Farm Loan Waivers

I am surprised, even shocked, by some of my learned friends shouting from their roof-tops, over the recent farm loan waivers by a few state governments. Some of them, clearly masquerading as economists,  express " concern" about "profligate spending" through these waivers. " As it is, the government's finances are not good. How can the government go on this spending binge? How will the budget support it? Where will the govt raise funds for this from?" ...   and some particularly relish adding " evil Modi!" to that. After all, anything and everything has to stop with " evil Modi!".  Otherwise one would never be able to establish that one is " balanced" in his views.   So much so, for modern day intellectuals.

Of course, even a nursery school kid will tell you that if you throw away your money into something that will not return the money, that money basically is written off, and it is not wise spending. We do not need economists to point that out. Economics 101 will tell you that such loan waivers will fall into the " unplanned expenditure" category, and will add to the already strained finances of the state governments. State governments, which announce such waivers, have to fund that through internal accruals, or go and beg the Central Government, which, at it's discretion, may budge partially. Who pays the bill? The hapless tax payer...   direct taxes, indirect taxes, borrowings... etc fund this...  so, it is amply evident that loan waivers are not good for the Income/ Expenditure statements of State Governments ( ultimately spilling over to the Centre). Governments may increase taxes, or borrow more to tide this over, and often results in their credit ratings getting lowered, increasing their cost of capital further. At the national level, exchange of the Rupee gets affected; companies cannot anymore borrow at favourable interest rates from abroad... etc etc.

So, if it is so apparent, why are the State Governments doing it? And why is the Central Government looking askance? Before we get into that, let us look at a few other areas of "leakage" of tax payer money, which these "Economists" and some of my intellectual friends are sweeping under the carpet.

First instance: Air-India. Accumulated losses more than Rs. 60,000 crores. All taxpayer money going down the drain. The more Air India flies, the more it loses. Strangely, all these Economists are against privatizing Air India. They play a pivotal role in form public opinion against it, and the Opposition parties are quick to seize on that, and instigate Trade Unions to go on indefinite strike against privatization.

Second Instance: Bad and Doubtful Debts of Private companies. Banks are saddled with up to 8 lakh crores, as per a recent estimate, and growing. Will any of these economists protest against writing off these assets? Other than crying " go and recover from business sharks" what else can they offer, as a meaningful solution? Is it as simple as raiding the biz houses and recovering sacks of money supposedly hidden away by biz magnates? How much more disingenuous can that be? If banks can somehow write off bad debts of business houses, why cant they write off bad debts of the poor farmer who has no collateral or no other means of supporting himself and his family? Remember, after banks write off the bad debts, their balance sheets are strained, and taxpayer money is used again, for recapitalizing it and getting the banks back to normal.

Third Instance: For decades, most state governments have been giving free electrical power to the farmers and downtrodden. None of these economists intellectuals ever protested other than the cliched " oh! this will spoil the finances!" , did they? Who foots the bill? Taxpayer. You and me. If this freebie can continue indefinitely, why not write off farm loans too?

Fourth Instance: Freebies by various state governments. Free TVs, laptops, mid day meals, sewing machines, bicycles, mobile phones, mixies...   you name it, they get it all....   all at taxpayer's expense. Was it ever stopped?

This list is endless. The point is - there are already a whole heap of direct and indirect write-offs and waivers that are draining the exchequer. Farm loans only add to it. And all these will most certainly exacerbate the fiscal balance of the State Governments and the Centre, alike.

Back to that question now. So, then, WHY are the state governments now doing it again, as had many of them done in the past? The answer lies in three successively failed monsoons. There is no water anywhere, except in the ocean. The hapless farmer is pushed to his limits, unable to support his family even for two square meals in a day. Not to mention private loan sharks  baying for his blood. Farmer suicides are not rhetorical. They are a harsh reality. A bitter reminder, that successive governments over the last 70 years at the centre and the state, have still left 55% of agriculture land TOTALLY dependent on the monsoon, and close to 70% of the working population are farmers.  Where did all the "development funds" to improve the lot of the farmer go all these years? No no, not to the Swiss banks!

