Does Chandigarh need high rise buildings?

Sum evaluates the strong oppositon to vertical construction in Chandigarh ....

Strong opposition to Tata Housing’s proposed high rise residential project near Sukhna Lake reminds me of the yester year’s debate of whether girls be allowed to wear skirts (and miniskirts) in colleges. A lot of colleges went ahead and imposed a ban, some even banned jeans and other western outfits crediting themselves with moral high ground. But as we evolved as a society, these trivial issues became non issues. The question remains who decides moral high grounds and set standards for what is right for the society?

Chandigarh, no doubt earns its title of being “The City Beautiful”, and I applaud the high quality civil and social amenities that its citizens enjoy relative to any other city in India. Needless to say planning and administration played a big part so did the futuristic vision of the legendary Le Corbusier in making this a world class city.

Any threat to the heritage or original set up of Chandigarh is indeed a concern that needs to be addressed including projects and developments that come up in its vicinity and periphery. Evaluating objections to Tata ‘s Camelot from a relative standpoint, the concerns seem to be narrowing down to an issue “whether Chandigarh needs to grow vertically, particularly in light of its heritage status?”.

The biggest strength of Chandigarh is its planned development and architectural brilliance from a city’s layout perspective. The civic and social amenities and fast implementation of projects adds value to the physical infrastructure. But the success of a city is measured not only in terms of its physical infrastructure and service delivery mechanism but also in terms of it being able to self finances its expenditure and generates funds for its growth. Equal opportunities for growth, environment consciousness and safe and secure environment are other parameters on which a city can be rated.

Let’s take up the issue of equal opportunities first; every citizen has a right to self growth and development and move up the ladder of socio economic status. There is a strong linkage between who are opposing this project and what strata of the society they are representing. MLA’s sold their society land to a private builder who is going to build a high rise close to an affluent area with green and natural surroundings much to the dismay of high profile settlers of northern sectors of Chandigarh. They are commanding and setting up their base in these sectors and are not ready to share even the minutest of this privilege with the growing and upcoming middle class. A high rise approved as per the norms within the framework of all legal approvals will provide avenues and opportunities to middle class people to dream a home in the north of Chandigarh. Is it a sin to conceptualize and bring about a project that provides such opportunities?

Another issue which concerns me is that the way the investigation was carried out and how it is biased and shares concerns of only a certain section of the society. The six part investigation fails to recognize the views of the villagers who are likely to share neighborhood with this project, the views of builders and brokers were never aired, the views of middle and upper middle class were nowhere to be seen. Is Chandigarh and in particular the northern sectors only the prerogative of the rich and affluent section of the society?

The matter is already sub judice and forming a public opinion based on lop sided facts and views will influence the action and thought process of regulatory agencies and civil bodies. We need a planned but equitable growth of a city like Chandigarh and provide opportunities for all classes of people to dream and own a house in Chandigarh. The feudal settlers of Chandigarh are lobbying against this project to protect their monopoly over the priciest assets in Chandigarh and no leaf is unturned by the ill informed media in helping them in their cause. Chandigarh needs high rise and residential projects (particularly high rise) near water bodies and natural surroundings are not uncommon in all major and planned cities of the world. There is a tradeoff between beauty and equitable growth in this case; and the choice will depend on the level of hierarchy the person belongs to in the society.



QE 2 : Whats the big deal about it ?

QE2: What is it and what’s the big deal about it?

QE2 or quantitative easing is printing of currency by the Fed (central bank of US) to buy treasuries (long term government bonds). So let’s see what the exact fact of the matter is as per an international weekly - “The Fed said it will buy $600 billion of treasuries between now and next June at about $ 75 billion a month”. In recessionary times or when the economy slows down from its long term growth trend the central bank intervenes to boost demand and growth by providing liquidity in the markets through an expansionary monetary and fiscal policy. Monetary policy can stimulate demand by cutting interest rates and / or reducing the statutory reserve requirements of the banking system. The rate most likely targeted by the central bank in the monetary policy is the repo/ reverse repo rate which are the overnight rates at which the central bank lends/ borrows from the banking system. In extreme and extraordinary circumstances (much like the present form in the western world) when nominal rates are near zero and real rates are negative there is no more scope with the central bank to make any further cut in rates and stimulate the economy. It instead is left with extreme measures like currency devaluation (by printing currency and increasing money supply) or by directly buying real assets.

