High inflation

An interesting blog by Ajay Shah inflation. http://ajayshahblog.blogspot.com/2011/10/reining-in-inflationary-dragon.html

He says that the supply side constraints have been present earlier also and hence we should not critic supply side constraints alone. However, the scenario from 2004 is different from now as we have more people consuming better quality products. Also, there should be political will to keep these constraints checked. I doubt if some of our ministers have such a commitment.

As the central bankers across the globe target tradeables for lower prices, we should also experience lower prices. Only catch is that the global central bankers should be able to contain inflation for us to experience the same.
Macro data points that are given in this link could be useful

http://www.mayin.org/cycle.in/tracking.html

RBI rate hike: Too dangerous to pause now - Jahangir Aziz

The RBI rate hike last week set the cat among the pigeons. Activity in India is undeniably slowing. Add to that the global slowdown. And it is easy to see why business is imploring for a pause in the tightening. I don't think that there is much more tightening left to come, but a pause needs to be timed well. Now is not that time. It may have been if the RBI had moved more aggressively last week.
True the economy is slowing, but is it slowing sufficiently for inflation to decline on its own? Take away the volatile capital goods component and non-capital IP grew 6.7% in July, the fastest in 4 months. Indirect tax for the first five months of this fiscal year is up 24% despite the duty cuts on petroleum products. Exports grew 44% in August and imports 41%.

On the other hand, August headline inflation accelerated to 9.8 %, domestic input prices rose sharply and core inflation jumped to 7.7%, twice the historical average.

Critics claim that these are yesterday's news. One needs to look forward as monetary policy affects the future. True, but core inflation can decline if capacity eases. Our best guess is that trend GDP growth has fallen to 7-7.5%. After last quarter's 7.7% GDP growth, the output gap (actual GDP less trend GDP) has risen to 1%. For core inflation to fall, growth needs to slow below trend turning the output gap to negative. This happened in 2009 when growth fell below 6%. But nothing today suggests that growth will fall to such levels.

Capacity can also ease if investment raises trend growth. A key factor holding back investment is macroeconomic uncertainty, both global and domestic. There is little the RBI can do about the first, but it can reduce domestic uncertainty by inducing inflation to peak and growth to trough early. The quicker the domestic uncertainty is resolved, the sooner investment will resume. This requires the RBI to act more aggressively to bring the cycle to an early end not less aggressively to prolong the cycle.
We know since 1972 (Bob Lucas) that the growth-inflation trade-off exists only when expectations are stable not when they are rising as in India now or falling as in Japan in the 1990s. Empirically, we know since the late 1980s (Stan Fisher) that the trade-off exists only when inflation is low not when the core inflation is twice its historical average. Instead curbing inflation by sacrificing near-term growth is essential to anchor inflationary expectations and safeguard medium-term growth.

Separately it is also argued that inflation is structurally high as non-farm growth has outstripped agricultural growth. Therefore, policy needs to tolerate a higher "normal" inflation. Nothing can be more dangerous. Many economies have tried controlling inflation at a higher "normal" only to find that it quickly goes out of hand (Latin America in the 1980s and 1990s).

We are not there yet but expectations are coming unhinged. The year-ahead inflation expectations of household have been rising since 2009, but till September last year they were below actual inflation. Since then inflation expectations have not only risen relentlessly but are markedly above realized inflation. Households till late last year believed that the authorities' could bring down inflation, today they are losing faith. Tolerating a higher normal inflation will further erode the authorities' credibility.

Source: http://economictimes.indiatimes.com/news/economy/finance/rbi-rate-hike-too-dangerous-to-pause-now/articleshow/10047086.cms

How to Tame Hunger

Arun Firodia, Chairman of Kinetic Group

Food inflation in August accelerated to 9.78% year on year, the fastest it has been in 13 months. This is over and above the high inflation of last year. As it has been doing all along, an alarmed RBI has tried yet again to combat this by hiking interest rates by 25 basis points — its 12th hike in the last 18 months. But obviously, this is not going to reduce demand for food nor food inflation.

What is the cause of food inflation? Some say that increased urban demand is the culprit. But production of food products has been increasing in step with the rise in urban population. And export of food products is too insignificant to have any impact on prices. What, then, is the real reason for the runaway rise in food prices?

