Value Investing: Dance without passion is just cultured movement

(Stocks covered: Godrej Agrovet, Laurus Labs, Tata power, Borosil renewables, BEL, BEML, Oberoi Realty, Mahindra Lifespace, Mahindra EPC, Rallis, NH, Max India, HCG)


Passion is growth. Passion is transformation of energy. Once I was travelling in train and a nice fellow who was a classical dancer and dance teacher was travelling with me. He was explaining about dance to other passengers and then he showed us a video of some party where one fellow was dancing full of energy but with unrhythmic steps. Then he explained that there is a natural rhythm in our body but that fellow in the video is dancing badly and then he pointed out another fellow with almost perfect dance steps. But I told him to look at the energy and passion in the dance of first fellow (bad one) while the focus of other perfect fellow was on his steps only as he was looking towards camera and other people all the time. Then dance teacher asked me why focus on passion? “Because dance without passion is just cultured movement,” was my reply. I told him that in Lord Siva’s Tandava extreme passion is the underlying force…it is not the cultured movement…and when Lord Shiva is overwhelmed with passion then even his dance becomes a cosmic event.

And it is strange that I find the implications of passion in each and every sphere of life. Any action without passion is just a cultured movement. Food, sex etc. provide physical contentment and joy but passion is the food for the soul…it is the realm of spirituality. Expression can be in any direction (dance, music, science) because expression itself is the culmination. We do 9 to 6 job but this is not our passion because our focus is not on the “expression” (job) but on the end result-money. Passion is the enjoyment of expression. And strangely when it is about enjoyment of expression then most of the times a passionate businessman (Dr. Devi Shetty) is more spiritual than a religious fellow because most of our religious fellows do not enjoy the journey...the expression but only their expected comforts from religion including ego (the most dangerous thing in this world is the Goodman’s Ego).

When the likes of Dr. Devi shetty (Narayana Healthcare) decides to extend his passion into business then his passion alone is what makes a stock a Value Buy. Value investing for me is finding these passionate businesses because financial data is just the result/demonstration of the actions of these passionate beings. Please note "passion" factor is not just about one man or promoter but includes everything in an organization which makes it capable to create superior products with high entry barriers. Promoter is just one of the factors which create or develop this capability in an organization like technical expertise and superior R&D focus (like Biocon and Laurus Labs), strong brand strength and first mover advantage (like Tata entered in staples via Tata Sampann Brand), Networking effects (like MCX), Superior and vast supply chain etc. Financial metrics do not create a business (and a value buy) but it is the business whose performance creates financial data. So a true value investor does not find value in a stock which is “cheap” on financial metrics but he yearns for “premium-ness” in the business model which can create a great product with strong entry barriers. Passion factor in business implies the ability to create a superior product with scale with high entry barriers. I think in traditional old school value investing there was too much focus on financial metrics like P/BV, PE ratio, FCF, Debt equity ratio, margin of safety and so on and then in the end a small mention of business model.

I think there is a need to realize that this financial melodrama emerges from business only so first value point is the business model not the other way round. Financial metrics are transitory. Strength of business model (passion) is permanent (relatively). Some time back, I gave much better example to a student about real (new age) value investing. I gave him the example of Indian Epic Mahabharata wherein before the start of war both Duryodhan and Arjuna went to meet Lord Krishna for his help and support for the upcoming war. Duryodhan was the old school value investor so he chose the army of Lord Krishna ( Financial metrics) but Arjuna who was the world’s first new age value investor picked Lord Krishna (passion, Transformation potential) and rest is the history how Lord Krishna, even without picking a weapon, was instrumental in the win of Pandavas due to his divine presence and unhuman wisdom.

Present day investing looks more like a simulation model where too much focus is on giving a target price of the stock advised though i am sure that the target given is not achieved 90% of the time in the manner it was proposed. This addiction for giving a target price comes from a feeling to demonstrate the superiority of the research- a target means great study and analysis. But if value investing is this simulation model then very soon computers will do the same much better than us (they are already doing in fact) and there is no job for analysts in the future. But fortunately investing is not simulation model. The main task of investing is to find the right direction which requires creativity, imagination, huge data of businesses and economies, and then some amount of luck. Financial metrics are helpful in choosing or discarding a vehicle to cover the distance in the right direction but they can’t decide the right direction.

So strength of business model which entails future scope of large scale of operations and transformation potential (like in Agriculture and electronics goods manufacturing in India) is the most important value accretion factor than any financial data. In many of my earlier posts I have mentioned this aspect in picking a great stock.

I do use financial data for judging the capacity and sniffing (dubious companies) but value for me emerges from business model and entry barriers.  It is just like mining of Gold. Here, the main capability is not superior mining equipments but the ability to assess the presence of Gold. If someone can't assess the presence of Gold then he is just taking high risk and high possibility that superior mining equipments will prove useless and costly. Financial metrics are just like mining equipments but true value event for business is the superior capability to assess the presence of Gold.

Value investing was more relevant in the age of less competitive business landscape

Value investing was useful (or great) when there was “information scarcity”. In old times, some 50-60-70-80-90 years back there was not much public information about various factors and dynamics about the business and a particular stock because of limitations and capability of media reach in those times. Only the privileged ones had the timely access to the specific information. Also, most of the public was not aware of the dynamics of stock market. For them stocks meant speculation. For them a stock like Colgate and a local Tooth Powder stock were same because for them stocks were just prices…nothing else. So stocks were lying here and there with asymmetrical and irrational buyers. Hence this helped and created opportunities for value picks because financial data/metrics were indeed the representatives of sound underlying business prospectus.

But I think another major factor was that businesses were much simpler and competition was less and globalization impact was much lower. Hence one could easily believe that the business growth line would mostly be a straight line. But not anymore. Globalization and flow of capital and technologies across the globe has rendered businesses very complex. Technological breakthroughs are occurring at such a fast pace that valuation methodologies like 10 year DCF have become useless because in this extremely fast changing environment nobody can estimate future cash flows as far as 10 years. Earlier, businesses were built upon capital but now capital is easily available. The differentiating factor is the business strategy and capability to create high entry barrier products. Like, optical disc storage manufacturers like Moser Baer tasted grand success and destruction of their business completely just in a span of 5-6 years. These days, slight delay in taking critical business decisions may prove catastrophic just like in case of Nokia and Kodak. That’s why study of business model is the first value factor in analyzing a stock/business.

Most important: Business strength is relative not standalone

One thing which I find missing in all business analysis whether it is value investing or credit rating is relative strength. A business is under constant threat from competition and most of the times businesses are vanished not due to mistakes or frauds but due to strong competition. So first thing, strength in business is not standalone but it is relative. Like, recently I was reading a credit rating report on Oberoi realty which was revised downward to negative due to Covid. Their logic is simple that there is pressure on its business but this even a layman can say. But business and life is not that simple. Oberoi is having one of the strongest balance sheet due to low debt and very strong brand positioning so it has much better capability to withstand any short to medium term pressure as compared to other players with very weak balance sheets due to high debt. So there is high possibility that this may knock out many small and weak players and due to scope of leverage (that too at lower interest rates) Oberoi realty can even acquire these properties or land at much lower prices. So if one can see then its relative strength is increased. Same is the case with Mahindra Lifespace which is also having least amount of debt and poised to acquire properties and will enter into partnerships with other weak players. Both Oberoi realty (CMP 300)  and Mahindra Lifespace (CMP 200) are my preferred picks for real estate sector.

