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NPA Problem – 2 : Afixing Responsibility Properly

Published November 8, 2017 by vishalvkale

In the previous article – India’s NPA Problem, 2001-2012; we got an overview of the NPA Problem, and could see from the graphs its genesis lay in the high growth period between 2003-2008. As the NPAs started rising from 2008 onwards  they clearly pertain to investment decisions taken in the previous years. Now in any high growth period, some investment calls are going to go bad; if we play too safe – we sacrifice some growth. But, when the same investment decisions turn bad to an extent that Bank Credit to industry dries up, it becomes a serious issue that needs to be dealt with.
There is a tendency by some to blame the UPA Government, and some to blame the NDA Government; as I looked at in the previous article, no one is calling the industry/s to task for failing to judge the environment properly. Is it the contention of the people that 100% of all NPAs were caused by unforeseeable external shocks? There is a strong case in these numbers for the industries & the regulatory authorities to re-visit these industries norms of operation and managerial skill-sets as well as operating environments to analyse where the real fault lay.
Let us look at the sectoral spread of these NPAs, and the details to get a more precise idea of the ground realities. NPAs are divided into Priority and Non-Priority Sectors, as we saw in the previous article, India’s NPA Problem 1. We also saw that the significant increase was from the Non-Priority Sector, which is what I choose to focus on to drive home my point. This Non-Priority Sector includes Loans {Retail, Housing, Credit Card, Durables, Auto etc}, Infrastructure, Coal, Iron and Steel, Textiles, Power, Computer Software, Rubber, Metals, Construction, Sugar, Food Processing etc.

These loans – detailed in one sample chart above –  comprised investment decisions taken by thinking, responsible managers and boards basis available information, as well as their own understanding combined with industry trends and organizational strategic priorities. Given the above, this surprising tendency to question only the Banks for these NPAs is unacceptable. Agreed that looking at it from a Bank perspective allows us to study aggregated data. Also agreed that disaggregated data is near-impossible to come by, which makes any serious study of this at sectoral disaggregated level a rather specialist task. But, it can be done.
Let me start with one or two real examples of failed organizational strategies. Once upon a sweet time, an investment decision was taken by the Senior Management, and was communicated to the hapless Business Head chosen for this misadventure – me. The BH said nothing, put his head down, and started on the GTM Strategy; detailing which produced irrefutable evidence that this was a certainty for failure. This was duly documented with Top Management, who refused to agree – saying let us set a stop loss {!!} and proceed. They also stated, don’t be defensive, go all out. 7-12 months later, that industry was driven to obsolescence by market changes – it was a Technology Product, with massive unsold inventories across brands and states, for the entire industry. Who is responsible for the loans decision/s that went into the seed capital for the new division/s?
Another example – once upon another sweet, sweeter time, several companies {How do I know? From my trade, but of course! I was heading a Region in one such} ventured to take a decision to invest into products of a particular technology, or solution, despite the presence of free, rampant, ubiquitous and effervescent, bubbly and exciting new information of a new product. Now this product was costlier, so these industry veterans bethought that there will be a market for the older range- logical. But – they forget two key aspects – the rate at which costs are cut in the trade, and the probable size of the market for older products. Result was, once again – unsold stocks at distributor and company levels. Marketshare tanked, companies shut in some cases, and new products shot up. The companies have stocks of old products several times that market size. Who is responsible here?
In both the cases above, companies and managements lost, big-time, as the investments did not give the projected returns. Was it possible to at least limit this loss, if not avoid it? Most certainly, it was eminently feasible. Now we can either go on a blame-game, and find fault with these managements, as is the normal case; or – alternatively, we can go deeper into these cases, and find connecting threads, understand why erroneous conclusions were reached despite the presence of evidence to the contrary. Remember, these were thinking decisions reached by domain experts, good people, people who were proved comprehensively wrong. What we do is our decision now –  the choice is ours.
And that is the key point – thinking decisions, taken by good people, domain experts – proved wrong; this happened on a scale that caused the Banking Sector to come under stress, caused economic issues and other connected problems. That is what we can extrapolate from the above analogous examples given above. While I do admit not all the problems could have been foreseen, fact remains that some decisions were proven wrong. The RBI report clearly identifies such issues, if you read between the lines:
The problem of NPAs is related to several internal and external factors confronting the borrowers (Muniappan, 2002). The internal factors are diversion of funds for expansion, diversification and modernisation, taking up new projects, helping/ promoting associate concerns, time/cost overruns during the project implementation stage, business (product, marketing, etc.) failure, inefficient management, strained labour relations, inappropriate technology/technical problems, product obsolescence, etc., while external factors are recession, non-payment in other countries, inputs/power shortage, price escalation, accidents and natural calamities. According to another study, the major reasons for NPAs include improper selection of borrowers’ activities, weak credit appraisal system, industrial problems, inefficient management, slackness in credit management and monitoring, lack of proper follow-up, recessions and natural calamities and other uncertainties {See Bibliography}
That is why, looking at NPAs from a Banks-only perspective is fraught with risk; that is also one of the reasons why some experts are opining the Bank Recapitalisation is like the kicking the problem into the future – unless structural reform is not undertaken. This problem is far deeper, and is also rooted in the culture prevalent in Corporate India as well. Structural Reforms will of course mitigate the problem – as I may attend to in some future article; but these wont fully solve the internal issues identified in the report mentioned, as also proven by the two real examples shared above. The question we should be asking ourselves is simply this : how can we ensure better decision making within our organisations? This is something I intend to try and answer on these pages, which document my thoughts… stay connected!

India’s NPA Problem 1 – 2001 to 2012

Published October 4, 2017 by vishalvkale

As the current dispensation reaches near midway in its 4th year at New Delhi, questions – hard questions – are beginning to emerge on its overall performance till date. The heartening thing in this is the surprising development of the main point at centerstage in the current public discourse, which is turning out to be the economic performance so far. Even some of its own party members and allies have come out against its policies or performance. For once, I can only say that it is nice that we are actually having a national dialogue around The Economy, which is very welcome.
There are several parameters of the Economy that we can discuss; here, I concern myself, in this article, around only one : The NPA problem that Indian Banks are facing. I would like to refer interested readers to the annotated article link in the Bibliography section, which is a report carried on the RBI Website wherein all the technicals are mentioned with data. My main driving concern in this article is the business side of the argument, rather than an economic side, which is only a secondary consideration for me as of now.