Given this state of affairs, farm loan waivers, though undesirable and harm, are UNAVOIDABLE under the circumstances. Unless those economists and some of my dear friends are saying " it is OK if a few thousand farmers and their families end their lives in utter desperation, but the State's finances cannot be imprudently used for waivers". I view this waiver as an extreme emergency measure, whichever government, belonging to whichever political party does it. A necessary evil, as it were.

So then, what are the long term solutions to this problem of farm loan waiver? To me, part of the answer lies in the SKILL INDIA initiative, or whatever rhetorical name it is called by. It is utterly unacceptable that a progressive country ours, has 70% of its population dependent on agriculture. As a comparison, the USA with 300 million population, has less than 3% of it's population as farmers, and is still a nett exporter of Agriculture products. The government urgently needs a long term re-skilling strategy , to skill the "uneducated" farmer into in manufacturing and services sectors. That obvisouly will have to start at the classroom level, by dramatically recasting our outdated education system. And move on into vocational courses, where the individual is trained in a particular trade- be it working in a textile mill, a cloth manufacturing plant, a toy making plant.. or whatever...  train him in a particular, allow him to excel, and create an environment where he stands a reasonable chance of a skilled job , preferably in or near his own place ( rather than crowding the big cities which are already bursting at their seams).

Next, aggressively introduce modern agriculture equipment and push drip irrigation and other modern methods of increasing agri productivity. Repeal draconian labour laws which prevent collective farming and getting machines to work instead of man. This should be done progressively, while re-skilling happens, in order to minimize any social unrest.

Also, aggressively invest long term reduction of dependence on the skies. Increase water bodies. Prevent lakes and ponds from being closed down. Deepen them wherever possible. Involve local population in that effort. Build more dams. (Damn the environmentalists, who are the biggest stumbling block in economic development).  Create more check-dams, which are much smaller in size than the conventional dams, but which play a very important role in last-mile water storage and release. Seriously work on interlinking of rivers. At least within the  state, to start with, if riparian issues crop up. Chandrababu Naidu has shown the way in Andhra, by interlinking the Krishna and Godavari within the state, in a span of just 11 months, bring in tens of thousands of hectares of land into additional cultivation. If the government will, there certainly is a way.

All the above, be it education reforms, free electricity bans, interlinking of rivers, etc...  are unfortunately either in the State List or in the Concurrent List. Which means that the Centre cannot act suo moto, and need state governments to display the kind of political will that is needed to push these reforms. Sadly none of them are displaying that, at the moment.

Until these reforms happen, and until the over-reliance on agriculture and the rain-gods is reduced, we will continue to witness such loan waivers in the future too. And until then, some of these Economists and some of my esteemed friends, can continue to score brownie points.

The GST Conundrum

I see a lot of doomsayers, coming down on GST, and it's implementation, effective first July. Knives are already being sharpened, metaphorically speaking, to be driven into the Govt., by the Opposition, Media and "Economic pundits", and wannabe's alike. Mr. Arun Jaitley's team is not helping matters, by taking a hard stand on the implementation. Confusion, and even panic, reigns supreme.

I have been on the ground, in at least two countries, when their respective GST's were implemented, replacing the then existing VAT structure. Australia in the late nineties and early 2000s, and in Singapore. These are relatively more "established" economies, with clear tax structure, and much greater tax compliance than in India today. But even these found it more than a handful, to manage the onerous task of cut-over to the GST regime. Even there, there were naysayers, denouncing the moves to transition into GST. My ears are still ringing with the Aussie shrills of " this will destroy the economy', in the Capital Hill of Canberra. But transition, they did. And successfully, too. With just two categories of GST . Everything has either one uniform GST rate ( 10% and 7%, respectively for the two countries), or none ( applicable only to the "essential goods and services"). Remember, Australia is politically a loose federal structure of states, owing allegiance to the Queen, and yet, some of them itching to secede from the union, time and again. I recollect the GST was one of the hot topics for the failed secession attempt of Western Australia from the Union, a few years ago. Singapore managed it very well, politically, and the transition was smooth. They initially were happy with 5% and then moved on to 7%.