So there is nothing like standalone strength in business and many cases when we may be witnessing a deterioration in the business and financial metrics of a stock/firm (and may declare unfit as a value buy) but there are strong chances that its relative strength may have increased massively which will pave the way for even stronger and comprehensive business growth in the future. We can see the impact of this aspect in many cases and I think the interplay will be more prominent in current Covid crisis. There will be many industries like Hotels, restaurants where strong and organized players will reap the benefits of increased relative strength in the future.

Risks and potential are embedded in business and economic realities not in financial metrics

Just to elaborate above points in more details...i am putting some cases below where some stocks were great value picks as per value investing metrics but due to subtle intricacies of their business models there were inherent risks and potential threats to their businesses. And similarly there are some sectors/stocks which are a great buy because of their business model and strengths which will create high growth in the future.

Banks and NBFC stocks

Let’s take the case of banking and NBFC stocks because I have always seen very strong fascination for these stocks in Indian market especially and all the times I have seen metrics like Price over book value being used for pointing out the undervaluation and scope for growth. I have no stock related to banking and NBFC businesses in my portfolio. These two businesses are highly leveraged ones so domain expertise and focus is very important. I have always found these very risky because of their current erratic business model. Like, the main task of Banks is accumulation of savings and creation of credit but they are distributing long term risky infrastructure loans which for me is not their forte. They lack the expertise to assess the risk associated with these infrastructure projects. I invested in NBFC’s in 2016 when I felt that because of their domain expertise in infrastructure sector they can fill up the vacuum created by Banks as banks were busy in repairing their NPA hit balance sheets. But I cashed out of all NBFC stocks in the beginning of 2018 (around 10 times gains) because I realized that they were also going way over the top. Everybody was becoming an infra developer because of low hanging debt money and I thought the debt will never be paid back.

Further, apart from risky loans by NBFC’s other factor was the high rate of interest in India and I was having doubts over the paying capacity of the builders. I don’t think infra development is a viable business at interest rates of 10%-15%. Infra should be developed at lower interest rates and for this it is the duty of government to give interest subsidy. I am waiting for long time to see interest rates falling in India and I hope that this may happen now. It looks absurd to have such a high interest rates for a strong economy like India. In fact large borrowings by the Government is one of the main reason for high interest rates in India as Govt competes for funds with private sector. So if they can’t control or lower it then they should give interest subsidy for infra which is going to add some value into our economy like large scale warehouses for storing agro produce to save the same from wasting, roads and railway enabling faster and cheaper movement of goods. These infra investments pay for their debt on their own as they do value addition. 

But still, the records of our banks and NBFC’s with regard to infra debts is very bad and I think there is more to the story than just bad poorly planned infra projects itself. Because I think, debt and infrastructure are made for each other…made in heaven. The loans taken by normal business entities like Telecom, FMCG, Steel, chemicals are more risky than infra loans because there is tough competition in these industries and often it is happening that two competitors are fighting hard for same business/market share with loans and as we can guess one is going to bite the dust and his loans will turn NPA i.e. the fight we are seeing in telecom now. So debt to normal businesses is very dangerous and requires high skills in allocation of debt. If one particular sector is already having high debt and chances of demand in that sector may go down or there may be severe competition and price war coming so in that case caution is required in allocating loans to that sector.

But Infra is different. Due to competition and miscalculations by businesses, we can create excess (redundant) capacity in steel sector but can we lay extra gas pipeline of 5000 KM length?? Can we make another road parallel to a newly constructed road?? Can we make an additional Airport. So as we can see there is hardly any scope for redundancy in infra and if properly planned (like costs during bid stage) then chances of failure are very less in Infra. That’s why I feel there should be low chances of NPA in infra but it needs lower interest rates. However, government can construct excess infrastructure to create jobs in the economy but which may not add any value to the GDP growth like in the previous post I have given the example of investments made by Chinese government in waste and excess infrastructure just to grow the GDP but these infra is not used. But there is no risk for the infra developer here.

Current consumption vs productive business investments

Further, I don’t rate lending for current consumption (relative to investment) very high. We are just dragging the future consumption into the present and demand for these consumption loans raises the interest rates. Consumer credit is not used to generate the income that will pay off the loan, as with business finance. Instead, payment of consumer loan will make people spend less so any spike in the GDP is reversed.  So interest paid on consumer loan does not have much economic development role and it is more like a rent on the economy. But giving a car loan, housing loan and personal loan is less risky than infra loans so lenders love these and because these are mostly secured so credit creation here is more like a rent. Also the assets like houses, cars etc. do not pay for their debt (more cars means more oil import also) because they do not generate income like that of a business asset. They are paid from the future savings so their impact on GDP growth is lesser. So more lending should be for business asset for a growing economy like India rather than consumption loans. India first needs to put money for business investments then we can think of a consumption based economy.

So banks’ main role should be the credit formation for tangible productive investments in the economy like for electronics goods manufacturing which will generate more income for paying the debt. But these days most of the bank finance is used for financing of real estate, business buyouts and financial assets like Bonds which are already in place. So for me, in their current avatars banks and NBFC’s were always very risky businesses for me regardless of the strength of their balance sheet which is always transitory.

The pressure on GDP growth we are feeling now is because of lesser investments in high growth sectors like electronics goods. Now we need new avenues for growth and for these investments is must like solar power equipment manufacturing. Now focus should not be on growing consumption because those who can consume they are already doing it and those who can’t needs money which will come from jobs and jobs will be generated by business investments. So if you ask me then consumption always follows investments…it is not the other way round as is being felt.

Auto sector woes and new torch bearers for Economic growth

Current pain in the Auto sector does not imply the malfunctioning of our economy. Actually what we are seeing now in our economy and in Auto sector is self-correction mechanism of a growing economy. While growing fast, this is natural that there is some misallocation of resources as one can’t oversee everything in minute details in a vast economy. Like we created vast manufacturing capabilities in Autos but none for electronics goods and saturation in auto is hitting us now. Further most of cars are sold (80%) on credit in India so natural demand was always low. Also, our Auto sector could not capture the export market due to product quality issues as India is a market of cheap and small car. But still, there is still a chance for our auto sector to grow their export business. So in an economy, in correction mode resources shift and structural changes take place like new demand and supply centers will emerge. This is perfectly normal and good thing about our economy is that we can still control it, direct it because we are not primarily an export oriented economy (demand is local) nor we are a saturated one like USA where they are trying to make people consume more and more.

Electronics goods manufacturing is the best alternative because of the sheer size of demand which is met entirely from imports. So here, without growing the aggregate demand in the economy we can grow the size of the economy by import substitution and with our impressive record in Auto sector there is nothing that should stop us because we are already the global leader in chip designing which are used in these electronics products.

