A new high while waiting with bated breath for Fed’s Jackson Hole symposium

 

Nifty breached the lifetime high once again on Friday, while the entire world waited with bated breath to listen to Jerome Powell, the Chairman of the Federal reserve system speak at the Jackson Hole Symposium. This symposium is an annual ritual hosted by the Federal Reserve of the State of Kansas. This year’s symposium has attracted a lot of interest due to the recent remarks of Powell about slowing down the Bond purchases in 2021. The markets wanted to know more about it and were hoping that Mr. Powell would placate the frayed nerves after his “Taper Tantrums”.

This reminds me of an old cliché about managing the economy of releasing a balloon to gauge the direction of the wind. That’s exactly what Mr. Powell did the last week, he simply released the balloon of tapering the bond purchases to find out the opinion of the markets. In the meanwhile, let us also be reminded of a more serious issue looking large over the US Governments horizon, The government is nearly reaching the debt ceiling and if the ceiling is not raised by the congress, we are looking at a government shutdown much before the new year.

Now let’s get back to the Indian markets. Indian stock markets have been on a dream run for the last year, they have been able to digest all kinds of bad news and have kept on conquering new highs.

The Nifty closed at 16,705.20 trading at a PE of 25.60. the Index has historically traded in the whereabouts of a PE of 25 and seems to be comfortably placed at these levels. It is also being said by most retail investors that the index is poised for a correction. A correction occurs when there is euphoria all around an when all and sundry want to trade in stock markets. Interestingly, the pace of expansion and participation of retail investors has quickened in the aftermath of the lockdowns during the pandemic. Ground reports suggest that retail investors are rather interested in staying invested in their favorite stocks and are in no mood to sell off a slightest provocation as it used to happen earlier.

As a student of behavioral finance, I see that there is a discerning democracy evident in the investor behavior during this pandemic. This is aided by democratization of information and communication. The adage of “It’s time to sell when your driver, autorickshaw wala, panwala, etc get interested in the stock market” is on the way out. The new investor is an IT Professional or a young graduate armed with a smartphone and unlimited information on the click of the mouse or the tap of her fingers. This is not a generation who would buy a stock just because it changed the name from a mining company to an IT company and later to a biotech company (Déjà vu?). The new investor is well read and well watched (YouTube), she can differentiate chaff from grain and has her eye right on the RIGHT stocks. A cursory glimpse on the twitter handles, telegram channels and WhatsApp chats tells us that the new investor is not after penny stocks and spends enough time to pick good quality stocks. Of course there are new age speculators, but they are also of a different breed, the demand for YouTube videos about technical analysis has gone up manifold and newbies are flocking this field to watch them.

These trends show that quality stocks find a market for themselves in this milieu and those falling for penny stocks are the same ones who fell for penny stocks in 1992, 1994, 1999 and 2008. This has resulted in heavy demand for quality stocks and thus the stocks within the universe of NSE200. It is just a case of too much good money chasing too little good stocks. This is New India and the new Indian Bull run, it does not seem to be stopping anywhere until 19000 on the Nifty. Only an adverse geopolitical event or any natural calamity can stop this bull run.

BUDGET 2020 ???

Budget session on saturday seems to become a dud as far as stock market is concerned. The Government is in no mood to give stops as expected by the stock markets.
Some predictions
Individual income tax rates will surely be revised to ensure that anybody earning less than 10 lakhs need not pay income tax. This will not be through direct change of slabs but by increasing incentives u/s 80C and 80D

Subsidy through PMAY may be extended to all kinds of house purchased/ built under 50L

Expectation of halving the MAT rate for infrastructure companies may not happen.

Real estate companies may get one more small dose of help to sell their unsold stock of flats.

Investment in CPSE ETFs, and CPSE Bond funds may get tax exemptions.

An incentive may be announced to businesses to employ more people. Here the catch would be that the business has to register for ESI and EPF to qualify for those incentives.

Dr. Anilkumar Garag

Markets during Elections

Most of my friends keep asking me what will happen to the Stock markets after the elections. I am not somebody who can predict the results of an election, therefore I would not like to venture into that. What I would rather do is contemplate on the possible outcomes of these elections.

Scenario 1. NDA wins with BJP getting past the 272 mark: The markets will celebrate this victory by showing us a new High and the business confidence index will pick up like never before. a Sensex of 50K and NIFTY of 15K cannot be ruled out with such results.

Scenario 2. NDA gets a majority but BJP does not cross 272. This is a highly difficult situation. If the NDA partners stick together then they will ask for a replacement of Modi and the contest for the PM's Post opens up, pitching Nitin Gadkari or Sushma Swaraj in the center of the ring. This scenario will see Stocks taking a pause and the NIFTY will meander between 10K and 12K till the picture is clear and a new budget gives the direction of the market.

Scenario 3. NDA does not get a majority and BJP fares very badly. This is a scariest scenario as it opens up close to two dozen PM aspirants and anybody with 30-40 MPs decides who would be the PM. Such a scenario would make the market hit lower circuit on the results day. The markets will take a hit of minimum 25% and NIFTY would near 8500 or lower and Sensex would near 24k-25k making it a scary  scenario. The markets will continue to go into a bear phase and would only rise after 2-3 years (as that would be realistic level of such a government's tenure). 2021-22 would see a new General elections again.

P.S. I do not see Congress forming a government under its leadership or at least under the leadership of Mr. Rahul Gandhi as he does not have the acceptability amongst non NDA parties. A Third Front Government is also not in the offing as any non-BJP government cannot be formed without the inclusion of Congress or the "External Support" of Congress

So let's keep our fingers crossed, keep an eye on the Satta market and the Forex market to provide us clues.

Until then let's meet on 23rd May.

Will OIL burn the toil of India and its economy?