I had earlier, in my analysis of Gold, asked the question, have we really emerged from the aftershocks of the Subprime Crisis, even now – 10 years later? A cursory glance at the numbers related to NPAs gives us a very interesting insight: NPAs were in negative territory in terms of growth in Gross NPAs in the run-up to the crisis {Look at the yellow line in the chart} – and then moved up after 2007, when the crisis hit home. Since then it hasn’t headed south. Bank credit also expanded at a much faster pace before than after the crisis {the blue line}; since then, till 2012/3, the numbers were subdued in comparison. I ask this question once again – are we fully out of the aftershocks of 2007? Stay connected with my blog as I attempt to answer that through my own self-study

Moving on, in the period from 2003-2007, as seen in the next chart below, net additions to NPAs were in negative territory; but again, after 2007, they went north, way north – hitting all time highs by the year 2012. And it is from this point that my argument diverges; most pink journals, publications focus on the banks. The enclosed RBI publication makes several observations around the Credit Risk Assessment in Indian Banks, which can decidedly be a lot better; but that is beside the point. Examine this data once again – especially the breakup of NPAs between the priority and non-priority sectors. {Priority Sectors – Bibliography point 2 –  are Agriculture, MSMEs, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Advances to weaker sections & Loans upto Rs. 50,000 provided the individual borrower’s household annual income does not exceed specified limits}.

It is the non-priority sector which has contributed significantly to the spurt in NPA growth. In fact, the rise in NPAs in the last2 years of the dataset – 2011-13 shows a sharp rise in NPAs in the non-priority sector of the economy; whereas the priority sector was almost flat in this period. Since the last decade, the share of priority sector in gross advances averaged at over 32 per cent, while its share in total NPAs remained much higher, averaging at around 45 per cent – Chart below. A deeper look at these numbers, in the next article, gives more clarity, with mid-corporate segment accounting for the largest growth in loans in one bank at least.
One side of the debate defends the Government saying this is a longer-term problem; the data bears this out faithfully, to be honest. However, we cannot pass judgement on that alone, as that would be cherry picking facts to suit a hypothesis; we need to look deeper, and at many other factors before we can arrive at that conclusion. For the other indicators do not bear out this hypothesis, as I looked at in one previous analysis. And yet, it is undeniable that this is a longer-term issue, with deep reasons underneath. We need to ask – why should these loans go bad? And the divergence in the MSME and other areas in terms of NPAs needs a deeper look as well!
Now, if a loan goes bad, and the borrower is unable to repay – provided there is no malafide intent – it clearly means that cash flows were not to the tune expected. Business is conducted only for the purpose of cash flows & performance.  This can arise from two or three reasons, {from the business perspective} namely :
1.     Either capacity has been generated but cash flow {sales} do not total cover costs, or
2.   Expenses overshot the plan
3.   Deep – seated structural issues
It is being said that the banks’ risk assessment can be improved; I don’t argue with that – but I humbly submit, in light of the simplified analysis in the above paragraph, that there is another side to it. And that is simply, firstly that these were business decisions that went bad, meaning that these decisions were taken on unsound business principles, or had no longer-term deeper thought in them, or that they were hit by unforeseen problems. Note – unforeseen, not unforeseeable. And that is the most significant aspect we should look at – the decision makers, and the borrowers. Lastly, it also could indicate structural issues; cyclicity of the business cycle is no excuse. And that is what I lay out in greater detail in the next part of this analysis day after tomorrow
In the article above, I look at, firstly, 10 years longer-term NPA Performance, its bifurcation along priority / non-priority sectors, divergence in the trendlines between these two; and the business case for loans going bad. Reason to go deeper is to avoid cherry picking data just to prove a hypotheses, and get to the gist of the real problem. And the reason to study the NPAs is simply that these provide case studies of where we went wrong as an economy, as a leadership, as a people. These are national resources – and we can learn from our mistakes. Stay connected as I progress on this journey basis authentic data; let us learn together…

Book Review : India – Priorities For The Future By Bimal Jalan

Published September 10, 2017 by vishalvkale

India – Priorities For The Future is a book that can be best described as being at the cross-roads of politics and Economics, which makes it quite unique. It is a very thought provoking and deep analysis of this intersection of these two vital aspects of our nation, concerning itself with the Economy of the country, its performance through the years in numbers as well as Macro Factors; and the political aspects of this, that is – the decisions, involved decision makers, systemic weaknesses and plus points as they exist and what needs to be done.
Bimal Jalan