Defense is another sector where i think huge scope for local growth and India has no choice but to go for local manufacturing as we can't fund the massive defense spending by imports. Here, i am investing in BEL (now at 73) because apart from defense it has equally potent non-defense business and it has everything to venture big time into electronics products manufacturing in India. Also, it gets the defense work from all other defense firms like HAL, BDL, Midhani etc. so it is like a proxy for the growth of Indian defense sector. BEML i like mainly for its Metro rail manufacturing in India, first Indian player to do this...has 50% share in local manufacturing. It has equally great defense business and govt. is going for the strategic sale of BEML (now at 600) so this alone can trigger a massive upside.

Healthcare is another stunning option and this is where we have unmatchable technical expertise and we can create an affordable global hub for healthcare services to promote medical tourism. We already are one of the biggest and highest growing in medical tourism but we can create a real giant much bigger than IT industry. Unlike other industries, healthcare sector create more jobs as the role of machines are comparatively less. Narayana Healthcare, Max India and HCG are my picks for this sector.

Laurus labs is another stunning stock which I think is ignored by market due to recent variability in financials/Profits though it was having one of the highest passion quotient among all Indian Pharma stocks. It is one of the best in complex API globally courtesy its strong focus and investments in R&D. Last year, due to raw material sourcing issues from China, its profits were hit as it could not raise the price of its products. But this has given Laurus an opportunity to do backward integration to manufacture the same in house cost effectively. Then there was the impact of capital investments for its formulations business. It invested some 500 cr for the business but it takes time for the new business to start generating revenues and profits. Laurus was in investment mode for past few years and it has invested some 900 cr overall in last 3 years or so. So apart from normal running expenditures of these newly created assets, the impact of depreciation was significant and this has alone hit the bottom line and I have seen many times investors lack the understanding of depreciation which is a non-cash item and for new ventures can distort the profit figure artificially. Like its revenues were increased just 30% from 1800 cr in 2016 to 2300 cr in 2019 but its depreciation cost almost doubled to 164 cr vs 92 cr. Other expenses increased from 200 cr to 400 cr. So as we can see, it was not that something has hit the earning potential of its existing business. It was just the impact of expenses/charges related to unused and preliminary assets. At 470 this one is a great buy. I have added good qty at 300-330 amid covid crisis.

Solar power equipment manufacturing in India. It is clear even to a layman that we can’t build our solar dreams on imports (80-90% equipments are imported) because then we are better to stick with thermal power. At least the income will be generated in India. So we have no choice but to promote solar manufacturing in india and for that government should give free land, cheap power, low interest loans and for that they have to ration the resources available in the budget. I am even in favour of RBI creating credit (at 1% interest rate) for solar and electronics goods investments because in any case banks are not lending money to them. Government has accumulated sizeable amount by imposing safeguarding duty on solar and electronics goods so that money should strictly be used for the purpose of growing manufacturing for these sectors in the form of subsidies. Here i like Borosil Renewable very much which is only indian company producing solar glass of top notch quality and recently invested big in doubling its production capacity to cater to coming local demand. I have invested quite a bit in it recently at 35. This is the best pick for solar sector as of now after Tata power which is another one i have added at 30-33 recently having order book of some 9000 cr. Tata power may be the stock of this year.
But if one looks at the financials and books of these two then they are not anywhere near to be regarded as value buys but when you study their business and their relative strength they are deep value buys.

Agriculture one of the best Bet: India has huge land fit for agriculture. Some 60% of our land is fit for agriculture which is among the highest in the world. India has some 160 million hectares arable land which is second highest in the world…larger than china. USA is the first. But just look at our productivity as compared to China. Like in Rice, China’s yield is double of India. So, India has large arable land but less minerals (mining) so it is prudent for India to build an agriculture based economy for exports and build industries based on agriculture like food processing etc. But not much work has been done into this. Corporates and their investments are required for this. So if you ask me, this presents a grand opportunity because sooner or later India has to focus on this. So these days I am again looking for promising bets in agriculture sector and so far has picked stocks like BASF, Godrej Agrovet, Mahindra EPC (got a bargain at 80 recently), Rallis India etc. Godrej Agrovet is a stunning player and a great proxy for agriculture sector growth. I have no doubts that after the recent reforms in APMC acts by Modi Govt, Godrej Agrovet will go for Contract farming for Palm oil at massive scale. Why i feel this is because in other agro commodities India is quite self sufficient but we import huge amount of Palm oil (Pulses is also a very big import) so we need this to substitute imports. Godrej Agrovet has massive turnover of 7000 cr with very diversified streams of revenue. It is into animal feed, Agrochemicals and seeds, Dairy, Oil palm, FMCG (Godrej Tyson foods). Animal food is the biggest contributor of the topline with 3700 cr, Agrochemicals at 1100 cr, Dairy at 1200 cr, Oil palm at 700 cr, FMCG 500 cr. So it is adequately diversified into various sectors related to agriculture. At 370 it is a steal and i am investing good chunk of my portfolio in it.

I think corporates like Tata, Mahindra should be encouraged to make large investments for growing basic agriculture in India. To protect and look after the interests of farmers state governments can become equity partners in these projects. Just take the case of development of large integrated industrial clusters by Mahindra Lifespace (Mahindra world city) in Chennai and Jaipur (1500 and 3000 acres) in partnership with state governments. India needs type of plug and play industrial clusters where manufacturing can be started immediately without putting large investments and time. These are preferred by foreign firms and in these integrated cities developed by Mahindra (Chennai is fully leased out) foreign manufacturers/businesses are the main customers. Mahindra Lifespace is one stock for which I really see a great future and this one is a great value pick at 180.

One last example on DHFL

Lastly, just want to share a part of my blog post on Nelco (click here) posted in Dec-2017 wherein I have explained the relevancy of financial analysis and also expressed my views on the riskiness of DHFL which was around 600 at that time (now at 12):

Sometimes I feel that understanding when and how to use financial analysis is more complex than learning various financial analysis tools itself. Like, for example, let’s take the case of ROE…I have seen people using this ratio to compare one stock with other industry stocks when in fact this ratio should be used first of all for comparing it with the COST OF EQUITY of the stock under analysis. Cost of equity of each organization is different keeping in view the riskiness of the operations of the organization. The more the riskiness higher is the cost of equity. ROE should be compared with this Cost of equity not with the ROE of other companies. Just let me give you a hypothetical example of PNB housing and DHFL. Both have ROE of around 15% but PNB trades at PE of 30 as compared to 20 of DHFL. Now I have seen reports which simply conclude that as ROE is same of the two stocks (not just these two) so DHFL is undervalued to the extent of 50% as compared to PNB.

But business profile of DHFL is more risky because it provides housing loans to low income and self-employed people while PNB is more focused on salaried employees (just assuming) due to its banking reach. So keeping in the view the high riskiness of business of DHFL (due to high rate of default) cost of equity of DHFL should be much higher than PNB (So as its Bond Int rates) and at once the undervaluation margin of DHFL will disappear. This safety is the reason HDFC will go on commanding premium valuations even if its ROE is lower than others.