Recent events in the world and the prices of crude point to the possibility of oil racing towards $ 70 per barrel have brought in the bears out of their winter sleep. The talk is all about how crude will hit $100 per barrel and how INR will be devalued to INR100/USD. Some pundits are gleefully rubbing their hands in anticipation and waiting to say "I told you So".

When all this is going on in the foreground, the background has the cacophony of mass movements of combining the power of "Mazdoor and Kisan" to overthrow the regime.

Now let us take a look at some more figures which would matter. The RBI is its recent policy (THE MONETARY POLICY COMMITTEE) said the following things about the economy.

" various indicators suggest that economic activity has continued to be strong. The progress of the monsoon so far and a sharper than the usual increase in MSPs of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand. Investment activity remains firm even as there has been some tightening of financing conditions in the recent period. Increased FDI flows in recent months and continued buoyant domestic capital market conditions bode well for investment activity. The Reserve Bank’s IOS indicates that activity in the manufacturing sector is expected to remain robust in Q2, though there may be some moderation in pace. Rising trade tensions may, however, have an adverse impact on India’s exports. Based on an overall assessment, GDP growth projection for 2018-19 is retained, as in the June statement, at 7.4 per cent, ranging 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2, with risks evenly balanced; GDP growth for Q1:2019-20 is projected at 7.5 per cent"

That was before the catastrophe in Gods own country. Now the picture may be a little different as Rubber and Coffee have to be adjusted to the vagaries of nature.

As far as the realities on the ground are concerned, Traffic keeps increasing despite the rising petrol prices. Our youth keeps taking out motorcycle rallies protesting against rising petrol prices. Rural demand keeps going up, People keep buying fancy mobiles even if they have to skip a meal because they have access to free data. Food may be expensive but data keeps getting cheaper. Clients keep complaining that the MODI SARKAR has bungled on the economic front but keep making money on the stock markets. Those who do not make money on the markets keep complaining that only a few make money in this world. Some of them complain that business has suffered due to demonetization and then say that since all the money came back to the banks, the measure has failed. Every comment has been two sided and oxymoronic (if there is a word like that).

Coming to the markets. Nifty at 11500 is prima facie scary but there are 30% good companies whose stocks are near the 52 week lows. Perhaps, looking to go to their multiyear lows. My take on the stock markets is : LIQUIDITY IS CONTINUOUSLY FLOWING TO THE MARKETS AND THEREFORE UNLESS SOME DRASTIC THING HAPPENS TO THE COUNTRY OR THE ECONOMY, THE MARKETS WILL CONTINUE TO GO UP.

As far as Crude is concerned, it is going nowhere. $75 is unsustainable, the Sheikhs will have to settle for sub 65 dollars always. this is a hiccup which will not last long. (reasons are aplenty)

As fas as the USD is concerned, its time to call the bluff, USD will hit its highest point in the nearest future and INR will come back strongly, on the back of strong exports and strong growth. A real rate of 2.5%, GDP growth of >7% and a fast growing economy needs investments and those looking through the Trumponion (or should i say trumpotatoe) glasses will eventually see merit in investing in the fastest growing economy and move from MAGA to MIGA

Sarve Janaha Sukhino Bhuvantu !!

MONETARY POLICY COMMITTEE ??

Managing an economy with a committee format is a challenge in itself. A professor friend once joked and said that "A Camel is a horse as defined by the Committee".

Inflation based on wholesale prices has been reported at 2.8% and Consumer price based inflation has been reported at 5.1% at these inflation numbers the real interest rate is 3.2% (based on the repo rate of 6% as the nominal interest rate). This must be one of the highest real interest rates in the recent past. When we look at these figures a casual question that pops up in the minds is: Why doesn't the RBI reduce its rates?

Probably the committee form of decision making is the culprit. when the five wise men meet to decide the fate of interest rates in the country, some members tend to look far into the future and predict an upsurge in inflation or a deep plunge in the value of the INR. The members must be thinking really hard about the future and doing a lot of number crunching. This reminds me of another professor of mine who used to say "too much of analysis leads to paralysis". That's the same paralysis that afflicted the UPA government during 2011-2014. I am afraid that the same disease has contracted the NDA too.

A lot of people have been talking about the banking system being full of NPAs and the whole system has gone to dogs. I wish to remind the readers about our government's own quantitative easing during 2008-2012 when the purse strings of all banks were loosened and laid bare before the corporate borrowers, the central banker was "Gung Ho" on having managed the world financial crisis in 2008. This loosening of Banks purse strings has come to roost. The Banks are staring at NPAs from large scale borrowers in the corporate sector.

Whenever somebody points out at the cause of rampant economic mismanagement in the erstwhile regime, one is branded as a "BHAKT". The previous regime has not only been guilty of mismanaging the economy but also played a part in manipulating the stock markets on various occasions. The minister was known to make dangerous statements and pull the market down and then retract the statements to assuage the investors on a regular basis.

Now the new regime is treading the path cautiously and has given the responsibility of setting interest rates to the MPC. Not only that, but the right / responsibility of deciding the GST rates has also been given to a committee of finance ministers (that makes it more than 30 wise men on a committee). Democracy in picking a ruling party and entrusting governance to a party is alright but entrusting major policy decisions to committees slows the entire decision making process and holds the country to ransom.

Hope that some corrective action is taken, some responsibility is taken and not everything is entrusted to committees of bureaucrats.

Farmers on Rampage

The newspapers and all other media are rife with the coverage on farmers agitation. Voices from all political parties in all colours are striving to show solidarity with farmers.

I have been a farmers grandson and have observed rain based agriculture for 20 years before our farm was taken away by the brutal tenancy act and a bunch of lies.

It is generally understood that small land holdings, depleting water tables, rampant use of fertilisers and chemicals, sparse rainfall have all rendered agriculture nonviable.

