Some crystal ball gazing for the next year

If you are an Indian then you are probably seized of the importance that the next 12 months, or even 11, have in store for the country. It is not easy to predict the outcomes in different aspects of life as much of these issues are quite complex in nature. However, it will be safe to say that whatever the outcomes, they are likely to change things for the country in a significant manner. In this post, I will try to do some crystal ball gazing into 4 important areas, namely Society, Politics, Economy and Markets.

Let us look at society first and, I think most of us will agree that we live in very divisive times today. Whether it is division along class lines or on community lines, there is a lot of basic mistrust that people have for each other today. This is manifested in the bitter invective political parties come up with, in communal skirmishes in several parts of India, lynchings on suspicion of kidnapping children and so on. The law and order machinery has pretty much broken down with rapes, assault and mob lynchings being a daily occurrence, as opposed to the exception they used to be earlier. The society is also divided along class lines – industrialists perpetrating big financial frauds on the banks seem to get away, while indigent farmers have to commit suicide as they are not able to pay small loans back to the banks. Nothing seems to be sacred any more – army men are pelted with stones, anti national slogans are shouted in the name of freedom and people cynically debate as to whether one needs to stand up to the national anthem.

Unfortunately, over the next 11 months or so I think the society is going to get more polarised along communal, caste and class lines. With the BJP in power, the right wing fringe groups have got emboldened and violence has become a way of life for both these people and the ones they oppose. For the political parties a divisive agenda is the only way to bring out a good electoral outcome and they will not do anything else. The court judgement on the Ram Mandir issue will add to the polarised atmosphere of the country and the movement towards an Uniform Civil Code will heighten communal tensions. The only way is to tighten law and order by being tough to all perpetrators of crime, without fear or favour. However, in an election year that will never really happen.

Politics is, of course, at the core of everything that is happening in our society today. For both BJP and the opposition the 2019 elections will be a game changing one. When BJP lost unexpectedly in 2004, it took them 10 years to come back in power, even though the UPA ran a shoddy and corrupt government. The opposition knows they have been lucky not to have their misdeeds exposed and judged in the current term of the government, but their luck will not hold if BJP gets another term. With this backdrop both sides will do everything possible, both fair and foul, to win at all costs. The by poll results have shown that if the opposition comes together, it is tough for the BJP to win in today’s scenario. However, a lot of this can change in the next 11 months, BJP will hope it does.

My assessment is that the opposition will never agree to the simultaneous election idea that BJP is so keen on. Congress knows that it has chances in MP and Chattishgarh, with Rajasthan almost certainly going to them. It therefore makes sense for them to show BJP on a losing wicket when it goes for the Lok sabha elections. The only way BJP has out of this is to hold elections in January or so and get these 3 states as well as Andhra Pradesh and Telangana clubbed. This has a definite element of risk as Bajpayee had found out in 2004 and many in the BJP will remember that lesson. In any case, BJP will probably have to bite the proverbial bullet as the alternative is certainly worse. Whichever way it decides to go, I cannot see it getting anything more than 250 and anything less than 200 seats. If it is the former then there will be enough parties who will tag along for them to form a government. However, anything less than 230 will really mean a Karnataka like situation where everyone will come together to keep the BJP from power. I think 250 is a possibility but for that to happen large sections of the society will need to support the BJP as they did in 2014 – the health program, MSP pricing, Kashmir having President’s rule, possible solution to Ram Mandir are all geared towards this.

What of the economy then? It is now clear that the corporate results are on the way up, though in a slow trajectory. The tax collections are fairly robust and the initial glitches with GST are improving now. Good measures like the bankruptcy code and declaring absconders as fugitives will make sure that people do not take banks for a ride. However, the expenses of the exchequer have increased manifold due to the Universal health scheme as well as the MSP increases. This, along with the refusal to reduce taxes on Petrol/ Diesel will unfortunately create an inflationary impact in the economy. The RBI may well be forced to increase the interest rates and coupled with the depreciating Rupee against the US Dollar, there is a good chance that the economic recovery might get stymied. The government is hoping that the effects of this will be only visible after the elections but people who know will be able to see this portent quite clearly.