As can be seen from the short preamble above, this is quite wide a scope, and seems daunting. The best part is that the entire scope has been dealt with remarkable aplomb and sufficient depth, while at the same time not exceeding too many pages. This is a very short, {well – relatively short anyways, considering the topic and the scope – 180-odd pages} book, and all the arguments are presented in a superbly logical and yet delightfully succinct manner.
The book is divided into two logical sections – “India Then”, reflecting the period from 1980 – 2000; and “India Now”, reflecting the period from 2000 onwards till 2015. The first section highlights the initiation of the reform process that started in the 1980s, and the second section looks at the situation and strategies taken up from the 2000, till almost the present time, 2015. While looking at the economic side, the book also consistently looks at the political side as well, taking pains to analyse the impact of the political situation and the political aspect of economic decisions.
This approach is what sets the book apart, and elevates this into the realm of one of the finest books to be written on the Indian Economy, as it creates a complete picture in broad strokes of where we are, where our weaknesses lie, and where we need to go in order to develop and take the nation forward. In fact, in more ways than one, it highlights the politico-bureaucratic bottlenecks and problems, and looks at how these can be overcome. That is the main thrust; the arguments, however, are economic and developmental in nature rather than political.
THE FIRST SECTION- The 1980s onwards
It is the general impression that the Indian Economy was reformed from 1991; this book puts paid to that impression, and takes one into the reality: the reforms process which started in the 1980s, the reforms taken then with steps like loosening of direct controls especially in Industrial Licencing. Several committees were set up on trade policy, PSU Policy, and shift from physical to financial control. Several of their recommendations were implemented. The result was industrial growth averaged 8% from 1985-1990 as an example.
Despite all of this, by 1991, the situation was dire, and the Economy was in doldrums. This is where the book acquires a life of its own, so to speak – and does a hard-hitting fact based politico-economic analysis of the fall of the Indian Economy’s reasons in three hard hitting chapters. The stunning aspect is that this fall happened when the Agricultural production was at its peak, and Industrial production was showing good growth.  The fact that the Economy despite that is a wonder, and needs explanation – I recommend you read the book for that.
Also in this section is a superb analysis of the Economic Strategy of the 1950s onwards, with solid reasoning, proving how no other approach was feasible given the overall conditions then in presence. This is a welcome correction, given the public misapprehension regarding this. As it moves into the late 1980s, we run into the paradox of good Industrial and Manufacturing, good Agriculture, in the run-up to the crisis. Here, the impact of the Gulf War, Oil Shocks, BoP situation. Collapse of the USSR, combined with our export scenario and unstable internal political environment In 1989-1991 – and how these carried into the crisis is a lesson in MacroEconomics for all readers.
THE SECOND SECTION – 2000 Onwards…
In my opening remarks, I had noted that this book is right at the intersection of Economics and Politics; the second part is where this book comes alive to transform into one of the most pertinent blunt and factual take-downs of our approach it has ever been my fortune to read. The author has gone deep into the Indian Economic-Political scenario, pulling out problems that we all  knew existed – but no one wanted to talk about… until now. The first section was a build-up, analyzing how we got where we are today, and what has been done. The second one takes off from there, building a classic case for some hard reform, and tackling the issues head-on.
As early as in the 3rd chapter of the first section, the author has identified lack of exportable products, the systemic problems plaguing us and the problems in the Public sector as contributory causes. Che goes much deeper in the second section, building the case for strong systemic reform, outlined in the magnificent last chapter of the book. The erosion of quality in the Public Sector has been discussed at some length again, pointing out the inability of the Public Sector to generate surpluses for investment over the past. Also noted are the growing Private-Public debate.
The most significant part of the book is the longest chapter, the 6th one – Politics and Governance, which forms the meat of the analysis in the book. It goes deep into the system of governance- looking at the Judiciary and its relationship with the Executive, and Legislature; the erosion of the values {or conduct to be specific} of the political class, accountability of the Cabinet – the myth versus the reality, noting with candid clarity that the Parliament and the Legislatures generally do what the Government wants them to do, rather than the other way around. He identifies the 3 key impediments – Deadweight of the past, power of distributional coalitions and growing disjuncture between Economics and Politics; concluding with a stunning observation on Pg 112-113 : Alleviation of Poverty is not an important criterion in determining electoral outcomes!
The next chapter – the 7th – is the shortest; but deals with the most fundamental aspect – the myth of the separation of powers, and once again in typical candid and dispassionate form. This looks at Centre-Judiciary Relations, Collective Responsibility,  Lack of accountability, Problems in Parliament and its functioning, and the Politicization of Administration. As can be seen, each and every one is a deep, systemic and fundamental issue where we need to introspect… The last chapter – well, I recommend you read it for yourself.

In conclusion – this isn’t a book on Economics, or on the Indian Economy per se. The title says India – Priorities for the Future; and that is precisely what this book is all about. As the books notes candidly in our development record as on date, our performance has many deep seated issues. These issues – the most important ones – are on the intersection of Economics and Politics; or rather – squarely in the Political Zone. Economics enters into it as we measure growth in Economic terms. Administrative reforms, Decriminalisation of Politics, Federation, Subsidy Rationalisation, Ministerial responsibility – if made more efficient, can have a defined impact on our nation and its Economy… 

Indian Economy – Problems as on Sept 2017, and Way Forward

Published September 4, 2017 by vishalvkale

The enclosed article {Biblio. 1} by Mihir S Sharma, one of the few straight talking Economists on Indian Media, does raise some excellent questions. It is a superb analysis of the shoddy economic management – and also raises the fact that something is indeed broken. The economy requires deep seated reforms at core levels-  not vacant sloganeering grandiose plans. Quite correctly, the need of the hour is attending to the real issues that confront on the Business, Trade and Economic Front; as well as a straightforward analysis of what is wrong, devoid of Jumlaas and vacuous statements.

