also started to get realized. Consequently, the Indian MNCs started to grow in diverse areas like metals, automobile, ITeS, pharmaceuticals, hospitality etc.

Not so positive

However, statistically speaking, the reforms have not been adequate in putting India firmly on the path to become a middle income economy.

On relative basis, the peer economies like China, South Korea, Thailand etc. have done better than India. Our share in global trade has only marginally increased to ~3%, while China more than tripled it share in global trade to over 17%.

 Not making national education & youth policy an integral part of reforms has perhaps been a grave mistake. The growth in India has definitely failed in ensuring adequate employment generation. Despite significant reduction in agriculture’s share in national income, the percentage of population dependent on farm sector continues to remain in excess of 60%. We have miserably failed in exploiting the demographic dividend.

Though, the financial markets developed a global scale infrastructure, we have not been able to implement a robust system for early detection of frauds and scams. Consequently, the investors continue to lose significant amount of money due to frequent scams and frauds in banking system and financial markets.

Many recent steps taken by the government indicate that the policy makers are full cognizant of the inadequacies of Indian economy. The new education policy, schemes and incentives to promote local manufacturing and exports, farm sector reforms, etc. are important steps that shall help in overcoming these inadequacies in the decade of 2020s.

The prime minister Narendra Modi carried out one of the largest cabinet changes today evening. Twelve of the incumbent ministers were asked to resign from their respective posts and 43 new ministers were sworn in. Most of the omitted ministers are senior politicians with vast political and administrative experience. Whereas many of the newly inducted ministers are young and relatively less experienced.

The media has been running live debates and discussions since evening to analyze the import of the latest cabinet reshuffle. A number of political experts, senior journalists and observers have been intensely discussing the inductions and omissions. The participants in debate include many of the so-called liberal intellectuals who have been critical of the Modi government performance on various parameters.

The most unfortunate part is that discussion totally exposes the bankruptcy of participating experts. Most of the participants are refusing to believe that India is a secular democracy that has afforded a fundamental right of equality to all her citizens. The experts are disgustingly analyzing the council of ministers through the prism of caste, community, gender, and region. None of the participant has bothered to run a google search on the newly inducted minsters to find out their ideas and vision of new India; their commitment to the constitutional values; their past track record of supporting innovation and enterprise etc.

The participants seem more interested in attributing the appointment to the loyalty to the party leadership and/or RSS and election winnability. The opposition parties’ spokesperson are also predictable in their commentary. Most have criticized the reconstitution, without offering any substantive argument.

The state of affairs is truly disgusting and frustrating.

 The city of Merrut in Western UP is famous for many things. In the ancient history, the town finds mention in both Ramayana and Mahabharata. In Ramayana, Merrut is the birth place Ravana’s wife Mandodari; while in Mahabharata it is part of the Hastinapur, the Pandavs’ kingdom. The medieval history of the town goes back to Indus Valley Civilization. In the modern history, the town was an important cantonment of British. It was in Merrut, where the first organized uprising against the British started in 1857. In post independent era, Merrut emerged as one of the famous education centers in UP. However, it became more notorious for the infamous Hashimpura massacre by the Provincial Armed Constabulary (PAC) in May 1987, when Virbhadra Singh of Indian National Congress was the Chief Minister of Uttar Pradesh. With that one incident started the decline of Indian National Congress. Congress lost power in the key States of UP and Bihar forever after that and could never form a majority government in the center.

Outside the history and politics, the city is famous for two things – scissors and publishing houses. The mint established by the Mughal Emperor Akbar in Merrut, resulted in development of foundries in the town. It emerged as major source for producing swords for Maratha and Sikh rulers. Finally it ended as the famous producer of scissors and blocks for printing presses. The publishing industry started in Merrut in middle of 19^th century and evolved into a major cottage industry.

The burgeoning printing presses motivated a large number of pulp fiction writers in the town. At one point in time Merrut was publishing 10 new novels every day. There were hundreds of ghost writers who were writing day and night for the popular household names. Manoj, Rajvansh, Ved Prakash Sharma, Surendra Mohan Pathak had become household names in 1970s and 1980s. The pulp fiction published in Merrut was a popular travel companion for most Hindi speaking population travelling by road or railways. The novels published in Merrut entertained and enthralled the readers for several decades. Young, old, man and woman all were obsessed with these novels. 

