Deconstructing DeMon for the Inglorious liberal

The expression “Inglorious” is trending now amongst the battle fatigued caucus of Indian liberals ever since their flag bearer Shashi Tharoor, M.P. titled his book “Inglorious Empire” - that successfully made a cottage industry out of Indian bitching about the British Raj. Pratap Bhanu Mehta is a hard trier among liberals. Perhaps the popularity of Tharoor’s title success has tempted him to absorb some shine off it as he partakes the expression as a title to his op-ed piece today. But all it could do was to expose his frustration more than his version of economic reality that he struggles to outline in it. 

In fact, most critics of India’s massive Demonetization (DeMon) program initiated by Prime Minister Narendra Modi fall flat on their nose like Mehta does – the liberal camp in particular. Let’s take Mehta’s piece today, flesh it out and you’ll know why.

Mehta begins his piece by confessing his inability to figure the “technical reasons” cited by Amit Shah for the current GDP growth pegged at 5.7% from the 7.5% as it prevailed an year ago. But he as well guessed it right that the overriding preoccupation with the cockle warming debates on social polarization – the great liberal appetizer  – has distracted him from observing the economic realities on the ground like rising crude prices, the gradual but unstoppable Chinese slowdown, Trump in Capitol Hill, Brexit and EU recession all which dented global commerce in a significant way. Mehta comes out way too naïve in pretending not to have noticed it.

As Mehta concedes, barring a few experts no one is seriously questioning the Government on falling growth numbers.  We know how 2007-08 mortgage crisis exposed the experts as a breed. He doesn’t seem to get that average, un-elitist and the few sensible among the elites don’t link economic slowdown to DeMon or don't confront the obvious because they know it would only present them in a shade of poor “orange” - the color  distinguishing the ignoramus truant holed up in Washington – that nobody wants. Mehta perhaps has sufficient rewards more than gumption to risk it. So he perhaps does. Further politics has increasingly a negative correlation with economics

In the midst of flagging all his grave concerns, Mehta has somehow deigned to notice the macro-economic stability that prevails and overrides the gloom he struggles to figure. The unruffled Indian majority should owe him a lot on that count even though they have digested the slide down in other indices like IIP, Private Sector Investment by tallying it with geopolitical tensions in the neighborhood and have benchmarked global comparisons to boot. Only that India’s indices have been faring better than most of the other developing nations – a fact Mehta has overlooked once again attributing his preoccupation with the glorious anti-polarization liberal crusade.

Now to Mehta’s greatest of findings that this Government gets what he calls as a “Free Pass” because of the severe economic maladies it had inherited from UPA. In his hurry to underplay the role of UPA in screwing up India’s economy by its sustained insolence that PM Modi has boldly begun to address, he forgot that the “past” doesn’t just refer to a decade under UPA, it has to be multiplied by a factor of five - to include the years from Indira Gandhi era when Bank Nationalization swept so many economic ills then prevailing under the carpet – to get a complete picture. Perhaps Mehta does implicitly convey his unabashed adoration for Modi in expecting him to reverse the ills of the last five decades in under three years. Noted, Thanks.

The biggest gaffe that one could notice is when Mehta airs his pet grief - by managing low inflation the Modi Government has neatly masked its non-performance in areas of job creation and employment. Mehta is seen as a complete dud here. He pretends not to notice how his claim of job losses militates against the fact that despite losing jobs by the millions, people still buy stuff, crowd malls or even buy Jewellery. It takes a scornful liberal or a complete idiot (means the same) not to figure how people get by if DeMon has killed all jobs or what alternative means of livelihood people have adapted to for themselves.  Wonder what these jokers might ask at a time not so far ahead in future when Robots, AI and other industry automation eliminates conventional manual labour. I wouldn’t be surprised if they foretell death due to starvation for 40% of working population engaged in industrial labour, just like the liberals did as Modi marched forward triumphantly, winning one election after another. Poor suckers..!