In 1951-52, 89% of what the consumer spent on food reached the farmer. Now, only 34% reaches him while 66% goes to middlemen. This amounts to a whopping Rs 20 lakh crore. And why is it so? Because as per the Agricultural Produce Market Committee Act (APMC Act), a farmer must take his produce to a `market yard` and sell it through middlemen. The chain of middlemen consists of eight to 10 links, each adding his profit margin of 30% or so. No wonder, then, that a farmer gets only Rs 5 per kg for onions while the consumer pays over Rs 30 per kg!

The APMC Act, passed in 1954, needs to be scrapped or substantially amended. The central government prepared a Model APMC Act in 2003. But agriculture being a state subject, many states have yet to adopt this Model Act — which provides for direct selling by farmers, contract farming and aims to remove interstate barriers for movement of food products — or implement it faithfully due to vested interests.

There are some honour-able exceptions. For instance, Andhra Pradesh has started `Raythu Bazar` (farmer`s market) where farmers can sell their produce directly to consumers at select locations in the city. ITC, meanwhile, has started an `e-chaupal` scheme to provide internet connectivity to farmers so that they can decide to sell their produce directly to supermarkets or through market yards. The scheme covers four million farmers in nine states.

However, neither these exceptions nor modifying the APMC Act will be enough. Presently, 30-35% of food products perish during sto-rage and transportation. If this proportion is reduced, supply would substantially increase and prices would come down. For this, we need to develop cold chains for storage and transportation all over the country on a massive scale.

Barc scientists have proved that gamma rays increase the storage life of food pro-ducts like onions. And scientists at CSIO in Chandigarh have developed a high voltage process to disinfect milk in seconds. This will replace the current method of pasteurisation and save a huge amount of energy. But, needless to say, farmers just cannot afford cold storage or gamma ray equipment. Nationalised banks should step in and create a network of food banks to make storage facilities available to farmers on a rental basis. Farmers could then safely store their produce in these food banks and sell only when the market rate was remunerative. They could also get loans for buying seeds, fertilisers and pesticides from the banks.

Contract farming is another idea whose time has come. The Model APMC Act provides for this. Some companies have already made forays, sourcing produce from farmers under contract and selling them under their own brand names. More such initiatives are required by corporate retailers for a variety of farm produce. This would improve farm productivity and total food production.

Unseasonal rains, famine or pests hit farmers every three to four years. In order to prevent such calamities from devastating them, insurance companies should come forward with different schemes to give insurance cover to farmers so that they can protect their incomes. In fact, given how essential this is to our food security, the government should make it compulsory for insurance companies to do so. It should also bear fully or partly the cost of insurance for small farmers so that they are not unduly burdened. That, again, would make farming a safe and remunerative vocation.

Presently, agricultural produce does not freely move across state boundaries. The time has come to remove such restrictions. In fact, why not go for free trade in food crops among all Saarc countries? If food prices start going up in some area, supplies could be rushed from other states or neighbouring countries. Also, there is an urgent need to exempt all food products from import duties and sales tax to bring food prices under control.

No country in the world has as much fertile irrigated land as we have. But our food productivity is quite low; China`s food productivity is double that of India`s. Contract farming or precision farming technology developed by our agricultural universities can help double our food productivity too.

In short, the government must take these urgent steps if both farmers and consumers are to benefit. Merely increasing interest rates will not do.

Source:
http://articles.timesofindia.indiatimes.com/2011-09-19/edit-page/30172315_1_food-inflation-food-products-farmers/2

Can Pranabda deliver 4.6% of GDP as fiscal deficit?

The intraday graph of Nifty looks like a hill. The expectations before the honorable finance minister started his speech before 11 AM were bleak. But once he uttered the magic number of 4.6% as fiscal deficit, the markets took off – mostly because of short covering. As he ended the speech and the market participants started using their right brain, they realized that 4.6% may not be achievable after all.

I turned my attention into the budget numbers to see if Pranabda could achieve what he has set out to achieve. There are more questions raised than answers.