The genre however started losing its charm to popularization of TV in mid 1990s. The online entertainment dealt a severe blow to the popularity of Merrut pulp fiction.

The recently released Hindi movie Haseen Dilruba attempts to give a new lease of life to Merrut brand of pulp fiction. It is definitely a cult film in that sense.

Set up in a small town (Jawalapur, Haridwar), this is a brilliant story of love, passion, aspirations, and families at crossroads of modernity and traditions. Given that these types of stories are firmly rooted in typical Indian middle class neighborhood, one does not need an ensemble star cast. Though this movie has star cast in Tapsee Pannu and Vikrant Messay, future movies of this genre could even do with rather unknown faces from a local neighborhood.

Tapsee (a disillusioned and aspiring middle class girl) and Vikrant (an educated common youth with a very strong emotional quotient) have played their part in Haseen Dilruba absolutely brilliantly. The direction, script, dialogues are all perfect for the setting.

I am sure this is just an experimental beginning and we shall see many more such film in future. OTT streaming provides a perfect platform for this genre of entertainment to flourish.

Even if this movie does not do well now (I wish it does), it will be remembered as beginning of a brand new trend in Hindi cinema.

The status of Covid19 may no longer be that of a pandemic anymore. A large majority of countries have seen significant decline in the number of active patients, after having experienced the peak of infection cases. The fatality rate has declined materially, especially due to acceleration in the vaccination drive.

However, in past few weeks, many countries in the world have seen reemergence of Covid19 cases in some clusters. Scientists are claiming that the rise in number of cases may be due to mutated variants of the Sars-CoV-2 virus. A fear has been expressed that we may soon see a third wave of the pandemic, primarily due to the emergence of new variants of Sars-CoV-2 virus, some of which might be immune to the vaccines available presently or the doses of vaccine being administered presently.

The pandemic has changed a lot of things in past one year. The lockdown and mobility restrictions have materially impacted our personal, social, and economic lives. There is a great deal of the discourse on how the businesses and societies must “prepare for a post Covid19 world”; much like we have learned to live with HIV – exercising precautions and restraint.

I strongly feel that post Covid19 world may be a realty in this decade. It may even take couple of decades to materialize. It would therefore be pragmatic to “prepare to live with Covid19”. In fact this thought has already started to gain currency. For example, Singapore government is reportedly “preparing its population to deal with Covid-19 as part of their daily lives and people will be able to work, travel and shop without quarantines and lockdowns, even with the coronavirus in their midst.” The Singapore administration believes that “With enough people vaccinated, Covid-19 will be managed like other endemic diseases such as the common flu and hand, foot and mouth disease” as the plans for Singapore to transition to a new normal are outlines.

"Finally, whether we can live with Covid-19 depends also on Singaporeans' acceptance that Covid-19 will be endemic and our collective behavior. If all of us shoulder the burden together - workers keeping their colleagues safe by staying at home when ill and employers not faulting them - our society will be so much safer," the ministers was quoted as saying.

I think, we In India also need to accept Covid19 as a long term companion, and prepare to live with it. The preparations must be done at the following five levels:

1.    Personal: Observe Covid19 protocols till 80% population is vaccinated, and herd immunity is achieved. It may take another 12-15 months. Till then continue to avoid non-essential travel and socializing; observe social distancing to the extent possible; and follow a healthy lifestyle to strengthen our internal immunity.

2.    Social: Accept Covid19 as a normal flu and not attach any stigma to it. Reimagine social and religious ceremonies and pilgrimages.

3.    Business Increase the investment in technology to reorient our business processes. The idea should be to institutionalize the decentralized working and adopt more collaborative work practices.

4.    Finances: Cut leverage at both personal and business level, maintain a decent level of liquidity, enhance financial and social security for ourselves and co-workers and build an emergency corpus for future natural disaster and pandemics.

5.         Governance: Include Covid19 in the normal budget. Provide for building, maintaining and improving healthcare infrastructure, keep running awareness campaigns, invest in vaccine research and innovation, and be ready for annual seasonal spikes in cases.