All Macro-Economic Parameters are in the doldrums, as should be evident to all but the most devoted Bhakt; the time is now ripe for us to rise above narrow parochial statements, and try and get to the root of what ails our nation on an economic front. High NPAs, Low Credit Offtake, Slowing growth for 6 straight quarters, slow export growth and an economy on Government steroids… and many other parameters that we can assess – all point to the facts that this are not right, and there is something wrong somewhere that need correction. What is more, we are already at 93% of the fiscal deficit target for the financial year, and this is just the first week of September.
A glance at the Economy does not inspire much confidence; and this isn’t cyclical in nature. Sure it will turn around on its own – some parameter/s in the external environment are certain to get positive over time – allowing another burst of high growth, which will push the required structural changes into the background. It is just a question of time. Question is -we now have the opportunity, and a clear political mandate, to get some real reform going; can we take advantage of this? This does seem unlikely, as Media and public is once again focusing on the small good news of GST July Returns, which is like celebrating a 4 in an ODI when you require 22 runs an over to win!
The Big Boys of the Indian Economy have no appetite for investment; neither do they have the required resources in their Balance Sheets to take further risk. The small boys, always under-represented in voice in Media, with little or no public imagination behind them, go unnoticed. Their performance, with both Profit and Revenue slippage in 16-17, is also rather worrisome; all in all, a bleak picture. Add to this  the rather unfortunate fact that access to Institutional Credit for these small players is still far from as good as it should be, a fact that goes woefully under-reported. Thus, we arrive at a situation where it is Government spending which is driving growth; rather a sorry state.
Another article, again by Mihir Sharma – kudos to him for a series of stunning analyses – points out : “A recent analysis of listed companies by the Reserve Bank of India showed that companies with paid-up capital of under ~50 lakh saw net profits fall by 23 per cent in 2016-17. Companies with sales of less than ~25 crore saw revenue fall by 44 per cent. This doesn’t look like a sector capable of reviving the supply of jobs. Nor is investment here going to be easy; commercial bank credit has slowed so much, and the government has been so slow to resolve the banking crisis that alternative forms of financing investment will be needed: Corporate bonds, for example. But, naturally, that helps only larger companies. If there’s a revival, it will come at the top end of the scale.” {Refer Bibliography}
Sure – the GST will deliver its benefits over a period of time, be it tax base, regulated transactions, cost savings for businesses et al – but that does nothing the change the fundamental problem – low credit offtake, high NPA, declining sales and investments and so on. The problems of the SMEs will remain as they are – access to credit, low technology adoption, distributed ownership and operations, managerial skill issues and so on. That leaves us two choices – treat this as cyclical, and applaud GST… or push our sleeves and get to task of attending to what is wrong, avoiding grandiose statements and plans.
To make matters more interesting, 233 of 633 districts are monsoon deficient as on date, and adding to this is other detailed analyses of precipitation distribution, making things uncertain, though not a cause for Alarm yet. One can only hope for a decent precipitation September month. Agriculture is just coming out of a long rut, and has seen a spate of loan waivers; further, it is a contributor to only 19% of GDP. Its issues are a debate unto themselves, and are far longer terms horizon solutions, which we do need to take – but that is another story, to be taken up later. The question in this overall backdrop – what can be done, firstly for immediate respite and secondly for longer term improvement?
 At this point, the Bhakts get personal and state – why don’t you suggest a solution? That is a fallacious approach to take, as it  diverts attention from the issues, and shrugs off responsibility from the leaders we have in Parliament, in various think tanks, institutions, and other similar places. It isn’t my place, a part of the public voice, to suggest solutions which require data, and access, and power – neither of which I possess. We have these institutions for a reason – and I can only point out basis hardcore facts and data that things aren’t going smoothly, that a course correction is long overdue. I and people like me can only serve to try and direct public and Media attention towards the right path.
On the longer term, one thing is clear – the SME sector needs to both upskill, upscale as well as get far better institutional support; some changes are being made in that direction, but far more is needed in various support terms from institutions. This is clearly a longer-term solution, and has further deep institutional process and structural reform that will be needed; not an easy thing to attempt, strong politician or not.  And thus, expecting an immediate revival in GDP, Jobs etc from this sector in the short term is expecting a bit too much.

That only leaves us with, as Mihir Sharma correctly points out, the larger boys – the ones who have scale, and established operations. In order that the NPA scenario gets clarified, credit offtake improves, and so on – it is essential we focus on these – or in other words, the domestic environment; rather than chase foreign money and investments, the need is to ensure local money gets mobilized for local investments, demand improvement steps be taken, private investment uptick starts post-haste; for, with the Government already at 93% of its fiscal deficit this year, it has little scope left in its balance sheets for any further activities – and last year, it was government investment that was a key factor in growth!


Book Review – Navigating India, A $18 Trillion Business Opportunity

Published August 22, 2017 by vishalvkale

When I read a book titled “Navigating India – A $18 Trillion Opportunity”, I expect to be feeling positive and invigorated about India; at the very least, I expect to know a lot more about the why, what etc about India and its Business opportunities. Sadly, this is not the case in this book. Not that it isn’t well written – that it is, yet it does precious little justice to its title. There is nothing in the book that is inaccurate, and yet it is an unbroken chain of negative and, in some cases, irrelevant aspects regarding India – cultural observations that have no connection with Business per se, beyond a certain point

So much so, that I am at a loss to pen anything on this review; for I cannot say the content is inaccurate – it isn’t; most of it is very accurate and includes astute observations, data and analysis. Most of it is relevant – and yet, most of it is also very well known and understood. There is no value addition for the most part, it is like regurgitation of the same scenario – but with fresh data, facts, observations and a fresh approach. While it is relevant, how relevant it is to business and economics is debatable.
The first chapter is a summary of the overall economic scenario of India, and does a good job of summarizing it, all said and done. It also includes the schemes of the Modi Government, though without any real analysis. It then abruptly changes track to using anecdotal evidence, abandoning for the most part the data driven approach espoused in the first chapter. The second chapter purports to be on Market, but is a series of demotivating examples of cases like the Satyam Fraud, Coke’s experiences – and it uses this highly negative demotivating approach throughout.

The third chapter is on our Democracy – giving a short summary of the GST, Taxation, FDI Policies, and a set of anecdotes on foreign policy and its relation to Business. The fourth chapter is on our Demographic Dividend, look at the the caste-education-religion factors in our country. The fifth chapter is on the ease of doing business in India, again almost purely anecdotal though with a small useful section on steps taken by the current Government. Problem is the excessive use of anecdotes, and the negative examples, which feature in this section.
The 6th chapter contains segments on Intellectual Property, Contract enforcement, Law and order etc – again with limited relevance. The 7th chapter is exclusively on corruption. The last chapter is a small short summary analysis of why India is set to get better. The difficulty is the overall lack of connecting arguments and proper detailing; all of these above is short and anecdotal, with a few supporting data sets here and there.
As I said above in the introduction section as well as in the Book Blurb section – the problem is not with the accuracy of the content; it is, most of it – along one side of the argument. It lists a series of pitfalls of doing business in India with anecdotal evidence- evidence of individuals, or companies that faced problems. It also digresses into areas that have at best a highly limited relevance to business, and is a listing of what to avoid while doing business in India.
While that is indeed important – it could have done a far better job even in this approach, had it gone into detailed analysis of the well known business failures of MNC companies – like the Kellogg’s example, which is a case study in business schools. In place of short anecdotes, like in Kelloggs example stated in the book, what was required was a detailed analysis of what went wrong. Other such examples could have been gone into – that looked at the overall business scenario; most of the content pertains to the regulatory or legal or related environment and the difficulty it poses to International business.
The lack of sufficient detailing and proper arguments in support lessens the learnings and the impact; thus, despite the correct facts used & a different approach, the impact is just not present. Overall, the tone become, in my opinion, slightly negative; maybe for other readers it will come across as different. Also, the inclusion of a few irrelevant aspects, in one or two chapters, does leave you wondering at the same, and feeling slightly disoriented.