So I have always felt that for new emerging sectors/products (Like IOT, Geo-spatial, Agri warehousing finance) the focus should be on to evaluate whether they can create/add some value on its own as only that’ll ensure their long term viability. Affordable supply and corresponding high demand is the most significant factor for a new technology/product to achieve widespread acceptability and growth. So in the coming paragraphs we’ll endeavor to find out whether the Satcom industry in India can add some value (solve a problem) on its own, can create adequate supply at affordable prices in order to create long term value for itself. This is going to be more fundamental with least (or no) focus on financial data of the current industry players as at current scale it is not required.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).

Vitamin D impact on Covid-19 Mortality and What China wants

Covid-19 crisis may be going to change the world as we know as of now. I still hope that India will emerge stronger from this crisis though there may be some complications due to migrant labours on virus infections and economy front in the near time and we need to plan for normalizing this migration as early as possible. On infection front, I still think our demography and better immune system may help us in controlling the severity and mortality though I think infections can run high as due to novelty of this virus it is highly contagious. But I am very hopeful of finding a cure of this virus very soon because of the advancements in the fields of genomics and DNA mapping.

Covid mortality and Vitamin D

I am a great devotee of Sun and believe in the power of Sun for our well-being. Every day in office, i take sunshine for 20 minutes at the roof of our office. For me Vitamin D is a miracle molecule for our health and longevity. When Covid began spreading in India in March i was of the view that Vitamin D is vital for covid immunity. Because Vitamin D inhibits inflammatory response of our bodies which is the main cause of death in covid.

Coronavirus is not killing us...in most cases it is the inflammatory (immune) response of our bodies. Coughing is our immune response- to throw out the pathogens so is diarrhea and vomiting....it is our body's immune response. Fever is a common immune response to an infection because a higher body temperature can provide a hostile environment for pathogens. That’s why I never take medicines for fever, throat infections etc. because I want my body’s immune system to fight with these infections and this further strengthens the response time and impact of immune system.

There is always a debate whether to treat fever or not. But fever is not a disease but a sign of fighting against the disease. That day I was reading about Wagner von Jauregg who in 1900 (before invention of antibiotics for bacterial infections) injected malaria parasites into the bloodstreams of people with syphilis which caused high fevers for many days. Then he treated the malaria with quinine.  But then he found that the high fevers caused by malaria cured syphilis. For this achievement, von Jauregg won the Nobel Prize in 1927. That’s why I always try not to treat the fever. Also at higher temperatures, our immune cells like white blood cells (neutrophils), B cells, and T cells work better.

Inflammation is the immune response of our bodies where white blood cells (like neutrophils) along with other chemicals fight against bacteria and virus. These white blood cells are equipped with weapons like enzymes to break the structure of the infectious organisms. This inflammatory response has two stages- first, “pro-inflammatory” where cells and other chemicals are produced for attacking and neutralizing the harmful pathogens/substances by releasing the enzymes and anti-bacterial products. So this is the first part of the battle where many cells and bacteria/virus will die which are required to be removed from the battle field and to rebuild the recovery (healing).

This healing of the tissue starts after the end of pro-inflammatory stage. Then “pro-resolving” forces take charge and they are the ones tasked with the task of tissue repair after the elimination of the disease-causing bacteria/virus. The discovery of existence of “pro-resolving” factors revolutionized the treatment of inflammation which earlier was mainly focused on “treating” (or hindering) pro-inflammatory factors by trying to reduce the action of the pro-inflammatory components but now they are focusing on to increase the action of the pro-resolving factors to start the healing process more quickly. Medicine world is getting the understanding that if we try to stop pro-inflammatory factors by using strong anti-inflammatory medicines (like aspirin, paracetamol, ibuprofen) then this will also hinder the signals for “pro-resolving” factors to come up and start healing process.

So when our lungs are attacked by virus then our immune system comes for the fight to eliminate the virus and clear away the damage and then to repair the lung tissue. When our immune system is working properly then it is very strictly regulated so as to only impact or attack the infected area. So our immune response to the virus causes inflammation in the lungs but in some cases it can also cause significant lungs tissue damage and this is the why covid is deadly. Thus this tissue damage and inflammation can cause difficulty in breathing and that’s why the role of ventilators are so big and so is the role of a robust healthcare system. This can also explain the high death rates of elders whose lung tissue is already weak due to old age.

It has been observed that in some individuals this virus may only cause mild symptoms but in some cases it causes an overactive inflammatory response in the form of massive release of “pro-inflammatory” cytokine cells. And this overactive inflammatory response is the only difference between survival and death from Covid. Virus is not at the core. Virus has the role in infection. In march when I was discussing this with some of my doctor friends; there were suggestions that this can be due to genes. But I told them that there can be a possibility of role of Vitamin D deficiency also because Vitamin D inhibits the production of pro-inflammatory cytokines.

Coronavirus is suggested to have come from Bats though it is not proved as yet but still lessons from Bats are important. It is surprising that bats are responsible for the spread of all the deadly viruses like Ebola, Nipah, SARS and MERS. Actually Bats are wonderful creatures as they can live safely along with the presence of these deadly viruses in them. This is due to their remarkable ability to limit inflammation…better to say their anti-inflammatory ability. 

Bats are the only mammals that can fly and this requires massive amount of energy for long period of time. So no surprise these Bats have very high metabolic rate (Metabolism is the biochemical process whereby our bodies create energy with oxygen for carrying out various functions) to enable the functioning of higher muscle activity for flight. We humans also do physical activity but only for short duration of time whereas Bats do this for much longer period of time. This high metabolic activity raises the temperature and in Bats this high temperature state persists for much longer time (to be considered as Fever state as per our benchmarks) so this leaves Bats with much higher body temperatures than human beings (41 degree vs 37 degree).

Due to this high metabolic activity and high temperature the result is the significant breakage of cells and DNA structure and this result in massive release of DNA bits floating around freely. Our bodies’ immune system identify and recognize these free DNA fragments as Viruses and this trigger our immune system to activate inflammatory response (release white blood cells (T cells ) ) which as explained above sometimes goes into over drive and releases massive number of cytokine cells which damages healthy tissue along with infected tissue. So same should have been the case with Bats also and they should have very short lives. But Bats have developed a remarkable ability to suppress this inflammatory response to minimum. In order to survive the massive release of cells damage, Bats might have lost some genes via mutation over generations related to high inflammatory response.

So the inflammatory sensors which work in our bodies to trigger inflammatory response but these react barely in Bats. So Bats do not survive due to inflammatory (fighting) response but because they have high tolerance for any infection. So this fierce and swift response from Bats makes viruses on their bodies replicate and mutate much faster and this is why they are so deadly for weak immunity system human beings. Also, as Bats have higher body temperatures so technically they are in fever state most of the times and this fever stops the infection from deadly pathogens. Further, as the viruses from Bats’ bodies already have exposure to high temperatures so they are more deadly for humans.

