Shinkashen .. all aboard..

Mr Modi's dream project of the bullet train is finally here. Though personally I would have been happier if the existing network got faster, from the average speed of 49kmph across the various varieties of trains, and if they ran on time and without accidents.

Anyways coming to the Bullet train. Its critics have the following to say:
1. The debt will be huge and will sink the future generations of India in a Debt trap as the Yen strengthens and the Rupee Depreciates.
2. 4-5 more such projects across the country and we will be in a certified debt trap right now and not later.
3. Finally, the cost of 110000 crores for the project is the amount of money allocated in the rail budget towards expansion and safety by the NDA govt!!

Now for some numbers:
Current trains...
On an average the cost recovery from ticket sales is only 57%. What it means is that if today it costs 850 from chennai to delhi ie 2127kms, (0.4 Rs/Km) it should be raised to 0.7 Rs. km or Rs.1,491/- to recover just the cost!! - Average speed of train - 65kmph. (ie 30% premium fast train on the national average!!)

Proposed Bullet train:
Total cost - 110000000000
assuming 10:1 debt:equity we have:
INR equity -                    1,10,00,00,00,000
INR Debt -                      1,10,00,00,00,000
JPY Debt (INR Equiv) - 8,80,00,00,00,000

28 year historical Yen-INR movement shows a 5.85% per year CAGR depreciation of the INR. But the JPY has depreciated from .6693(aug'13) to .5786(sept'17) ever since Modi was announced as the PM candidate. This is very significant.

So the capital cost increase and the interest payment increase due to this is priced in and over the 5 year construction period the increased costs are 22,470 Cr. (It will less than half of this as i have assumed the entire JPY is drawn on day one).

Now each train can have a minimum of 8 cars and a maximum of 16 cars with 78 people or thereabouts in each car. Assuming we start with 15 trains in each direction per day and a 90% capacity utilisation we have a total of 33696 seats sold per day.

The increase due to the rupee depreciation at historical levels will require a 1.5 to 2% increase in prices every year for 50 years, which means the ticket price will double from the government launch estimate of 3300/- to 6600/-. If one adds the general price rise to this, this ticket cost will have to add another 100% ie taking it to 9900/- +

Working out the above we arrive at 2200 per seat with a 9% ROI on total cost which includes the equity, INR debt, JPY debt with interest and the expected fall in the INR vis vis the Yen. To the above we add 50% of the above cost as the cost of maintanence, staff etc etc. this results in a ticket price of 3300/- to start with for a distance of 500kms. cost per km is Rs.6.6/-

Road Comparison
Toll road costs are today at 1.25 per km. (you still have to add the cost of running the car ie 5-7/km)
comparing with the current network

Train comparison:
Chennai - delhi - Ist Ac ticket cost  (current)- 6000/-
                                                     (Shinkasen)- 2127*6.6 = 14,038/-
Time current - 32hrs
Shinkasen     -  13 hrs

Extra trips by shinkasen - 1 on the same asset. As asset cost is 67% of the ticket cost, the extra runs will give me a saving of 50% on the ticket costs on the same asset on the same route. so possibly this can be priced at 14038*.67*.5 = 4702 ie 9,335/-

The yearly expected increase in ticket costs will have to be 3.5% to keep up with the exchange changes and inflation costs, which may or may not happen.

So the GOI can reduce the debt burden by issuing 5% tax free bonds in India to its citizens and also issue shares on the shinkasen assets and routes. In my calculations I havent taken any income towards the 10% slack in capacity which can be exploited for carrying cargo!

So is this a good deal or not? I guess its one of those things that only time will tell. However, if one goes by what Japan and China have experienced with their bullet trains, the economy and its people have only benefited by it!!

Politics of climate, US growth is in coal...