Finally, how will the markets fare in all of these. Right now, I see the Nifty being in a range of 10000 to 10800, with a possible negative bias. If elections are held separately and BJP loses the assemblies then a fall to 9000 and below is quite feasible. In the event of BJP losing in the Lok Sabha and being unable to form the government, a 20-25 % downside from the 10000 figure is reasonable to expect. On the other hand the relief will be palpable if BJP somehow comes back to power and a rally to 11000 plus, maybe nearing 12000 can be expected.

So there you have it – a swing of 8000 to 12000 is possible. This is the kind of excitement that many expert investors seek in the markets in order to make money. For most of us though, such volatility is really not desirable. How should they deal with their investments in this turbulent period?

I will write about investor strategies in the next few posts.

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Nifty outlook for 2018 – Troubled but with some hope

When I look at what has happened in 2018 with the Nifty so far, I definitely get a sense of deja vu. A decade back in 2008, the Indian markets were flying high with the Nifty having crossed 6000 in January. At that time too, there were global rumblings on the sub-prime crisis, though the Indian context was not really an issue. We all know from history what happened. We went into a sharp and brutal correction initially, followed by years of listless performance till 2014. What many investors are worried of now is whether there is a chance of history repeating itself and , more pertinently, what is likely to happen in 2018. Let me try and share my observations in this post.

To begin with, let us understand one major difference between 2008 and 2018. In the former year, Indian markets had a very strong dependence on FII money and they could crash the market by pulling out whenever they had any inkling of bad news. Over the years, with the domestic retail money coming into the market through SIP in Mutual funds, the dependence on FII money has reduced a lot. As of now we really do not know how the domestic retail investors will behave when they see sharp cuts in the markets. In the past few years, they have not panicked when there were some cuts but what we are looking at now is going to be more serious. My own take is this – given the increased knowledge about goal setting and financial planning, it is unlikely that there will be panic on a large scale. Yes, some people will book profits and take out money fearing deeper crash, others will lower their SIP contributions but these will not be impacting the markets in a serious way.

So what are the factors that will play a greater role? As usual one will have to look at performance of earning as well as the news driven sentiment in the markets. I can think of the following issues for 2018:-

  • The society and the polity are clearly divided along serious fault lines in India. The opposition will oppose everything and even try to manipulate to have any chances, the government is in no mood to listen to any advise, even if it is good one.
  • The impact of the budget will be important for elections in 2018. If BJP wins in Karnataka along with some North Eastern states they will be tempted to call for an early election. I somehow think this will not happen though and the General elections will be held in 2019 only.
  • The elections will definitely be fought along 2 large blocks in 2019. Throughout 2018, the election results for the states will have a high impact on the markets.
  • Budget implementations, especially on the GST and welfare schemes will have a positive impact on the markets.
  • Earning growth is clearly starting to happen now. If this goes well in the next few quarters, the Nifty will shrug off the current panic and move forward. However, this will not be the year of decisive growth, it will be incremental at best.

With these factors playing out, how do I see the Nifty move through 2018? Well, to start with, I think it will go down to 10000 or even 9500 over the next 2 months. If the yearly results are good and some of the election results and GST figures show BJP in a good light, recovery will start slowly. Even then, any decisive move is only likely if the BJP wins the Karnataka elections – this looks quite difficult as of now. In the absence of such a win, this will be slow going year for the Nifty, waiting for triggers in the form of quarterly results. Assuming that the current trend of earning improvement continues and there is a good monsoon as widely predicted, Nifty will probably recover at a faster pace in the latter part of the year. Here are my predictions for the Nifty then:-

  • 9500 by March end 
  • 8500 by May end if BJP loses Karnataka to Congress
  • 9000 by July end with good monsoons, GST collections and Q1 results
  • 10000 by October end with good agriculture news, welfare scheme implementations and earning growth for H1
  • 11000 by December end if BJP wins at least 2 out of the 3 state polls in Rajasthan, MP and Chattisgarh.