What US is doing with QE2 is experimenting with printing currency to buy long term treasuries. Printing currency will increase money supply in the economy which will keep interest rates low and provide liquidity in the system to stimulate demand. Increasing money supply is followed by high inflation but that is not too much of a concern in an economy with a lagging demand. US is currently focusing on stimulating demand and kick staring the economy towards its trend growth rate of around 3.5-4 %. In fact at this stage a though of increasing inflation will signal increase in demand, which Fed can control by raising rates in the medium term.

Emerging and growing economies like BRICs and to a lesser extend Germany are skeptical of QE2 and crying horse over this loose character policy of the Fed. When Fed introduces liquidity in the system by printing currency, investors will look for assets with high yields. With interest rates on treasuries ultra low, investors turn to risky assets like alternative investments, real estate and emerging economies (emerging economy is an asset class in common parlance). A flood of money chases high interest rates and high yields in emerging economies which propels asset bubbles in these economies (I know of a few bubbles already – Brazil’s currency bubble, China’s real estate bubble and India’s stock market bubble). What this also leads to is that the demand for dollar decreases and the demand for foreign currency increases, thus putting downward pressure on dollar and appreciating pressure on the foreign currency. No surprise dollar is on a downward trajectory relative to Real, Rupee and Euro. China with its elephant footed currency peg has prevented Yuan’s appreciation by buying dollar assets and thus amassing huge foreign exchange reserves. Indian and Japanese central banks too have intervened in the currency markets to keep their respective currencies on a crawling peg and not let them rise astronomically.

There’s another more inherent risk with this dreadful depreciation of dollars. Greenback is regarded as the reserve currency of the world and countries around the world are accumulating Dollar reserves to insulate themselves from a sovereign default. Imagine this situation; China has around $ 2 trillion of reserves, now when Fed move make dollar depreciate by 15-20% in the short run, reserve are going to depreciate straight away. Scary, isn’t it?

I can go on and on and on with the explanations and counter explanations in explaining how this complex situation is unfolding and what are the implications for all the counterparties involved. To make it straight and plain, Dollar is going to depreciate which will make dollar exports competitive, foreign currencies will appreciate and the dollar reserves of countries will dwindle.

My solution to this is rather radical and very quick (my wife is frowning as I write this ‘boring’ bit of article on a Sunday evening). First, emerging economies should pressure for a value weighted SDR as the reserve currency of the world; with the currencies of all G20 economies getting weights proportionate to the size of their economies in the SDR. Second countries keeping their exchange rates artificially low (China) and even at some stage US, should be penalized. Third, India in particular, should start accumulating Chinese Yuan as the reserve currency as China is India’s biggest trade partner outside of US and the trade is going to get bigger with both the economies growing in size and scope. Dollar will dwindle and Yuan will appreciate finally, there is no risk whatsoever (though I acknowledge political risk) in accumulating Yuan as a reserve currency, central banks must pay heed to the mind of a radical investment analyst.

Explaining Dip in IIP Numbers (Sep 2010 - India)

Explaining Dip in IIP Numbers

“Industrial growth continued to decelerate slowing to a 16 month low of 4.4% in September on account of sluggishness in key sectors” – Business Standard.

IIP or Indices of Industrial Growth numbers are one of the key short term leading indicators of economic health and help form expectation of GDP growth growing forward. It is important to know that reported IIP numbers are calculated as percentage growth over last year.