Other countries have still not moved into a GST regime. China, for example, has a peak VAT rate of 17% plus local taxes. There is no official plan to move to GST there. One may then wonder " if China can do without GST, then why impose on us? You, evil Modi!". Firstly, this is not a political debate about GST. It is an economic one. In fact, if at all, this could impact Modi electorally, if the implementation goes awry. After all, his major constituency of voters in 2014 had been traders, who are , generally speaking, so used to pocketing tax meant for the exchequer, by various dubious means. GST is expected to put an end to their " incremental income" , by forcing compliance, and making sure that the money that is meant to go to the govt , does so. Yes, there could be the proverbial slip between the cup and the lip, for some time, but I do expect that to be ironed out over time. Modi has bitten the bullet, and a hard decision has been taken to implement. Even fi electorally damaging for his party, this GST will be prove better for the country over the long term. Perhaps, Modi's hunch is, that going by the example of DeMon, where it was widely expected to trounce the BJP in U.P., but instead, give him a handsome mandate, he may fancy taking electoral chances too, in 2019.

Secondly, why GST? All countries that have implemented GST have witnessed increased compliance, at stable prices, over time. GST will be , broadly speaking, more like the musical chair game, where the onus is on the last person in the chain, to collect evidence of compliance earlier, and claim relief, failing which he will lose out. Hence it is in his interest to comply. Failing which , the end consumer will end up paying through his nose. Thirdly, the state governments hitherto had been playing with tax rates in every tax budget, to shore up their regimes of freebies ( remember those farm loan waivers, free TVs, free fridges, free bicycles, free laptops, sewing machines and what not?) . No, the state Govts lose the ability to fiddle around with tax rates, generally speaking. The will now be the sole preserve of the central govt. Hence, expect the State Government finances to come under strain, if they do not tighten their belts. This is good for the country as a whole, in the long run, but in the short term, frictions are inevitable.

Fourthly, in a vast federal structure like ours, implementing a monstrous tax structure is going to be a daunting task. For the manufacturers, traders, service providers, govts, tax authorities and Chartered Accountants alike. Make no mistake about it.

Lastly, in a country where awareness about taxes is generally abysmal, expect a lot of cheating, and blaming the govt for it, to happen. This will provide the ideal fodder for the political parties to go after the government. In some cases, prices are expected to spike, in the name of GST. After all, the average ignoramus citizen is unlikely to either fathom GST or question it. The RBI has done well not to reduce interest rates, in spite of the lowest possible inflation agains ta backdrop of three successive failed monsoons. There was heavy political pressure to do so, in order to stimulate growth, but so far, the RBI has held it's ground, perhaps in anticipation of a general price rise due to GST. The bottomline - in the normal course, GST should only reduce prices overall ( may vary amongst individual goods and services) , but then, the shoddy implementation is most likely to aid the those cheaters amongst the principals, and could witness a general price price. To me, this appears to be the most likely scenario. I will be delighted to be proven wrong. Nett of it, is GST for the better or for the worse? My take - worse, for the short term. But will simplify and regulate taxes and their compliance over the long term, and will stimulate growth, and free movement of goods and services across the country.

Praise the Lord!!

Tirupati Venkateshwara Swamy has played hide and seek with our family. As a child, I never got to visit Tirupati. Whenever that topic arose, my father, in a  stern voice would say " Oh! There is this ancestral curse that would not allow us from visiting Tirupati!"  I poked him further when I was old enough to understand.