If you are writing a book on a Business Opportunity in a country, or the prospects of growth for that country – it is vital that it should come across to the reader as to specifically what makes this country such an attractive proposition – as well as lay out the pitfalls. It should look not just at Democracy, Regulations, Corruption, Contracts, Laws, Demographic Dividend etc; the book should have looked at India as a Market – what makes it attractive; what makes a business succeed here in a sectoral analysis, cultural examples of success in consumer category, as well as in B2B / Core / Industrial category. This is does not do, which is a major shortcoming…

GST & Subsidies – The Pluses, and how to mitigate the Minuses

Published August 6, 2017 by vishalvkale

In the midst of these seemingly hopeless times with nearly every economic parameter going down, it is heartening to see a small, tiny uptick in credit offtake from banks {Business Standard ,”All Eyes On RBI Today”,  2nd August Credit Chart – See Chart below}. I haven’t seen many people note this : but the chart is clear. There is a small uptick – this may of course be irrelevant, and unsustainable; but it is present. It is now for the Government to ensure this uptick is sustained; increasing Credit Offtake is a prerequisite for a sustained Economic Recovery. 

However, it is with regret that I admit my article isn’t about recovery prospects; as most of my readers will no doubt be aware – I don’t indulge in speculation; that requires detailed data trends which are not available to me, as well as tools. This present writeup is more about the risks that are facing us in the current situation, which taken individually or together can derail this small beacon of hope. The beacon of hope isn’t just the Credit Growth, but rather the GST as well as the increasing Tax Base; and of course, not to forget the welcome initiative of this Government to take some hard decisions. As to whether these hard decisions are enough or not, is another story, for another article. As I said, speculation isn’t my style, neither is it my current forte.
Lets us tackle this most prickly of issues straightaway. Article after article is claiming-  in the Pink Media {I freely admit I have stopped reading White Media, as I find them not upto the Mark. I count Livemint in Pink Media, as in Economic Media} – that the current dispensation is not taking hard decisions, or real reform moves. I respectfully submit that the reality is the exact reverse – they are not only taking Hard Decisions, they are doing so with a single minded determination. Let us give credit where credit is due.
The GST is itself a hard decision; fine – it is, well, let us say not upto the mark – but it is a start. {Libs, hold on please – will attend to GST in a separate section here}; yet, the Government went ahead, warts and all. This will unlock future potential, as I analyse in a strategic analysis of GST impact subsequently in another article. Next, the rather unfortunate tendency of this Government to target subsidies with a single minded determination and focus brings a new atmosphere in the country and among the people.
Bhakts are over the moon over this reform; Libs are cautiously optimistic, while being wary of the downsides of this move – which are, quite frankly, way too many and way too technical to be stated in a short summary. Both sides are right. The news on the ground isn’t great; the move has choked the economy, as we can see in the trickle of information that is now coming out. While there is logic in the claim that these are temporary, this needs a careful look at.
Trucks – one article said 20-30% – are not getting loads; Chemists are not ordering some key drugs in sufficient quantity as they fear input credit will not be passed on; SME order books are empty, and they are paying a temporary price; Hotels business is down 20; Manufacturing sector took a big hit in July – which is the sharpest decline or hit in nine years; Housing and Real Estate is showing signs of stress due to RERA and GST; Textile Segment – esp the small units – is also showing stress due to GST. You can of course claim that these are short-term changes, but there is more to it, as we shall see.
The Government, at long, long, last – has shown some signs of attacking our crippling subsidy problem. We are a developing country, and the more we spend on Subsidies, the lesser we have for Development and Capital Expenses. In that light, it is beyond argument that this is one area that required attending to. At last, we are doing it – but is our approach right? There are some indications that the Government is thinking of tinkering with the kerosene subsidy, and the fertilizer & Gas subsidy.
On the face of it – this looks a great move. But go deeper, and problems emerge. The government has announced that the price of subsidised kerosene will be raised by 25 paise per fortnight until the subsidy goes. But look elsewhere – 40% of Kerosene is diverted, true. What of the balance 60%? That is used by those whom it was meant for. Second, cooking gas subsidy is being phased out. Third, railways – where catering and Blankets etc might be phased out.
First of all, as all indicators point out – as I look at in this article of mine on my blog – The Indian Economy has not been faring too well. On top of that, demonetization created massive disruption particularly on the SME and Unorganised & farming sectors of the economy. Adding to this potpourri was a potent cocktail called The GST, which created further disruption. Point to be noted here – this was bound to be felt highest in the SME and Unorganised sectors, as the Larger players had the time, knowledge and the money to implement change processes as well as whither the short term storm. Also remember that the contribution of the Small and Unorganised sectors to the Indian Economy is to the extent of 40-50% of GDP as well as being the major contributor to Savings as well as employment
While the overall direction’s utility and benefits are actually beyond argument – the bhakts have it right there; the downside risks outlined above need to be taken into consideration. The Smaller players in various sectors, who together make a large segment – how long will it take for them to feel the benefits of the new regimen of the Economy? Do they have to ability to whether this storm? If not – what will be the impact? Joblessness – how many people will lose their jobs? {There is evidence of this, look in links enclosed} Or how many companies and operations will have to shut shop? And quite apart from the economic impact, what about the human side of the story? The two taken together, make a strong case for a more Human approach, for reasons of pure economics, as I look at in the next part..
The human side is what worries me the most, followed by the ability of the small sectors to engage with and emerge victorious over the challenges thrown at them. That they will win eventually is beyond argument – history is mute proof of that. But the process of change can be painful. It will require deep strategies, executed to perfection, to mitigate the impact, involving re-skilling, re-training, and a very soft handling. As on date, there seems to be no evidence of this happening. What will happen to the people who will get hurt in the interim is open to question; they will just have to cope on their own.
The other critical factor is the ability of the smaller players to weather the change. Take subsidies; sure – some of it is a waste. But large portions do reach the intended beneficiaries {read Kerosene article below}; to this category of people, people like you and me perhaps, the small amount of help through subsidies is actually quite large from their point of view. Instead of devising mechanisms to reduce misuse, the Government is doing away with them altogether. Similar is the case of the facilities example – instead of finding ways to improve, the Government might just do away with them.