The Government of the day is expected to announce a Minimum Support Price (MSP) for agricultural produce. The father of green revolution advises that the MSP should be 50% higher than the production cost.

The Government of the day is also expected to regulate food prices and keep inflation under control.

If the producers of food grains are required to be given a higher price and the prices of food grains have to be kept under control, doesn't this look like a catch-22 situation? Apart for this, the Government has to keep its fiscal deficit under control by cutting down on subsidies. Over an above these pulls and pressures the Government is also under considerable pressure to cut down on agricultural subsidies from the international community.

All this calls for an out of the box thinking and a brainstorming session to find an everlasting solution for the ills of this system.

Before I go about thinking aloud and airing my views about the prevailing situation, let me take the reader back to 2014-15 when, Pulses' prices had hit record highs. a lot was said about the prices of pulses skyrocketing and fingers were pointed at the party in power and accusing them of rigging the prices. It actually turned out that, the farmers had not sown pulses because of bad market conditions. once the prices improved, the sowing area for pulses improved, this led to a bumper crop of pulses in 2016. which has in-turn led to lower prices, leading the farmers to take to the streets, claiming MSP.

This story has repeated in Onions, Sugarcane, Tomatoes, Paddy, Wheat and a host of other crops too. The answer does not lie in MSP or loan waiver. the answer lies in education. In Kannada there is a proverb that goes like this "ಕೋಟಿ ವಿದ್ಯೆ ಗಿಂತ  ಮೇಟಿ ವಿದ್ಯೆ ಮೇಲು " meaning "The knowledge of farming/agriculture is far superior than than any other education".

Now some out-of-the-box thoughts on this crisis.

• Undertake an agricultural census and digitise the agricultural land holding records.
• Consolidate Land holdings by clubbing small land holders. Encourage creation of farming co-operatives / companies / partnerships and provide concessions to such entities.
• Announce income tax on Agricultural income for all individual land owners with a land holding of more than 4 hectares for irrigated lands and 10 hectares for non-irrigated lands 
• Integrate electronic markets or E-NAM across the country.
• Declare all APMCs without membership in E-NAM as void. Mandate that all APMCs should compulsorily become members of E-NAM
• Initialise a licencing process for moneylenders and regulate money lending to farmers. Most agricultural loans from banks are not so bad that they drive the farmers to suicide, but the private loans are the ones that drive them to suicide. But, the blame is always heaped on the organised banking community.
• Instead of going for complete digitisation of transactions, the better way would be to 
• Make digital payments compulsory for buying fertilisers and and agro-chemicals
• Make cash deposits easier by not charging any fees for cash deposits. Banks may charge for withdrawals (after a certain limit), but not for deposits.
• All kinds of payments to Government and its agencies to be made compulsorily in digital form. This will reduce cash transactions to a large extent.

Unless the agricultural markets are reformed and a free market environment is created, no ray of hope can be seen. Government will have to set up robust systems for free and fair markets to continue. 

A change in the mindset of the farmers will also have to be brought in to emphasise and drill down the fact that the government is just an enabler and not your customer.

My reflections at Prabuddha Bharat's STEP 2016

On 24-25 September 2016, Prabuddha Bharat Belagavi had organised a "State of the Nation Conclave 2016" the Conclave was supported by the Visvesvaraya Technological University and Rani Channamma University. The conclave was addressed by renowned speakers and I was also asked to present my reflections on the State of the economy. Below is the text of my reflections at the conclave.

"It is always a feeling of deja vu when you get invited to your home town and are given a chance to address a gathering of delegates in a prestigious conference. I must make it a point to thank Shri L K Havanur, The president of Prabuddha Bharat, Prof Sandeep Nair for thinking about me to be a person of some value to speak to the august audience.

I would  like to place before you my thoughts on three things about the state of the economy.

1. Economic themes post 2014: there is a paradigm shift in the economic themes post 2014 and the new government has been talking about two very important themes;

 

    a. Ease of doing business: we have been doing business, the wrong way for the past 70 years and have been able to bend rules backwards to accomodate our whims and fancies. The times have changed and also the new regulations on GST will change the way we conduct business in the country. whenever you go to the market to buy anything, the regular question asked is whether you want a bill for the transaction, if you want it then you wil have to pay VAT or sales Tax and the price of the product will go up by that extent. This choice is invariably offered by businessmen of all hues and sizes. With the implementation of GST, the question would become redundant as the seller would have already paid his part of the GST and would be eager to recover that amount from the buyer. Hence learning the clean way of doing business becomes more important. this to my mind is the real contribution in ease of doing business. business becomes easy when every body follows the same rules.

 

   b. Make in India: there is a lot to be done in promoting 'Make in India', a lot is being done though, labour laws are being tweaked slowly and surreptiously to make it easy for hiring and firing. But the challenges of Make in India are numerous. One of the biggest challenges is the Prohibitive Land proces and highly complex ownership structure of land holdings. this is one obstacle whcih is going to be diffifcult to remove and make "Make in India" easier.

2. Challenges faced by the government in monitoring the economy:

    a. Collecting economic data is a nightmare for our statiticians. Our IIP data is published three months late, Our inflation data is not relied upon by our own industry people. collecting, collating and computing GDP has become a bone of contention between private data aggregators and the government statitistians. Collecting authentic data in a timely manner is a big challenge for a country whose unorganised economy is larger than the organised economy.

   b. Building and maintaining an organised market for various commodities, products and financial services is another major challenge. creating an ecosystem of organised markets and then collecting and disseminating data are two sides of the same coin.

