Thursday, September 13, 2012

Pranab & Mamata Out, Mulayam In: Reforms on - III

Ever since Mamata and Pranab were sidelined and Mulayam joined the government, the government’s messaging around reforms has been clear and consistent.

Whether it be the Vodafone tax issue, the taxation of foreign institutional investors (FII), the petrol price hike, the diesel price hike or noises around foreign direct investment (FDI) in retail, the government is slowly but surely pushing ahead the reforms agenda. And the timing could not be better. With elections just two years away, the government has enough elbow room to push ahead major initiatives and to start to see the fruits of its efforts.

In my stories a few months back (Pranab & Mamata Out, Mulayam In: Reforms on!, Pranab & Mamata Out, Mulayam In: Reforms on – II), I consistently pointed out that with the new political equations in place, India is all set for the next set of reforms.

Here are some key excerpts from my previous stories accompanied with the latest updates.

Excerpt: So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …

Update: As expected, Mulayam is being very flexible.

Excerpt: This was followed by an interview of the prime minister with Hindustan Times yesterday, where the messaging continued. “The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going,” said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.

Update: There is far more clarity around the controversial tax issues and attempts are being made to revive the mutual fund sector. However, not much movement has happened around the fiscal deficit and infrastructure. But I believe those will also start to pick up pace in the coming months.

Excerpt: This messaging continues with reports that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.

Update: Diesel price hiked as projected. Besides, decontrol is a sham, since the oil companies continue to make petrol price decisions only with the approval of the Finance Ministry in spite of petrol having been decontrolled.

Excerpt: So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (PM-Pranab-Sonia hiatus was key cause of policy paralysis), which captures some of the background dynamics that might have contributed to this situation. Here’s what it says:

“It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA’s resounding victory in 2009, the PM made another bid for the job and failed.”

What this history makes clear is that Dr. Singh was always keen on doing the finance minister’s job himself, or getting another economist whom he trusts to do the job for him.

The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was Manmohan Singh’s senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)

Update : A great insight from FirstPost. Chidambaram, after taking over a finance minister recently, lost no time in setting the reforms ball in motion, and in a direction different that that set by Pranab.

Conclusion

In the 1990s, Manmohan did magic with PVR’s support. Is he on his way to another round of magic, with Sonia’s support? I tend to believe so. Time magazine called Manmohan Singh an “underachiever” and he has also been badly bruised in the Indian media. I will continue to keep track of this story to see how it plays out over the next few years.

IIP, Exports and Bank Credit Numbers Bad? No, Not At All

Over the last two days the numbers for the Index of Industrial Production (IIP), exports and bank credit were reported and, on the face of it, they look disappointing. However, a deeper look shows the long-term growth trend is intact and, in fact, all the key indicators point to the possibility that the growth slowdown is also over and the economy is getting ready for the next growth phase.

To understand this better we need to look at the economic and market recovery during 2009 after the great bear market of 2008. During that time, equity markets started to make new intermediate highs in the April-June 2009 period in anticipation of the upcoming growth phase later in the year (which did materialize). These intermediate highs were accompanied with huge increases in foreign institutional investor (FII) inflows, even as IIP, bank credit and exports were tracing negative year-over-year (YoY) growth numbers.

Refer to my analysis of December 2011 (Macro-Technicals Point to a Possible Bottom) in which I talked about a possible bottom and the indicators for the same. My analysis shows that an economic recovery is preceded by falling inflation and a rise in commodity prices after making new lows as well as a rise in U.S. 10-year yields after making new lows. And that equity markets would continue to make new intermediate highs even as IIP and exports trace negative YoY growth numbers and bank credit YoY growth continues to fall.

It is exactly the same recovery pattern that is being traced out now, with equity markets making new intermediate highs, a sharp increase in FII flows, falling wholesale inflation, a rise in commodity prices after new lows and a rise in U.S. 10-year yields after making major lows.

In fact, the growth numbers for IIP, exports and bank credit being posted now are far better than during the economic and market recovery of 2009. For instance, exports are down 9.7% now compared to the minus 35% during the market recovery of 2009. As for bank credit growth, it is at 17% now compared to 15% during the 2009 recovery. In fact, bank credit growth went down to 10% later in 2009 even as equity markets continued to make new intermediate highs. As for IIP, it is running at around 1% now compared to minus 2% during 2009.