I am a hard core gym man for more than 20 years and also like jogging and sprinting. Many times friends and relatives have questioned this madness for physical workout and strength as they feel that career is more important than this. When I was doing Chartered accountancy many doubted on me as they perceived this gym etc.as wastage of time and declared that CA and Gym are not made for each other and I’ll be a failure. But I did pass the CA that too without any sort of coaching. I have seen the children of our relatives and friends doing study all the time. so many times I have told them that as you have never done intense workouts so you don’t have the ability to feel the massive inflow of power, energy and rhythm in your body. I told them that when we regularly stretch our bodies to the maximum (by intense physical activity) then our bodies release large amounts of testosterone (a hormone) which is what makes a man a MAN. It is vital for sex drive, bone mass, muscle building, fat burning and sperm count. Its production drops as we age. So one can see why our current generation is so weak, fatty and powerless. It always surprises me how a real MAN can derive happiness from owning an Apple mobile phone rather than having a strong and powerful body. But sadly this is what our current generation is and many times I have to tell them that you surprise at my madness but I pity you for your weakness.

Many times I have told my friends the impact of high temperature on the health of our bodies. Like if you are doing gym/sports/intense aerobic activity 4-5 times a week then you are taking your bodies into higher temperature for longer periods of time and this will save you from many infections. Many times, in winters in Punjab whenever I caught with flu I would simply do intense sprints in the morning for around 1 hour and most of the times it cured the flu. The reason may be the high temperature. Further, my body remains hot most of the times and in winters if I do intense workouts it emits steam just like a pot of boiling water. Many people get terrified to see the steam oozing out of my body. It took me long time to understand that this may be due to higher metabolic rate of my body.

I studied about the remarkable bodies of Bats while I was searching for the answers for steam coming out of my body and then I found the reason from the Bats- it is high metabolic rate and higher base body temperature. So taking the clue from Bats I always have the belief that ability to fight off the Covid may be derived mainly from the regulated inflammatory response of our bodies and hence Vitamin D may play vital role.

So few days back, there are reports which confirm the important role of Vitamin D in controlling the deadliness of Covid (Not preventing as most people are reading it wrong). The association is the role of Vitamin D in inhibiting/regulating the production of cytokines. The study was able to find that this is also why countries like Spain and Italy suffered so much since the people there had lower Vitamin D levels as compared to most other Northern countries. Scientists who have done this research are of the view that the impact of Vitamin D might be as high as cutting the mortality rate in half. The government health agencies of UK have recommended taking vitamin D supplements during this pandemic. Some links:

https://www.sciencedaily.com/releases/2020/05/200507121353.htm

https://www.nutraingredients.com/Article/2020/04/28/Clear-link-between-vitamin-D-deficiency-and-severity-of-coronavirus-say-researchers

https://www.indiatoday.in/coronavirus-outbreak/story/is-vitamin-d-a-shield-against-coronavirus-researchers-study-covid-19-connection-1681736-2020-05-25

I also think that the mortality rates are defined by the robustness of healthcare system because in the worst cases there will be stress on healthcare system in the form of ventilators etc. But it is possible that Vitamin D has also one of the factor affecting mortality rates.

So the threat of covid is here but it would be better to look after our Vitamin D intake. The perfect way is to absorb sunshine on bare body when sun is at maximum height (around 12 am to 1 pm). Then there are cod liver oil capsules, eggs and mushrooms. Also, studies have found that by exposing Mushrooms to sun for almost an hour results in the massive increase of Vitamin D levels, almost equal to Vitamin D supplements. Just take the mushrooms out of packing and place them in sun uncovered. Whether vitamin D is effective against Covid or not but it is great for our strong bones and overall health.

(Disclaimer: I do not belong to medical profession in any capacity so please discuss with your doctor before moving ahead with anything)

But how high is the mortality rate of Covid-19

I was trying to get the answer of this question as this will have the most significant bearing on our response and length of lockdown in the country as lockdowns have massive economic impact.

Death rates across the world seem to vary too much but as the timing and strain of the virus is almost same so the death rate should almost be the same. Virus is not mutating very fast as of now and also it shouldn’t be more deadly in one place than another. But still there is way too much variation.

The likes of Italy, Spain, France, UK and Netherlands have death rates in the range of 10-15%which is very high while the likes of Russia, Germany, south Africa, south korea, Chile, Qatar has low rates of 1%-2%. Even worse affected US has death rate of 6%. But there is a pattern to this variability. Like, first countries with elders have suffered the most like Spain and Italy. Italy has the largest population in the world at 65 or older and this also defines the high death rate because these elders were already suffering from many other life threating diseases. So there is high chance that the death is not due to Virus but due to other reasons but as they were Covid infected so it is treated as covid death but this may not be the case. Still, the elders are almost 80-90% of the dead in high death rates countries including USA.

But I checked the life expectancy of Italy, Germany, USA,  Spain & France and the same is 82.5, 80.6 , 78.6, 83 and 82  years. So Italy, Spain and France’s populations are equally or better equipped to fight the virus. So there are other factors at play than the virulence (deadliness) of the Covid alone.

Germany has lowest death rate due to robustness of its healthcare and one of the reasons is that large proportions of infected in Germany were aged between 35 to 59 which has very lower death rates. Russia also has low death rates due to fairly young population but there were accusations that it hide the actual death cases. But there is no visible increase in the overall death rate in the country as compared to previous years. Further, Russia has done very extensive testing (some 6 million) and I think this is one of the reasons. Avg age of people died in Italy is above 70. Germany also had much lower infections in older people (20%, Spain and Italy 50%).

I tried to find out the number of deaths in Italy, spain in the same period in the previous years so as to check how many deaths are actually due to covid. Actually, in my view this data should have been taken for all the countries because too many people are questioning the data where they want to or where they find the death rate low but they wanted the same to be higher (Ego bias) like they have questioned the data for countries like India/pakistan which have low death rates but in my view one of the biggest reasons is the young population of these countries. But still, having the data of normal death rates of previous periods (excluding accidents as now there are lower accidents due to lockdown) would have given some valuable insights because too many deaths might have been recorded as Covid deaths when the underlying reason is not covid related complications.

Also, the method of counting deaths due to covid in Russia is important as Russia has counted only those deaths due to covid which are actually due to underlying covid symptoms like pneumonia not where people have dies due to heart attack but they were infected from Covid. I think this will have profound impact on mortality rates. Also, as explained above Vitamin D may also have a role on the death rates.

Testing is the main reason which can artificially inflate the death rates. Because due to limited testing capacity, in most of the high death rates countries testing is only done on those with severe symptoms. But as per the experience there are many people who don’t even show any symptoms (asymptomatic) or show very mild symptoms so they are n tvot been tested at all. So there is a selection bias of only counting symptomatic people in high death rate countries. Estimates put asymptomatic people at some 40%-50% of all the infected people.

Iceland is one such country with high testing rate of almost 13% of total population and so far it has only reported 1800 cases with just 10 deaths. It has tested everybody quite opposite to what every other country is doing- testing only the sick persons with symptoms and large numbers of people were asymptomatic. Iceland has no lockdown as of now. Even schools are opened. Germany also has done more extensive testing including those with no symptoms. So testing only on the basis of symptoms may be giving inadequate data for doing any reliable analysis and drawing inferences. Current conclusions about death rate of covid do not take into account that only a fraction of infected people are actually tested (selection bias).