In a pessimistic scenario many things can go wrong – Oil prices can continue to rise, inflation can get out of control, Monsoons may play truant, earning growth may be muted and BJP may lose most elections. In such a scenario Nifty may well end the year 2018 languishing at around 9000 range.

On the balance though, I think we will be getting back to 11000 though the route will be rather tortuous as I have described in the post.

My take on the budget 2018

All budgets in India are a product of both Economics and politics and it was expected widely that this budget would be same. The Finance minister, I would say, has largely fulfilled this expectation. He has given a budget which is addressing almost all sections of society and tried his best to address the pain areas as best as he could. Yes, there are issues which the urban salaried middle class investor can grumble about, but they have had it good for several years now and could probably do with some hardships.

Before getting into the specifics of the budget let us try to understand the social, economic and political context under which it was being delivered:-

  • This is the last full budget of the current government as the next one can only be a Vote on account. Therefore, whatever policy decisions had to be taken could only be done in this budget.
  • The agrarian distress in rural India is all too real, evidenced by farmer suicides and loan defaults. This has given rise to social tensions and BJP had already felt the backlash in electoral terms in Gujarat.
  • In urban areas too, the general consensus is that the rich have got richer and the income inequality has grown significantly. It is easy to see, both through data and anecdotally, that one section of people have a lot and the majority have very little.
  • Job creation has simply not happened because the growth in GDP had been way less than we hoped for. To a large extent demonetisation and GST, fundamentally good measures both, suffered from serious implementation lacunae and was responsible for the muted GDP growth.
  • Though the government tried to promote entrepreneurship through Mudra loans and the like, the off-take was not at the desired levels. Also with Indians getting better educated the aspiration is nowadays for jobs in most families and this was not being met.
  • Politically the BJP was in a no win situation even though they were in power at the centre and 19 states. In most of north India they had maxed out in the 2014 elections and could only go down from there. Their main rivals, the Congress, on the other hand, had done very poorly in 2014 and could only improve.
  • Now that BJP is the incumbent government, they have to protect their turf and public anger would be against them. The veterans in the party were always wary of a 2004 like situation, where they lost heavily against all odds.
  • With this backdrop, the FM had to produce a budget that would enthuse majority of the Indian populace. In case the reactions were great this will give BJP a chance to advance the elections, if not they still had some time left for course correction.

Let us now look at the main provisions of the budget. You will notice that the first part of FM’s speech almost sounds like an election manifesto, except that these are not mere promises but announcements in a budget, for which financial allocations are there.

  • Better realisation for farmers in selling their kharif crop. MSP of at least 50 % more than cost may have an upward impact on inflation but will definitely go a long way to reduce farmer distress.
  • A humongous national healthcare protection scheme for 10 crore families. The poor often lose their all in illness and this will ensure that they are shielded from it.
  • Bigger outlays for SC/ST and education scheme for ST.
  • Free gas connections for 8 crore poor women.
  • Initiatives for fisheries, animal husbandry. Job creating incentives foe apparel, leather and footwear industries.
  • A big rail project for Bengaluru courtesy poll bound Karnataka.
  • Much of these are very good but they require resources which had to come from taxation in various forms. 

The fiscal slippage this year made the target next year a more conservative 3.3 %. Though corporate companies with turnover of less than 250 crores benefited from a tax rate of 25 %, there was nothing for larger companies. Similarly, individual tax payers got very little, the Standard deduction of 40000 Rs was in reality only a benefit of 30000 Rs. The LTCG on equities were an unkind cut, especially if you see that the STT has not been discontinued either. This can easily have a dampening effect on the huge MF inflows we have been seeing month on month, for the past few years.

The senior citizens have fared a little better this time. The 50000 Rs tax exemption from FD interest income, the 8 % interest on Senior citizen FD and the increased limit on 50000 Rs for health insurance are all good measures.

