Hickory Piketty Dock - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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31 MAY 2014

Thomas Piketty's book 'Capital in the Twenty First Century' has become an Amazon best seller. It talks about how the economic system, one that places greater importance on capital, has resulted in rising inequalities. Using lots of statistics, he shows that the returns on capital are higher than the rate of growth of the economy, and so the rich are getting richer. This has led to controversy, about the accuracy of his data, and the interpretation of it; nonetheless, it has caught the public imagination.

The world's stock of financial assets is US$ 156 trillion, more than twice global GDP. Because of institutionalization, this is vested in a few hands. The world's largest asset management firm, Blackstone, for e.g. manages US$ 3.5 trillion in assets, which is more than the GDP of India! As large equity holders, these firms drive decision making of corporates, and demand improving quarterly performance.

In order to deliver improving quarterly performance, there is now an increasing reliance on improvements in machine productivity. Improvement in labour productivity has more or less plateaued. We are thus seeing economic growth, thanks to machines, without concomitant employment growth. As mentioned in these columns, 20% of American families are those without a single wage earner.

What are these machines?

Some examples are driverless cars, 3D printing, robots, drones and others.

Google has made a prototype of a driverless car, for two persons. This technology will have many positive implications. The automobile, as designed, is a vastly inefficient way of converting the energy in crude oil to transport people. As Amory Lovins points out in 'Natural Capitalism' less than 2% of the energy is used to move the passenger, nearly 80% is spent in moving the vehicle, in proportion to their weights. The smaller the vehicle, the more energy efficient it becomes. Being driverless, it allows for more productive use of travel time, and it is actually safer. However, if these become popular, there would be a loss of jobs for chauffeurs.

This technology is now being envisaged for use in trucks, which would affect some half million jobs in the US if it came to be adopted. It is also contemplated for use in civil aviation (pilotless planes) and in ocean going ships!

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As this analysis by McKinsey points out, India's priorities are different. The main ones mentioned in the analysis are 1. Job creation, with 115 m. non farm jobs needed to be created over the next ten years 2. Improving farm productivity using new technologies and farming methods such as permaculture, to improve yields and lead to sustainable farming, and changing some rules and regulations that prevent farmers from getting a better price, and benefit middlemen 3. Increasing spend on basic services like healthcare, water and sanitation 4. Making basic services more effective.

The Modi Government has already started taking steps, and Narendra Modi wants a 100 day action plan from senior bureaucrats of each ministry. One hopes that they take in new available technologies in formulating their plans.

The plan is to create 100 new cities. These will help provide jobs, and housing, both badly needed. In planning the cities, the Government could incorporate a 'walk to work' concept in urban design, to minimise the use of automobiles in a world where fossil fuels are fast depleting.

There was great hope that the technology of horizontal fracturing, or fracking, to extract oil/gas from tight formations of shale rock was to provide a solution to the declining stock of fossil fuels. However, although there may be shale gas reserves, it is viable to extract them at a certain price. The current prices of crude oil are not high enough to warrant extraction, hence the US EIA (Energy Information Agency) cut its estimate of recoverable shale gas reserves from the largest field, Monterrey, in California, which was thought to be 2/3rds of America's shale gas reserves, by a whopping 96%.

This means that prices of crude oil would need to rise much higher to make the extraction of shale gas

viable, something that would pose a problem for global economic recovery, and, for oil importing countries like India, a widening current account deficit. So the design of the new cities must consider the future, and cities must be planned on the basis of optimal use of public transport, and with more efficient design of cars in mind. Towards this end, it is surprising why the Government does not discourage use of the more gas guzzling larger vehicles, and encourage the use of the more fuel efficient, smaller vehicles. This can be done by giving excise concessions to the latter, and higher excise rates for the former, in a tax neutral manner.

The Government is contemplating permitting 100% FDI in the defence sector. Huge advances have been made in defence technologies, which India could do well to tap into. The Chinese have made enormous strides e.g. in drones that can land on an aircraft carrier, quite an achievement. The rail gun is a frightening piece of equipment that a few countries have developed. Meanwhile India continues to be haunted by the scandals in defence procurement and has a slow and cumbersome process.

One of the areas mentioned in the McKinsey report mentioned above is water. A small country like Israel, largely desert, has managed to solve water problems, using a mix of conservation, new technologies such as desalination and reuse of wastewater in agriculture. In India, politicians have, in many states, promised free electricity to farmers to obtain their votes, which leads to excess pumping of water, its overuse, leading to degradation of soil and reduction of the water table.