1. To start with, the finance minister expects the tax collections to go up by 18%. Last year he budgeted an increase of 19% and over achieved it by 5%. Can this year be a repeat of last year? Looking at the last years numbers, one would believe that he could achieve the target. However, a look into Q3 FY11 GDP numbers could shake that belief. In Q3 FY11, the economy grew by 8.2%. If we break it up, Agriculture, Industry and Services grew by 8.9%, 6.4% and 8.8% respectively. These numbers certainly are not as appealing as they were in Q2 FY11. I wonder, if the growth of industry and Services is slowing down, how can the tax collections grow at 18%?

2. The above numbers also throw a spanner into the allocations made to MNREGA. There has not been an increase in the budget of MNREGA because the government believes that work force would be employed by private participants. It is only when the private participants are not able to employ will they approach the MNREGA program. With slowing economy, the enrollment in MNREGA may increase and the government may be compelled to increase allocation to the program.

3. As against a divestment target of Rs 40,000 crores, he could achieve only Rs 22,744 crores. This year he expects to do Rs.40,000. The question is: If he could not achieve the target when capital markets were hot, how could be achieve the target this year when markets look weak (atleast for now)?

4. The Finance Minister has collected Rs 150,000 crores as other non-tax revenue last year through the 3G and BWA auctions. This year he expects to collect Rs 62,000 crores. What can he sell now?

5. When crude oil has gone up from $80/bbl to $120/bbl, how can he expect to spend Rs 14,700 crores less on fuel subsidies? How can he spend Rs 5000 crores less on fertilizer subsidies?

6. The only way he could spend on subsidies is by direct transfer to end users as is done in Mexico and Brazil. However, for that to happen Aadhaar system has to be set up. Mr. Nandan Nilekani has been asked to submit a report on direct transfer of subsidy by Jun’2011 and put up the system in place by Mar’2012. If we cannot use the direct transfer facility to reduce leakage this year, how can we spend less on subsidies?

The more one thinks the more questions come up. I hope that our finance minister has a solid plan in place.

Concerns on Indian Markets

To get the call on Indian equity markets right, one should get the answers for the following:
1. Where are the interest rates headed?
With one year deposit rates touching 10% and banking borrowing more than 1 lakh crores from RBI, there is a clear sign of tightening. The loan rates have also gone up steeply. My home loan costs 1.25% more in less than two months.
With the windfall gains (due to 3G) missing in the next fiscal and government fixed on increasing spending on NREGA & implementing right to food & education, it would borrow more. This leads to crowding and further hardening of the interest rates.

2. Where is the Current Account Deficit headed?
Thanks to Egypt crisis and QE money chasing commodity prices, India would have to spend more on oil subsidies. This increases the trade deficit.
The CAD may be exacerbated by decreased flow of foreign capital in the form of FII, FDI and repatriations.

3. Is government under control?
Every day sees a new scam. CWG, 2G spectrum, Adarsh, Black money and the lost goes on. All these new items do not give confidence that the government is under control. Where has the promise of 20 km road per day gone? When will railways start to improve its security, infrastructure, sanitation and catering? When will food inflation come down? When will reforms process restart?

4. Is the growth under trouble?
The corporate earnings season for the third quarter has seen no upgrades from analysts. The initial trend shows that the margins are under pressure due to increase in raw material prices. The 20% Sensex EPS growth for FY12 could be tempered downwards by atleast 5%. With FY11 EPS at 1050 and FY12 EPS at 1200, we could see the fair value for Sensex at 18,000. As we know, market over react on either side and can expect the same now.

I am not too worried about the decreasing government consumption figures. It would come back if other sources dry up. However, I am getting concerned about lower numbers for the Index for Industrial Production. The IIP number has come at 2.7% for Nov’10 and the expectation for Dec’10 is 0.6%

What is heartening is that the CSO has pegged FY11 Agriculture growth at 5.6%. This takes the GDP growth to 8.6%. As FY10 growth has been revised upwards, we are growing slower than envisaged.