Sure, these are hard decisions – some of them are bound to be beneficial, given they are based on solid logic. But does the on-ground reality in industry amenable to such gut-wrenching changes? If it isn’t, it doesn’t mean we don’t do the changes – all I am saying is that there is way to take hard decisions – and this isn’t it. Once again, it boils down to the most tricky of all things in life : implementation. Further, there is also a distinct feasibility of markedly improved strategisation as well as tacticalisation. I refer to strategic ways of mitigating the downside, and the precise tactical roll-out plan of such far-reaching changes; many, many methods are feasible, which given the audacity and correctness of the overall objectives and the strategy, will certainly lead to benefits for all… but is anyone listening? I fear not…


And several others over the course of my regular readings… 

Gold Story Since 1991 : A MacroEconomic Perspective

Published July 2, 2017 by vishalvkale

A lot of us Indians set store by Gold – both as an item of value, a shubh indication or item so to speak, as well as by its capability to generate returns. While I don’t argue with the first – Gold is indeed auspicious, and also in addition comprises Streedhan, and has no comparison on that scale. But as an investment vehicle it leaves a lot to be desired for. In the realm of macroeconomics, in addition to this, Gold is also used as an indicator by some people, and as a hedge against inflation.
The purpose of this article is just to look at the price of Gold over the past 20 – 25 years, and look at the returns it has generated over this period of time. This is the first article in a concerted effort to understand the interplay between various macroeconomic indicators and overall economic performance. I am documenting my thoughts and my personal research on my blog so that others who may have the same thoughts can be stimulated to research for themselves. For the period 1991-2017, the returns from Gold over the 25, 20  year periods has been range-bound in the area of 8-9.5% approx., which needs to be kept in mind by retail investors; as my article is not about retail investment, I leave it at that. The data is readily available, interested people can study and draw their own conclusions.
Gold in MacroEconomics has no precise treatment to the best of my knowledge; that said, various experts have tended to use it as a lagging indicator or as a proxy. However, in the 25 years whose price I have studied today, I could not find a correlation, except one significant factor- which is anyway well understood by Economists the world over. I will come to that later on in the article. Gold is universally considered a hedge against risk and inflation, due to its perceived safety and value proposition.
That is why I chose the year 1992 for the beginning point – as Gold is thought to be a lagging indicator. Even if you go back, the price of Gold was stable from 1988 through to 1991, when it jumped by nearly 25% – recall 1991 was the crisis year when we had the balance of payments crisis. The price movement of ,a lagging indicator. In fact, a comparison of Gold vs Senses makes for a most interesting study – both charts given below for your ready reference and study.
We have seen that Gold price can fall – recent history is proof of that; and has been proven time & again in the past as well. But more to the point is the comparison of the trendlines of Gold, GDP Growth and Sensex, which can then use to judge the direction of the economy. Further, we are well aware of the exact events that have occurred in the study period in terms of various marcoeconomic factors, as I went into in a previous article on my blog, replete with charts. Such a combined comparative study across parameters can then be an indicator of the current situation.

Chart 1 – Gold

These are given in the 3 charts above & below- one each on Gold Price, Gold vs Sensex, and GDP Growth rate. It is a most instructive comparison across these three parameters. The charts {Charts 1 & 2} clearly show a flat trend of Gold rates leading upto the watershed year in Global Economics – 2007, and the sudden spurt in the prices from that year. This is also replicated in other indicators – like inflation, given below – which is another macroeconomic indicator. From any parameter, almost, that we may choose for assessment, the year 2007 comes out as a significant watershed; nothing was the same afterwards. But that line of thought shall have to be consigned to the waiting bin for now; let us move on to Gold.
Chart 2 – Gold Vs Sensex

The interesting aspect is the years 2010-2016, wherein it is evident that gold was hovering or in fact increasing as uncertainty and issues cropped up for the UPA Government – a small but significant proof of the fact that Gold is a hedge investment against uncertainty and risk. But the most critical aspect is the trendline in comparison with the Sensex – in itself not exactly a great comparison, but one that gives unsights nonetheless. One can see Gold rising steadily even as risks piled up in the Global Economy in the leadup to the 2007 event, and continue its rapid rise through the tumult.
Chart 3 – Sensex

But most interesting is the event of 2004-2006, wherein Gold had, after a remarkably steady few years at 4000-6000 levels, jumped up by a significant margin. This is a lead indicator, which is not borne out by the some examples of prevalent macro-economic theory, which identifies Gold as a lagging indicator. Not being a qualified economist I cant say more; but I have personally always traced Gold as a Leading Indicator of the Economy. Given that it is a hedge against risk & uncertainty, it is fairly certain that as risks become unacceptable, investors will shift towards safe havens.
Chart 4 – GDP

Chart -5 : Inflation

Now coming to the present, we have seen in previous articles that the current situation is, to put it mildly, rather dicey; with a series of indicators ranging from PMI to GDP indicating a rising unease in the Economy. Let us put it all together to see if we can spot a trend. Interestingly, here again a trend is clearly visible – as seen above in the rising Gold price from 2011. But trace the inflation, gold, sensex and gdp graphs from 2004; {Charts 1, 2, 3, 4 & 5}  we can see all are again rising in that period. However, the current situation is markedly divergent – in that inflation is falling, demand is falling or subdued {it follows from inflation, but demand trends are also available – the subject of a future article on my blog}
Moving on, once again, we can see Gold reversing the trend of stability or falling prices from 2011 towards a higher returns from 2016, which again coincides almost perfectly with the rising stress factors identified in my earlier blog in this continuing study of the Indian Economy. Again, we can readily see rising uncertainty in the period of 2016-2017 due to various well-known factors; which is tending to shore up Gold prices for now. From this we can surmise that, given the various factors identified in the previous article – PMI, GFCF, IIP, PMI, Credit Growth, Rising NPAs etc – the uncertainty period is far from over.

