Union Budget 2020-2021

An investor's prelude

Saturday, 01 February 2020 Opinion

Team InvesTrekk
Show some urgency in execution, only aspiring won't do
investrekk@gmail.com
A common saying in markets is that investor should stop panicking once the
policymakers begin to panic. (For private circulation only)

After a long spell of staying in denial, the policymakers have shown some
urgency in past 6 months. However, they have so far refrained from pressing
the panic button. The investors are eagerly waiting to see the finance
minister pressing the red button hard today. No Research. No
In my view, the current state of Indian economy is akin to a person who is Advice.
single wage earner for his family; has little savings; chronically suffered from We simply state what
hypertension and diabetes, and recently got a heart attack. we see while exploring
This person cannot afford to spend couple of months in bed for the vast treasure, you
recuperating. He has to immediately go for work so that he can pay the bills know as India.
and feed the family.
The economy not in crisis as yet
There is enough evidence to suggest that the Indian economy is witnessing a
serious slow down. It is open to debate, whether this slowdown qualifies to
be a crisis as yet; because unlike the previous episodes of economic crisis in
1990-91, 2000-01, 2012-13, we are not facing any balance of payment
threat, energy prices are comfortable, core inflation is under control, there is
no global liquidity or credit crisis, there is no overheating in any of the
sectors in the economy, the asset quality at banks is no longer worsening,
and there is no political instability.
....nonetheless vicious cycle needs to be broken urgently
Nonetheless, the sharp deceleration in growth rate is a matter of concern.
More so, because this time, the deceleration encompasses all sectors and
sub sectors of the economy. On supply side industry, agriculture, services
all three sectors have witnessed sharp contraction in growth. On demand
side both consumption and investment demand growth has been at multi
year low. Consequently, the economy appears slithering into the vicious
cycle of low employment-low income-low consumption & saving-low
investment-low growth-low employment. Breaking this vicious cycle urgently
is critical due to demographic characteristics of India. The fact can no longer
be denied that unemployment of youth is perhaps the most serious socio-
economic challenge India faces presently; and it needs to be addressed
before the things become unmanageable.

It is important to note that InvesTrekk does not offer any portfolio management , brokerage, money management, equity research or
investment advisory services of any kind. Please take advise of a qualified and registered investment advisor before taking any
investment decision.
Material from these reports may be copied freely, without any need for permission from the authors or the company. This is however
subject to copyright consideration of the contents of third parties.
 01 February 2020

...as high risk strategy of govt does not leave any margin for error
It also needs to be fully assimilated that Prime Minister Modi led NDA
government has adopted a very aggressive strategy for bringing about
changes in the way business is done in the country. A spate of disruptive
legislative (GST, IBC, PMLA etc.), administrative (demonetization, bank
consolidation, changes in tax assessment rules, subsidy rationalization, etc.)
and strategic (e,g, dramatic shift in the rules of engagement with Pakistan
and China) changes when the economic growth cycle had already turned
down have intensified the economic stress.
The aggressive socio-political agenda with little political consensus (e.g.,
legislations to reform Muslim marriage practices, J&K reorganization with
abrogation of Article 370, implementation of CAA and NPR, etc.) has further
deepened the economic slowdown. The opposition ruled states are mostly
refusing to cooperate. BJP has suffered losses in state elections that has
somewhat weakened the union government position. The global lobbies
engaged to work against India's interest have also found good ammunition
out of this aggression.
The key monitorable now is whether the government withstands the social,
economic, political and strategic pressure being applied by both the internal
and external forces and stay true the course chosen by it or yields to these
pressures. Because, if the government withstands the pressure and stays
committed to the course chosen by it, we have decent chances of India's
socio-economic conditions improving dramatically in next five years.
However, if the government wilts under pressure and retreats from its
chosen position, our country will be pushed at least 20years behind on the
development curve. The budget therefore needs to adequately demonstrate
show the resolve of the government.
FM akin to CFO of a stressed company
I see the finance minister as CFO of a stressed company. She faces all the
problems a highly stressed business could in bad times, For example—
• Business of the company has witnessed considerable slow down in past
few years - revenue shrinked and losses increased.
• Ability to modernize and expand constricted - stressed balance sheet
and poor cash flows are hindering capital expenditure.
• Investors are reluctant to commit more capital - return on past tranches
of investments has been poor.
• Company not able to sell non-core businesses and assets to mobilize
resources for sustaining capex and meeting repayment obligations.
• Competitors snatched market share - competitive pricing and delivery.
• Ability to retain talent hampered due to a variety of constraints.
• Rating agencies have put the company on watch - possible down grade.
• Top management struggling with allegations of misgovernance and
failing to deliver on promises.
• To make the matter worst, the new accounting system put in place a
couple of years ago has still not stabilized. Many claims have been
overpaid and many have been rejected erroneously.