The only cause for a concern is a fall in corporate profitability in the June 2012 quarter after tracing a recovery pattern in prior quarters. Overall economic recovery is typically preceded by a slight improvement in corporate profitability numbers and hence the concern. The silver lining here is that most key sectors – including banking, software and consumer goods – showed a rising profitability trend with overall corporate performance numbers being pulled down by infrastructure-related industries, primarily energy and steel. Keep in mind though that infrastructure sectors typically start to recover only when recoveries in the banking and consumer sectors are well-established. The extraordinarily poor numbers in energy and steel were driven by environmental regulatory issues and the banning of iron ore mining in certain states. With the ban already lifted in Karnataka, I believe these issues are transitory and the worst case is that the beginning of the next growth phase might get pushed back by a quarter or two.

In conclusion, there is no cause for concern around the recently released numbers for IIP, exports and bank credit even though on the surface they might sound disappointing. Most of the economy- and market-related indicators are pointing toward the economic recovery picking up pace and the equity markets continuing to make new intermediate highs.

Friday, September 7, 2012

Interpreting GDP Numbers: long-term trend intact

The GDP numbers declared last week for the quarter that ended in June 2012 showed the economy growing by 5.5% year-over-year (YoY). I came across many economists and analysts who say that in the short term there are signs of recovery given the 5.3% YoY growth in the quarter that ended in March 2012. There are many more who say that India’s long-term growth story is under threat given the sub 7% growth rates in the past five quarters.

Well, here’s the right way to interpret these numbers.

First, the difference of 20 basis points between the 5.5% and 5.3% is of no consequence, especially given the large revisions and mistakes occurring in the government’s numbers. Furthermore, the difference is just around 12 basis points if we include the second decimal place! And if you take into account that the March quarter typically shows a bump up in GDP growth rates, then the June 2012 quarterly growth rate of 5.5% should actually be interpreted a little negatively.

Second, while looking at GDP numbers, an over-reliance on looking at YoY growth rates would very often lead to an incorrect interpretation. In order to correctly see the long-term growth trend and the impact of business cycles, one has to also look at the GDP chart in absolute numbers.

Shown below is a chart of just the YoY growth rates. If you just look at the YoY growth rate chart, it does seem a little depressing.

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Now take a look at the chart of absolute GDP.

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Does it show that the long-term story is over? Or does it show that the long-term story is well intact, albeit interspersed with minor business cycles? I rest my case.

Recently, even the RBI reduced India’s long-term trend growth rate from 8% to 7.5%. I normally have great respect for the quality of analysis at the RBI, however, this time I would tend to believe the RBI might have been a little premature to reduce that rate.

To put things in perspective take a look at the chart below. It shows a comparison between absolute GDP of the U.S. and India over the same period as the previous charts. Since the U.S. GDP is in USD and India’s GDP is in INR, I have indexed it to start at 100 for both.

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If India’s long-term story is supposed to have ended based on the GDP trend, then what about the U.S.? Is it going vanish from the economic landscape and become a powerless player?

Well, no. India’s growth story is not over and neither is the U.S. going to lose its pre-eminent position in the global politico-economic landscape anytime soon. Period.

 

Related Analysis

June ‘12 : India’s Growth Story Intact: Interpreting macro numbers and trends the right way
May ‘12 : GDP Downgrades: Be wary of research house estimates; India’s growth story intact
May ‘12 : Party Time Again: Time to buy panic for the Sensex ride to 80,000
Apr ‘12 : Bull run intact, Growth rate on a rise
Dec ‘11: Macro-Technicals point to a possible bottom

Darghi Says Nothing New

There has been a lot of anticipation about what European Central Bank president Mario Darghi would say today in the press conference. His statement is out and there is nothing new there. It is purely a clarification of the bond-buying plan declared on Aug. 2.

Here’s what he said in his statement on Aug. 2:

“The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective … Over the coming weeks, we will design the appropriate modalities for such policy measures.”

The complete statement along with the transcript of the press conference on the ECB website provide a fair indication about the modalities, too!

All that he has done today is provide clarification around the modalities and technicalities of the open-market operations already declared. There is absolutely nothing new there.

Here are some key points (reformatted) from the ECB press release titled Technical Features of Outright Monetary Transactions.