That is self-evident; or should be – yet we can find grandiose statement abounding. But sadly, this is not borne out by any Macro-Economic indicator that I have studied so far. It will be some time before the Economy can begin delivering the hoped for numbers, which is what is indicated by all the indices we have looked at so far in this continuing self-study of our economy. That is also what the movement of Gold seems to indicate, at least to my mind. But over and above this – this small study raises deeper questions in my mind, as I trace the period from 2002 onwards till 2009, and see the sudden spurt in prices and indices from 2004. Are we still suffering from the aftershocks of the seminal 2007 event that shook us all? That is a question I hope to answer in the fullness of time…  

The Indian Economy – Detailed MacroAnalysis, Supply Side

Published June 3, 2017 by vishalvkale

As we move towards the GST implementation, the prospect of an economic distress is becoming increasingly evident, at least from a variety of economic indicators. The extreme-right wing is quick to point out the GDP Growth which is still among the better rates in the world & the numbers from Agriculture as proof that all is well; and add to this potpourri the rising stock market, laying claim that all is well with the Indian Economy. The other side is equally quick to point out the slowing GDP numbers from Q4-17 as proof that all is not well.
As a middle-roader, it seems evident to me that despite all the good that has taken place, as well as the systemic changes implemented aka the GST, The reality is quite different, and calls for some deep soul-searching. A look at the complete picture, far from inspiring confidence in the state of the Indian Economy, actually raises a series of questions, and some serious doubts over the near to mid term. Over the long term, a positive outlook is pretty much a guarantee; the trick is getting to the long term, which poses some serious and deep questions.
Gross Fixed Capital Formation
First, the investment numbers. Gross Fixed Capital Formation is at a slow point, which is a cause for serious concern. Not only is it slow, but it has been slowing for 4 years now – 2013 {Refer the chart below for details}. This is a vital point, for this means that the issue isn’t bad policies by the current Government; but rather the issue actually is an economic slowdown that s responsible. Other charts we look at will no doubt establish this general slow-down in the Economy, which has generally gone under-reported.

What is GFCF? As per Economics Help, Gross fixed capital formation is essentially net investment. It is a component of the Expenditure method of calculating GDP. To be more precise Gross fixed capital formation measures the net increase in fixed capital. Gross fixed capital formation includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings. Disposal of fixed assets is taken away from the total. Thus, a slowdown in this is a cause for concern!
The Index of Industrial Production (IIP)
Next, let us look at the IIP : The Index of Industrial Production (IIP) is an index for India which details out the growth of various sectors in an economy such as mining, electricity and manufacturing. Here again, the Graph shows a worrying trendline, as can be clearly seen in the chart given below. This is notwithstanding the change in the baseline that effected; the higher numbers of the new series would automatically be higher for the older numbers as well.

The Purchasing Manager’s Index
Add to this the PMI – The Purchasing Manager’s Index, which is The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Here again, the trendline can be seen since 2013 or thereabouts, showing increasing stress in the manufacturing sectors of India. Note that a figure below 50 can be interpreted as less than half the purchasers are not too gung-ho about economic prospects.

Credit Growth
Add to this the figures for Credit Growth, and things get really serious : this is the rate at which the bank lending to business grows vis-à-vis the same period last year. This rate is at its lowest in the past several the interested to check for themselves. It can be seen that there has been a long-term degrowing trend starting 4 years ago – again, as in all charts above, making this article a simple economic analysis, and not a comment on this Government.

Gross NPAs
Lastly, let us take a look at the graph of NPA of Indian Banks. This once again shows a rising trendline, extending back 2-3 years and more. While this deserves a more detailed look, to be taken up later, again the overall picture this trendline poses does not inspire confidence.

Putting it all together
Put it all together – IIP, PMI, GFCF, NPAs, Credit Growth – all are showing a decreasing trendline. In almost all, the trendline extends beyond 2014; in almost all, the trendline in the tenure of the current government clearly shows little impact as of now, as can be seen from the graphs quite clearly. These are key economic indices – Industrial Production, Purchasing Managers, Gross Investment in Fixed Capital, Non-Performing Loans, Credit offtake from banks all are signs of healthy economic activity. And in each and every case, the trendline is not one that inspires confidence. This is just the supply side of the equation – the demand side has an equal number of stunning surprises, as I look at PCFE, GCFE and consumer sides in the next article!
Thus, as of now, there is little to celebrate for the extreme-right, right, left or centre wings. The ground reality is that the situation is worrisome, and the interventions of the current government is not yet giving results. With the GST now coming in, the hope is that this will turn things around – but will it solve the core issues that has led to these graphs above? Why has this happened? For that, a deeper analysis is required. But, for now, let us keep in mind that, notwithstanding the GDP growth rate we are all crowing about – the situation a dicey, requiring hard work, and some serious intellectual thinking for solutions!

References: Trading Economics, and Capitalminds for graphs, charts and numbers

Listen To The Macro Trends – Or Lose Marketshare!