3. What has changed int he last two and a half years?

       

       a. A very personal example is that I have been asked to be on stage and present my reflections on the state of the economy. The organisers wanted me to talk about my thoughts without asking me about my lineage. This is the biggest change here. Earlier dispensation wanted only those with the right lineage to address gatherings. Being capitalist is no more considered regressive. Still some pockets of the civil (should we call them that) society think that being communist is being progressive. So first victory over the class war has been won by debunking the thought about left leanings being progressive.

     b. We have a government at the centre which has engaged a number of common citizens in a constant dialogue on governance with the help of loca circles and the mygov initiative on the digital platform. I appeal to all of you to please participate on this platform positively and constructively.

    c, Finally you have elected this government in the hope that the government cleans up the house. when you engage somebody to clean your house, remember that the cleaner is bound to reach undr your seat too to get the job done. therefore don't complain that the janitor has reached under your chair too. get up and declare your dirty assets to the government before the cleaner approaches you. these are the last few days available for declaring your black money, make the most of it and declare before the due date.

I would like to end my submission with the following lines

Mera desh badal raha hain, aage badh raha hain.

Thank you"

UNION BUDGET 2015-16 My Take

Hi,

Its been a long time that i have actually visited my own blog and tried to type.

on 28th February we had an amazing session at our college. We had organized a budget viewing session on the large screen at our college auditorium, this was followed by a few remarks by experts on finance, economy, agri-horticulture and taxation.

The highlight of the programme was the presence of Shri. Athani Veeranna, the Chairman of our Institute, who is a leading chartered accountant and an acknowledged expert in taxation matters. He was his usual self in being highly meticulous in pointing out the pertinent facts in the budget and then giving his views on the budget proposals.

Prof B Veerbhadrappa, an economist, Economics Professor and the finance officer of Davangere University who sat through the entire proceedings. He gave a fabulous overview on management of the economy and spoke about the balancing act of the finance minister.

Mr. Basavanagouda, the coordinator of the Tarala Balu Krishi Kendra also did a great job of providing insights into the budget proposals for the agriculture sector. He analysed the proposals with respect to the wish list of the progressive agriculturists.

Then it was my turn to voice my opinion on the budget proposals. A lot has been said about the budget in the last three days but my opinion is my opinion and as always i beg to differ a little from the tread path. So here it goes....

JAM- the Jan Dhan - Aadhar - Mobile troika will necessarily plug the leakages in the subsidy system (a glimpse of the fallout of the troika was evident when the brother of the PM participated in demonstrations)

62% of the tax collections are to be devolved to the states and this is being projected as the spirit of true federalism. I see it in a different light. The center wants to put the onus of providing subsidies on the states so that there can be separate policies for separate states.

one of the visions of the government enunciated was of providing 100% housing by 2022. This is a laudable decision. Industries in cement, steel, housing finance, power and infrastructure can look forward to large opportunities. In fact, the next two decades will belong to the infrastructure industry.

An announcement of setting up an unified Agricultural market has been made, if this becomes a reality, then commission agents in APMCs will have to look for better business opportunities or remodel themselves to be a part of this new arrangement. Anyhow this will change the game for ever in the Agricultural produce markets.

MUDRA (Micro Units Development Refinance Agency) is being setup with a Rs 3000 cr. initial investment, this should pave way for credit availability to small, tiny and micro industries and free them from the clutches of private money lenders. The unorganised market of money lenders charges usurious interest rates and it has become the bane of the businesses at the proverbial bottom of the pyramid.

A bankruptcy code is envisaged to help faster start-ups and faster winding-up of companies. Along with ease of doing business, ease of closing business is also of vital importance so that resources are not wasted on trying to make unprofitable business to survive. This is a welcome move.

A vital point is that NBFC with more than 500cr capital will be treated as financial institutions under the SARFAESI Act. this would prevent the goonda raj prevailing in the private financing of commercial vehicles and tractors.

The Finance minister has promised a universal social security system, I am now feeling that we are truly moving forward to become a developed country. The Atal pension scheme is the right step in this direction.

"Sabka Saath and Sabka Vikas" has also brought in "Nayee Manzil" to appease the minorities with less formal education to start micro enterprises. (if the same was done for all communities then it would have been real sabka saath and sabka vikas). Here the government seems to be wooing the minority just the same way as the earlier governments.

A Rs. 25000 cr Rural infrastructure Development Fund has been announced, good days are here for gram panchayats and taluk panchayats. Hope the money finds its way to real infrastructure.

Apart from the RIDF another Rs. 70000 cr has been announced as investment in infrastructure, supporting my take that this is going to be a decade of infrastructure.

Much needed boost has been provided to the power sector by announcing a policy of plug and play power projects, Ports to be converted to companies (did somebody say Adani?) a start-up fund of Rs. 1000 cr for IT start-ups.

Financial Markets have found a new measures by the merger of SEBI and FMC. A welcome move, for that matter too many regulators spoil the broth, so minimum government is essential for maximum governance. Measures to develop and deepen the bond markets, introduction of Indian Gold coins and authority to FEMA to control equity investments will pave way for better administration, development of markets, freedom from gold imports and a sovereign gold bond to take care of the craze for gold investments.

The central theme of the budgetary proposals seems to be a road map for establishing a cashless society. Ease of doing business has been addressed again in bringing about a public contracts resolution bill ans a regulatory law for infrastructure.

Education seems to be loaded with skill development and not with mind development. A Student Financial Aid Authority to take care of financing the students of higher education is a welcome move but what is needed is "NATIONALIZATION OF EDUCATION" if Modi is being hailed as a Thatcher of India then it is imperative that the BJP with its majority pushes for Nationalization of education. only such a move will be able to provide education to all the classes of people. Germany is a very good example of what nationalized education can do to the country.

A Bank board to be setup and then this is expected to grow in to a bank holdings company. A Sovereign holding company to hold all governments investments, to be managed professionally is the right direction to take. Hope this too happens in the near future.