  • The Outright Monetary Transaction (OMT) to be undertaken under the overall frame of EFSF/ESM. (Obviously, and already indicated in the Aug. 2 press conference.)
  • The OMT would be preceded by strict conditionalities and a monitoring mechanism, with the IMF being involved. (Nothing new; already happening for Greece and mentioned in the Aug. 2 press conference, too.)
  • Will buy bonds between one-year and three-year maturity. (Nothing new; already indicated in his Aug. 2 press conference.)
  • Purchases will be fully sterilized, meaning the overall impact on the money supply will be neutral. (That’s obvious. The bond-buying program is not to inject liquidity, but to stabilize the bond markets.)
  • The OMT bonds would rank the same (pari passu) with other private creditors. (Obviously, because if they have to take other creditors’ approval for a higher priority, the bond buying will remain on paper as other creditors would be unlikely to agree.)

All the hype around today’s press conference was overdone. In fact, there was really no need for a press conference if the only agenda was to release a few points around the modalities of the OMT transactions.

 

Related Posts

May ‘12 : OECD Report: Part truth, part scaremongering
May ‘12 : Greece paranoia – a blessing in disguise for India
May ‘12 : Global recovery robust, fears unfounded

Thursday, July 5, 2012

Pranab & Mamata Out, Mulayam In: Reforms on - II

All the messaging from the Prime Minister’s Office continues to point towards only one thing - reforms are on!

In my story last week (Pranab & Mamata Out, Mulayam In: Reforms on!), I pointed out how, with Mamata sidelined, Mulayam in its fold and Pranab as president, Congress has not had it so good in many years. And that meant the reforms process was now on.

In fact, I had pointed this out as far back as May 2012 (Reform Initiative: Mulayam to decide, not Mamata nor Manmohan). This was after Mulayam “pledged” support to the UPA government.

“So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …”

The government’s decision to postpone implementation of GAAR-related tax provisions by one year, and a promise to clarify the provisions and remove uncertainties in the minds of foreign investors, was a major sentiment booster, with equity markets going up nearly 5% over the past week.

This was followed by an interview of the prime minister with Hindustan Times yesterday, where the messaging continued. “The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going,” said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.

This messaging continues with reports that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.

So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (PM-Pranab-Sonia hiatus was key cause of policy paralysis), which captures some of the background dynamics that might have contributed to this situation. Here’s what it says:

“It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA’s resounding victory in 2009, the PM made another bid for the job and failed.”

“What this history makes clear is that Dr. Singh was always keen on doing the finance minister’s job himself, or getting another economist whom he trusts to do the job for him.”

“The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was Manmohan Singh’s senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)”

All in all, after a very long gap, there seems to be some real hope that the reforms process is getting back on track.

Rainfall Shortage at 30%: Are we heading for another drought?

A report from the India Meteorological Department (IMD) indicates there was a whopping 49% rainfall shortage for the week ended July 4 and a shortage of 30% for the season to date.

This reminds of 2009, when the IMD kept hoping the rainfall shortage in the initial part of the monsoon season would be made up in later parts. But that never happened, and finally the season ended with a 23% rainfall shortage, supposedly the worst drought since 1972. If things don’t improve soon, then 2012 could become the worst drought year in nearly 40 years.

I came across a nice story done by Akshat Kaushal last year in Business Standard titled Has India’s Met Dept failed us? Here’s what he says about the IMD’s forecast accuracy:

“The failure of the IMD to predict the monsoons correctly in 2009 was not a one-off incident. Consider this: Since 1988, in the last 23 years, the IMD has been able to successfully predict the monsoon only nine times – a success rate of just 40 per cent. Significantly, the IMD has never predicted a drought. In fact, in the last decade, the country experienced droughts on three separate occasions, and the IMD’s predictions in every one of these years pointed towards abundant or normal rain.”

However, even if there is full-fledged drought in the country this year, my analysis of last week (Rainfall Shortage: Even if there’s a drought, the impact is likely to be minimal) shows that the impact on GDP growth would be minimal.

Well, let’s see how things pan out for the monsoons over the next few weeks.

Corn Price Rise: Impact on India limited

Global corn prices are showing a sharp rise just as they did in 2008, this time on expectation of a poor yield in the U.S. Take a look at this 20-year chart of U.S. spot prices (from Vix & More). U.S spot prices for corn are up nearly 30% over the past month.

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In India, the prices are up about 15% over the past month (see the NCDEX chart below – Maize Feed, Davangere).

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As far as India is concerned, the largest impact would be on the price of poultry as more than half of the corn produced in the country is consumed by the poultry sector. With the poultry market growing by about 20% annually, as long as corn prices remain high, that would continue to put additional pressure on poultry prices.