Published May 15, 2017 by vishalvkale

One of the current trending news items in Business news is the status of India’s IT Industry, which has been hit, seemingly hard, by the gale force winds of what seems to be The Trump Administration’s new approach towards the US Economy. The impact, as per two news reports I have read, is expected to be quite massive, at least in terms of Jobs: the job loss is expected to be 56,000 in one year, and upto 2,00,000 in three years.
This is now more than terrifying… this is turning into a virtual bloodbath… if true {IF true}, then my question is how could we be so underprepared? The answer : the exclusive focus, the singleminded focus on current cash flows, current revenues, excluding any focus or analysis of the future trends, emergent risks, technology & consumer trends… we need to spend far, far more on investing in people at all levels, increasing their knowledge base, sensitising them to long term trends. The current manager is taught to think that reading is bookish; that the present is all that matters; that statistics, trends are nor them.
This isn’t the first time an Industry has been hit by large-scale gale-force external winds; though this instance is by far and away the most visible. The Telecom Services trade is also witnessing a similar external wind; though for different reasons. Another example that comes to mind is the Handset trade, which has also been hit brutally hard by external winds. In both cases, organisations have shut down or been sold; there have been pink slips; tumultuous shifts in Market-Share as the industry dyanamics changed course seeminglyovernight.
Let us take a closer look at a couple of these instances, and see whether the changes were really indeed overnight, and could they not have been either foreseen, or at the very least, a rough estimate of the trend be prepared beforehand. Take the IT Trade, for example. There were indicators aplenty; the rising trend of protectionism, which isn’t a new trend, neither is it a trend isolated to the USA is just one such example. This development was well known before it struck. That is why the massivity of the expected impact comes as a surprise. This trend has been evident for some time now; it should have been anticipated by all of us. Similarly, the domain specialists in this field have, for some time now, been writing of the need for Indian Firms to step up the value chain, and get innovative. The combination of these two factors accounts for the impact we are seeing!  
Let us move our emphasis to Telecom Hardware – the advent of 4G devices was a known factor. This should have been anticipated, and yet wasn’t, not fully at any rate. The rising market-share of Chinese players as well as the online players was another well known trend, that should have been noted, and its import extrapolated. Yet, at least one or two firms in my knowledge were stuck with high 3G stocks, leading to price pressure. This is standard, first year marketing – new technology drives down the prices of existing products on the path towards obsolescence. The power of the internet as a disruptor again should have been anticipated. Some brands, which anticipated both trends – succeeded in not only holding on to their share, but also growing. The ones that didn’t, either failed or lost market-share.
Telecom services is another sterling example. The advent of additional players was, is and remains a known factor. The dilution in ARPUs in the past 4-6 year is also a matter of public record. The investments in the industry are again, exceedingly well known. Balance sheets and their status is also on public record. Add to this the on-ground competitive factors  like increasing competitiveness on retail counter shelves, lack of stickiness in retail, erosion of pricing power at consumer level, as well as known advent of Jio were all factors that are well known in the trade. All that is required is the connection of all the dots.
In some cases, these factors were connected well in time, the big picture successfully drawn, appropriate decisions taken; these companies are today reaping the benefit of these timely decisions. But the fact remains that by and large, Macro  Factors are not usually connected up – Patanjali is another example; there were a host of indicators that should have indicated to the FMCG companies of big trouble on account of the Patanjali factor. In each of the 4 examples analysed above, it represents an ill-timed focus on the current, the now, and not enough {in some cases, zero} focus on the future trends. Another factor is innovation; unless the firm & the local industry is innovating, the risk that it is not growing in value addition remains. When the Macro Environment changes, it is these innovative firms which are at the edge of competence / skills and Technology developments, which weather the impact and come out of the change phase in flying colours.
The current & the now deserves our attention; any laxity in this sphere has crippling long term impacts. That is beyond argument; but, at the same time, what is needed is a focused, planned attention on the future in terms of Micro as well as Macro trends. The Business Manager, probably starting from Junior-Mid Levels, {Third line in tall structures, 2nd in flat structures} should be sensitive towards such movements. This will help escalate relevant industry long terms shifts & trends to top management; as well as help in upskilling these potential top managers to read critical business factors. This small shift will strengthen the organization in the mid levels, freeing up top management time for criticalities. This isn’t easy to implement – but needs to be done. You have to learn the skills for the top while you are climbing the ladder; every manager must ideally invest in self on the way up; that said – every company should also invest in upskilling its line & staff teams in reading the business environment…

Retail Investor Confidence & Trust

Published April 14, 2017 by vishalvkale


A headline on TOI drew my attention, when I read that a firm had allegedly illegally raised several hundred crores from the unsuspecting public, some 55,000 of them. I was initially surprised, then stunned, and  finally shocked at the article, and its implications. For starters, how did a company raise 600 Crores from the public, all of 55000+ people – without having the requisite approvals? This was stunning beyond measure. Where are the famous checks and balances?
This news, and other such news titbits, introduce an element of needless risk in the minds of the people untouched by this event; it introduces doubt and uncertainty. Unitech isn’t a small company, in that it is quite well known and high-profile, with forays in Real Estate as well as Telecommunications. How does an investor trust any private company offering, regardless of size? There are mechanisms in place, of that I am aware – but are these enough? And, more critically, are these well known – not to the business managers, but to the investing public at large?


The issue I am raising isn’t the core safety of the money; I am not aware of the specifics of this investment, and further, all investments are subject to market risk. The point is straightforward – as per the news article, a company raised money without approval, which is a shocker to be frank. How did this come about? This is by no means a normal occurrence, one to which answers are urgently needed. The article goes on to state that many investors have approached the National Company Law Tribunal, which passed orders for refund of the money. These orders were not fulfilled.
That brings me to the second aspect : despite orders being passed for refund, nothing was done. Where is law and order? Where is compliance? To be fair, the company appealed for time, and reduction of the payable interest rate. This appeal was rejected, and as on date, the money is still outstanding, with investors still doing the rounds hoping for their hard-earned money to be given back to them. One can only hope that at least these investors get back their dues from the company.


If the above statement sounds sarcastic or morose, there is a whole history, a deeply personal history behind it. A history related to another very well known Indian Company, a household name almost. This company shall remain anonymous, but the story is telling. My father invested a large percentage of his savings {almost 25%+} in this well-known company’s division. The intermediary was an ex-employee, well known to and related to us {blood relative}, a senior employee now retired. Dad went ahead and invested. That was the last we saw of that money, and the end result was a shock for my poor Dad, and a house we had to forego as the investment failed, and no money was available. It has been decades since then, and we still haven’t seen hide nor hair of that money.
Of sure, all of the above happened. We and others complained; orders were passed – in our case, timely repayment in installments and all of that. To the best of my knowledge, only 1 installment was ever paid, at least to my Dad. We still have to recover well over 1 Lac plus interest from them. Will that money ever be recovered? I don’t think so. It was in that light of that sordid history that I made the above sarcastic and morose comment : one hopes these investors get their money back!


This latest is just another case of a corporate getting its hands dirty. We have an excellent system in operation, we have the laws governing this system that are, by and large, followed. That is something to be proud of, and repose trust in. Any system has loopholes; that isn’t the issue. Sadly, such things will happen; witness the Subprime issue and its proximate causes. That is the world we live in, sad to say. The problem is that once these issues come to light – they should be addressed on a war footing


The reason is that each such happening undermines the investor confidence and trust in the system; and that we in India can ill-afford. As it is, retail investor participation in markets is very low indeed. And given that we Indians have no social security system in place, we need returns on our investments that are higher in returns to enable an independent old age. Such repeated happenings only serve to exacerbate the problems, and ensure that the retail investor keeps participation at a low level… which we need to increase
What we need is urgent and effective speedy redressal in order to deepen the markets, which will serve as an additional safety valve, as an informed investor class will be created. It is a no-brainer that more actively participating investors will be better informed, more proactive in analyzing companies and investment avenues, will have greater options to choose from etc. This will in turn make it far more difficult for “operators”, as well as spread the investment, as investors will be less likely to invest large percentages into one avenue of investment…
Will this happen? I hope so, but I fear not….