Finally, though this is an election budget there is really very little for the urban salaried investor in it. However, they probably are not too important in the scheme of elections and the BJP seems to have the other bases covered. If the monsoons are good, the BJP may well be tempted to call early elections. Will they win ? Only time will tell.

How will Indian economy and markets fare in 2018?

The Indian economy and the markets are poised at a very interesting point. Throughout 2017, the markets were on steroids supported mainly by the huge influx of domestic money coming into SIP. The economy was a different story – there were structural reforms such as GST carried out but our growth was decidedly sluggish and the improved earning many had thought was just around the corner did not materialise. Will this change in 2018? What are the contributing factors and how are they likely to play out over the course of next year?

To begin with, the GDP growth fared a tad better last quarter as compared to the prior one. However, if one looks at the subsequent IIP numbers and the exports data, it is evident that there is not a great deal to be enthused about as yet. Agriculture too is a big concern at this point of time. If you add inflation and fiscal deficit to this mix then a growth rate of 7 % will not be easy to achieve, though it is probably still possible. From a revenue perspective the GST implementation is getting better and it can be hoped to achieve stability by the end of the fiscal year. The recapitalisation of banks, bankruptcy laws and reduction in subsidies are all steps that will stand the economy well in the medium term. However, in the short term these can all cause a fair deal of pain.

In the above backdrop, there has been some positive signs of earning growth. With the monsoons having been normal largely, rural growth has revived to some extent. At the same time agrarian distress is also a fact of life. Farmers are not getting the right MSP and are unable to service their loans. While loan waivers cannot be a solution at all situations, there is a need to manage this in some manner. Consumer goods and Auto sector have largely been buoyed up by increased demand and this is also reflected in their stock prices. Infrastructure spends and affordable housing are two great growth stories that will play out in the next year. If the overall earning growth revives in 2018 it will obviously lead to sustained growth in the markets.

One critical factor in India is always the budget and this is determined, more often than not, by the political context. As of now, the BJP is quite wary of the opposition getting together to thwart their relentless march. Given that this is likely to be the last full budget, there is a good chance of some cheer being spread. On the taxation side this may mean some relaxation of the rates on both personal and corporate income tax. This will put more money in the pockets of the people, thereby boosting consumption. Increased spending in infrastructure, education, healthcare, housing are likely to take place. All of the above should have a positive impact on the GDP figures, assuming that inflation is contained and there are no negative news on the monsoon front.

Assuming the above plays out what will be the impact on the markets? Well, for one, the markets can very easily get spooked if the BJP loses any of the important elections of 2018. The smaller north eastern states will not matter too much but if the BJP loses in Karnataka, Rajasthan or MP then the markets may well correct fairly deep. We all saw what happened when BJP trailed in the initial counting of Gujarat votes. One key assumption in the markets is that the current initiatives will continue and that is possible only if the BJP remains in power. Businesses are very clear that any alternate party coming to power is going to be largely detrimental for the economy. Now rationally BJP cannot win all elections but any elections that it loses will see deep correction.

Given the significant rise of all our indices in 2017 and the above complex scenario, it is safe to assume that the growth will not be as spectacular. However, it is still likely for the Nifty to be at a level of 11000 to 11500 by the end of 2018. The path to it may be tortuous though and Nifty may well test levels of 9500 or even lower, should something unexpected happens. Individual stocks may see greater purchase and it will therefore be important to look at these too in addition to the MF route. The downside protection of indices is fairly robust, given the overall strength of the economy as well as the huge amount of money being pumped in through the SIP route in MF.

If this holds true, how should you be investing in 2018? I will cover that in the next post.

India in 2018 – the fault lines run wide and deep

There are moments in the nation’s history which can be termed as watershed moments. For our country independence/partition, Chinese war, Green revolution, Bangladesh war, Emergency and aftermath, liberalisation of economy, Babri masjid demolition, BJP coming to power and losing it, UPA winning against all odds and then making a hash of it are all such moments. These have had serious impact on India, but what we see today over the past few years is more of a path breaking phenomenon.