5. When will inflation subside?
WPI for Dec spiked up to 8.43% from7.48% of the previous month. The food inflation in higher double digits still persists. There seems to be no silver lining in the nearby horizon

6. Who wants to buy?
- FIIs do not want to buy Indian equities because the developed world is looking attractive
- FDI is slowing down because of lack of reforms and our dear environment minister putting road blocks
- Mutual Funds have no additional inflows to buy. Funds into ELSS are trickling in
- Insurance companies’ business has slowed and hence the incremental money has gone down
- Corporates are not buying as liquidity is king and they do not want to lock in as March is round the corner
- HNIs will not buy until the confidence is back
- Retail will not buy until the market bounces

Greed thrills but kills!

I remember the period when a 200 rupee stock in Money Matters went up to 400 in a couple of months. The 400 rupee stock went up by another 200 in less than couple of months. Along with the stock price, the volumes also shot up. This shows the interest in the stock. This indicates the greed taking on the fundamentals.

Just one issue, the stock falls from 700 to 100 in less than 40 days – a fall of 86%. Most of them have not got an exit. This reminds all of us – Greed thrills but kills!

M100 Midcap ETF from Motilal Oswal AMC. Any good?

Finally!!! Someone is introducing a midcap ETF in the market place. I have been waiting for it a long time. It provides great value for certain type of investors but for the others, its existence does not matter. I see this faltering in short term but could do well in 5-7 years as markets expand.

I was amazed to see some of the reasons why one should invest which are totally and utterly incorrect. First, let me hightlight who will get benefited with M100.

1. Any investor who is looking for liquidity in the midcap space will and should invest in M100 ETF
2. Anyone who is indifferent to midcap stocks but wants a piece of it could invest

Now the reasons which should NOT make you invest.

M50 ETF is successful:
How do you define success? Is it the size or the performance? For me it is performance with a reasonable size. Motilal M50 has managed to generate over Rs 300 crores in assets which is commendable. However, its performance does not seem convincing so far. Due to the recent correction, it has managed to catch up with Nifty Index but still lags it. At one stage, it was underperforming Nifty by about 4%which is significantly huge.

Five months is short period to form an opinion about the instrument but I hope it does well and provides an alternative to investors seeking alpha at lower cost. The performance of the ETF vs Nifty is shown below:
Better returns than Nifty:
There is a wide spread perception that more risk means more returns. Hence, Midcap index outperforms large cap index at all times. This is incorrect. If one carries more risk, the expectation of return is higher. Whether that would generate more returns is still questionable. Thanks to 2007-08 market crisis, the performance of CNX Midcap lags that of Nifty for three and five year horizons. It is also the case with one year and six months horizon as well. The following table shows the same.
There seems to be a crisis every decade. There seems atleast one period of lack of confidence every year. Hence putting all eggs in one basket is not a good idea.

Most midcaps under perform CNX Midcap index:
I read that one should invest in M100 midcap ETF because most midcaps underperform the midcap index. This is true. But what we are missing is that the top five midcap funds that manage nearly 75% of the midcap AUM have consistently beaten the CNX Midcap index. This outperformance is huge. If I were a long term investor, I would rather invest in these funds than in the ETF. It needs to be seen if the ETF does as well as the index. After all there are 20 stocks that have daily traded three month average value of less than 5 crores. Illiquidity could be a major issue for the success of the fund.
The key takeaway is that the long term investors are better off investing in midcap funds rather than the ETF. The additional expense of 1-1.5% is offset by the outperformance of the funds. This will be the case until the information asymmetry exists between various stakeholders.

Which ELSS to invest in, in this fiscal?

For those who have invested in ELSS schemes at the end of 2007, it should have been a wash out for your investments. That is because the Nifty index is there exactly where it was three years back. Does it mean ELSS investments are bad? The answer is no. The last three years period is an aberration where the market lost half its value in one year, regained most of it in the next before adding further gains in the next. If one is a long term investor, the returns could be handsome. Remember, this is the penultimate year of a chance to invest in equities for tax saving purpose before the Direct Tax Code comes into existence from April 01,2012.

This piece talks about the good ELSS funds one could consider to invest in. It goes on to identify those that should be avoided. Due to their consistency of returns (with appropriate risk), there are five funds that stand out. Since its launch four years back, Fidelity Tax Advantage Fund has been doing well. It has managed to beat the index in all four years. It comes at the top of the list. Closely following Fidelity Tax Advantage Fund in its consistency of performance is Canara Robeco Taxsaver. The two funds from the HDFC stable have done well over the last three years and hence their ascent to the top five. ICICI Taxplan had lost its way for a while but has come back strongly over the last two years.