It turns out that, over a hundred years ago, one of my ancestors had died on his return from a padayatra of Tirupati. Remember, in those days, there was no flight, train or bus. People used to commute in bullock carts. For pilgrimages though, traveling in groups on foot ( Padayatra) was preferred.  So, my great ancestor had decided to relieve his soul from his body, on his way back, after his sumptuous prasadam of laddoo, which must then have been a 200 year-old  tradition by then. Lo and behold! The dogma in the family was set right there. All everyone had faithfully adhered.

Until in 1985. The rebel in me was not convinced. I had then told myself " his time was up, and so he had passed on. Why blame the Swamy for it? Also, if I visit Him, and his only response is to take my life away, then he is no God, which obviously cannot be true!". Youthful belligerence had prevailed ultimately. After I had joined the college of Engg, Guindy, Chennai , I had made , not one, but 7 trips to Tirumala and Tirupati. What had started off initially as a mark of rebellion had soon turned into a mini-infatuation with Balaji. My friends I made those trips, waited overnight in the serpentine queues without food, water or toilet-outs and endured pain. All for an under-60 second darshan of Him. But I never felt bad, for many reasons.

Firstly, I used to look forward to the trip, for not just the temple visit, but also hiking expeditions that invariably followed, in the nearby hills. Short, but sweet hiking trips with friends made it very, very enjoyable. None of us could afford any hiking gear, but that did not deter us. We had to be wary of the forest officials. the relative of one my friends was in the forest dept., and he arranged for the hikes, along pre-set paths, and kept it "safe and discreet".

Secondly, youth and company of friends had ensured that overnight waiting in the queue, was had turned out pleasant than waiting in the queue for a Rajinikanth movie ticket!

Thirdly, and most importantly, is the connect with the murthi (statue) of the Lord. I have to admit here, that every time I had visited, I used to sulk at the long wait. I used to tell myself " Why this obsession for the people? What is so great about this temple, that people are more than happy to wait out and have darshan? Chee! May not be worth at all!".   These murmurs within the cerebrum used to continue, even as I stood in the queues. Inch by inch, the goal would gradually come nearer. Weary legs, tired eyes and drooping shoulders would wish that the agony ended soon.

Until one reached the sanctum sanctorum. The shrill " Jarugandi, Jarugandi!!" notwithstanding, one glimpse of the Lord within that all-important 60 seconds, would invariably be enough to forget everything in this world. The pleasures and pain, the happiness and sorrows and all travails and tribulations, would, in a flash, be relegated to oblivion. There mere presence in front of that majestic form of the Lord, would put everything else in the back burner. Such is His radiance. The magnificent decorations on the imposing statue, shining in all splendour with gold and diamond on every inch of His body, would send the crowd into raptures. " Govindaaaa, Gooooovinda!!" filled the air. In an instant, I used to be transported to another world, forgetting everything else. Even today, I can swear by it. There is something unique about Lord Venkateshwara of Tirumala, which I do not find in most other temples. That wonderful and indescribable feeling can only be experienced.

For the believer and the non-believer alike, it does not matter whether you visit on foot, by air, by train, or by road. All I can say is - live that experience!

The future of Energy Sector companies in Indian Equities - June 2017

This is a discussion on the fundamentals of energy sector, which companies to invest and avoid. Note of caution: this is in no way, any recommendation to invest, and I am not liable, in any way, for any consequences.

There is a tectonic shift in the energy scene in India. here are the salient developments:

1. Oil - ONGC is producing less and less, and more worryingly, finding less and less . Private players are no different, when it comes to success in exploration.

2. World oil prices are heading lower, but this likely to be a temporary phenomenon. In 10 from now, I expect oil prices to be double of where it is, now.

3. In India, natural gas is not a game-changer. At least not yet. All efforts to pipe gas to end consumers is a mixed bag. For Industrial consumers, it has been a fairly successful things. Private consumers are largely restricted to cities.