Let me explain – since independence till 2014, the overall Indian state was run along the lines of a socialist democratic state with some capitalist overtones. Yes, in 1991 we were forced to liberalise the economy which created a number of ultra rich people and a rather well off middle class. Also the BJP government between 1998 and 2004 was of a different quality in terms of doing things better than it’s Congress counterparts. However, UPA won the 2004 elections and India went back to the norm. If we look candidly as to how things were largely defined in India they were as follows :-

  • Majority of the people were living poorly, if they were Muslims or backward castes their conditions were even worse.
  • Most people were engaged in farming and poor again, though there were some farmers who were well off and a few who were really rich.
  • Infrastructure was poor – electricity, good roads and drinking water were still off for many living in villages.
  • Corruption was a way of life from lowly government clerks to high places such as the courts. It affected poor the most as they could not pay through it to get things done. The better off kind of accepted it as a way of life.
  • The nexus between politicians, crony capitalists, media houses with committed journalists was well established. If you were part of the system you benefited from it , if not you would simply have a rather hard time.
  • Tax collection was poor as most people who could avoid it did so, with the flawed logic that even if they paid taxes nothing much would happen anyway.
  • The ruling dispensation thrived by keeping people satisfied through various means – the poor through subsidies and MNREGA type programs, the industrialists through deeply discounted land and loans, the journalists through free foreign junkets, the minorities through Haj subsidies and allowing them to continue their regressive policies, the SC/ST and OBC through reservations  and the middle class through a vastly better lifestyle as compared to their earlier generation.
  • Corruption and black money were the hallmark of the economy. Both were needed for election funding which got more expensive over time. It was a secret all knew well but no one wanted to do anything about it.
  • While the Congress and other political parties largely perpetuated this state of affairs, we as citizens were equally responsible for allowing it to happen and taking part in it actively through avoiding taxes and black money of our own at times.

However, winds of change have been blowing through the country. Factors such as relative prosperity of one part of India driving up overall aspirations, brazen scams shaking up the placid Indian populace, the left liberal hypocrite narrative having run it’s course, the majority community getting tired of being used as punching bags for living their own faith, the proliferation of electronic and social media all contributed to this change. BJP would have done well in 2014 in any case but two factors stood it in great stead – Congress was clearly seen as the fountainhead of corruption, it’s leadership spineless and devoid of authority to do anything about it. On the other hand BJP did look like the relatively cleaner party and Modi a leader who would be able to turn things around in an effective manner.

To put it mildly, the last 3 1/2 years have been interesting for the society and polity of India. On the one hand several Hindu fringe outfits and their practitioners got emboldened with their own part coming to power and started acting like loose cannons. This resulted in the unnecessary controversies about Gau rakshaks and other stuff. The media hyped it up fully in collusion with the opposition. They needed to do it desperately as it was as though they were losing all relevance in contemporary India after having controlled the narrative for several decades. So you had attacks on Churches played up as Hindu intolerance with intellectuals returning awards over it and other issues. BJP too fell for it by bringing ordinances like cow slaughter ban without explaining it properly. Lies became the order of the day, facts did not matter any more. Through 2014 BJP won elections in Maharashtra, Jharkhand, Haryana to really spook the opposition.

The opposition did get back briefly in 2015 in Delhi and Bihar, the first through BJP’s stupidity of not calling elections immediately after winning all lok sabha seats in Delhi, the second through a completely unprincipled tie up between Nitish Kumar and Lalu Yadav. These losses were good for the BJP though as they were able to focus on a lot of economic fundamentals in 2016. The framework that has been put for opening bank accounts, insurance for the poor, Aadhaar linking of bank accounts and other financial instruments are seminal changes. With the help of data analytics available with CBDT and the GST framework being in place now, it is possible to hope for a quantum jump in tax revenues in the next few years. Focus on the infrastructure and better conditions for doing business will also create a positive environment. In 2017 the stellar performance of our stock markets indicate the confidence in this direction.