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 01 February 2020

Given these circumstances, you imagine the plight to the CFO (here
minister), given that -
• Most debtors are unable to discharge their obligations and are
seeking debt waiver or substantial concessions.
• Employees are threatening strike if salaries are not hiked and non-
core assets are sold.
• Raising prices of goods and services is mostly out of question due to
already precarious competitive positioning.
• Shareholders are seeking higher dividend.
• Creditors want equity to be diluted materially and debts be
discharged to deleverage the balance sheet. Any increase in leverage
ratios is strictly no-go zone.
• The media has already declared that the CFO is going to lose her job
in a month. They have also declared a retired banker as her
successor. The management has neither confirmed nor denied these
viral media posts.
Under these circumstances, as an investor I am totally befuddled. I do not
know what to wish from the finance minister today.
I cannot wish for-
• Fiscal profligacy (large tax concessions or subsidies), because I know
it will be politically extremely challenging to unwind the stimulus in
near term.
• Meaningful tax hikes, since it could be counterproductive at this
juncture.
• Substantial easing in foreign investment norms, since it could
jeopardize the nascent recovery in the financial system as more
domestic businesses may become potential defaulter.
• Any disruptive reform, as the system has still not assimilated the
disruptions caused by demonetization, GST, IBC, bank
consolidation, etc.
This essentially means that I am not praying with the large majority of
market participants for tax concessions, cash subsidies, etc. So the chances
of my being disappointed with the budget are far lower.
Nonetheless, I would expect that the finance minister-
• Avoids jingoism.
• Doesn't try to please all, because she cannot.
• Is not incremetalist in her approach and does some zero based
thinking.
• Understands that we need ship loads of foreign capital and
technology to survive and grow, and respects them for what they
have.
• Focuses on India's strengths not weaknesses.
• Gives euthanasia to the people who have been already declared brain
dead, instead of keeping them on ventilators with false hopes.

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 01 February 2020

Economic Survey 2019-20 (Part 1)

The government presented the annual economic survey for the financial year
2019-20 on Monday. The 941 page document divided in two volumes and
several appendices is mostly directed at the criticism of the government
policies and its failures. In that sense its mostly apologetic and defensive. It
tries hard to justify the government policies and statistics that have been
questioned by many experts and some global agencies.
If one has to find a development theme in the Survey, it is the "stong
emphasis on private enterprise". The best part is that for the first time
a government paper is speaking so forcefully about Laissez Faire - Free
market, free economy based on trust and transparency.
Make money
“Make money – there is no weapon sharper than it to sever the pride of your
foes.” – Thirukural, Chapter 76, verse 759.
The Survey shows that contemporary evidence following the liberalization of
the Indian economy support the economic model advocated in our
traditional thinking, i.e., reliance on the invisible hand of the market for
wealth creation with the support of the hand of trust.
It is highlighted that India’s aspiration to become the third largest economy
in the world by 2025 depends critically on strengthening the invisible hand
of markets together with the hand of trust that can support markets.
The invisible hand needs to be strengthened by promoting pro-business
policies to—
(i) Provide equal opportunities for new entrants, enable fair competition
and ease doing business;
(ii) Eliminate policies that undermine markets through government
intervention even where it is not necessary;
(iii) Enable trade for job creation, and
(iv) Efficiently scale up the banking sector to be proportionate to the size of
the Indian economy.
Most importantly, it is emphasized that the socialist policies followed post
independence were hindrance in achieving the scared goal of wealth
creation. The policies path was set right in 1991 and that has led to
exponential wealth creation in subsequent 3 decades. Rise in market
capitalization of Indian equities is acknowledged as a major source of wealth
creation.

