Some food for thought
"Lord, Lord, how subject we old men are to this vice of
lying! O, what a goodly outside falsehood hath!"
—William Shakespeare (English writer 1564-1616)
Word for the day
Cosplay (n)
The art or practice of wearing costumes to portray characters
from fiction, especially from manga, animation, and science fiction.
First thought this morning
As per trending news on media, Mukesh Ambani, chairman of
Reliance Group, has not got any salary hike in past 11years. He is drawing a
salary of Rs15cr/per annum since the global financial crisis. The rickshaw pullers
who transport me to and from metro station have also not hiked their per trip
charge for past 11years. Porters in Sadar Bazaar, the wholesale market of
Delhi, who carry heavy stuff on their head or back, have also hardly got any
raise in past 11 years. My banker friends are also complaining that they never
got the pre crisis level bonus again. The recruiters are able to recruit an
average fresh management graduate, engineer, CA or lawyer almost at the same
initial salary as 2008.
The data seen in isolation may suggest that we are almost a
developed economy, where inflation and wages have been absolutely stable for
past decade. Ram Rajya is all around, where the richest Asian and a poorest man
(rickshaw puller) are contended with no wage hike.
But then enters the demon. Since 2008 we have two pay commission
reports and the salaries of government and public sector employees have grown
multifold, despite rising deficit, inefficiencies and redundancies.
The question is what model of economics are we following?
Chart of the day
Finding ways to improve business sentiments
Last weekend, a noted journalist, a reputable entrepreneur,
couple of top bankers, couple of large corporate and numerous financial market
participants echoed one common theme - currently the business sentiment in the
country is very poor and government must immediately do something to improve
the sentiments. The underlying message was loud and clear - the government is
not doing enough to improve the growth environment in the country and the recent
budget has been a cruel dampener for the sentiments.
Collectively the commentators did highlight the problem
adequately. However, no one appeared, at least publically, offering solutions
to kick start the sagging growth and uplift the business confidence. "Cut
rates" and roll back super rich surcharge were common catchphrases.
I think a deeper study of past economic cycles could highlight
what actually marks the bottom of an economic cycle and what efforts leads to
higher growth and better business sentiments.
One dear fund manager friend highlighted the following points:
- Revisited 2001-04 period to understand the drivers of economic recovery. Sharp rise in current account surplus was the single biggest factor. There’s no other such period of CAD surplus in last 30 years. Improvement in CAD was due to both decline in trade deficit by 50% from 4% to 2%. Also surge in remittances from gulf on higher oil prices along with surge in software export helped achieve CAD surplus.
- Fiscal deficit during 2001-04 was nearly 1.6x of current level.
- In FY03, HDFCB cost of deposits fell 100bps along with gsec yields collapse. FD rates fell 200bps to below 5.5%. This fall happened despite fiscal deficit of 5.9% by center in FY03
- India returned to CAD deficit from FY05 led by surge in capital goods imports among others as well rise in crude oil prices
- Bank asset quality improved dramatically during this period driven by spike in loan growth and modest decline in gross NPA. Ratio of Gross NPA fell from 11% in 2002 to 9.5% in 2003 , 7.4% in 2004. It bottomed at 2.4% in 2008. Bank advances grew at an avg of 20-25% during this period.
- There is not evidence to suggest that the efforts of the incumbent government had much to do with the recovery. GDP growth was quite weak and fiscal quite high. Inflation was low as growth was very low and FX was getting stronger . Surge in CAD was due to IT and remittances for which Vajpayee government cannot be credited. In fact the budgets presented by the then finance minister Jaswant Singh were severely criticized for lacking in measure to spur growth.
- GDP grew 4% in FY04 but surged to 8% in FY05 as agri grew 8% on monsoon recovery
- Tax to GDP were fairly low all throughout. However between 2000 and 2012, govts gained from spectrum auctions and mining auctions. The present government has no such luxuries. Hiking effective rate of tax (ERT) is perhaps the only option available viable option. Massive disinvestment can help (not the book entry type done in recent past). Sharp fall in crude prices and accelerated FDI in e-commerce etc could also add some comfort.
- Contained inflation was the only notable achievement of Vajpayee government, and it is true for the present Modi led government too.My argument to him was that 2001-04 has to be seen in light of 1998-2000. Post Pokhran test in 1998, there were economic sanctions that impacted capital goods imports materially. Then we had this huge Y2K event that brought unprecedented billions of USD in remittances to India.To overcome economic slowdown due to sanctions, Vajpayee government had unleashed massive infra projects and reforms like Golden quadrilateral, KG-6 under NELP, UMPPs, SEZs, and telecom etc.; though most of these projects were done without assessing the "demand". FRBM was suspended. 2002 onwards sanctions were eased. But all these spending under PPP model laid the foundation of current NPA cycle Though not without causing few years of high growth in UPA1 regime.A cursory glance at data highlights the following to me. Analysts and economists may want to do a deeper research to find out what would actually work under the current circumstance.
Business confidence trends
In past 20years, the business confidence in India has mostly
remained neutral. We have seen two episodes of big fall in business sentiments
2000-01 and 2008-09. These falls were followed by huge spikes in 2001-02 and
2009-10 respectively. We had also seen a spike in 2012-14 period, but in past
3yrs it has remained mostly neutral.
All three episodes of spike in Business confidence have
coincided with spike in consumer inflation, perhaps indicating return of
pricing power for businesses:
Fiscal stimulus also has helped business confidence. Both in
2002-03 and 2009-10 material rise in fiscal deficit was seen. Though in 2013-14
improvement was in sentiment was accompanied by improvement in fiscal benefit.
Fall in interest rates may perhaps be the single most important
factor in improvement in business sentiment.
Economic growth has almost immediately improved after the
improvement in business sentiments sets in. Though it more looks like a chicken
egg syndrome.
Current account improvement does not seem to have any material
correlation with the business sentiment. It is therefore important to deeply
analyze the correlation of global economic cycles with domestic business
sentiments and growth cycle.
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