The diminishing faith amongst the Private Sector that Mehta alludes is called "risk perception" which is an extreme variable. What is a manageable risk for a young Bill Gates or a Mark Zuckerberg could be a dubious abyss for a wizard like Warren Buffet. Again what Mehta doesn’t notice is that PE/VC investment in India has topped $ 22 billion in 2015 itself, a peak by itself. What the capitalists don’t invest in industrial ventures, they invest in financial assets. Just look at the record Sensex / Nifty performance of the last 3 years. It is called an investment cycle. Smart money moves in and out of asset classes and working capital in alternation. Grow up, Mr.Mehta.

Now Mehta saves his ammo for his final pitch – Demonetisation. Like the thousands of insidious liberal critiques that preceded his, this one too heads straight to the trash can. Mehta’s sweeping criticism on DeMon – high cost, low outcomes, other means to achieve the same goals – all have been rejected outright by the people since it is short on specifics. The liberals are always ready with their objection to a public policy, before they are ready with the alternatives. If they say DeMon could have been implemented "better" which is a comparative, what is its "good" forerunner or a previous example they are benchmarking it to…? It is the first of the kind in terms of sheer scale and therefore an experiment well worth trying in an economy where the unrecorded cash floating in the system has far exceeded that in the recorded universe, fueling asset price inflation, hawala and its nefarious destination – terrorism, both social and economic. To those who speculate whether DeMon has ended all terrorism or have all unaccounted cash been sucked in, the answer is it will.  To those who quiz why have the government and RBI kept shifting the goal posts during DeMon, the simple answer is even they were learning on the run. Only that the liberal idiots have been too naïve not to recognize DeMon as an experiment as did most average Indians on the street. Hence they didn’t complain then and still don’t. 

The fact remains as Lord Meghnad Desai puts it "Demonetisation did not cause the economic damage people had predicted (even wished), and yielded political benefits. India is being digitised. GST has been passed after 15 years of dithering."

The liberals are too presumptuous to think the average man doesn’t speak up because he is way less intellectually endowed. In fact, he doesn’t because he is unassuming yet shrewd enough to pick up on weak signals, sees too much too early and knows way more than the liberals do.

Insights from street children

A brief pause (or an interminable wait during peak hours) at a traffic light is a sure invitation to beggars and vendors in Indian cities. But this editorial from the Economist seem to have spun an insightful theory – how to contain the huge forex inflows into India – based on it. Excerpts -

“INDIA, it is fair to say, is not yet reconciled to the new-found strength of its currency. One poor wretch, pressed against the car window at a Delhi traffic light, tries to change a dollar bill she presumably cadged off a tourist. She wants 50 rupees for it. Alas, the dollar now fetches less than 40 rupees.

This vigour is due to a strong inflow of foreign capital, some of it enticed by India's promise, the rest disillusioned by the rich world's financial troubles. The net inflow amounted to almost $45 billion in the year to March, compared with $23.4 billion a year earlier.

The migration of capital from the rich world to the poorer one is a sign of a bleaker season to come in the world's biggest markets. This would, then, seem an inauspicious moment for India to bet its future on export-led growth. If it cannot resist the inflow of foreign capital, it should try instead to make room for it—by observing fiscal restraint—and to make the most of it—by investing it wisely. India may then have an economy worthy of a more expensive rupee; and its children may have better things to do than hang around at traffic lights trying to change a buck.”

Well said, The Economist…

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Try giving us better roads, Mr.Karat

Courtesy the Left sponsored nuclear impasse, as a value demanding citizen of India, I suggest a constitutional amendment to help our future governments from being held to ransom by quirky coalition partners.

I don’t debate on the nuclear deal itself. The issue here is whether we want a mid-term poll and if so, who can demand it; the electorate or the elected representatives? Having elected them once every 5 years at a huge cost, shouldn’t we, the tax payers that fund this jamboree, expect them to run the full term? I worry for the billions that would get spent on an all too avoidable mid-term poll by the Government for deployment of security personnel and polling staff, setting up polling stations (some 800,000 throughout the country for a general election), purchase of electronic voting machines, and issuance of photo identification cards.

Taste this. The 1999 election cost the exchequer Rs.8.80 billion ($212 m). It grew at a CAGR of 21.37% since 1967, when its cost was Rs.17.9m. On that basis, the 2008 mid-term poll if it occasions, would cost us Rs.50 billion ($1.2 b). Remember the money is all what you and I have paid as taxes and we still are making do with the pathetic (conditions of power, water, roads and other soft infrastructure like healthcare and education) infrastructure that we have. Wouldn’t these billions be better spent on laying better roads than elections?