What happens if domestic prices continue to rise? Given that India exports a large part of its corn, my sense is that government will intervene to arrest the price rise, most likely by banning exports. That is exactly the kind of thing it did during 2008, when corn prices were showing a sharp rise.

The only strange part in this whole phenomenon is that global prices are rising even as the International Grains Council is expecting a higher global production this year. Here is what it says in its report of July 2, 2012:

“Overly hot and dry Midwest weather conditions have led to a downgrade in the U.S. maize production forecast, with projected yields now likely to be below the ten-year trend.  Despite the downgrade, the crop is still forecast at a record 350m. tons, although the risks are to the downside.  However, projections for some other countries, including China and India, are increased this month.  Consequently, world maize production is still expected to rise by 5.7% to 917m. tons in 2012/13.”

It almost seems as if corn prices have been driven up more by speculation than by lower yields in the U.S. And just as in 2008-09, when the price dropped sharply, there’s every likelihood of the same happening this time.

Either way, although higher domestic corn prices would impact poultry prices and consequently food inflation, the overall impact on the economy would be fairly limited.

Capital Economics’ India Report : Another example of poor research

There is a research report from a macroeconomics consultancy firm called Capital Economics, which seems to be getting some degree of visibility in Indian media. As per news reports, the firm attributes the recent slowdown in India to governance issues, estimates sub 5% GDP growth for Q1 and believes no reforms would happen till the 2014 general elections.

Based on all my analyses of the past one year, I believe that Capital Economics might have got some of its economics wrong. I don’t mean to pick on Capital Economics in particular, but this is another example of shallow analysis by a set of experienced folks.

Growth slowdown caused by governance issues?

Lets take a look at its first point about attributing the recent slowdown to governance issues. That seems a little far fetched, when seen in the context of strong growth that has happened during the past five to six years, a period marked by an acute lack of governance. The slowdown of past few quarters is purely short term business cycles playing out, driven primarily by a slowdown across the globe.

Take a look at India’s GDP chart below, which shows the absolute value of GDP at fixed prices over the past seven years. I guess the chart very clearly shows that the long term trend has been pretty much intact, though interspersed with short term cyclical slowdowns. Key point to note is that YoY growth rate charts are not always the right way to interpret these numbers.

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Sub 5% GDP growth in Q1 2012-13?

As for sub 5% GDP growth in Q1, I really don’t have a call on such a short term and error prone number. But even if the YoY growth was less than 5% GDP and in say 4.5% range, the long term trend would still remain intact. All that it would mean is that there was a short term cyclical slowdown.

No reforms till 2014?

Regarding Capital Economics’ third point about reform process remaining stalled till the 2014 elections, they might have got this one horribly wrong. In one of my previous analysis I had argued how, with Mamata sidelined, Mulayam in its fold and Pranab as President, Congress has not had it so good in many years. Mulayam provides the numbers in parliament to pass through some of reform measures and Pranab was seen as somewhat as an anti reformist. My sense is that the reforms process will pick up steam as the elections come closer, in order for the government to showcase its developmental story.

Capital Economics past record

Lets now take a look at Capital Economics past forecasts. Copying below an excerpt from a Bloomberg story dated Dec 7, 2008

"Capital Economics` Khan expects India`s $1.2 trillion economy to grow 5 percent in 2009, less than the 6.3 percent forecast by the International Monetary Fund”

In 2008-09, Actual GDP growth was 6.8% and the forecast was being made when half the year was already over and they still got it horribly wrong !

Low quality research from top ranking firms

In my previous analyses, I have been very critical of the quality of research at some of the top firms including Goldman Sachs, Morgan Stanley, Fitch and S&P`s of the world. I guess Capital Economics falls in the same category, though it is in no way considered a ‘top’ research firm, so to say.

But good research also exits

Amongst the top research firms, I have found JP Morgan India (Kalpana Morparia?), to have a very good sense of India’s long term growth story. They had the courage to publicly talk about their confidence in India long term growth trend right during Oct 2008 also, at the time Nifty was around 2500 levels. They continue to stick to their stand on the long term growth trend for India.

There is a nice analysis in NY Times from Vivek Dehejia. He is amongst a handful of economists who has been able to differentiate between long term trend and short term business cycles.

All my detailed analyses of past nine months have continued to suggest that he India long term growth story has been very well intact for the past decade.

Related Analysis

Friday, June 29, 2012

E.U. Plan : More hot air ?

Notwithstanding the reactions from the markets to the Euro deal, the reactions from some Euro trackers and economists are pretty pessimistic.