Should the Government neglect developing its water resources, it can face the conditions now faced by Venezuela.

Thus investors would do well to look at companies in the water, and related business.

Technology is also coming into a business as staid as the road business. Two US inventors, Scott and Julie Brusaw have invented roadways made of glass with solar panels inside . The roads are strong enough for heavy trucks to drive on, and generate electricity which melts snow/ice and provides it to cities. The new urban cities being planned could also look at this technology.

India has to build its infrastructure, which is poor, and affecting the competitiveness of manufacturers and exporters. This, however, requires money. The UPA has left the new Government with a burden of unpaid subsidy bills, and an economy that grew at 4.7% in 2013-14 on the back of extremely weak manufacturing growth, reflective of the policy paralysis.

The Government has, as one step, established a SIT (Special Investigative Team) to tackle the problem of black money. It comprises two retired Supreme Court judges and the heads of several investigative and enforcement directorates. Perhaps it may throw up an amnesty scheme, using the tax collected from it for infra spend.

The Modi Government is also like to do a settlement with Vodafone over the tax dispute and conciliatory talks have begun. The Finance Minister, Mr Jaitley, has promised stability in taxation law, doing away with retrospective changes, and big bang reforms to attract investors.

The stockmarket took a necessary pause and corrected last week. The BSE-Sensex lost 475 points to end at 24,217, and the NSE-Nifty dropped 137 to close at 7,229. Corporate results are encouraging. Aggregate net profits of 965 companies (excluding petroleum and banking and finance) were up a whopping 62.2%.

Regrettably, the Government, as a majority owner, still interferes in the working of, and thus impacts the result of, some public sector companies in sectors like petroleum and banking. That is why the above analysis excluded these. ONGC, OIL and GAIL are forced to bear a good chunk of petro subsidy. This is unfair both to minority shareholders as well as to the companies, which have to borrow for their capex or working capital needs. One hopes that the new Government will start to phase out this burden being borne by companies. As per public sector banks, the NPAs (non performing assets) are usually a result of lending to dubious projects under instructions from some senior Government functionary. This, too, should stop, hopefully after the recommendations of the PJ Nayak committee are accepted.

Sometimes it is State Governments that create a moral hazard, as those of Andhra Pradesh and Telangana seek to do, in writing off farmer loans to the extent of Rs 1 lac crores. This, however, works to the advantage of banks (such as Andhra Bank) who get to recover the full money loaned to defaulting farmers from the Government. The price, of course, will be paid by the tax payers and consumers of these states.

In corporate news of interest, RIL has taken over control of the Network 18 group, which includes CNBC, and its promoter, Raghav Bahl, has resigned. For RIL, which is shortly to start offering 4G services, such channels provide content which can be fed into their telecom offerings. Expect more such deals with, or takeovers of, content providers.

The QE programme is not working, yet most economies continue with it. In Japan quantitative easing has failed. The economy continues to sputter and consumer spending continues to drop.

The DIPP (Deparment of Industrial Policy & Promotion, Ministry of Commerce) wants to change the law relating to the Land Acquisition Act, basically with a view to removing the 'impact studies' which slows down land Acquisition without any benefit. It has to do this, because manufacturing growth is slowing down in the absence of new investment, and this is where a chunk of job growth will come from.

In the coming week, the market would watch out for the credit policy on Tuesday. Should Governor Rajan spring a surprise and cut interest rates (he has said in an interview that though inflation targeting is of prime concern for both RBI and Government, growth also matters), the markets may also spring.

Thereafter it should again pause, until the July Budget, the first of the new Government. The Budget ought to be a mix of tough, but necessary decisions, as the Government has to scrounge for funds to pay off Chidambaram's pending bills, and investment friendly decisions.

Buying on dips would be advocated.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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2 Responses to "Hickory Piketty Dock"
sitarama
Jun 4, 2014
i)If jobs are vanishing - driverless cars, drones, robo-machines etc - what can be done to provide enployment opportunities? Though I am 70 this is frightening(!).
(ii) moral hazard of writing off loans has become a standard practice of politics. Is there a way out of this?
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abhay dixit
May 31, 2014
Picketti should study Venezuela and other countries which follow socialism/communism to understand the 'benefits' of that system.

Anyway to day the capitalism is 'managed' by governments and no more pure.
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