In its latest Annual General Meeting, Mr. Mukesh Ambani, Chairman of Reliance Industries announced an ambitious plan for setting up new energy business. The plan includes building four Giga factories to produce photovoltaic modules, advanced energy storage batteries, electrolyzers for the production of green hydrogen; and fuel cells for converting hydrogen into motive and stationary power.

The announcement has added more energy to the already popular trade in alternative and new energy. Even though the media narrative has been more focused on the renewable energy and electric mobility, from stock market perspective, the most popular trade has perhaps been in the sugar manufacturers who have set up decent ethanol manufacturing capacities in past one decade or so.

The Government of India had announced an ambitious ethanol blending program (EBP) in 2018, through a National Policy on Biofuels-2018 (NPB-2018). The program included interest rate subvention for setting up molasses and grain-based distilleries (DFPD). The Bureau of India Standards (BIS) prescribed standards for E5 (95% Petrol and 5% Ethanol), E10 and E20 blends of ethanol and petrol. Initially the target was set to achieve E20 stage by 2030 in line with the Sustainable Development Goals (SDGs). However recently, the E20 target date has now been advanced to April 2023.

NBP-2018 in perspective

To put the NBP-2018 in perspective—

·         At the end of FY21, the ethanol production capacity in India was 426 crore liters from molasses-based distilleries, and 258 cr liters from grain based distilleries.

·         To Achieve E20 target by 2025, India would need a total of 1500cr liters capacity to cater to the blending demand and other demands, e.g., liquor, sanitizer etc.

·         It is estimated that the molasses based capacity shall get increased to 760cr liters (from present 426cr liters) and grain based distillery capacity shall get enhanced from the present 258cr liters to 740cr liters by 2025.

Obviously, the larger focus would be on grain based distilleries rather than sugar based distilleries. To produce the required ethanol to E20 target, total 6 million MT of sugar and 16.5million MT of grains would need to be sacrificed.

·         Technically E20 target could be achieved without any significant modification in the vehicle design. However, when using E20, there is an estimated loss of 6-7% fuel efficiency for 4 wheelers which are originally designed for E0 and calibrated for E10, 3-4% for 2 wheelers designed for E0 and calibrated for E10 and 1-2% for 4 wheelers designed for E10 and calibrated for E20. However, as per SIAM, the efficiency loss could be further reduced through some modifications in engines (hardware and tuning). SIAM has assured that E20 material compliant and E10 engine tuned vehicles may be rolled out all across the country from April 2023.

·         The present transportation fuel consumption mix in India is 65% Diesel, 28% Petrol and 7% Jet Fuel. NBP-2018 addresses only the petrol blending.

·         The dispensing pump infrastructure would need to be developed to enable dispensing of E0, E10, E20 and E20+ separately. Presently, only a handful of fuel stations are equipped to dispense the variety of blends. Besides, the entire supply chain and logistics of OMCs needs to be augmented to store, handle and dispense different blends.

Objectives of NBP-2018

From various discussion papers and policy documents, it is not clear what is the primary objective of the EBP. A plain reading of NPB-2018 would suggest that the current account deficit is the primary driver of EBP.

As per “The Roadmap for Ethanol Blending in India 2020-2025”, published by NITU Aayog, “India imports 85% of its oil requirement. The Indian economy is expected to grow steadily despite temporary setbacks due to the COVID pandemic. This would result in a further increase of vehicular population which in turn will increase the demand for transportation fuels. Domestic biofuels provide a strategic opportunity to the country, as they reduce the nation’s dependence on imported fossil fuels.” The positive impact on environment is mentioned as an incidental benefit.

However, at places energy security and commitment to emission reduction under SGDs are also mentioned as primary objectives of EBP.

It is pertinent to note the following in this context:

·         EBP, in its present form addresses only 28% of India’s fuel mix, i.e., petrol used as transportation fuel. It does not address the more polluting diesel which forms 2/3^rd of India’s transportation fuel mix.

·         To achieve E20 target, about 50% of the ethanol requirements would be met through sugar based ethanol. Sugarcane is highly water intensive crop. In that sense, it would not be environment friendly to increase the acreage of sugarcane crop.

