Will Narendra Modi 2.0 please stand-up?

narendra_modi
One of the strong points in favour of Prime Minister Narendra Modi in the run-up to the Lok Sabha elections last year was his tenure as the chief minister of Gujarat. He was seen and projected as a no-nonsense guy who got things done. Also, unlike the Gandhi family led Congress party, Modi did not come with any baggage.

In fact, Modi, as chief-minister, handled many important portfolios himself. After he was elected as chief minister of Gujarat again in December 2012, Modi kept important portfolios like home, industry, information, ports, general administration, science and technology, climate change, Narmada and all policies, with himself.

Given this long list of portfolios, power in Gujarat was very centralized around the chief minister’s office. Further, Modi chose to operate through trusted bureaucrats. This allowed him to cut through the red-tape that is a part of every government and ensured that things happened at a fast pace. This further helped project Modi’s image as a doer.

A paragraph from William Easterly’s book The Tyranny of Experts best explains the situation Modi was in: “The leader may have unconstrained power [i.e. Modi as chief minister in this case], but his intentions concerning what to do with that power are presumed to be good. He…just needs expert advice to accomplish good things.”

This was a model that worked for Modi in Gujarat and he brought it to Delhi as well. The prime minister’s office like the chief minister’s office in Gujarat is a very strong one. There is nothing wrong with this.

The only trouble is that in order to implement the economic reforms that he had promised during the course of the run up to the Lok Sabha elections, Modi needs much more than just a strong Prime Minster’s office. He needs votes in the Rajya Sabha that he does not have. These economic reforms are necessary in order to create jobs for nearly 13 million Indians that are entering the workforce every year.

One theory that has been projected by experts and analysts is that the Bhartiya Janata Party (BJP) led National Democratic Alliance will set their weakness in the Rajya Sabha right by 2017. The logic being that by then the BJP would have won a sufficient number of state assembly elections. And it is members of state assemblies who elect Rajya Sabha members. This also explains why Narendra Modi is campaigning so hard in Bihar.

The trouble is that unlike the Lok Sabha members, all Rajya Sabha members are not elected at the same time. The members have staggered six years terms. Further, one-third of the members retire every two years.

Given this, it is unlikely that even by 2019, the BJP led NDA will have a majority in the Rajya Sabha. As Pradeep Kaushal wrote in The Indian Express earlier this year: “Between now and 2019, when the Modi government’s term ends, the NDA will just about cross the  100-seat mark in the House — and that’s in the best-case scenario. That will leave it well short of the halfway point in the Rajya Sabha, which has an optimum strength of 250.” The current strength of Rajya Sabha is 244 members.

Kaushal further wrote: “Taking best-case scenarios of the BJP getting a simple majority in Bihar, and doing well in the West Bengal and Uttar Pradesh Assembly polls, the party can reach only around 70 by the end of its tenure.”

Given this, all important economic legislation will continue to remain stuck. This includes land acquisition reforms, which the government seems to have given up on and the goods and services tax, which remains stuck.

In this scenario, what Narendra Modi needs to understand is that his lone-wolf act who gets things done, is no longer working. He needs to reach out to parties outside the NDA, if any economic reform has to be pushed through.

What needs to be pointed out here is that the Congress party has around 68 members in the Rajya Sabha. Further, as members retire, this number is going to come down in the years to come given that the Congress no longer rules as many state assemblies as it used to in the past. And this is a factor that both Modi and the BJP need to exploit. They can seek inspiration from Atal Bihari Vajpayee who successfully ran a coalition of more than twenty political parties.

Also, the excuse that the Congress party is not letting it do things, doesn’t really hold. It is behaving exactly in the way that BJP did when it was in opposition. Every government has to face the opposition and work around and along with it.

Further, Modi needs to stop coming up with big hairy audacious goals. As analysts Saurabh Mukherjea and Sumit Shekhar of Ambit Capital wrote in a recent research report titled Civil servants burn the midnight oil in Delhi amidst growing policy drift:To be fair to the NDA, most of its problems are typical of any

Indian Government which juggles with paucity of funds and scarcity of talent. Where the NDA is different is in its desire to constantly announce Big Hairy Audacious Goals – policymakers repeatedly tell us that most of the targets that the ministers announce to the media have little or no feasibility analysis to support them. The more seasoned policymakers say that these targets can create issues for the NDA as it gets further into its tenure and is held accountable for its targets.”

Modi and NDA have set enough Big Hairy Audacious Goals for this particular term, be it general goals like Make in India or Digital India or Skill India or specific ones like increasing the share of manufacturing in the economy or rural electrification or increasing coal production. Over and above this they made many electoral promises as well in the run up to the Lok Sabha elections.