But one of the best case for us is the cruise ship Diamond princess where some 700 people were tested positive out of 3500. So this ship is like a closed environment test in a laboratory. The ship was quarantined in Japanese waters on 3rd feb with 3711 people so almost two months have been passed. Japan has tested all the people on the ship. The ship has more elderly people. The ship was perfect for the spread of virus as infected crew was cooking and cleaning the rooms, all the people were eating together in closed places, close living spaces, many old people, much higher social interactions. So that ship had the worst environment. Infection started from foodservice crew members which put all of the ship into the virus risk. Out of 3711 people some 712 were found infected but 651 have recovered with only 13 dead (all elderly). So, almost 83% were never infected at all in spite of being in such a dangerous place for virus spread. Almost 50% infected people do not show any symptoms at all…the same is 100% for Children below 10.

It is surprising to see such a high % of asymptomatic people for a virus considered so deadly. So if we can extrapolate these findings on our current death rates then these rates should be fallen by 50% because as of now our data and study is based on symptomatic persons when 50% do not show any signs.  One can say that cruise passengers generally are rich & otherwise healthier people so this ship data may also be biased. But still in any case, we can very well count and rely on the data of recovery and asymptomatic patients. Also, it shows that this virus is not at all deadly when it encounters healthy people even if they are elderly people.

But still, the attack rate of this virus is relatively high as there is no immunity to it as of now. So in case infections are high then there will be heavy stress on the healthcare system which is very dangerous for countries like India with less robust healthcare system. Hence, until more data about its mortality rate is found or there is a medicinal cure for it, it is better to follow social distancing. It is particularly important for the safety of elders in our homes and people with compromised immunity due to underlying diseases as they are more vulnerable. So i think India is doing right by locking down as our healthcare system may not be as robust. Further, sometimes over-reaction is much better response than over-confidence.

What China wants

If you ask this question to any Chinese, ultimately the finger will be pointed towards only one man- Xi Jinping. Welcome to the world of Autocracy. Some people believe that authoritarian governments are better for planning a great strategy and its implementation and so they are more likely to lead a country into economic growth. They cite the reasons like fewer regulations, prompt and timely implementation, power to make bold and big decisions etc. This logic may look better on the paper but real life is always very different because of its multi-dimensionality. First, for this to succeed a superman like human being is required like Maharaja Ranjit singh, Samrat Ashok, Shivaji, Akbar, Maharana Pratap etc. But persons like these are very few and stretched over centuries. So collective consciousness has better chance to perform under democracy than when autocracy is the slave of someone average like Xi Jinping. Democracies due to their public answerability are much better in planning strategically to the core and implementation if successful is maintained even if there is a change of leadership like BJP in place of Congress. Further, democracies due to freedom and openness promotes innovation & creativity which are the main forces fostering economic growth (quite contrary to the Chinese model where debt is given to states for spending and Voila!! GDP growth is here). That’s why I always say that GDP growth is not economic growth.

And China needs a superman now. But the problem is that there are some people who think that superman is superman because he wears his “underwear” over his pant (this is Underwear syndrome). China has so many like them. Recently, British economist Jim O'Neill remarked he was thankful the coronavirus outbreak started in China and "not somewhere like India”. If one can see these are the persons who suffer from “Underwear syndrome”. Look at the wisdom of this man…he can’t see the conspiracy and poor governance levels of china in handling the virus but he is so sure of India’s incapability to control.  Now this man should see the pathetic response and condition of UK in fighting with the virus.

There are many such “underwear syndrome” people in India also who shout “Bhakat” at everything which can question their intellect. Being in stock analysis stream, I normally want to have free discussions without being tagged as a follower of BJP or Congress like I was critical of the timing of Demonetization but still PM Modi ji is doing a fantastic job. Look at the fear he has instilled in the minds of Pakistan and China. After very strategic Balakot strikes, Modi Ji has ended the pakistan's madman theory of using nukes...Balakot strikes called the bluff out of Pakistan's Madman theory. And now both Imran khan and Pak army is trying to bring India into talks. Now they are saying nuclear weapons are very dangerous. Look at the alliances he is building with all the global powers of the world. Indian Economic growth and PM Modi ji- I’ll further touch this topic in some other post but let me bring a perspective. India and China had almost same GDP in or around 1988-89 and they had the similar defense spending but today China GDP is almost 5 times of India and defense budget is some 6-7 times bigger. And in all this period from 1989-2019 when for most of the time congress was in command. 

Further, there was high growth phase during 2004 to 2012 but that was the time of great IT and Pharma export story which happened mainly because of some great maverick and visionary individuals and there was not much role of govt. They supported it once it was put into act by these individuals. And then these two sectors set the tone for the demand for cars/bikes which set the tonefor the growth of Auto Industry in India. It also developed real estate and wealth distributed from these rich IT/Pharma people to common man. But when Modi government took charge in 2013, the growth started to slow down in these sectors due to competition and global slowdown. So India is in need of new sectors which can be the torch bearers of growth for next 10-15 years.

So there were many people around me with whom I used to do free and long discussions but then I noticed some of them using “Bhakat” jibes in social media and I left them completely after that. They are not worthy of a talk leave alone brain storming discussions. Recently, one such fellow brought the topic of RBI giving the dividend to central Government. One of my friend replied that central govt might needed this money to which that fellow used “you are a Bhakat” Jibe and was smiling. But then I asked him whether he tried to understand the inner working of RBI and the impact of this dividend. He only had a wry smile and murmured that ex RBI governor was also against it. But I told him where is his intellect and why you want to believe this man Raghu Ram only…why he has better credibility. Why can't Ex RBI governor Bimal Jalan who has advised for this dividend? Why it is that you people only find value in someone who is Anti-Modi? In some cases i have seen these people supporting pakistan and china also!!!

I told him that earlier Raghu ram had also hailed Modi Govt to initiate the bank loan cleanup and blamed the seeds of this crisis on reckless lending in UPA regime.

But the main reasons for not re-electing him was more about his attacks on Govt policies and less on his RBI operations. When he was not lowering the int rates in spite of Govt pressure he expressed that the prime mandate of RBI is financial stability/inflation not economic growth. But then on other hand he was criticizing govt heavily in public over Make in india, Jan dhan Yojna, Tolerance which was never his mandate and he was giving his comments as RBI Governor. I think he was crossing the line.

Raghu was also advising for privatization of PSU banks which was easy to say at his position not at the Govt level and the time needed for this was massive while economy/banks needed urgent support. PSU banks are not bad per se it is the managing power. UPA mismanaged but this does not mean that BJP would do the same. PSU banks have social responsibilities of taking banking to poor masses in rural area. I have seen SBI branch in remotest villages of India but not a single private bank. So another view to see PSU banks as social and economic growth driving entities as a whole not from the micro view of the profitability of these banks.

Even Jalan panel advocated the dividend out of revaluation reserves. The panel is chaired by former Governor of RBI Bimal Jalan who is an institute in itself and a very credible fellow. So I tried to explain to him the logic behind the RBI dividend. I am explaining the same here also. Please keep in mind these are just my views:

1. First of all, RBI has a very different type of balance sheet. It has liabilities in the form of money issued but it is the only one who can issue interest free liabilities. So RBI has this superhuman ability-it issues zero interest liabilities and earns interest from the assets purchased from it. Due to its capability to create money it’ll never default on its liabilities.