4. The government continues to push Nuclear energy vigorously, with those countries who are willing to play ball. Equity returns from companies focused on Nuclear, are likely to be slow and steady, and will be like bank rate of return.

5. Wind power was pushed aggressively by the UPA, ahead of solar, mainly due to technical reason. At that time, a decade and half ago, wind power was cheaper to instal. However, the cost per kwh of wind power has not kept with time. It has stayed. On top of it, maintenance of windmills is an expensive proposition, which makes the cost per kwh significantly higher than coal. Unless government gives big subsidies, it is not viable. Companies like Suzlon suffer on multiple fronts - cost of capital to instal and run ( BOO or BBOT model) , the right technology, and non-payment from state electricity boards. With Solar power costs coming down crashing, state boards are playing the wait-and-watch game, rather than investing in new windmills. That does not bode well for the likes of Suzlon.

5. Due to rapid technological advances, now, SOLAR power is as cheap or marginally higher, than coal. That makes it a wonderful proposition in a hot, tropical country like India. Maintenance costs too are rather modest, even in inhospitable terrain like the deserts of Rajasthan or in Ladakh. The key component, the solar panel, is imported, mainly from USA and China. If any producer in India comes up, they are the ones to subscribe to. The key drawback of Solar power is that it is not a 24*7 source, which means, you need alternate sources during nights, rainy periods etc. to back up. Solar will signficantly cut our carbon footprint too. The sad part is, India did not see this coming, so not many producers have invested in research and production of panels. The Chinese and Americans are making hay.

6. Hydro-electric power is suffering from erratic rains. I do not expect to see significant investments in the future . Companies like Torrent Power, Tata power etc are likely to stay flat over the long term, unless they reinvent themselves.

7. One beneficiary of this will be battery companies like Amara Raja. I think they will do well to tap the storage requirements, especially in stand-alone smaller solar units, and will do well over the long term.

8. Transmission and distribution companies like T&D Areva, Jyoti Structure, Voltamp etc... will continue to be depend on the vagaries of the state electricity boards. The UJAS scheme has given a temporary relief to the balance sheets of the state electricity boards, but it has only kicked the can down the road. The long term solution lies in stopping of free electricity, removing pilferages, and timely collection of bills - these are very difficult, in a country like India. So, I am not very gung-ho on them.

9. With LED bulbs, again, companies like SuryaRoshni or Wipro Lighting should ideally benefit, but, with volumes increasing, their margins are getting squeezed too, so they are not exactly exploding in the stock market.

10. Alternative fuels like baggasse, ethanol etc - I do not see a future in India for these, since Solar costs are coming crashing, and it is cleaner. So, companies like Thermax, BGR, Cethar Vessels etc may be affected, unless they reinvent. Thermax has a subsidiary called TBW, specializing in alternate fuel boilers.

11. nett nett... where to invest in the energy sector?

My mantra for the long term - AVOID excessively leveraged companies that have a drag on their balance sheets - BGR, GVK, GMR, LANCO, Suzlon etc... you can speculate short term if you wish to, but to me, these are not investment-grade. AVOID political animals like ADANI POWER.

AVOID - Banks that have exposure towards thee excessive leverages

My take ( all long term only)

1. Evergreen companies like L&T, Siemens. Cummins

2. Risky bets like CG power, Torrent power ( small portions of your portfolio)

3. Amara Raja - not just for energy, but for auto and comms sector reasons too.

4. Select companies in energy space like Technoelectric engg, KEC and Kalpataru power

5. PTC Finance - is a power-sector related play, which will do well over the long term, since their payments are secured by govt backing.

are the experts in dissecting some of these companies and suggesting what could be good plays.

After my illness, my memory is failing me , in terms of specific names. I have tried to recollect as much as I could.

Disclaimer: With market at all time highs, I other than L&T, Cummins and Amara Raja , I do not have any personal exposures in any of these companies. I plan to take position whenever the market corrects 30% or more. Nifty currently rules at the 9650 mark

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