At the same time there are serious fault lines that are emerging in our society and polity. These will be exploited by the opposition and hyped up by the section of the media unfriendly to the BJP. Both of them are clear that a return to power for the BJP in 2019 will give it enough time to complete the unfinished tasks of the legal cases as well as dealing with black money and tax compliance. Once that takes place, it will be almost impossible to challenge the BJP hegemony in future elections. Already they control most of India and unless the trend reverses quickly, it may well be over for the Congress.

What are the fault lines? Let me try and outline them below :-

  • Weak governance by the BJP in Rajasthan and Maharashtra in addition to the poor handling of Vyapam scam in MP has taken some sheen off the BJP.
  • No matter what explanation BJP gives, jobs are an issue with so many youth being without jobs. While good work has been done through Mudra schemes etc, much more needs to be done on both skill development and start up facilitation.
  • Agrarian distress is again a reality and the government has to be accountable. It is not enough to say that the situation was bad earlier, the onus is on BJP to make it better. Losing rural votes will mean losing the elections.
  • Social tensions are on the rise. The incidents are not many but each one will be blown up and some unfortunate comments by unthinking party men mean serious image issue for the BJP.
  • While BJP is still seen as largely clean and Modi’s popularity remains high, it is true that no real movement is seen on the UPA corruption cases. The 2G case was a fiasco for the government and it cannot afford a repeat of it.
  • The Ram temple is an issue again. If there is no substantive movement on this in 2018, the BJP runs the risk of going into a general election with large parts of the population thinking it has not been able to fulfil any major promise.
  • Traditional support base of the BJP is miffed with the short term issues of GST and unless this settles down soon they will continue to be a factor in elections.
  • It is not easy to carry out disruptive changes, people who have never paid taxes but are expected to do so now will obviously have major negative feelings about it.
  • Any serious corruption scandal surfacing will be detrimental to the BJP.
  • The opposition, media houses, some parts of industry, Muslim and Christian organisations as well as some judges of courts will try and make things difficult for the BJP every step of the way. For them it is a battle for their existence.

It is important to understand that though the BJP has good support, there are many who are opposed to it too. The battle of perception is an important one over the next 18 months and it will be to the finish. In this period both parties will not cede an inch and try their best to trade punches. The Gujarat elections were replete with verbal skirmishes that were bitter and below the belt at times – it is very likely that we will have similar or worse in the days to come.

The unfortunate part in such an acrimonious battle is that, whoever wins, the loser will feel bitter about the loss and the winner may well gloat. It will be important as a mature democracy that both parties accept the verdict and move on. For the sake of the country as well as my own inclination I hope it is the BJP.

A dispassionate look on demonetisation

Now that the dust and din have settled on the actual amount of cash returned to the banks on the demonetisation initiative, there are clearly two different camps that have emerged. The government and supporting voices are insistent that the drive has been a success and will have great long term benefits for the economy and country. The dissenters question the move and say that the data now proves beyond any shade of doubt that the move was completely ill advised.

Let us look at this from a fundamental perspective to understand what has really happened, why it has happened and what is the likely fallout. To begin with the objective of demonetisation was to unearth the huge amounts of cash that was being used in an unaccounted manner in our economy. It is important to understand that the proportion of cash in the black or parallel economy is a small percentage, nearly 6 %. The bulk of it is in real estate and other assets. However, this cash keeps working as the lubricant for deals in real estate, film industry and other areas where regulations are weak at best and non existent at worst. Thus, the amount of cash is ever increasing and more importantly untraceable. When the government went for demonetisation, the hope clearly was that some of this unaccounted money will not find it’s way back into the banking system as people will be worried to account for it.