Looking at some of these reactions, it seems that the current Euro deal is another example of kicking the can down the road.

Here’s what Nouriel Roubni says in his Tweets:

“The EU agreement is much less than needed. Markets delusional in cheering this half baked agreement that has little details in it.”

“ESM is senior to private claims. So how can loans to Spanish gov 2 recap banks be pari passu with bonds? By using the to-be-phased-out EFSF?”

“Only 2 pieces of a banking union in EU deal: joint supervision; direct ESM bank recap. Missing 2 key parts: EZ-wide depst ins; insolv regime”

And here is Tyler Durden  on ZeroHedge:

“The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leaders still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures”

After some 20 euro summits and some three years of the Euro crisis, this one too seems to be just another promise of a plan, rather than concrete action.

Rainfall shortage : Even if there’s a drought, the impact is likely to be minimal

With 25% season shortfall in rainfall to date, there are drought-like conditions prevailing in many parts of the country. However, even if there is full-fledged drought in the country this year, my analysis shows that the impact on GDP growth would be minimal.

Season rainfall to date as per the Indian Metrological Department (IMD) is around 23% less than the long period average as of 27th June 2012. Furthermore, the long range forecast update of 22nd June 2012 from IMD does not sound too encouraging. For the month of July there is just a 41% probability of normal monsoons and a huge 36% probability for below normal monsoons. Very similar probabilities for the month of August 2012 are also predicted. That does sound very depressing.

Keep in mind, however, that the IMD is still sticking to a normal monsoon forecast for now.  “Rainfall over the country as a  whole for the 2012 southwest monsoon season (June to September) is most likely to be normal (96-104% of LPA)” says IMD in its press release.

So, what next?

Even assuming a full-fledged drought like the one in 2009,the impact on GDP growth would be minimal, even though the agricultural population could face some hardships. The reason for this is that agriculture now comprises only around 15% of GDP. Even though agriculture employs nearly half of the country’s population, there is enough money in rural areas due to the good harvests of the past two years and the government’s job guarantee schemes to help mitigate the impact on the rural population.

The drought of 2009 was supposed to be the worst in 37 years, but that same year was the year of recovery in the Indian economy, with a GDP growth of around 8.3% , up from 6.8% the previous year !

I came across a very nice  analysis in mydigitalfc.com of Aug 2009, which said “Corporate India remains quietly confident of weathering the drought this year…impact is expected to be limited and would not be felt immediately”.

There was another great analysis from Niranjan Rajadhyaksha in Livemint.com in August 2009, the summary of which is: “The record suggests that India’s economy began decoupling from its farm sector at least two decades ago”

Of course if the Industrial recovery that is currently underway loses steam, the story could be very different this time. But as of now there are no signs that the recovery is being hindered. And of course there is no doubt that, just like in 2009, there would be a  rise in sugar prices. But food grain prices might not rise too much due to adequate stocks of food grains within the country.

In summary, since India posted a GDP recovery in 2009, the year the worst drought of 37 years stuck, I doubt there would be significant negative impact this year even if there were drought conditions.

Pranab & Mamata out, Mulayan in – Reforms On !

Within just a few days of Finance Minister (FM) Pranab Mukherjee having resigned, the Prime Minister, (PM) Manmohan Singh, has started to reverse some of the regressive tax policies being pushed by the erstwhile FM.

Venky Vembu in his fantastic story on Firstpost.com says” Let’s be very clear about it: there is nothing wrong with plugging tax loopholes……But where Pranab-da erred was in going overboard with his exertions to knock the stuffing out of Vodafone….”

The messaging from the Prime Minister’s Office is clear : Reforms are On !

When the PM of a country reverses the decisions of its FM and provides pro-reforms clarifications within one day of the FM resigning, the messaging there cannot be ignored. The PM did not wait for a month, he did not even wait for a week - he started acting even "before the body got cold".

No doubt the fact of PM Manmohan Singh’s responsibility for the slowdown in the reforms process, and the large scale corruption going on right under his nose, cannot be denied. But possibly, he might still have a chance to redeem himself and set right the wrong that has happened.

As for the numbers game in Parliament, Manmohan Singh’s government is well placed with Mulayam in its fold and Mamata being sidelined.