Current deceleration of IIP number is India to a 16 month low can be accounted to two factors. One is a statistical effect and other one is a structural and strategic effect. The statistical effect could be that current deceleration in on account of high base of last year. Last year increase in IIP was very robust and the base for last year (2009) was the slowdown period of 2008 during which industrial production and other key indicators were exceptionally skewed downwards. So, robust growth of 2009 was on account of low base effect of 2008 and 2010 deceleration is on account of high base effect of 2009. Not much to be read into this statistical effect if this indeed is what is happening.

But there is another and somewhat worrying side to this deceleration. The deceleration in growth could be on account of slowdown in the inventory cycle. Businesses typically like to maintain appropriate inventory levels based on their expectations of future growth and level of demand. Thus the current production numbers are based on future expectation of demand. If businesses are getting pessimistic on future growth in demand, they may like to lower their inventory levels and slow down the production. Lower production means lower IIP numbers and may signal a slowdown in GDP growth going forward. Indian economy is closely integrated to the world economy and expectations formed in the global economy get reflected in domestic indicators although with a lag. If industry is indeed in the process of slowing the inventory cycle, global expectation may have played a part too.

There’s a third angle to this story too, inflation and rate increases may have played a part in slowing down the industrial production too. Inflation is positively correlated to industrial production only if the businesses are able to pass on the inflation to its consumers. There is no empirical evidence on a full pass through of inflation by businesses on a macro level and the level of inflation which is not passed through drags industrial production (as input costs increases and margins become lower). Rate increases by the central bank in the midst of high inflation lets industry to form expectation of further rate increases and thus a slowdown or moderation of growth and thus low demand. It’s a complex and a very tight balancing act for RBI indeed.

The great subsidy debate.....

Tuesday, November 9, 2010The great subsidy debate....

Subsidy to Farmers: Replace subsidies with greater market access for farmers including allowing export of agricultural produce. Farmers will get more for their produce in global markets and Global prices will become the floor for setting domestic MSP. Government agencies can assisit farmers by providing integrated marketing and distribution services for a global reach. Deadweight loss of subsidies will be coverted into producer surplus. Free market leads to better price discovery and competetion, international prices will serve as a benchmark for domestic pricing of agricultutral produce by the state government.

Kashmir: The Way Forward......

It is heartburning to see the valley under fire. The situation is a national emergency, if indeed we consider Kashmir to be an inseparable part of India. Stone pelting and bullet firing is no pleasant sight and my heart burns for the Kashmir and its citizens who have ultimately lost patience after years of being under siege.

I do recognize the political compulsions and complexities in initiating and continuing any kind of dialogue over a subject as complex as Kashmir especially with a counterparty that is vulnerable to short temperament and outbursts. However we do need to move forward and for a first and shed our image of a soft nation in taking the bull by its horns.

Being an economist at heart (with a ‘finance ka kida’ in my mind) I tend to weigh every possible situation from an economic viewpoint. India has finally arrived at the world stage and everyone (including India bashers) is sitting up and taking notice. They say ‘make hay when the sun shines’, but are we making hay when the sun is indeed shining on India? Now is the moment of reckoning for us, when we have a young educated work force, increased fiscal and intellectual capital and high opportunities for growth. The economy is running at full throttle, not concerned with how rests of the economies are panning out. We are at the same time engulfed in our domestic issues like internal security, insurgency, and lack of political decision making. These internal disputes and complexities (including Kashmir problem) are preventing us from operating us at full capacity and are taking off more than a couple of percentage points from our GDP growth rate. The complexities of Kashmir are hurting the counterparty even more as it values Kashmir more heavily than even the right to live for its citizens.

Both India and Pakistan wants a bigger pie of the cake whenever they come anywhere close to discussing Kashmir, but can’t we think of a situation where we increase the size of the cake and satisfy alter egos of both parties. Radical and extreme situations invite radical solutions, even though any radical discussion or thought on the K word invites sharp reactions.

Here is my piece of the mind on the way forward. Kashmir (excluding Jammu) to be given autonomy based on self governance, the territorial right remaining with India (of Indian part of Kashmir), state functions being the prerogative of the autonomous body. SAR Kashmir, India (Special Autonomous Region of Kashmir, India) being given a tax holiday, economy concessions and packages for up gradation of social and physical infrastructure. Line of control should be regarded as international border for all purposes.