Finally a commercial division in the courts has been announced, this will pave way faster resolution of business conflicts and lead to better environment for conducting ones business.

I would not like to dwell on the tax proposals, As it is said that Taxes and Death are a certainty and they are not avoidable. Both cannot be moderate, thus less spoken of them the better.

All in all a budget that creates hopes, promises more than it delivers and seeks to flush out black money by making life difficult for offenders. this budget can be called high on hopes and low on real, ground level issues. let's hope that whatever is promised is delivered, as that is all that we can do for the next four years.

Indiana Jones delivers a dud again!

It has been a long time that I have written on the economic policy, given my propensity to criticise the economic policies and particularly the monetary policies, I had thought that my days as a critic were numbered with the appointment of a charismatic and learned RBI Governor (Indiana Jones). Alas! that was not to be. The governor blinked again, isn’t it ironic that once one gets on to the chair of the governor one tends to think in terms of the establishment only and also think that all that is done using the monetary policy tool is right?

Lets take a look at the Governor’s statement. The first line states that repo rate will be increased by 25bps and in the ensuing paragraphs (specifically pt no 4 and 5) he goes on to gloss over controlling inflation and how inflation is an unjust tax on the people.

I have a funny feeling that economists always speak something and do something else. (I hope you get the drift… we are surrounded by economist politicians right from the top of the pyramid, everybody has been a finance minister ;))

I would like to reiterate again and again the doctor sitting at RBI HQ does not have the medicine required for the economy and the medicine lies in the cupboards of the FINMIN or the PMO. Unless the political bosses start thinking about supply side of the economics and make things easy for the producers and the processors. It is going to be an uphill task to manage lower inflation rates. Inflation in India is a supply side phenomenon and not a demand side phenomenon, no amount of increased interest rates is going to dampen the buying power. Increasing the producing power by enabling faster credit growth to the industry, approve projects, unshackle agriculture and then see the growth as well as stable prices.

Let’s pray until this happens. All comments are welcome

Downhill INDIA

This is an article that I wanted to write for a long time and had not found the motivation to do so. We have witnessed the fall of INR and have heard many versions about how to stem the rot.

Here are my views, not on how to strengthen the Rupee but on how to strengthen the country:

India is suffering from high inflation for a long time now and there seems a big gap in the steps that the Indian government has been taking and the results of those steps.

My limited knowledge of economics tells me that the government should

1. Instill confidence in the investors of large infrastructural and industrial projects by clearing the air on land acquisition and financing of projects. Many infrastructure and industrial projects are languishing because of not achieving financial closures and roadblocks in land acquisition.

2. Develop a strong agricultural plan to increase the yields. We desperately need a second green revolution to feed our teeming millions. (No free lunches and subsidized food please, that will lead to a idle population). Our country has been facing a demand led inflation and supply of food grains is not keeping pace with it. All the stocks of wheat lying rotting in FCI storage are best utilized for distribution in the open market rather than waiting for them to completely rot to be then given to distillers.

3. Our country needs a strong manufacturing policy. There is an urgent need to have a policy of increasing capacities in all our industries to meet the growing demand for manufactured goods. Many sectors in our country are oligopolies, unless these oligopolies are broken there is no hope of reigning in inflation.

4. Real estate is the highest employer of unskilled labour and is also the root of the unaccounted money in this country. Firstly, our states have to reduce stamp duty on transfer of real estate and strong regulation to see that actual prices are reported during these transactions.

5. The government either has a monopoly or strongly regulates the markets for basic necessities like coal, power, water etc. The government has to get out of these businesses.

6. Business like Coal, Sand, Power Distribution, are controlled by mafia. Our Law and Order system needs an overhaul. Can there be a time limit for framing charges on anybody who is arrested? If one is arrested, can there be a law that forces the police to frame charges within a stipulated time other wise those arrested can walk free? Such a law exists in the US. Another lacuna is the number of times the cases in courts get postponed. Can there be a law that limits the number of adjournments in court cases?

7. Our financial markets are very shallow, even with a turnover of Rs.150 billion on our bourses in the spot markets, we have situations where insider trading, front running, price rigging and circular trading are rampant in the market. For this turnover there are only 20 million investors who have a demat account (a mandatory requirement for trading in the markets). Unless our markets attract more investors, we will not be able to broaden and deepen our markets.

Another thing that ails our markets is that there are two clear financial markets. the unorganized market full of Ponzi schemes and unregulated lending is draining the economy.

Most of these things that I have mentioned here are repetitions from my earlier blogs. But this is a wish list, and these wishes are being granted by those in power.

Therefore there is more of the same. Let us learn from our mistakes and bring about the required change.

All Comments are welcome

Budget 2012-13

This year's budget has four points which have caused anxiety.

1. Raising Service tax to 12% and creating a negative list of services. This act of the finance minister has put a plethora of services in the ambit of service tax. Indirect taxation in itself is a very demotivating tax for entrepreneurs. "Value Added Tax" or excise duty are taxes for adding value to the raw material so that the ultimate user of the goods pays for the labour spent on these raw materials. Service tax is also in the same legion, the ultimate consumer of service has to pay tax on the services consumed. The logic being, our government is not able to tax individuals and firms directly, effectively and therefore they would like to recover taxes from them through this roundabout means. The logic may be correct but it is flawed when you calculate the yield.

Imagine a large industrialist who has more than 50% stake in his public limited company, he obviously falls in the 30% + Surcharge category tax slab. If his company has lets assume a payout of Rs. 1 billion as dividend then more than 50% of that money would come straight to the promoter's pocket and that too tax free!