What has happened in reality and why? Well, now we know for certain that the amount of money not returned into the banking system is only 16000 crores. Even though the government had not officially named a figure, it was widely expected to be much higher around 3 lac crores. I think some of the reasons are as follows:-

  • A lot of people managed to use the bank accounts of known people to deposit money. For example, I personally know a few who have done this in the accounts of people who worked for them.
  • While it was a great initiative to open the Jan Dhan accounts, I wish there was some deposit limits set to them based on the economic condition of the account holder. Many of these accounts were unfortunately used for parking black money with a promise of paying a percentage to the account holder.
  • The great Indian ingenuity to circumvent rules was in full display during November and December of 2016. An entire industry sprang up to take your old notes and give back 70-80 % of equivalent new notes. Unfortunately, instead of declaring their money and paying taxes on it, many Indians chose to go by these shady routes.
  • In the initial days there was panic and there were even stories of sackful of 1000 Re notes being abandoned etc. However, it soon dawned on people that even if they could not use others accounts or middlemen, it would simply make sense to claim it as current earning and deposit it in their own accounts.
  • The above was possible as the follow up from IT authorities were not thought to be very efficient in their follow up. Many CA’s also advised people to deposit their money and figure out how to handle tax notices etc at a later date.
  • I know of a Doctor who had 15 lacs of black money and he simply generated current year invoices to show it as current year income. As most people went about this way, the amount of money collected from the amnesty scheme was well below expectation again.

Let us now look at the impact of demonetisation on the economy as a whole. It needs to be understood that the unorganised sector got very badly hit by this move. Cash was the only mode of transaction there and sudden unavailability of it almost shut down entire industries in several parts of the country. Several workers in these industries were suddenly left without jobs and these were the section of people who could not afford to be out of work even for a short while. Yes, over the next two months most of the jobs were back but the short term misery inflicted on these people, cannot and should not be forgotten. The organised sector was more fortunate but here too there was a distinct slow down in business and demand.

Why was this not reflected in the GDP numbers of Jan 2017? Well, for one the timing of the demonetisation was chosen very well. A lot of demand and business got executed in the October period as it was festive season in India. Normally there is a lull in commercial activities post Diwali anyway. The data from the unorganised sector anyway takes a long time to find it’s way into the statistics. So the impression of the 7.9 % growth despite demonetisation was clearly a false one, as latter events were to prove. However, this should really not be seen as a problem as most well informed people did understand that the GDP will suffer by 1-2 % in the short run. I am surprised at the 5.7 % number but had been quite prepared to see something to the tune of 6.5 % for the last quarter.

The other area which has been actively promoted by the Government with the Prime minister himself being the champion is digital transactions. It is true to say that in the initial days there was a spurt in these, mainly due to the fact that cash was simply not available. The aggressive marketing of the payment companies and the Indian inclination for good deals saw a surge in these payments. However, with the cash flows having resumed, the transaction growth in these areas is becoming muted. Also, this was at best a byproduct, for the government to say that this was one of the main aims of the exercise really smacks of opportunism, if not hypocrisy.

With all this said, are there any long lasting gains from this drive then? Yes, there definitely is and only the open minded will be able to see the obvious. We now have all cash in the banking system and in a manner that can now be traced. For example, a Real estate transaction can still have some cash component BUT now the IT authorities know the money trail. This is of significant advantage and will now help IT people to follow up on any suspicious transactions. Yes, this will take time, given the paucity of resources but it is sure process though slow at times. The regulation on cash spending is a good follow up measure and this again helps in tracing the money trail. Also, the fact that cash has come back does not mean it has been accepted as accounted income. If you have a sum of 10 lacs in your bank account deposited last year, you will still need to account for it.

So while the overall impact in the short run may be poor, the long term benefits of a cleaner economy that is far more tax compliant will definitely be there. Other measures such as clamping down on benami properties and getting GST to be effective will also help in this regard. The problem is with the government trying to get mileage out of it politically and hence shifting the stands every now and then.

Demonetisation was a bitter pill to swallow for many of the citizens and for people affected adversely the taste lingers. It will however, usher in a completely new country as long as things are followed to their logical conclusion, without fear or favour.