Secondly, sugarcane is not an all India crop. Most of the sugar cane is produced in three states, viz., UP, Maharashtra and Kanataka. Tamil Nadu, Andhra Pradesh, and Gujarat, and some other states are minor contributors to sugarcane crop. Naturally, most of the ethanol producing capacity is located in UP, Maharashtra and Karnataka. Transporting this ethanol to various locations for blending and storing it there, could be a significant energy consuming effort in itself. Storage is even more critical since sugar is a seasonal industry. Most of the molasses is produced between November and March, while the consumption would take place 365days in a year.

The role of grain based distilleries therefore could be more important than the sugar based distilleries over a longer period. This brings me to the other area of reforms which is work in progress.

As per the 01 May 2021 press release of the Press Information Bureau (PIB), “With the vision to boost agricultural economy, to reduce dependence on imported fossil fuel, to save foreign exchange on account of crude oil import bill & to reduce the air pollution, Government has fixed target of 10% blending of fuel grade ethanol with petrol by 2022 & 20% blending by 2025.”

It further reads, “To increase production of fuel grade ethanol and to achieve blending targets, the Govt of India has allowed use of maize and rice with FCI for production of ethanol. Government has declared that rice available with FCI would continue to be made available to distilleries in coming years. The extra consumption of surplus food grains would ultimately benefit the farmers as they will get better price for their produce and assured buyers; and thus will also increase the income of crores of farmers across the country.”

While EBP addresses a part of the current account problem, the implementation of three laws to reform the farm sector in 2020, could potentially address the fiscal deficit problem by improving the condition of the agri economy. Reforming the Food Corporation of India (FCI) by restricting its role to maintaining a strategic food reserve and substituting the public distribution system (PDS) of providing subsidized ration to poor with direct cash transfer (DBT) may result in significant savings for the government. However, this shall mean redundancy of the system of minimum support price (MSP) for wheat and rice. A strong demand vertical for wheat and rice in the form of grain based distilleries could be a good facilitator in this reform process.

Ethanol could impact the fiscal balance adversely at least in initial years. As of now Petrol is not covered under GST regime, whereas ethanol attracts GST. The GST on ethanol works out to between Rs 2.28– 3.13/litre, while the central excise duty on petrol is approximately Rs 33/litre. As per various estimates, E20 EBP might result in direct revenue loss of Rs100bn to the central government. Besides, poor fuel efficiency of blended fuel may need further subsidies to motivate the adoption of E20 fuel.

Sugar to ethanol – impact on sugar companies

The general view so far is that the EBP shall enhance the profitability of the sugar companies materially and also reduce the volatility in their earnings. In this context it is pertinent to note that-

·         The government took care of volatility in sugar prices, and hence earnings of the sugar producers, by prescribing a minimum selling price (MSP) for sugar in 2018. The MSP so prescribed affords a minimum profit to the producers, even in the seasons when the sugar production far exceeds the demand.

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·         Besides, ethanol pricing under EBP, has made the production of ethanol more remunerative for the sugar mills.

However, the forecasts made by various analysts might not be fully factoring in the following trends in their calculations:

At present pricing, ethanol produced directly from cane juice yields an EBIDTA of ~10%, which is half of the EBIDTA yield if ethanol is produced from molasses. It is therefore less likely that mills will be shifting majorly away from producing sugar at all.

As the sugarcane crop becomes more profitable, we may see further rise in acreage and productivity of sugarcane; in which case the problem of plenty may persist. Besides, in the year of drought when production of sugarcane is low, ethanol might have to take a backseat, impacting the projected profitability of sugarcane companies materially.

The biggest challenge would however come from material fall in global prices of fossil fuels due to popularization of alternatives like electric vehicles, worsening of demographics, and structural shift in travel habits and needs.

Electric vehicle

Sugarcane being a highly water intensive, and therefore energy intensive, crop in India, the more sustainable solution to current account and carbon emission would be electric mobility. The purpose is not served meaningfully if the electric vehicles are run on the power generated by thermal plants using the imported coal.

The salvation therefore lies in materially increasing the electricity generation through non-fossil sources; and developing technology for storage of such electricity using non-polluting sources. Hydrogen cells and other technologies mentioned in RIL vision for future will therefore be critical to achieve multiple objectives of sustainability, energy security, trade balance and fiscal improvement.

Now a question would arise, “Should we be buying the stock of Reliance Industries?” Well this is a question that does not fall in my domain. The readers may look elsewhere to find an answer to this.