So our friend promoter now file income tax returns claiming tax free income of more than Rs. 500 million and may be a salary of around 20 million rupees. if he pays 33% tax on the 20 million rupees his tax outgo would be 6.66 million rupees and that would be an effective tax rate of 1.2%. what is the amount of money he would be spending on services to pay a service tax is another question. if he spends around 5% of his residual income on services he would be paying a service tax of approximately Rs. 2.5 million. Compare this with the tax he would be paying if dividends were taxed. If dividends were taxed then the tax that this person would be paying would be 30% of Rs. 520 million amounting to Rs. 156 million.

The excuse put forth for not taxing dividend at the hands of the tax payer is that it is very difficult to implement. All we need is to implement it with the big fish and let the small fry go away. A cursory look at the share holding pattern of large companies in India shows that the most of the companies have promoters stakes above 30%. retail investors account for around 5% of the investors in these companies. therefore it is easier to locate the shareholders and demand dividend tax from them in fact with compulsory demat accounts it is still easier for tax collection. Dividend can also be taxed at source like any other TDS and the companies can be asked to deposit the TDS on dividends. That way it would be the most easiest tax to collect. In times of inclusive growth it is blasphemy to let go large industrialists with small effective tax rates.

So instead of taxing people on the services they avail, it would have made great sense to tax dividends and the government could have mopped up more tax from this exercise.

2. Amending tax laws to levy capital gains tax on transactions outside India, when the assets are in India with retrospective effect from 1962 is a RETROGRADE STEP. Any amendment in tax laws should be for the forthcoming year so that the businesses and the people at large take this as a cue and engage in activities knowing fully well about what part of their earnings need to be share with the government. If the government is going to pull out historical deals and ask for a share in the profits earned in earlier periods, this means that the government is going to wait until you make profits and then lay its claim on its share after the game is over. That's not GAME Mr. Finance Minister! Any tax law which proposes to tax income in future is welcome but not past income. Past is Past Pranabda, please make the rules of the game before the game starts, Indian government is known for changing rules of the game midway, but changing the rules after the game is over is obnoxious and not palatable.

3. Fiscal deficit seen at 5.1%. Should we say this is realistic or should we assume that our FM will be off target by 2% like all other FMs in the past. If he is off target by 2% then it would mean a Fiscal deficit of 7% and that would be catastrophic. If he is realistic,  then what happened to the target of 3% fiscal deficit announced in the previous years? Why can't the government cut costs? stop spending on freebies and concentrate on good governance and prudent financial administration? Are coalition pressures stopping the finance minister from taking bold measures like restructuring the tax rates to increase effective taxation rates of wealthy people and reduce the taxation rates of the the lower and middle income groups? World over there is a growing consensus amongst the rich that they are ready to share their wealth but that is not to be seen in India, why? This approach of floundering on the policy front and squandering the fruits of growth in the last decade will slowly and surely take the country to a 1991 like crisis.



Car Sales for the year 2011-12. Source http://www.team-bhp.com/



4. Increase in excise duty on large cars. Whom are you kidding Mr. FM? Even if you consider all cars of C1, C2, D1, D2 and Premium Category as large cars, the number would be @ 720,000 cars per year, an increase of Rs. 50,000 per car amounts to Rs. 36,000,000,000 that is Rs. 3600 cr. I think that's too much ado about nothing. One more tokenism.

Let's talk about the Rajiv Gandhi Equity Savings Scheme. As a stock market practitioner I still have no clue as to how am I going to tell aam aadmi that he should open a demat account and invest Rs. 50,000 in equities locked in for three years and then he would get an income tax benefit. Seems a far fetched idea! Anyway thats our FM for you. 

As far as the markets are concerned, FII liquidity is still chasing Indian equities, since they do not have any other assets elsewhere worth investing. Around 10 bn dollars have already reached the shores of India in this calendar year and these dollars are giving me the jitters that they may fly back the way they came in, SWIFTLY...

Hoping that the FIIs do not find a better place for investment, our markets will surely go up slowly. technically speaking, the 50DMA has crossed over the 200DMA after nearly a year and a half and has given a good bullish signal. I only pray God that these things will keep the market moving northwards despite the wrong economics.

Have a nice Day

Is FDI in Retail the "fix-all" for the Indain economy

The cabinet approved 51% FDI in multi-brand retail in the last week. The rumour mongers and spin doctors of the government have started talking as if they have taken a giant step in the direction of development of Indian Economy.

Lets take a look at what are the fall outs of 51% FDI in multi brand retail. If the larger retailers really warm up to this idea and invest in or country, who will bring in the remaining 49% is the moot question? will it be through equity dilution to the Indian Public? or will the corporate chieftains, known for their hoarding propensity grab up the remaining 49% stake? if the public is allowed/invited to participate through the equity route, it will be a welcome step in making public participation more inclusive, else it will be another of those schemes meant for the rich to be richer and poor to be poorer (this is assuming that the larger retailers will adhere to good corporate responsibility and keep their shareholders interests in mind whence they manage their businesses).

Another major lobby which will benefit from this immensely will be the real estate lobby. People holding (hoarding) large patches of prime real estate will be able to strike highly profitable deals at unrealistic prices and will be able to make more money. The high rents paid for these commercial properties will end up burning a hole in the pockets of the final consumer. No only this, but another interesting thing is panning out in the Indian markets due to these unrealistic property prices and rental rates. Visit any city, you will find hordes of empty commercial spaces in the upper floors of posh building without any tenants. The owners think that they will be able to attract the same rent as building space with frontage and have kept them empty. The rentals of commercial spaces work out to a little over 4% per annum on the investments made. investors in real estate/ commercial properties are still doing it because they think that the loss in rentals will be made up by the capital appreciation. (doesn't this smack of the stock market mentality? unattractive dividends being made up for by the capital appreciation of stocks!)

The question is, is this approach to real estate pricing  correct in the first place? Is real estate the same as stocks? stocks are liquid: real estate takes a long time to liquidate, stocks can be easily transferred: real estate takes an eternity, litigation in stocks is very minuscule: real estate is highly litigative in nature. So many differences can be drawn to elucidate that real estate and stocks are different classes of assets and they have to be valued and treated differently.