If the amount to be invested is less than Rs. 10,000, it is advisable to go with the top two. However, as the quantum of corpus increases, it is advisable to spread into all these five funds.

There are three funds which are a strict No No! They are Tata Tax Saving Fund, Principal Personal Taxsaver and Principal Tax Savings Fund. It is a shame that the two funds from Principal basket having done so well in the past have failed to deliver miserably in the last three years. A real pity for Rs. 1000 crores of AUM under them which could have been better off else where.

There are three funds that look promising – Axis Tax Saver, Quantam Tax Saving Fund and JP Morgan Tax Advantage Fund. Infact, Axis Tax Saver which was launched on 31st Dec 2009 happens to be the best performing tax saver fund of the year. It is to be seen if these funds sustain their performance and attract more inflows. While Axis Tax Saver Fund has Rs 50 Cr as AUM, the rest two have less than Rs 3 Cr which is a cause of concern.

Among the other bigger tax saving schemes, SBI Magnum Tax Gain Scheme – 93 and Sundaram Tax saver have been showing lack luster performance. However, Reliance Tax Saver has been better than average and hard core Reliance mutual fund investors may go for it.
Happy Investing! Happy Tax saving!

How wealthy are you?

I take liberty to publish an impressive article by by Alan Hosking, Publisher of HR Future magazine. Its a must read for every one.

In this, oh so materialistic, world we live in, we’re inclined to think of wealth in terms of one thing only – money. Sure, it’s probably the form of wealth that most people recognise the easiest and want the most. But is it, really?
Let’s test your concept of wealth … Which would you rather have – R2,000,000 and an aggressive cancer with six months to live, or no money but the option of a long healthy life? It’s a bit of a no-brainer.

I want to suggest that there are at least seven types of wealth. When you consider them, you might find that you’re wealthier than you realise!

1 Physical wealth. The first form of wealth is your physical health (and with this I include your mental health). If you can’t get out of bed, it’s not much fun having millions and not being able to enjoy them. If you want to become truly wealthy, go for physical wealth first as that will give you the means to start acquiring other forms of wealth.

2 Relational wealth. We weren’t meant to live in the forests alone. That’s why we’re lonely when we are disconnected from family, friends and society. Again, money means very little when you have no-one special to share it with. I know people who are fabulously wealthy but who are miserably unhappy because their relationships with parents, partners, children, siblings or friends have disintegrated. Strive to build up your relational wealth and you will never be lonely.

3 Spiritual wealth. This refers to your values and the development of your spirit – the essence of who you are - through prayer, meditation or contemplation. Many people focus on external (material) wealth and never discover internal wealth. They consequently never discover who they really are and die in poverty in that regard. When you find yourself, you find the wealth that was put into you for success in this life.

4 “Meaning” wealth. This wealth is built by discovering and developing your reason for being on the planet. This is the only way your life will truly have any meaning. At the end of your life, if you feel your life has had no purpose, you will feel deep regret that your life has been of no value.

5 “Memories” wealth. As we get older, we are able to build this wealth. Everybody has memories, but not everybody has happy memories – of their childhood, of their partners, of their children, of their careers. This is one wealth you cannot build at the end of your life. You have to build it now by creating the memories you want to carry with you for the rest of your life. When you live for others now, you will build a wealth of happy memories that will make you a wealthy person as you age.

6 “Opportunities” wealth. Some get given many opportunities, some get very few opportunities, and some create their own opportunities. Some take the few opportunities they get and turn them into something wonderful. Many get given opportunities which they fail to recognise and never seize them. It’s up to you what you do with the many or few opportunities life gives you. The way to build “Opportunities” wealth is to learn to recognise opportunities that come your way, no matter how small they may be, then use them to create magic.

7 Financial wealth. This wealth is the easiest to spot, but not necessarily the easiest to acquire. There is no get rich scheme that is really sustainable. Set yourself financial goals, then work toward achieving them and you will be able to build wealth in this area.

As you build your career and your life, don’t chase financial wealth only. Make sure you build wealth in the other six areas I mentioned and you will truly be a wealthy person!