This is what I have in mind. When any elected government faces a mid-term crisis because of the tail wagging the dog (minority coalition partners that act up and threaten to withdraw support), the legislative process should be automatically funneled to a permanent body that lasts for the remainder of the term. This will cut the Mamata Banerjees, Prakash Karats of the world down to size or at least wouldn't tempt them to precipitate a crisis, as there's nothing in it for them, no arms to twist. Since that delegation is authorized by the ruling coalition, petty prejudices would not short circuit policy making. Wouldn't you agree...?

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Leave the barn door open

Recently Deepak Parekh cautioned investors against the increasing trend of setting up India focused Special Purpose Acquisition Companies (SPACs) for raising funds on the AIM. After all round-tripped liquidity has always been scorned at and is not new to stock as well as realty markets in India. It's good to keep a watch always over the nature of money that's coming in. We don't want drug money laundered here.

But that's what it should be, a watch. Not blocking entry for legitimate portfolio investments where we need them badly. Wealthy portfolio investors round-trip investments because the door is bolted from inside. Why not leave the barn door open for funds to come back to, say, fix our infrastructure? Regulators like SEBI should focus on veracity and completeness of disclosures with an eye on the source and end use of funds. If the purpose is served well, let them take some tax benefits by all means, who cares. Let Funds come in initially with accredited investors who know what they are letting themselves in for. If that works well, broaden the investor base by allowing retail to join in.

Regulated or not, smart money will always chase opportunity. You can keep watch, but do just that. Don't go for their jugular....That said, already there are several active India focused SPACs - that don't have a web presence. I am linking their SEC filings that are available for reference - East India Company Acquisition Corp [regd], Global Services Partners Acquisition [GSPAC] [EDGAR], Millennium India Acquisition Company [EDGAR] and Phoenix India Acquisition Corp [EDGAR]

Markets thrive on liquidity – never choke them… We've just gotten rid of that habit. Don't hurry to get it back...

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Capital gain or business income ?

The clichéd question is back.

Now it’s almost become a habit for India’s CBDT to confuse tax payers by issuing conflicting opinions and then consolidating all that mess into one super mess in the form of a Circular – but its title will read `clarification’.

The latest circular implies that tax officials will have to look into the holding pattern of the securities bought and sold, the sale-purchase ratio, the time involved, the funding sources and the overall transaction volume etc. If you were even remotely connected with the business of trading in the stock market, you would ask “ so what’s new ?”

Amarjeet Singh, partner, KPMG India, echoed my sentiment: “This circular does not make a huge material difference as it is just an aggregation of previous principles. In the case of litigation, this clarification gives them (FIIs) an upper hand. Now, I have principles on the basis of which I can ask for the courts to give me a benefit (in litigation on tax reatment).”

Oh, yeah…everything is clear now. CBDT has done its job. May you all rest in peace. Time to get back into the woodwork.

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Plunge Protection Team for Indian markets ?

Contrast the underlying philosophy behind Government’s fiscal policy and RBI’s monetary measures, the clock is stuck at 10 past 10. Finance ministry wants the reforms to continue on the liberalization plank. Liberal SEZ, more FDI, lifting of investment caps, more resources freed towards industrial progress. All these boost forex inflow, enthuse the stock markets that have soared to dizzying levels. With SEBI also considering letting in big ticket investors like Hedge Funds have a direct exposure to Indian equities, barring short term blips, the long term India story is in tact and the buoyancy is likely to persist.

Not all are happy about it. The RBI and its Governor Dr.Y.V.Reddy are a worried lot for one. So far RBI has managed recessionary phases and forex crisis of different kinds over the decades. They are now facing a new kind of problem they’ve often not met with before – Forex reserves are building up at a faster clip than they can count, much less manage. With $ 203 billion as on April 20, 2007 as per latest available RBI statement, they’d better figure a way out to deal with it soon.

