The Great Indian Economic SlowDown

Arvind Subramanium has again been in the news with a very informative and well-explained paper of his name: “India’s Great Slowdown: What Happened? What’s the Way Out?”

We all have been talking about the slowdown at the behest of the parameters available in the public domain. But his recent paper co-authored with Josh Felman has been very elaborate on its way to mention the key factors lucidly and even pointing out the remedies possible.

Few factors are:

1.     The collapse in Commercial Loans: Rs 22 Lakh cr was Housing loan sanctioned in 2018-19, while it has reduced to Rs 1 lakh cr in 2019-20 (6 months data)

2. Credit Crunch: Credit is the grease that runs The economy. ILFS saga in tandem with the major irregularities found in the functioning of other Infra companies have tapered off the flow of credit. In fact, the companies are paying more in bank interest than their earnings. The Nominal GDP growth rate taken as a proxy of Likely earnings would result in these data-

Interest Rate on Loans: 10.5 %

Likely Earnings: 6.1 %

This is no sustainable way forward with these rates and things will go worse before the situation gets better.

3.      Budget Deficit doesn't show the true picture: Restricting the deficit to 3.3 % is a healthy figure. It also shows that the economy can relax the percentage point upwards to boost the economy if the government wants so. But there is a problem. For better explanation, you may refer to this one: https://www.financialexpress.com/economy/under-reported-deficit-rise-in-non-capex-extra-budgetary-borrowings-raise-the-fear-of-a-debt-trap/1475171/

But the summary is that the real deficit may be up to 6-7 percent depicting that there is no space for increasing the budget deficit in the name of boosting the economy.

4.     Housing Sales: Considering the Top 8 cities (2019), the housing sales tuned up to 2 Lakh cr. But the unsold houses amounts to 8 lakh cr. That's terrible. The demand has been meager in the face of supply. The more worrisome fact is that a percentage of the loans sanctioned by the NBFCs and Banks to these Infra players are not going into building new estates but just to maintain the already existing inventory that they have.

5.     Electricity Generation (Growth percentage): It's even worse than the 1990 crisis falling to the meager 1 percentage point.

6.     Double Twin Balance Sheet challenge: With growth collapsing, India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies. In this situation, the standard remedies are no longer available. Monetary policy cannot revive the economy because the transmission mechanism is broken. Fiscal policy cannot be used because the financial system would have difficulty absorbing the large bond issues that stimulus would entail. The traditional structural reform agenda—land and labor market measures—will not address the current problems.

And these all come at that time when we have been quite lucky with the prices of Crude falling from $ 106 in 2014 to $ 61.11 per barrel as of 24th December 2019. Meanwhile, the RBI cut interest rates by a cumulative 135 basis points during 2019, more than any other central bank in the world over the period and one of the largest rate reductions in India’s history, in the hopes of reviving lending. But lending continues to decelerate, and investment remains mired in its slump

Nevertheless, the positive sides are that macroeconomics factors have been quite stable for the nation. We have healthy foreign exchange reserves. The data reached an all-time high of 413.0 USD bn in Oct 2019 and a record low of 1.1 USD bn in Jun 1991 (just for a perspective). This would mean that we have enough cushion to shrug off the exchange rate fluctuation that the economy may face. The inflation has been well contained in the limits.

The remedies suggested by the eminent scholar are these:

1. Fix India Data problem. There has been a concern about the validity of the GDP, NPAs figures.
2. The Bankruptcy code: Consider the big picture. Only Rs 2 lakh crore has been resolved through the IBC so far (with recoveries of just Rs 83,000 crore), a small fraction of the initial stock of NPAs. At this rate, it will take a very, very long time to solve the bad debt problem
3. Increase supervision of NBFCs
4. Allow new GMO Crops (It's controversial. Safety concerns led 38 countries, including 19 in Europe, to officially prohibit their cultivation)
5. Do not raise GST rates and Do not cut personal tax.

The fact remains that our Finance Minister has got a tough job. It may sound funny but when Mr. P Chidambaram on being asked by Rajdeep Sardesai, what would you do if you were Nirmala Sitharaman, he said "I would resign. If my assessment was so wrong, I would resign". All eyes are on Budget 2020-21 which may be presented by the minister on February 1.

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References:

1. https://www.hks.harvard.edu/sites/default/files/centers/cid/files/publications/faculty-working-papers/2019-12-cid-wp-369-indian-growth-diagnosis-remedies-final.pdf
2. https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart
3. https://www.ceicdata.com/en/indicator/india/foreign-exchange-reserves
4. https://en.wikipedia.org/wiki/Genetically_modified_crops
5. https://www.financialexpress.com/economy/under-reported-deficit-rise-in-non-capex-extra-budgetary-borrowings-raise-the-fear-of-a-debt-trap/1475171/

Truth is not always true

There is an old Indian story about Truth. It seems that in ancient times a brash young warrior sought the hand of a beautiful princess. The King, her father, thought the warrior was a bit too cocksure and callow; he told him he could only marry the princess once he had found the Truth. So, the young warrior set out on a quest for Truth. He went to temples and to monasteries, to mountaintops where sages meditated and to forests where ascetics scourged themselves, nut nowhere could he find Truth. Despairing one day and seeking refuge from a thunderstorm, he found himself in a dank, musty cave. There, in the darkness, was an old hag, with warts on her face and matted hair, her skin hanging in folds from her bony limbs, her teeth broken, her breath malodorous. She greeted him; she seemed to know what he was looking for. They talked all night, and with each word she spoke, the warrior realized he had come to the end of the quest. She was truth. In the morning, when the storm broke, the warrior prepared to return to claim his bride. ‘Now that I have found the Truth’ he said. ‘what shall I tell them at the palace about you?’