Struggling with jetlag, i had the honour of watching a live telecast of Trump giving a speech from the white house where he basically said that the US was unilaterally withdrawing from an agreement where another 197 countries are parties !!

the main reasons stated are as follows:
1. US was unfairly targetted and that CHINA and INDIA were benefitting!! - well that was the thrust of the agreement in the first place -  that developing nations will be given some slack time to allow them to use that time to get into the developed bracket in the global sweepstakes!!
2. By getting out he can open coal mines and other manufacturing industries like steel, cement etc. which have a potential of 6.55Mn jobs and adding 3T$ GDP to the US economy. Methinks Trump just single handedly  taken the US from developed status to underdeveloped status. He thinks US will be great again with industries where the median wage is less than 30kUSD? Just imagine these 6.5Mn people plus families numbering over 30million people who cant afford medical insurance (O-care would be gone by then) with pollution related diseases in the next decade - thats a hole in the Balance sheet of the US that is being set up today. His fear was apparant in his voice when he mentioned that the US had over 20T$ of debt - and therein lies a tale - are we looking at a US default on its paper - considering Trump this is a distinct possibility!!

Now for some Data:
Cumulative US emissions are estimated at 25% of global emissions, EU (28nations) is 23%, China at 11% and India at 2%. Its a no brainer that the more developed you are , the more your share of global pollution.

So it was a no brainer that the paris climate deal was made on the central pillar of allowing the low emitters to up their emission to allow their populations the same chance to develop and also the transfer of technologies from the developed nations to the underdeveloped so that this process of development can be expedited.

the long and short of the US leaving the climate deal can be used by the remaining 197 countries to come together to levy a carbon tax on all US exports and that would truly set the circle one full round of karma.

Demonestisation - endgame redux

In my first blog on demonetisation ( http://forsec.blogspot.in/2016/11/you-hustle-you-deal-you-steal-from-us.html ) i had said we have to wait for the dec'16 and mar'17 tax numbers to arrive at the conclusion as to whether the parallel economy is finally moving mainstream. this chart shows that at an average growth of 13.5% for the two months of nov-dec, it ties in with my band of 4.6% to 17.6% .

A lot needs to be done and already the banks have shown their true colours by imposing an additional 1% transaction fee on debit/credit cards. Refer  my earlier blog on this ( http://forsec.blogspot.in/2016/11/fight-good-fight-post-demonetisation.html) where i had said that banking fees is one area that needs to be regulated - these should be pass through and not a profit centre for banks - its that simple and i am sure easily implemented by a RBI notification. govt departments can set the tone by making all their digital transactions free for the customers, which still hasnt happened! (update - the govt has started to make their transactions cost neutral)

March'17 tax figures will tell us how far demonetisation has resulted in reducing the parallel economy and also company results will tell us how much they have been impacted. A higher Rabi sowing of 6% has already shown that more of the formal economy has been used this time around to finance agriculture, whether this results really in a higher final production when procurement happens, we will know at the time of harvest.

At the beginning of the demonetisation move i had warned that this was the endgame for the informal economy, as the government will follow it up with more measures to go after those who are happy with an "informal setup". The recent announcement to use CA's to review the banking data to identify people who are potential tax dodgers is but one of many such measures that the government will be employing to end the informal economy, sooner rather than later. (update - the budget for 2017 has taken many measures to disincentive cash - lets see how this plays out in the fullness of time)

a final reminder from the evergreen epic..
"Being a journalist, Hacker had no particular talent for reporting facts" - the press reporting has to be taken with a pinch of salt as it is clear now that a part of them are pro-govt and a part of them against the govt.
"He can't seem to grasp that I don't want the truth, I want something I can tell Parliament.." - a govt pushed to the wall may just select obfuscation rather than the truth and that would be a bigger calamity than the various scams of the previous govt.
"Perhaps the government thinks that a tax is the best form of defence." - the introduction of GST may be the loophole for the govt as an excuse in the event of a sharp decline in growth and in the event there is no fall in growth - trumpet the success of both demonetisation and GST.