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 01 February 2020

Private enterprise key to wealth creation

“The one who utilizes all resources and opportunities at hand is an efficient
(entrepreneur) and nothing is impossible for him to achieve.” – Thirukural,
Chapter 76, verse 753.
The Survey emphasize the importance of entrepreneurship as an engine of
economic growth and change in India. It seeks to dismiss the popular view
that entrepreneurial activity in India is largely necessity driven and typically
borne from a lack of alternative employment options.
The Survey finds that entrepreneurship at the bottom of the administrative
pyramid – a district – has a significant impact on wealth creation at the grassroot
level. This impact of entrepreneurial activity on GDDP is maximal for the
manufacturing and services sectors.
It suggests:
1. Policies that enable ease of doing business and flexible labour
regulation enable new firm creation, especially in the manufacturing
sector. As the manufacturing sector has the greatest potential to create
jobs for our youth, enhancing ease of doing business and implementing
flexible labour laws can create the maximum jobs in districts and
thereby in the states.
2. Literacy, education and physical infrastructure are the other policy
levers that district and state administrations must focus on foster
entrepreneurship.

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 01 February 2020

Policies to focus on business, encourage creative destruction

The events post 1991 liberalization provide strong evidence that India's
economic growth depends critically on promoting “pro-business” policy that
unleashes the power of competitive markets to generate wealth, on the one
hand, and weaning away from “pro-crony” policy that may favour specific
private interests, especially powerful incumbents, on the other hand.
While pro-business policies increase competition, correct market failures, or
enforce business accountability, pro-crony policies hurt markets. Such
policies may promote narrow business interests and may hurt social welfare
because what crony businesses may want may be at odds with the same.
The liberalization of the Indian economy in 1991 unleashed competitive
markets. It enabled the forces of creative destruction, generating benefits
that we still witness today. The forces of creative destruction following
liberalization in the Indian economy have led to the rise of new sectors such
as financials and information technology.
Creative destruction brings new innovations into the market that serve
people better than the old technologies they displace. It brings new firms
into the markets, which compete with existing firms and lower prices for
consumers. It brings dynamism to the marketplace that keeps firms on their
toes, always on the lookout for the next big way to serve consumers. It has
only one pre-requisite – a pro-business policy stance that fosters
competitive, unfettered markets.
When creative destruction is fostered, sectors as a whole will always
outperform individual companies within the sector in creating wealth and
maximizing welfare. Therein lies the motivation for India to pursue pro-
business, rather than pro-crony, growth.
The following chart shows the creative destruction in post liberalization
period in terms of changes in the Sensex constituents over various time
periods.