IndiGrid InvIT Fund IPO – should you invest ?

In the investment world we are all looking at newer ways to invest, always hoping that the next product coming across will hopefully give us better returns than our earlier ones. In this context the Infrastructure Investment trust bond issue from IRB Infra generated a lot of interest in the market and was oversubscribed 8.6 times, despite the high ticket size of 10 lacs. Close on it’s heels we have the IndiGrid InvIT fund IPO, open from 17th to 19th of this month.

To begin with, Infrastructure projects such as ports, roads, power projects and other kinds of construction are normally on a massive scale and need a lot of funding. These are also long gestation projects where the returns will only come after a certain number of years. If you look at NHAI for example, the several companies started by it for the different projects are all technically running at a loss, due to the high interest rates and depreciation that they have to deal with. Their loans are huge and though the marginal profits on EBITDA are very good, progress in some of these projects have been slow due to the adequate availability of cash at the right times.

The idea of an Infrastructure Investment Trust ( InvIT ) is to restructure these loans by paying it off with the investment they will get in the trust. The Trust will then have an arrangement with these companies to get returns from them through the profits generated. Investors in InvIT will get their returns through dividends, buyback etc. As all these companies are having pretty much assured revenue over a period of time, the returns are likely to be good.

The below information about the IndiGrid InvIT Fund IPo, is taken from the website http://www.chittorgarh.com and a few other sources of publicly available information:-

Incorporated in 2016, IndiGrid InvIT Fund is an infrastructure investment trust (“InvIT”) established to own inter-state power transmission assets in India. They are focused on providing stable and sustainable distributions to their Unitholders.

Sterlite Power Grid Ventures Ltd, sponsor of IndiGrid InvIT Fund is one of the leading independent power transmission companies operating in the private sector, with extensive experience in bidding, designing, financing, constructing and maintaining power transmission projects across India.

Company’s sponsor owns 11 inter-state power transmission projects with a total network of 30 power transmission lines of approximately 7,733 ckms and nine substations having 13,890 MVA of transformation capacity. Some of these projects have been fully commissioned, while others are at different stages of development. They recently won bids for two transmission projects in Brazil,

Of the 11 inter-state power transmission projects owned by the Sponsor, they will initially acquire two projects with a total network of eight power transmission lines of 1,936 ckms and two substations having 6,000 MVA of transformation capacity across four states (the “Initial Portfolio Assets”).

Objects of the Issue:

The object of the issue are to:

1. providing loan to BDTCL and JTCL for repayment or pre-payment of debt (including any accrued interest and any applicable penalties) of banks, financial institutions, SGL1, SGL2;
2. repayment of any other long term and short term liabilities and capital expenditure creditors.

Comparision of InvITs

Comparision of InvITs (IRB InvITs & IndiGrid InvIT)
Particulars IRB InvITs IndiGrid InvIT
Price band Rs. 100-102 Rs. 98-100
Issur Size Rs. 5921 cr. Rs. 2250 cr.
Sector Toll Road constructions Power Transmission
Likely yield 8 to 12% 10 to 15%
Entry Level At a Premium At par value
Tenure 16 years 35 years
Corporate Ratings AAA/Stable AAA/Stable
Proportionate Allotment 75% of the issue (i.e. except retail) 75% of the issue (i.e. except retail)
Risk Factors Inflation, Traffic Volume, Govt. policies Load Availability, Market trends
Market perception Bearing Risk as above Considered as Safe asset class Globally
Promoter IRB Group Sterlie Group

Should you be applying to this issue? Well, if you have not got an allotment in the IRB InvIT IPO then you should definitely look at it. The one thing which may be a spoiler here is that the yields are primarily going to be in terms of interest and this will be taxable in the hands of the investor.

In case you are not yet fully invested in equities through MF and stocks, you may want to delay investment in InvIT’s for now. Focus on building your equity investments and you can then look at future InvIT issues. There will surely be many more soon.