The trading community, which relies on the difference between the farmers/producers price and the retail price will be the worst hit in this milieu. The commission agent will lose his relevance once large retails come over. Remember Reliance had started a vendor portal to procure all their SKU's directly from the producers. Disintermediation is a good thing for markets. But, intermediation employs a majority of people in India (with a long history of trading, and a country of traders) the question arises that whether it is prudent to kill the business that Indians are so good at?

I have posed these questions to elicit comments and make this a lively discussion/debate. Please feel free to vent your views on the subject.

Now, for the outlook on the markets: The cheer in the stock market will be short lived as with other bailout measures. the NIFTY is in a secular bearish trend and it will take a big effort to turn the tide.

ANNA forces a compromise

The entire episode of Anna and his struggle to bring about the issue of corruption center stage has brought about some key take-aways.

1. The youth and the middle class population of India have become politically aware and they should shed their cynicism and VOTE in the next election.

2. We should not be carried away by tokenism of the politicians: like spending a night at a villager's house (after installing generator, western toilet and filling his house with mineral water)

3. We should stop electing people who are known land grabbers and are in cahoots with builders, contractors and other people who deal with businessmen who sell their wares mostly without receipts and thus steal on sales tax, income tax and other taxes.

most black money results from evasion of taxes. if taxes are paid truthfully and correctly then the question of generating black money does not arise at all.

4. We should stop talking about CASTE in this country.

WE ARE ALL INDIANS FIRST AND INDIANS LAST. ELECT A GENUINE REPRESENTATIVE NOT FROM YOUR CASTE AND THEN SEE THE DIFFERENCE.

ELECT A REPRESENTATIVE WHO SPEND LEAST MONEY ON CAMPAIGNING.

STOP ELECTING PEOPLE BECAUSE THEY BELONG TO A FAMILY

ELECT PEOPLE FOR THEIR WORTH NOT BECAUSE THEY BELONG TO A FAMILY

That's all for today

I know this post is going to elicit a lot of comments. all comments are welcome.

How to support the fight against Corruption

Let us all pledge to do our bit to free India from the clutches of Corruption and Black Money by taking these simple but very DIFFICULT STEPS

1. Ask for a bill on every purchase and pay the Sales Tax.
2. Give Receipts on every sale and pay the VAT/Sales Tax
3. Declare the correct amount on every sale or purchase of Land and Flat and Pay the registration tax that is applicable.
4. Never demand or pay a cash amount while buying or selling property.
5. Stop bribing the traffic police for traffic violations and pay up the legitimate fines.
6. Register for only one ration card, gas connection and electrical connection.
7. Pay electrical bills on time even for connections of farms.
8. Declare genuine farm income only and not club other incomes as Agricultural income to avoid taxation.
9. Do not pay or receive donations without receipts.
10. Stop acting as though the law is meant for the minions and not for us.
11. Stop running households on expense accounts of businesses. Declare real income from businesses.
12. Stop Bribing people asking for enhanced credit limits/ Loans etc in Banks and financial Institutions
13. Stop asking for kickbacks on commissions on LIC policies, General Insurance Policies, etc.
14. Stop buying Degrees and Diplomas online and apply for jobs with them.
15. Stop asking teachers to give more marks by bribing and coercing them.
16. Start giving receipts for services (especially Doctors): Consultation, Operations, procedures, etc. Other Consultants like Accountants, Tax Consultants, etc.

All these and much more....

Only if we start cleaning up our house and souls then we will be able to clean up the country. Our country is seeped in corruption not because of the politicians and bureaucrats but because, we tolerate corruption, we always believe the laws are for others and not for us. we always want to wipe out corruption but want to get farther by bribing somebody on the way.

THINK ABOUT IT!! IS IT POSSIBLE TO SACRIFICE ALL THIS!!

Hoping for a corruption free India!

wither markets

Let's look at what's the problem with the markets. Nifty went to about 5650 and bounced back today. I think this is just a small bounce. Nifty is headed towards 5500 before it decides which way to go.

In fact, I heard a nice joke the other day. Somebody said that Nifty has made a Ghazini pattern. It forgets where it is going after every fifteen minutes.

There is a lot of bad news for the Nifty to do anything good. Inflation is still very high and we have negative real interest rates in Indian markets. Most of our friends (and experts) expected the dollar to be at Rs.42 by the year 2010 and they even went on TV to boast about it (in fact one very learned "Professor" grilled me hard about this issue when i said that the dollar would reach Rs.48 and of course made fun of me) I only pray to the good lord and ask HIM to forgive the Professor for he knows not what he did:)

With negative interest rates, the FIIs will slowly start realizing that they are not making money anymore and losing due to the depreciating Rupee. I am categorically saying it again that the Rupee is expected to depreciate up to Rs.50 per dollar and you can expect FIIs to take a walk from the Indian markets for a short time.

The reasons for the fall in the markets will be the usual suspects (from the media viewpoint) lukewarm budget, inflation, scams and any other new "NEWS" they can find. but the writing on the wall is very clear. NIFTY at 4900.

NEWARKED

Obama visit has triggered off the fall in the markets as expected. If India is to create jobs for Americans we can now coin a word called "newarked".

Newarked: means you just lost your job to a Newyorker/ American. you can also say that your job was newarked, meaning it was given off to an American.

Antonym of Newarked: Bangalored.

Anyway, now that Obama has come and gone, let's get back to business and see where we are headed. The market tried to touch the all time high during diwali and then has been flaundering post diwali. i think the market will correct by another 20% before it begins its northward journey.