Pakistan Administered Kashmir or “Azad Kashmir” (as it is fondly called) be made a SAR Kashmir, Pakistan and a similar self governance mechanism to be followed as discussed above for Indian part of Kashmir. Increased bilateral exchanges like trade and commerce, social, cultural and religious exchanges should be facilitated between both Indian and Pakistan’s SAR Kashmir and increased focus should be made on economic self dependence of both regions.

As discussed, the Line of Control should be made a sealed border to check illegal immigration and infiltration. GOI should also consider fixing its porous borders with Nepal and Bangladesh to check the free flow of infiltrators in and out of the country.

Kashmir is indeed a special case and very close of my heart not only because its people have suffered since long while rest of the country has moved forward but also because it is the most beautiful part of India, and its hurts to see it bleeding. Economic logic also says; restructure the loss making or bad performing divisions by a spin off or a split off. No one is suggesting a split off, but a spinoff is certainly possible.

How about an equity index based on complete universe of securities ?

Sum proposes an idea of having an equity index based on the entire universe of securities traded in an exchange.

There’s some problem with me, somehow I refuse to accept the things the way they are. Its not surprising I get along with few people and always keep all those around on the tenterhooks. Its confusing when new friends say they don’t understand me. I hate maintaining status quo on the rule of nature, law of world, rule of thumb kind of things and have landed my self in difficult situations more than once in challenging such authorities.

Nevertheless, getting back to business, I am pretty engrossed with the thought of why do we accept the benchmark indices like NIFTY, S&P 500 and FTSE which are value weighted index of certain specfic and representative stocks to track the overall movement of the market. I shared this with an avid investor who has blown up his bottom trading Nifty futures and his staunch reply was ‘you got any problems with that?’. Well yes I do have problems with accepting an index of representive stocks to track and guage the overall sentiment of the market. Maybe it’s the motivation to treat these index as the underlying for other financial instruments that keeps the index simple and make it relatively irrelevant or rather less important than the instrument for which it is the underlying.

I ain’t no research fellow, but it is not very insane to form the hypothesis that the stocks included in the index show different characteristics and form difeerent patterns when included in a benchmark index. Does this make the index biased ? Maybe not, but I still am not ready to buy the idea of having a benchmark index (with certain representative stocks) that tracks and gives a brief of what is happening in the overall equity marketplace.

The index culture came to being when IT industry was in infancy. The lesser the better was the norm and complex things were best avoided. Now the world hass changed, maintaining a 50 stock index is s easy as maintaining an index of complete universe of securitites trade on an exchange. So does having an index based on complete universe of securities traded on an exchange makes world aa better place of live in. Well; Certainly No, but it certainly dosen’t make it any worse either. So why not give it a shot.

Some say, the outliers may screw up the overall movement of the index (based on the entire universe), but that’s exactly why I want a complete universe index and not one based on some parameters out of the universe. The outlier effect in an index based on certain parameters taken out of the universe is more likely than otherwise.

No grudges agaisnt any representative index (rather they make my job a lot easier), but still I would like to see some financial innovation in this space. Having an index based on the entire universe of stocks would make the correlation of the index with the overall economy much more significant.

So what do you say ? How about a test drive with an index based on entire universe of traded stocks on an exchange.

Sugar Dreams

Investment Strategy in the light of proposed decontrol of Sugar prices.

This moonsoon season has coincided with the deregulation season this time. Everything is getting decontrolled, next on line is sugar and it is again a major plus for sugar producers, efficient markets and better price discovery. Consumers will benefit in the long run with ‘efficient prices’.