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 01 February 2020

Laissez faire - the preferred policy

The Survey admits that Government intervention, sometimes though well
intended, often ends up undermining the ability of the markets to support
wealth creation and leads to outcomes opposite to those intended.
For example—
• Frequent and unpredictable imposition of blanket stock limits on
commodities under Essential Commodities Act (ECA) neither brings
down prices nor reduces price volatility. However, such intervention does
enable opportunities for rent-seeking and harassment.
• Regulation of prices of drugs through the DPCO 2013, has led to
increase in the price of a regulated pharmaceutical drug vis-à-vis that of
a similar drug whose price is not regulated.
• Government policies in the food grain markets has led to the emergence
of Government as the largest procurer and hoarder of foodgrains –
adversely affecting competition in these markets.
• Debt waivers given by States/Centre shows that full waiver beneficiaries
consume less, save less, invest less and are less productive after the
waiver when compared to the partial beneficiaries.
It is suggested that each department and ministry in the Government must
systematically examine areas where the Government needlessly intervenes and
undermines markets. Note that the chapter does not argue that there should be no
Government intervention. Instead, interventions that were apt in a different
economic setting may have lost their relevance in a transformed economy.
Eliminating such instances will enable competitive markets and thereby spur
investments and economic growth.

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 01 February 2020

Make for the world

The Survey identifies that the current environment for international trade
presents India an unprecedented opportunity to chart a China-like, labour-
intensive, export trajectory and thereby create unparalleled job
opportunities for our burgeoning youth.
By integrating “Assemble in India for the world” into Make in India, India
can create 4 crore well-paid jobs by 2025 and 8 crore by 2030. Exports of
network products, which is expected to equal $7 trillion worldwide in 2025,
can contribute a quarter of the increase in value-added for the $5 trillion
economy by 2025.
China’s remarkable export performance vis-à-vis India is driven primarily by
deliberate specialization at large scale in labour-intensive sectors, especially
“network products”, where production occurs across Global Value Chains
(GVCs) operated by multi-national corporations. China used this specialised
strategy to export primarily to markets in rich countries.
By harboring misplaced insecurity on the trade front we are unlikely to grab
this opportunity, our trade policy must be an enabler.
...enforce ease of doing business
Ease of doing business is key to entrepreneurship, innovation and wealth

creation.
Enforcing a contract in India takes on average 1,445 days in India compared
to just 216 days in New Zealand, and 496 days in China. Paying taxes takes
up more than 250 hours in India compared to 140 hours in New Zealand,
138 in China and 191 in Indonesia. These parameters provide a measure of
the scope for improvement
Setting up and operating a services or manufacturing business in India
faces a maze of laws, rules and regulations. Many of these are local
requirements, such as burdensome documentation for police clearance to
open a restaurant. This must be cleaned up and rationalized
Logistics is inordinately inefficient in Indian sea-ports. The process flow for
imports, ironically, is more efficient than that for exports. Although one
needs to be careful to directly generalize from specific case studies, it is
clear that customs clearance, ground handling and loading in sea ports take
days for what can be done in hours. A case study of electronics exports and
imports through Bengaluru airport illustrates how Indian logistical
processes can be world class.

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 01 February 2020

Banks need to scale up

A large economy needs an efficient banking sector to support its growth.
Historically, in the last 50 years, the top-five economies have always been
ably supported by their banks.
The Indian banking system is currently sub-scale compared to the size of
the economy.
As PSBs account for 70 per cent of the market share in Indian banking, the
onus of supporting the Indian economy and fostering its economic
development falls on them. Yet, on every performance parameter, PSBs are
inefficient compared to their peer groups.
It is suggested to use FinTech (Financial Technology) across all banking
functions and employee stock ownership across all levels to enhance
efficiencies in PSBs. These will make PSBs more efficient so that they are
able to support the nation in its march towards being a $5trn economy.
All these recommendations need to be seriously considered and a definite,
time-bound plan of action drawn up. With the cleaning up of the banking
system and the necessary legal framework such as the IBC, the banking
system must focus on scaling up efficiently to support the economy.
Government needs to get out of business
A comparative analysis of the before-after performance of 11 CPSEs that had
undergone strategic disinvestment from 1999-2000 to 2003-04 reveals that
net worth, net profit, return on assets (ROA), return on equity (ROE), gross
revenue, net profit margin, sales growth and gross profit per employee of the
privatized CPSEs, on an average, have improved significantly in the post
privatization period compared to the peer firms.
The analysis clearly affirms that disinvestment (through the strategic sale) of
CPSEs unlocks their potential of these enterprises to create wealth evinced
by the improved performance after privatization.
Therefore, aggressive disinvestment should be undertaken to bring in higher
profitability, promote efficiency, increase competitiveness and to promote
professionalism in management in the selected CPSEs for which the Cabinet
has given in-principle approval.