Some of the stocks that can be bought now are RCOM, Bhartiairtel and IDEA. Stocks to exit are all Banks and auto stocks. This is exactly opposite of what experts are talking about on TV.

Stray Thoughts on Financial Ratios

Whenever we talk of financial ratios, some students of finance who read only text books come up with weird rules and standards. On Monday I was conducting a viva-voce exam for some students. Most of the summer projects were ratio analysis of the company that they had worked in as interns. First of all ratio analysis is not a two month activity, at best it can be a three hour activity or an overnight assignment on finance, nevertheless these students spent an entire 60 days in companies and then came out with a report on financial ratios. That was the first thing that pout me off. the other thing that put me off was that one of the students confidently came up and said that the current ratio of the company he had worked in was at 1.8 and that it was not ideal. when asked about the ideal ratio he said it should have been 2. I asked him where he has read this, he mentioned the book of one of the finest gurus of finance in India (Dr. I M Pandey). I asked him to bring the book and read the paragraph where Dr. Pandey has categorically written that one should not follow this convention blindly. in fact he has not used the words "rule" or "standard" that goes to show how the students reads and understands according to his convenience.

I asked all these students about their perception of a great blue chip company. They cried ITC and Hindustan Unilever in unison. then i asked them to find out the current ratios of these two companies. being FMCG companies they invariably work on negative net current assets and therefore a negative working capital. That in fact is the reason for their high efficiency. the students went about finding out the current ratios of these companies and came out with the obvious: less than 1. Then the students were convinced that there is no hard and fast rule about the current ratio.

Current ratio (Current assets / Current Liabilities) is calculated to find out the liquidity position of a company or firm when the company or firm is an unknown one. If one is analysing a known brand and a company which is in business for a long time then this becomes redundant. If the company is able to dictate terms to its suppliers and its customers then it will always be in a position to use all the suppliers monies for financing its current assets making use of its own funds redundant. That shows why big companies with bigger brand names are in a position to sell for cash and buy at long credits, skewing their current ratios below unity and therefore operating with negative working capital.

A petty businessman with a lot of commonsense would find this article talking about the obvious. he always know that running a business with others money the right way of running a business.

Now for the opinion on the markets: I reiterate that the markets are poised for a fall. they may pick up some steam and even reach the earlier high of Jan 2008. The distance between today's indices and January 2008 highs is only 10-12%. This distance will be traversed in no time at all and all those investors who realise that the markets have gone up will be the ones who will buy between 5800 and 6250 of the nifty. I pray that more people read this part of the piece and refrain from any buying at these levels. and please do not feel left behind if the nifty actually goes above the 5800, because even if the nifty really touches the previous high it will fall to minimum of 3500 in the coming year 2011. So please reign in your horses. If you still plan to be in the markets then just trade, be nimble, get out at the faintest profit margin. The markets can start falling anytime from now to December and the fall will be substantial.

Economy is fine says the Economic Advisor.. As usual I beg to disagree..

The Economic advisor to the prime minister says the economy is doing fine and we can expect a growth rate of 8.5% this year. Good News.

As always I am a naysayer and my only grouse is that we have inflation running at an average of 10% for the last four quarters and with nominal interest rates lower than the inflation rates we have already run into negative real interest rate territory for the last three quarters. This does not bode well for the foreign exchange rate front. As long as the real interest rate remains negative, Rupee will keep being under stress, new symbol not withstanding. May be, this is good for the software companies and other export led businesses, but since we are an oil importing economy with a trade deficit of close to a billion dollars and heavy reliance on "invisibles" to Balance our BOP, we need more to be done on the trade deficit side.

All through the blog you will find mention of this inflation in India being more due to non availability of supply than the over supply of money. Managing this inflation by using monetary policy is like managing hypertension by asking the heart to pump less blood rather than by exercising more. Ask any doctor for a remedy he will certainly say that your body needs exercise to counter high BP and not drugs to slow your heart down. But our regulators are not "doctors" they have their monetary policy blinkers on all the time.

what next? INR (sorry I still do not have the font to write the symbol of the Rupee) will weaken to offset for the negative real interest rate for another six months and then if we see some inflation management (monetary or otherwise) we may see a stop to the rupee losing value.

This, along with the money due to be pulled out from emerging markets, thanks to the new act signed by Obama will lead to depressed markets for the next six months. a recovery for the markets is seen only later.

A review of the economy is expected on the 26th evening. The shape of things to come will be decided later. But, since it is an RBI event and therefore a monetary event, it may not give any medicine for the disease of low investment and low supply kind of situation we are in.

Till then short a few August futures and make money.

Moneycentre sample survey

"If it isn't broken dont fix it" says RBI

That seems to be the mantra from our venerable Governor of the RBI. this credit policy is just a tweak with respect to raising the SLR to 25%. All the other rates have been maintained at the same level. RBI's review has pared down the GDP growth outlook of 6%.
The stimulation of the economy on the back of the financial crisis in the form of eased liquidity remains nearly constant. The powers that be, have been crying hoarse that it is still not time to repeal the stimulus given during the crisis. One fails to understand, why should the government not stimulate the economy constructively on a continuous basis? Why should the government only think of monetary measures when fundamental shift in stimulating the economies are needed?
The best form of stimulus would be to encourage individual savings and collective investments.
Now, what does one make of this credit policy? The policy may have said many things in words but as far as deeds are concerned, it is very clear. The Governor does not think anything is wrong and he does not want to rock the boat when everything is to the Government's satisfaction.
What do we expect in the market? The markets are more concerned with the slow growth expectations. We have already witnessed sluggish growth in corporate sales, this may start affecting the margins and profits in the next quarter. That is the fear in the minds of the players in the market now. The markets have also gone up on one way street for most part of the last year and the time for profit booking is ripe now.
So BOOK PROFITS AND DON'T WAIT TILL THE MARKETS TOP OUT.