Easterly in his book The Tyranny of Experts quotes the Nobel Prize winning economist Gunnar Myrdal. As Easterly writes quoting Myrdal: “The political leaders of…countries have to arouse ambitions among the masses” because “this is their means of acquiring power.” The leaders know that “the aspirations which they know they can arouse successfully are the cravings for…economic development.””

This is what Modi and the BJP did in their quest to win the last Lok Sabha elections. And now it is time they started working towards achieving these goals and aspirations and delivering economic development, because if they don’t, all the promises that they made in the run up to the last Lok Sabha elections, might just turn out to be a marketing gimmick.

And marketing gimmicks don’t work twice.

The column appeared on The Daily Reckoning on Sep 2, 2015

Why small investors never make money in the stock market

Dear Reader,

Take a look at the following chart. What does it tell you?

graph_02

The above chart clearly shows that as the expectations of corporate performance have fallen, the amount of money coming into the equity mutual funds, the best representation of the small investor investing money in the stock market, has gone up. Stock prices are ultimately a reflection of the future expected earnings of companies.

What does this tell us? As analysts Saurabh Mukherjea, Gaurav Mehta, Prashant Mittal and Sumit Shekhar of Ambit write in a recent research note titled Exit The Fantasy, Enter The Reality: “The last time corporate India had such a poor performance in terms of revenue and profit growth was during the 2008 financial crisis, the year that had seen the Sensex drop by more than half of its peak.” 

So how has the stock market continued to do well (if we ignore the recent fall) despite the poor performance of Indian companies. The answer lies in the fact that small investors have been pouring in money into equity mutual funds, which in turn have been investing that money in the stock market.

In the last five months between April and August 2015, equity mutual funds have invested Rs 39,205 crore into the stock market. Between March and July 2015, investors have poured in Rs 45,127 crore into equity mutual funds. The foreign institutional investors, who have been driving the stock market for the last few years, have been net sellers and have sold stocks worth Rs 8,950 crore between April and August 2015.

As the Ambit analysts point out: “Today, however, in spite of such an abysmal performance, Indian equities have remained afloat, helped by retail investor optimism. In contrast, over the past six months, FII equity flows into India have dried up.”

In simple English what this tells us is that the small investors usually start investing in stocks around the time stock prices start to peak, with the expected corporate earnings falling. In fact there is research that backs this up.

As John Plenary writes in Capitalism—Money, Morals and Markets: “There is now academic evidence from Robin Greenwood and Andrei Shleifer at Harvard University that when markets are close to their peak, investors are most bullish because they tend to extrapolate recent rises in prices into the future when they form their expectations. In short, they expect the highest future returns when markets are close to a cyclical peak.”

This is precisely what seems to have happened with the small investors in India who started entering the stock market in hoards through equity mutual funds since mid-2014.

A similar trend was seen during the five month period of November 2007 and March 2008, when Rs 32,109 crore of fresh money came into equity mutual funds. During this time, the FIIs were net sellers to the tune of Rs 11,704 crore. In fact, the contrast comes out best during January 2008, when FIIs were net sellers to the tune of Rs 13,036 crore. At the same time equity mutual funds saw inflows of Rs 12,717 crore, and in turn they invested Rs 7,703 crore into the stock market. The BSE Sensex peaked on 8 January 2008, at 20,873.33 points. So, most money came into stocks when the Sensex was peaking. It started to fall after that and by 17 March 2008, the Sensex had fallen to 14,809.49 points.

A similar sort of trend is playing out now as well. In August 2015, the FIIs have net sold stocks worth Rs 16,877 crore. During the same period, the equity mutual funds invested Rs 10,017 crore in the stock market. The data for fresh inflows into equity mutual funds during August 2015 is not available as of now.

What all these numbers tell us very clearly is that the small investor ends up investing in the stock market through the mutual fund route around the time when the stock market is peaking. And this explains why the small investor rarely makes money in the stock market.

If the market continues to fall in the days to come, as it is expected to at this point of time, the mutual fund equity investor who has invested over the last one year, will be in for a rocky time.

Data contribution by Kishor Kadam.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

The column was originally published on Firstpost on September 1, 2015

Of LIC and the great Indian disinvestment farce

LIC
I should have written this column around a week back, nevertheless it’s still not too late to make the point that I want to make.

On August 24, 2015, the BSE Sensex fell by 1624.51 points or a whopping 5.94% to close at 25,741.56 points. This was the biggest drop that India’s premier stock market index had seen since January 7, 2009.