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 01 February 2020

Economic overview and outlook

Overview
The year 2019 was a difficult year for the global economy with world output
growth estimated to grow at its slowest pace of 2.9 per cent since the global
financial crisis of 2009, declining from a subdued 3.6 per cent in 2018 and
3.8 per cent in 2017. Uncertainties, although declining, are still elevated
due to protectionist tendencies of China and USA and rising USA-Iran geo-
political tensions.
The Indian economy slowed down with GDP growth moderating to 4.8 per
cent in H1 of 2019-20. A sharp decline in real fixed investment induced by a
sluggish growth of real consumption has weighed down GDP growth from
H2 of 2018-19 to H1 of 2019-20. Real consumption growth, however, has
recovered in Q2 of 2019-20, cushioned by a significant growth in
government final consumption.
India’s external sector gained further stability in H1 of 2019-20, with a
narrowing of Current Account Deficit (CAD) as percentage of GDP from 2.1
in 2018-19 to 1.5 in H1 of 2019-20, impressive Foreign Direct Investment
(FDI), rebounding of portfolio flows and accretion of foreign exchange
reserves.
Imports have contracted more sharply than exports in H1 of 2019-20, with
easing of crude prices, which has mainly driven the narrowing of CAD.
In an attempt to boost demand, 2019-20 has witnessed significant easing of
monetary policy with the repo rate having been cut by RBI by 110 basis
points.
Having duly recognized the financial stresses built up in the economy, the
government has taken significant steps this year towards speeding up the
insolvency resolution process under Insolvency and Bankruptcy Code (IBC)
and easing of credit, particularly for the stressed real estate and Non-
Banking Financial Companies (NBFCs) sectors.
At the same time, impact of critical measures taken to boost investment,
particularly under the National Infrastructure Pipeline, present green shoots
for growth in H2 of 2019-20 and 2020-21.
Outlook
Based on CSO’s first Advance Estimates of India’s GDP growth for 2019-20
at 5 per cent, an uptick in GDP growth is expected in H2 of 2019-20. On a
net assessment of both the downside/upside risks, India’s GDP growth is
expected to grow in the range of 6.0 to 6.5 per cent in 2020-21.
Key Risks
Continued global trade tensions and Escalation in US-Iran tension
Hike in short-term interest rates by global central banks may result in
capital flight.
Slow progress in IBC implementation
Expansion of fiscal deficit due to higher public spending
Worsening of CAD due to non recovery in domestic savings

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01 February 2020

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 01 February 2020

Indian economy in nine charts

Investment decline to the

lowest in a decade

The merchandise imports

have shown a structural
down turn, indicating
success of import
substitution strategies.
Though Make in India
program does not seem
to have yielded desired
results as imports are
almost constant since
FY16

Money multiplier has

contracted post
demonetization

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 01 February 2020

Domestic liquidity is in
surplus since past six
months

Policy transmission
continue to remain slow

Credit growth remains

poor

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 01 February 2020

Core inflation under

control, food inflation
spikes

Rural wages contract

impacting rural
consumption

We have failed in
capitalizing on our
strength, i.e., culture &
history

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 01 February 2020

Financial markets

Net flows to mutual

funds double yoy

FPI turned huge buyers

Benchmark indices
returned a decent double
digit return

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 01 February 2020

Important disclosures
It is important to note that InvesTrekk does not offer any portfolio management, brokerage, money
management, equity research or investment advisory services of any kind. Please take advice of a
qualified and registered investment advisor before taking any investment decision.
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