If government estimates are to be believed, this year is going to be a surplus for sugarcane production and sugar supply will outsrip demand. No better time to decontrol, three months time frame is what they are looking at. If you are an investor, no better time to pick up a few lots of sugar company stocks. Balrampur Chini is the only stock I am following for this sector and it is trading at around 85-86 levels. I have a target of around 120-130 with a 4-6 months investment horizon. Keep a stop loss at around 75 and go long this stock. There is likely to be major upside with a few positives lined up for this sector. For commodity traders, go short sugar with 2 months expiry (though watch out for seasonal trends on increases in prices around the festive season).

No more ‘Chini Kum’, enjoy monsoon with lots of sugar (and some sugarry returns) up your sleeve.

A tender apology to the people of Kashmir.

An apology to the people of Kashmir and the way forward for the Union of India.

We’ve been unfair to the people of Kashmir since independence. We owe an apology to them for what they have gone through all these years and for our inability to provide them the same level of economic, political, cultutal and social status that our democracy bestows on all citizens of this country. My tender apology to all the Kashmiris who have suffered in whichever way for all these years while the establishment and the people of rest of this country failed to hold their hand and form a common cause with their struggle and miseries.

A political dialogue is required for a permanent solution of the Kashmir problem and that is in the interest of all, including India and Pakistan and in particular the people of Kashmir, on both sides of the border. For the Union of India, it is time we make some amends in our approach and thinking towards Kashmir and provide it all the amenities and priveleges which other states of the Union are enjoying since independence.

The union should consider bringing the State of Jammu and Kashmir at par with other States of the Union both on economic and social infrastructure fronts. A major thrust on physical infrastructure including (but not limited to) building world class roads, bridges, canals and waterways, airports, schools, colleges and hospitals, recreiation facilities and providing essential services like electricity, water, sanitation and other pheripheral services. The intangibles in terms of restoration of civil and local bodies, local administration and social sector schemes delivery mechanisms needs to be spruced up.

The people fo Kashmir have suffered and a NREGA kind of scheme which promises them guaranteed employment commensurate with their skills needs to be introduced. Provide them safe houses, hassle free public transport, pensions for the elderly, free education for the children, self employement for the youth, world class medical care and welcome industry and businesses in the state. Focus should shift on uplifting the economic profile of the both the people and the state of Kashmir. Government should consider setting up a free trade zone and SEZs with special economic benefits in the state. All businesses which employs 50 of more Kashmiris should be provided a tax holiday and preferential treatement in terms of tax waivers and low cost financiang be provided to SMEs and Cottage Industry.

Empower the people of Kashmir economically and provide them an environment which gives them a sense of belongingness with the Union of India. The problem of Kashmir will precipetate in thin air if the Union is able to deliver half of what is said in a secure environment. People would not mind the use of excessive force if that ensures them economic empowerment and a better living standard in a safe and secure state. Do you think Kashmiris would want not to side with the Union of India, if they are economically and scoailly empowered to be first grade citizens of this country? All talk of autonomy (even in the partial sense) and the thought of even the minutest of roles for Pakistan in Kashmir will send shivers down the spine of the citizens of Kashmir. The only worry at that stage would be to maintain the status quo and ensure high growth and opportunities for Kashmiris in Kashmir. Welcome Kashmiris in the mainstream and embrace them with love, compassion, respect and equality. Kashmir shall never be the same again. Long liveKashmir, long live it’s brave citizens.

Handling Internal Security Issues

Required - An Article 356 replica to strip states of Police function in the event of ineffective policing. 

The orders it seem are clear from the top; hit them and hit them hard. Centre’s strategy has started showing some headway in tackling the Maoist violence. A few top Maoist leaders were gunned down recently and we are increasingly hearing threats from Maoists of avenging their killings. The single minded approach of the centre and it’s pulling up the states over their inaction and lop sided approach has started paying some dividends; though the fight is now getting nastier. Maoists are fighting with gusto but their killing of common man highlights their traits of cowardice.