In all the hungama that followed around the Sensex fall another important story got buried. On the same day, the government was trying to sell 24.28 crore shares or 10% stake in the Indian Oil Corporation (IOC) at Rs 387 per share. The government was hoping to raise around Rs 9,400 crore through this disinvestment.

In the budget presented in February earlier this year, the government had set a disinvestment target of Rs 69,500 crore. Of this amount it hopes to raise Rs 28,500 crore through what it calls strategic disinvestment.

On a day when stock markets all over the world fell it was hardly surprising that there were almost no takers for the government’s share sale. The retail portion of the IOC disinvestment issue was subscribed only 0.18 times i.e. only about one-fifth of the shares that were offer.

The fact that the government had no idea of what was about to hit it, can be made out by the disinvestment secretary Aradhana Johri’s comment on August 21, 2015. She said that the stock market had an “excellent appetite” for the IOC offering. As it turned out, her definition of the stock market included only one investor. In the end, the Modi government, like the governments before it, had to call on the Life Insurance Corporation (LIC) of India to come to its rescue.
LIC picked up 20.87 crore shares or 8.59 per cent of IOC and thus bailed out the government. This would have cost LIC around Rs 8,087 crore. There are multiple points that need to be made here.

The government treats LIC as a sovereign wealth fund, which keeps coming to its rescue whenever required. But the money LIC has and manages is not the government’s money. The LIC manages the hard earned savings of the people of India and given that these savings need to be treated with a little more respect.

A filing made on the Bombay Stock Exchange website points out that LIC now owns 11.11% of IOC. SEBI rules do not allow mutual funds to own more than 10% of a company. This is to prevent concentration of risk on the overall investment portfolio. But this does not apply to LIC, given that it is an insurance company.
The question is why is the government allowing this concentration of risk in LIC’s investment portfolio to happen? Why are rules different for the private sector and the public sector? Ultimately like mutual funds, LIC is also basically managing money.

The LIC chairman SK Roy has said in the past that “every investment decision happens after due diligence.” What due diligence leads to an investment corporation (which LIC basically is) to buy a share at Rs 387, when the weighted average price of the stock during the course of the day was around Rs 380?

Roy told The Indian Express in an interview in July 2015: “If you see the OFS (offer for sale) of last 14 months, we have never got more than 50 per cent of the offered amount…So the question of bailing out doesn’t arise. A bailout happens when the entire 100 per cent is taken by us. There’s no data to support this.”

In the IOC disinvestment last week, LIC bought 20.87 crore shares of the 24.28 crore shares that were on sale. This amounts to 86% of the total shares that were being sold by the government. This makes it clear that the LIC bailed out the government and what Roy had claimed in July is no longer true. Further, Roy’s claim about following “due diligence” doesn’t really hold. Like previous LIC chairmen he also followed instructions from Delhi though he can’t admit to doing the same.

Also, if IOC is a good buy, why was LIC bringing down its stake in the company since June? As on June 30, 2015, LIC’s holding in IOC was 2.83%. Before the August 24 purchase, this holding was down to 2.52%. Hence, over a period of nearly seven weeks, LIC had sold a substantial stake in the company.

Also, as an LIC official told Business Standard on the condition of anonymity: “LIC is a long-term investor and we looked at the offer quality and subscribed for it. A call was made to us since as there was a crisis-like situation with the markets. We have not set aside any funds for disinvestment. We take a call based on the merit of every offer.” So, if IOC was such a good buy why had not LIC set aside any money for it?

Further, any ‘real’ disinvestment happens when shares are bought by the private sector (be it retail or institutional investors). But what seems to be happening with the Modi government’s disinvestment programme is that the LIC is taking over from the government. One arm of the government is being replaced by another government. This is nothing but a farce.

In fact, the disinvestment secretary Ardhana Johri made a good joke when she told PTI that the sale was “highly successful given the market conditions” and “with this the government has managed the best-ever first half disinvestment collections in seven years.” The government has managed to raise around Rs

Hence, on this front the Modi government has been no different from the earlier Manmohan Singh government, which also used to get LIC to rescue its disinvestment share sales.

Also, what is the point of going through this elaborate farce anyway? If shares are to be bought by LIC, why does the insurance behemoth have to buy shares from the market? Why can’t the government allocate shares to LIC directly and at a discount, so that LIC investors can also gain, given that it is their hard earned money that is being put to such risk?

To conclude, the government also plans to raise Rs 28,500 crore through strategic disinvestment. This is essentially a euphemism for the government selling its stakes in loss making companies. Further, the Cabinet has already approved sales of shares of such companies’ worth around Rs 50,000 crore.

I sincerely hope that if the stock market investors do not buy these shares, LIC is not forced to take them on.

The column was originally published on The Daily Reckoning on Sep 1, 2015