2. So due to the nature of its function-zero interest liab which earns interest-it’ll always earn net income so due to almost nil risk the requirement of capital is not high. In fact there are some countries like Israel whose Central bank has even operated with –ve capital. So we can afford to be conservative with central banks.

3. Then, RBI balance sheet is a part of big macro level balance sheet of Government so it can’t ignore the fragile balance sheet of govt while maintaining high levels of capital. RBI is part of Govt. But it is also true that to give autonomy to RBI they should have adequate levels of capital.

4. So as we can see now the issue is what is this adequate level? If we take the global standards, then RBI is way over capitalized. Against the median ratio of capital to assets of 8% RBI had 27% in 2017-18.

5. As we know reserves are part of retained earnings. Same is true for RBI but almost 3/4th of the reserves of RBI are revaluation reserves. Foreign currency assets are some 70% of total assets as this is the prime role of RBI to have foreign reserves. Then there is Gold and local currency G-Sec…so most of the reserves comprise of the fluctuations in these foreign currency reserves and Gold/G-Sec.

6. As rupee is falling forever so these reserves are only rising. So prudence says that RBI should keep reserves in case there is rupee appreciation. But RBI keeps most of the revaluation reserves in the contingency reserves not available for dividend (although commercial banks can show valuations gains as profits).

7. Now there is big secret about RBI needing these reserves. Actually RBI has limited ability to influence Rupee depreciation i.e. it can’t sell all its USD reserves to support the rupee as it needs USD for country. But strangely, RBI has unlimited ability to support the appreciation of rupee as it can buy any amount of USD by creating money at will. So due to this, the chance that Rupee will appreciate massively is remote as RBI can control that.

8. Also, at the current levels of contingency reserves RBI can support the appreciation of rupee to the levels of 45 which is highly unlikely.

9. So all this means that RBI can part away some of the revaluation reserves to support the government without affecting and risking its existence and autonomy. As per Jalan committee, RBI has excess reserves to the tune of 50%-60% (some 5-6 lac cr) which it can transfer in 3-4 years.

10. Now the next important question is-how this will be done and where the money will be spent. But here are many combinations to do this and each one has its own repercussions like public spending of this money will be inflationary and dangerous. To channelize for the economic growth and to avoid high inflation the excess dividend should go to bank re-capitalization.

But I was sure that that fellow could not grasped the essence of this explanation. I told him not to act like a fool. But when they use “Bhakat” jibes I actually find this very funny and laugh a lot as it just shows that they have nothing much to say or offer on the subject though I want to say to them, “come on!! you can be better than this.” But when these people use "Bhakat" jibes they think that they are a superman with underwear on the pant.

But I don’t expect foolish jibes from intellectual people. These are only for the use of average people who can’t think much so all this buzz and noise is created for these brain dead people. But I again want to say I expect much better from intellectual class.

Coming back to China- So there is no doubt that China has done a big blunder in handling Covid and spreading it in the entire world and there is massive global backslash and US is using this opportunity to trap, sideline and destroy China. So a normal human with average wisdom would have tried to reach other countries with helping hand using soft power. Just like what Taiwan did- Taiwan has distributed large quantity of medical assistance to the countries across the globe just to create a positive environment for them so that they can throw away the Chinese takeover threat. But what is China doing?? Just the opposite. They have tried to trap small countries into debt for medical supplies, imposed duties on Australia imports for asking for Covid inquiry, showing aggressiveness in south china sea, taking away autonomy of Hong kong and now they are creating troubles with India at borders. 

There may be a chance that Xi wants to portray the strength and power of China in the wake of local and global backslash. He wants to show that china is still tough and will take hard stance. But this is expected from average fellow like Xi and it is good that this is happening because at least now the world will be able to recognize the threat of autocratic and irresponsible country like china. The threat is not new and global powers had in them to recognize this much earlier when china was stealing technology, when they were ring fencing their economy but wanted to be largest exporter, when they killed innocent in Tiananmen square in 1989,when they killed Tibetan soul, when they are forcing millions of Uyghur muslim in detention camps. But all kept quiet due to their economic reasons as China was a massive market for them or they needed china money like Pakistan. But now all of a sudden, the world has got a massive slap from the china behavior and I feel world will never be the same for chinese.

India has also crafted their China strategy carefully now and all of a sudden India is getting into the game. India has made string alliances with China adversaries like US, Japan, Australia. Also i think, we need to play the economic card well because china can't afford to loose such a large market like India. In the past, India never tried to avoid One China policy and never recognized Taiwan as separate but recently two BJP MP’s virtually attended the swearing-in ceremony of Taiwan President Tsai Ing-wen and even sent her congratulatory messages. India avoided the same in 2016. India also supported Covid inquiry proposal at WHO. So now China by creating tensions at border areas is trying to give a warning to India. But I think India now is well prepared and well assured of itself. And even this plan of China to hit the psyche of India may backfire because this will further strengthen the purpose and need of strong alliance of India with US. China can’t afford the US alliance with India because this will hit its interests very hard both from India and US.

So China has done a grave mistake in letting India to go to US to balance the threat of China. China has done a foolish thing by posing themselves as a threat to India when it was certain that India would always wanted to settle the disputes with china and move forward. There is not much at stake with border disputes with India and both china and India could have settle the disputes by keeping something and giving something for the mutual benefit. China has nothing much to gain from any war against India now as this will hit China very hard both physically and economically and this will give US the chance the pounce at south china sea, Hong kong and Taiwan. Even Tibet will be in danger. But strangely China has chosen Pakistan which itself is very unstable and opportunistic. So wisdom would have advised China to befriend a democracy and responsible power like India for long term benefits. With Pakistan, China can’t even be sure of the safety of nuclear weapons. Some says that with Pakistan China may benefit from the expansion of BRI initiative via CPEC. But had china formed a friendship with India then india would not have opposed the same and in fact may have even partnered with them. 

Right now amid current border tensions there is high chance of a small scuffle between India and China though both may want to avoid it as no one knows for sure whether it could remain low intensity fight. Both may be apprehensive of each other (game theory) and may even decide to forego it for some other time. But China is giving India the reason to change their strategy and target where it hits china the most- by supporting Taiwan and south china sea and forming alliance with US for defense strengthening. There is a big tactical difference in the focus of both- India considers China as prime enemy whereas China considers US. So China has to cross US for its global ambitions and it is not in its interests to create a strong enemy in the form of India. Here, it is better if India behaves or create its image as someone very unpredictable because this makes formulating a definitive strategy against India very hard. Though i feel that India's Balakot strike and tough stance during Doklam is enough to create an aura of unpredictability. But China after facing humiliation at Doklam may want to avenge the same by having a low intensity fight...so India also need to create unpredictability. Also, there are always doubts on the combat qualities of chinese forces...they are timid and corrupt. One of the reason is the one child policy of china due to which some 70-80% of chinese army men are only son of their families and this make them combat averse. I think China knows this especially keeping in view the brave stories of indian army right upto kargil war where they snatched the victory from the jaws of defeat.