The normally intrepid Guv is close to pressing the panic button or is near as he can get, as he continues to let the Rupee appreciate against the US dollar, much to the chagrin of businesses with huge $ billings like IT, Healthcare and Telecom. Though he has also left all key rates unchanged and announced steps that would pave the way for lower interest rates on home loans in its annual credit policy - aimed at sustaining growth without fuelling inflation, it’s totally clueless where it comes to dealing with the mounting forex reserves.

Financial assets if badly managed can often spell disaster for any economy. Compare the 9.5% returns earned by GIC of Singapore as against India’s paltry 3.5%. Isn’t it time that we look at other economies that are handling the situation efficiently and adopt the best practices that worked well with them ?

I am not a fan of regulatory overkill. But if there’s a certainty of idea vaccum at the top, I’d better tweak my belief system than to let my tiny net worth erode. How about a working group on financial markets on the lines of Plunge Protection Team – may not be a panacea, but could well be a dry run to test internal efficacies in an emergency.

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What do you think ?

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Rule No.1 for Equity Analysts – CONFUSE !

I had always maintained that best time to invest in a stock is when no analyst is talking about it. The one thing I look for is to make sure that it generates adequate cash from its operations ( to support its financing & Investment activities without adding in too much of fresh debt ) and makes it regularly to the dividend list.

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My portfolio modeled after this theory is still in good shape, so I am actually walking my talk.

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I had noted that a stock should've rallied 100% over one week to draw the first analyst's attention to it. Soon all of them would be talking it up. That’s precisely when I exit it. This theory of mine is well tested and I recommend it to one and all.

Hence I am qualified to spurn those late bloomers.

Look at this. Till the week before last, when Asian markets were performing well, all these analysts were doing an encore “this is an extended bull market – stay long”. Now since last week, may be because of Yen carry trade unwinding or general fatigue associated with any long bull market, when investors booked some profit the market suckers have turned bearish. And how much at that ? Just stopping short of saying “Apocalypse NOW” ! Full report published in Economic Times today is here.

According to this report which quotes some analysts, things seem to be changing fast considering that the risk appetite for emerging equities has declined. “Even from these levels, there is more possibility of a downside than an upside,” says one of the top three FIIs with a large investment portfolio in India and other emerging markets.

It even goes to say “The depth of the Indian market has been questioned by many FIIs. Even though the Indian equity market has seen a correction in line with other emerging markets, the spiralling effect is scary. Part of the reason is because small investors, who are more like speculators, invest directly into the equity market”.

Were they not scary earlier ? Why do you suddenly feel cold after it had declined by 20% ? Where were you when new listings ( construction, infrastructure stories) with no track record were offering 50% plus returns ? Now tell me, how much does your wife trust your judgement ?

Yet taking a contrarian view, there are some who believe a further correction would be the right time to buy the ‘India story’. A Morgan Stanley analyst, based out of New York, states: “My view remains the same as reported in our research note. This is an extended bull market, and a correction is long overdue. So, we would buy after a 10-12% correction in the Indian equity market.”

What is an investor to make of it ? I use my own judgement which is to buy more of good stories with every decline. Tell me, would you buy these morons ?

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Algo customization for India

The Asia-Pacific region and India might be considered to be coming up on the algorithmic rails, with more than three quarters of orders currently routed via FIX in Asia. But the decentralised nature of markets in Asia will mean that it will be harder for brokers and vendors to develop differentiated technologies in each market. India, with its multiple connectivity challenged exchanges, will lag the trailblazers

While customised algorithms specifically for the Asian markets work as well as anywhere else around the world, it is difficult to simply import algorithms from other parts of the globe and expect them to work across Asia. They do need calibration to market conditions.

In terms of algorithmic providers in the region, Credit Suisse accounts for a 63 per cent market share according to TABB Group, followed by Goldman Sachs (13 per cent).

Richard Balarkas, managing director, head of Advanced Execution Services Sales at Credit Suisse, says that with each specific market in Asia the algorithms have to be carefully calibrated. He says: “Some of the Asian markets can be trickier than many other markets. There are a lot of idiosyncrasies out there in terms of tick rules, trading hours and the way they handle orders.

“That is another way in which algorithms can help. If you are selling from somewhere in Europe, then trying to trade [equities in] Asia can be extremely complicated and difficult to understand.”

While Algo trades are sweeping the stock markets, there are also some lurking dangers of its widespread use.