The wizened old crone smiled. ‘Tell them, ‘she said, ‘tell them that I am young and beautiful.’

So, Truth is not always true; but that doesn’t mean Truth does not exist.

This article is an excerpt from the book “Bookless in Baghdad” by Shashi Tharoor. You can check out this book here- https://goo.gl/ZKovv9
Know more about me @ www.shashiprakash.in 

Are You An Intelligent Investor?

Now let's answer a vitally important question. What exactly does Benjamin Graham mean by an "intelligent" investor? Graham defines the term- and makes it very clear that this kind of intelligence has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, "is a trait more of the character than of the brain."

There is a proof that high IQ and higher education are not enough to make an investor intelligent. In 1988 Long-term Capital Management, L.P., a hedge fund run by a battalion of mathematicians, computer scientists, and two Nobel Prize-winning economists, lost more than $2 billion in a matter of weeks on a huge bet that the bond market would return to "normal". But the bond market kept right on becoming more and more abnormal- and LTCM had borrowed so much money that it collapse nearly capsized the global financial system.

And back in the spring of 1720, Sir Isaac Newton owned shares in the South sea company, the hottest stock in England. Sensing the market was getting out of hand, the great physicist muttered that he "could calculate the motions of the heavenly bodies, but not the madness of the people". Newton dumped his South Sea shares, pocketing a 100 % profit totalling £7000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price- and lost £20,000 (or more than $3 million in today's money). For the rest of his life, he forbade anyone to speak the words "South Sea" in his presence.



This article is an excerpt from the book "The Intelligent Investor- Benjamin Graham ( Revised edition updated by Jason Zweig). This book is by far the best book on investing ever written according to Warren Buffett. I have been going through this book for the last couple of weeks and found this particular excerpt worth sharing. You can check out this book here- https://goo.gl/k5vbr7
Know more about me @ www.shashiprakash.in 

Read It and Feel proud to be an Indian.

“If I were to pick one field to focus on, it would be that of mathematics, India invented modern numerals ( known to the world as ‘Arabic’ numerals because the west got them from the Arabs, who learned them from us!). It was an Indian who first conceived of the zero, shunya; the concept of nothingness, Shunyata, integral to Hindu of culture and Buddhist thinking, simply did not exist in the west. (in the history of culture,’ wrote Tobias Dantzig in 1930, ‘the invention of zero will always stand out as one of the greatest single achievements of the human race.’) The concept of infinite sets of rational numbers was understood by Jain thinkers in the sixth century BCE. Our forefathers can take credit for geometry, trigonometry and calculus; the ‘Bakshshali manuscript’, seventy leaves of bark dating back to the early centuries of the Christian era, reveals fractions, simultaneous equations, quadratic equations, geometric progressions and even calculation of profit and loss with interest.

Indian mathematicians invented negative number: the British mathematician Lancelot Hogben, grudgingly acknowledging this, suggested ungraciously that ‘perhaps because all the Hindus were in debt more often than not, it occurred to them that it would also be useful to have a number which represents the amount of money one owes.’ (That theory would no doubt also explain why Indians were the first to understand how to add, multiply and subtract from zero- because zero was all, in western eyes we ever had.)

The Sulba Sutras, composed between 800 and  500 BCE, demonstrated that India had Pythagoras theorem before the great Greek was born, and a way of getting the square root of two correct to five decimal places. (Vedic Indians solved square roots in order to build sacrificial sophisticated altars of the proper size.) The Kerala mathematicians Nilakantha wrote sophisticated explanations of the irrationality of ‘pi’ before the west had heard of the concept. The Vedanga Jyotisha, written around 500 BCE, declares: ‘Like the crest of the peacock, like the gem on the head of the snake, so is mathematics at the head of all knowledge.’ Our mathematicians were a poet too! But one could go back even earlier, to the Harappan civilisation, for evidence of a highly sophisticated system of weights and measures in use around 3000 BCE.

Archaeologists also found a ‘ruler’ made with lines drawn precisely 6.7 mm apart with an astonishing level of accuracy. The ‘Indus inch’ was a measure in consistent use throughout the area. The Harappans also invented kiln-fired brick, less permeable to rain and floodwater than the mud bricks used by other civilisations of the time. The bricks contained no straw or other binding material and so turned out to be usable 5000 years later when a British contractor dug them up to construct a railway line between Multan and Lahore. And while they were made in fifteen different sizes, the Harappan bricks were amazingly consistent: their length width and thickness were invariably in the ratio of 4:2:1.”

 This excerpt is from the Novel- “The Elephant, the Tiger and the Cellphone” by Dr Shashi Tharoor.  I strongly advocate and advise you all to go through this amazing piece of work.