China foolishly tried to blackmail countries to stop questioning covid handling by stopping the supply of essential medical and other supplies. This has led many countries across the globe to think about their mistake in creating their supply centers in China. And I have no doubt that there will be flight of supply chain from China. Whether this will come to India or not is another thing which I’ll discuss in another post on economic revival and growth of India. China may try to stop this forcefully but now they have already committed the grave mistake and now there is no stopping.

I have seen some commentaries these days which say that China growth is much internal now and share of exports have fallen to some 20% of GDP. So they mayn't worry that much about Exports. But if you ask me this is not the case and there is a need to do some fine tuning. First, Investment is one of the biggest components of the China’s GDP (some 40%) and this investment is controlled by the Communist Party. Massive funds in the form of Debt is given to state run enterprises, local governments via state run banks and this debt is used to construct roads, bridges, large real estate projects. So for them it is very easy to grow GDP. By increasing debt for investment by some 10% they can create GDP growth of 4% (10% of 40%).

But most of these investments are waste and bad as they do not contribute anything for GDP growth because they are in excess of their requirements. Nobody use these bridges, real estate projects…these are ghost cities. So these investments does not do anything for the economy…no factory uses the road and bridges to move their goods faster, no farmer benefits from them and save his agri produce. So these are just bad investments and needs to be written off so as to correct the GDP figure. But this is not done in China and as per estimates some 10-15% GDP is reported higher due to fake numbers and bad investments like this. In my view this can even be higher. China has one of the highest debt to GDP ratio ( 317% as of now) and most of the debt is bad.

So if one takes into account this excess reporting of GDP by some 15% then all of a sudden 20% share of exports becomes 30% and this is very significant because share has fallen but absolute value has gone only bigger and bigger and then further there is a question of distribution pattern of local growth and export income.

I am leaving this topic here now due to length of this article but will touch this issue in much detail in the next post on economic growth.

IND AS 115: Whether Covid Lockdown expenditures at Project sites are abnormal costs?

Covid lockdown has inflicted a very severe damage on the businesses (may be short time impact for most of the businesses). But in some cases, the hit is like a double edged sword where they have lost the revenue but can’t avoid the expenses. Project sites are one such casualty. Infrastructure projects generally recognize revenues under percentage completion method (Input method) as per the guidelines of IND AS 115. Here the issue is whether the expenditure incurred by any company at a project site during the covid lockdown is abnormal expenditure without having any impact on contract performance and these are not reflected in the contract price. So these covid period costs should be charged off into the profit and loss account directly and should not be considered as part of contract costs and to evaluate the percentage completion of the contract. This view has been stemmed from the following Para from IND AS 115:-

Para 98: An entity shall recognise the following costs as expenses when incurred:

(b) costs of wasted materials, labour or other resources to fulfill the contract that were not reflected in the price of the contract;

First of all, wasted material and labour cover the cases like when we supply some wrong dimension steel to site which is not used at all for the work and so this is wasted material and an abnormal cost as this incurred cost of steel will not impact the work progress neither there is any clause for the reimbursement of the same in the contract. Same is the case for a transmission tower erected at wrong location with material given by customer so the labour is wasted and the entire tower will be required to be erected again. So we can see abnormal costs are those whose incurrence does not have any impact on the future work progress and contract price.

But can we say that the costs incurred for minimum site running expenditures like labour retention costs, crane rent, electricity bill, car hire charges are abnormal and have no bearing on the progress of the work like abnormal costs we have explained above. But this is not the case because if the management had decided to cancel these contracts (clause in the contract?) to save these costs and then re-arrange these resources after the end of lockdown but in that case they would have incurred much higher costs due to demobilization and mobilization costs and labour would have been more difficult to rearrange and that would have impacted the work progress very badly after the lockdown. So we can see that these expenditures are incurred in order to save the contract from over costs and delays which can result into penalties (even after considering lockdown period as force majeure). So this expenditure is not abnormal as non-incurrence of this expenditure will hinder the objectives of the contract (costs and timely completion) and by this way it is different from the two cases we have mentioned above where non-incurrence of wrong steel and labour will not have any impact on future work progress. By incurring these costs, the contractor keeps the project site ready for functioning after the end of the lockdown and so these costs have do have a bearing on future work progress.

Further, in many contracts there is a clause for reimbursement of minimum expenses incurred during force majeure period (over run charges, ORC). This lockdown is a force majeure event (due to an act of Government). Hence we can see that if there is such clause of ORC payment o to contractors during force majeure period then these expenditures incurred during lockdown is taken care by contract revenue in the form of ORC payment and one can say that these are not abnormal. But force majeure events are not abnormal events in the sense that even though they are difficult to foresee but still these can be taken care in the contracts by having adequate clauses in the contracts. It is just like we take project insurance because loss/damage events are impossible to foresee and prevent so these are taken care in the form of insurance and insurance has a cost to the contract. And when insurance is in the scope of the contractor then he builds the same into his bid price. Hence, if insurance is in the scope of contractor then even if there is no explicit price mentioned against insurance cost but it is treated as if insurance cost is built into the contract price. Hence, when there is a damage or theft of a material the same is not considered as abnormal cost because it is insured although in many cases firms do not get any insurance claim from the insurance company for the loss.

Same thing is true for force majeure costs also. Force majeure event can be in the form of flood also. In the areas prone to heavy rains there are always chances of heavy flooding (force majeure). So if there is no ORC clause in the contract for taking care of extra costs due to floods then the contractor will have no choice but to build the same into the price. So it all depends upon the judgment and assessment of the contractor in each case because the events like lock down are once in a century type of events and if contractor decides to build the probable costs in the contract price there is every chance for his bid to be lost. So inclusion or non-inclusion of force majeure costs becomes a commercial or business decision and so this is not an abnormal event. Like if management specifies a clause in the crane rental contract that they can cancel the contract any time then the same will result in higher cost because some people will not bid as they would settle for somewhat lower price for a fixed period contract elsewhere with some other customer. So this firm may either get sub-standard crane or higher price due to less competition. In order to avoid this management may continue without mentioning such a clause in the contract just to save the force majeure period costs because this can become counterproductive. So as we can see not having a contract cancellation clause is a commercial and business decision. The risks of force majeure events are well known but not taking care of the same in the contract does not make them abnormal events instead these are business decisions only.

But buying a large quantity of wrong dimension steel or erecting a transmission tower at wrong location are abnormal events because firms do not bid for contracts (building these mistakes in the price) thinking that they will do these types of mistakes which are in fact the essence and purpose of their business. Hence as we can see there is this fundamental difference between abnormal costs and business decision. So incurring unavoidable costs to keep the project sites ready for functioning after the end of the lockdown is not abnormal costs not having any impact on the future work progress but in fact these costs will ensure the timely completion of the contract along with avoiding heavy mobilization and demobilization costs and penalties due to delay in the contract completion.

Hence expenditures incurred during covid lockdown should be considered as part of total estimated cost to fulfill the contract and be treated as incurred for the purpose of revenue recognition.

Further, due to increase in the cost of labour and material due to lockdown a contract may become onerous. An onerous contract is a contract in which the aggregate cost required to fulfill the contract obligations exceed the economic benefits expected to be received from it. In such cases, the contract shall be accounted for as per IND AS 37 and a provision/liability is to be provided in the books.

( Views are Personal)