What is worry some is non alignment of the interests of centre and the state governments. Especially since the internal security is a state subject and centre is only providing inputs and support to the states to handle the Maoist menace. Some state level parties are hand in glove with these Guerrillas which jeopardizes the efforts of the machinery (West Bengal and Jharkhand and proximity to Maoists of a Didi or a Gurji is not unheard of). Are we in such circumstances committing the same mistake what America is making in AfPak war. There are so many similarities here, the terrain is difficult, the enemy is hard skinned and fighting with gusto, the growth and spread of violence is carcinogens and the local administration is double faced. Pakistan cannot be trusted in the Af Pak war, nor can the local state machinery be trusted against the Maoists.

If Article 356 can be used to dissolve or put in suspended animation the state legislature thus placing the state under direct federal rule, why can’t we legislate to bring a law which suspends / dissolve the state’s police department in the event of its failure to tackle the security and law and order problems?  Article 356 of the Constitution of India, gives the central government the authority to impose president's rule in any state if there has been failure of the constitutional machinery in the state. We can have a similar legislation to suspend the state’s jurisdiction over its police and the subject of internal security and police be placed in the center’s list (temporarily for the particular state in question) in the event of its inability to maintain law and order and suitably tackle internal security threats. A call for help by Omar Abdullah is a very recent example where a state government had admitted its inability to maintain law and order. Army is not the solution, as in cases of internal security threats Army is handicapped to perform in civilian areas.

Enough of lip service by the local states, if you can’t perform the function of internal security of your citizens effectively, let some one else do it for you. 

'We broke it first'

Testing the Hypothesis 'breaking news stories are the same as inside information'

News Channels take pride in boasting ‘we broke the story, first’, particularly Business News Channels where the story and its timing of breaking the news matters. I have some concerns on ‘we broke it first’ kind of news and they ring an alarm bell in my head. Isn’t it “Inside Information” if you have prior information of some key event that is likely to effect the stock prices in a significant way; and aren’t we restricted from trading based on inside information?

The king of insider trading, Hedge Fund Galleon’s general partner Raj Rajaratnam used his ‘sources’ to extract inside information on technology companies and generate alpha. He is behind bars and FBI is still struggling to get to terms with his modus operandi. I’m not placing the business news channels and their breaking news stories in the same bracket as the ‘king of good times’, but I am just toiling with an idea of testing the hypothesis ‘whether breaking news stories are the same as insider information’.

Lets imagine a situation wherein an analyst of a leading news channel (lets say ABC News) is following Reliance Industries and through his ‘links’ get to know that Reliance is contemplating an acquisition in the energy sector in US. The information is classified but the news reporter is convinced that he’s got a breaking news. He report the news to his editor in the expectation that it will appear as a breaking news but at the same time also asks his broker to trade Reliance stock (let’s say he orders his broker to buy RIL, considering the acquisition is at low valuation and favorable to Reliance). The story doesn’t end here, the editor too tells his broker to trade Reliance (buy) before approving the telecast of ‘breaking news’. Some ‘Shiren Bhan’ or the ‘pretty damsel, Sonia’ (in the pic) might present the ‘breaking news’ but not before they have asked their broker to trade Reliance. They may be a lot more links in the chain than just the analyst, editor and presenter all of whom may share this inside and classified information to generate excess returns. It would not be wrong to assume in such a scenario that enough trading will take place based on the above inside information to influence the stock price of Reliance in a favorable direction. The inside information gets priced in the stock value and the stock price moves to a new level.

Let’s say we move ahead a couple of days and the deal indeed happens, Reliance buys an energy company in US at a cheap valuation and confirms it through a media briefing. There is frenzy for this news story all across business channels and newspapers. The retail investors believe this to be positive news and take a buy decision on the stock. However since the acquisition news has already been priced in the stock due to insider trading by the news channel and other links it generated, the stock does not show a favorable trend to this news when it is official made public.

Result, the retail investors gets screwed (again) and the news channel proudly proclaims ‘we broke the story first’. I have to say I fail to reject the null hypothesis that ‘breaking news stories are the same as insider information’ and as an investor I feel like a trumpet (vuvuzela) that anyone (including news channels, companies and other market participants) can blow at will.