There was a great story on First Post: With Mulayam on its side, UPA won’t need Mamata anymore , which had correctly identified the changing political equations in the country. To quote from the story:

“ Indicatively, the Samajwadi Party has 21 MPs in the Lok Sabha and eight in the Rajya Sabha; the Trinamool Congress, on the other hand, has 20 MPs in the Lok Sabha and nine in the Rajya Sabha. But it’s not just about the numbers. As The Telegraph reported, citing Congress sources, having Mulayam Singh by its side gives the Congress much more elbow room on policy matters: for all the “samajwadi” economic philosophy that his party embraces, Mulayam Singh is perceived to be “more flexible” than Mamata when it comes to economic reforms.”

So what does that mean now for some of the major reforms and other governance measures that have been on the backburner?

Many of those measures are likely to go through. However, Karuna can still play the spoilsport, but only to a limited extent. CBI (Congress) has cases pending against his daughter and Raja, one of his key lieutenants.

Mulayam is expected to be flexible. But why is that so? For the same reason that Lalu Prasad is flexible … all the CBI cases pending against him, his relatives and his friends, cases ranging from murder to bribery. Congress has done this kind of deal with Mulayam before, withdrawing a CBI case in return for support. That’s the kind of deal they must have worked out this time.

All in all, with Mamata sidelined, Mulayam in its fold and Pranab as President, Congress has not had it so good in many years.

Wednesday, June 27, 2012

JP Morgan India: Courageous leader

JP Morgan India upgraded Indian equities to “overweight” from “neutral” last week. This was despite acknowledging the risk factors facing the economy, and demonstrated that they were encouraged by what they called a number of more positive factors including historic valuations.

I don’t usually give much credence to reports from agencies like S&P, Moody’s, Goldman Sachs, Morgan Stanley and most others.

However, JP Morgan India, under Kalpana Morparia, seems to have got the long-term trend right, even as far back as October 2008 when the markets were making a capitulation bottom. In September 2011, they had the courage to call the IIP numbers misleading and take a stand stating that economic growth is not collapsing.

Among the major global financial firms, JP Morgan is not just the first out of the blocks in acknowledging the strengths of the India story, but it has also made a bullish call when pretty much every other major firm has made a bearish call. That takes a lot of courage in the murky world of large and influential financial firms.

Moody’s had followed immediately with a “stable” outlook for India sovereign rating. That’s again courageous given that S&P and Fitch have scaled down their outlook to “negative” with a threat of downgrading the sovereign rating to below investment grade / junk status.

In fact, it now seems that every other brokerage firm is starting to come out of its slumber in trying to rate India “overweight”, “stable” etc.

The question to ask is that when the signs of recovery and an upcoming bull market were apparent as long ago as back in Dec 2011 (Dec '11: Macro-Technicals point to a possible bottom) why are these agencies (except maybe JP Morgan) only waking up now?

Related Analyses:

Tuesday, June 26, 2012

Rupee Fall: No capital flight, only speculation (Corrected)

The current fall in the Rupee is purely speculative as there are no signs of flight of capital.

This is very similar to the situation in April 2009 – when the Rupee was making new lows even as inflation was coming down, corporate profitability was improving and stock markets had just broken out of bear market lows.

Consider this:

  • The foreign exchange (Forex) reserves as of June 15, 2012 were around $289 Bn, just around $ 20 Bn lower than a year ago, and about $ 2 Bn higher than a week prior. The Forex situation has been fairly stable for the past year, with only minor and ‘routine’ fluctuations.
  • FII remains long-term bullish based on equity inflows, with massive net inflows of around Rs 36,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 1,600 Cr and Rs 3,100Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of around Rs 500 Cr.” (to June 26th).

So what next?

The fall might continue a bit longer; however I don’t expect it to either to fall significantly more, or to have any significant negative impact on corporate profitability. The reasons for this are:

  • At some point, the RBI and the government will crack down hard on speculators and that would be the end of the Rupee fall. The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher. Those who seem to underestimate the absolute power that a state commands, do so at their own peril. Ask Vodafone.
  • Oil and all major commodities are down more than 25% from about a year ago and are on a sharp downtrend. That will cushion the impact of the rising rupee.
  • With corporate India posting a robust 20% growth in bottom-line for the March 2012 quarter, a robust economic recovery is well underway. With improving economic fundamentals, it would be just a matter of time before the speculative positions in the Rupee start to unwind.

The situation today bears an uncanny resemblance to the one two years ago, around April 2009. Even during that time, the rupee was making new lows, even as a recovery was well underway and stock markets had broken off the lows.

With the short term economic slowdown over, and a robust recovery underway, it’s very likely that the Rupee fall would get arrested and stock markets make new highs.