Vijay Kumar Gaba: November 2019

Friday, November 29, 2019

It's an economic emergency, almost

The economic data for 2QFY20 will be released today evening by the Central Statistics Office (CSO). There is a near consensus that this data may not be good. The estimates of various agencies and institutions are ranging between 4% to 4.8% growth in real GDP over 2QFY19 (vs. 5% in 1QFY20). 2QFY20 is expected to be the sixth straight quarter of decline in growth rate, the longest span of decline since 2011-2012.

Since this data belongs to the quarter ended September 2019 and the financial performance of the businesses for that quarter is already in the public domain, it is reasonable to assume that the financial markets have assimilated the poor growth numbers quite well. However, the growth estimates for corporate revenue and profit for 2HFY20 may not be factoring a negative surprise.

Going by the forecasts of most analysts and economists, the growth estimates of 2HFY20 are not very encouraging; though the consensus is expecting the second half of the year to be better than the first half. It is estimated that the measures taken by the government to stimulate the growth, lower lending and tax rates, likely bumper Kharif crop, low base effect, inventory rebuilding in key sectors like automobile, cement, steel etc., shall have positive impact on the 2HFY20 data. The overall FY20 growth is expected to be in the range of 5.4 to 5.8%, implying a growth rate of ~6.5% in 2HFY20.

The non-profit think National Council of Applied Economic Research (NCAER) recently released its mid-year review of India’s growth prospects. NCAER has presented the lowest estimates so far, forecasting that the economy will grow at just 4.9% in the financial year 2019-20.

India may therefore lose the claim of "fastest growing economy" in next six months. The statement made by the finance minister in the parliament on Wednesday clearly indicates that the government is not oblivious to this fact. That is perhaps why the finance minister changed the narrative from the usual "slow but still the fastest growing" to "slow but no recession" (see here).

A section of commentators is insisting that on ground the Indian economy may already be witnessing a shallow recession. (see here, here, and here)

Even if we ignore these rather pessimistic opinions, one thing is clear - the impact of slowdown is highly skewed. The lower and middle socio-economic strata, which consist of over 70% of the population is facing recession like conditions. This is adequately reflected in (i) consistently falling private consumption since 3QFY18; (ii) shrinking household savings and (iii) rising household debt. The rich who form less than 10% of the population are contributing more than 50% of the growth.

Under these circumstances, the economic policy response, in my view, must be non conventional. A gradual, piecemeal stimulation may not be effective in these circumstances, which in fact has been the case in past one year. The response has to be immediate, accelerated, and massive. The policy makers need to acknowledge the situation as an economic emergency and accordingly use exceptional methods.

For example, instead of caring excessively about the fiscal deficit at this point in time, the government must consider a classical Keynesian response. Similarly, the monetary policy response also needs to be dramatic. This incremental 25-35bps rate cuts may not bear the desired impact. A sharp rate cut 100-125bps with rationalization of USDINR and REER may be necessary. Negative real rates, competitive exports and incentive to borrow & invest.

The proposal to initiate a TRAP like program is welcome. But the bureaucracy must be sanitized to make sure that the effort must be "how the coverage of such an initiative could be maximized" rather than minimized as the case has been tax rate cuts and real estate rescue plan.

Thursday, November 28, 2019

Why "public servants" are treated like Kings and Lords in India

If someone wants to understand the "unease of doing business & living" in India, a 45-50km drive in and around the city these days is a great idea. You would find long queues of vehicles at FASTag distribution counters.

Last late evening, I found many poor taxi and small commercial vehicle drivers waiting for their turn to obtain a "prepaid card". A couple of them said that they joined the queue at 7:30 in the morning. Their turn did not come till 10AM. They left and rejoined the queue at 8:30PM. They were not sure if they would get it by the night.

In principle, the FASTag is a "prepaid card" that is used to pay toll charges across the country. This is a substitute for cash payment at toll booths. The primary purpose of this facility is to reduce the time spent by vehicles at toll booths.

The secondary objectives may include (i) preventing the leakages in the toll collection; (ii) encouraging digital payments; (c) making toll collection process efficient and economical; and (iv) reducing the carbon emission by minimizing the traffic jams at toll booths.

Using this card as a vehicle tracking device is certainly not one of the stated objectives of this facility. The government agencies in fact clarified on this issue also. However, the KYC process for buying a FASTag implies that tracking the movement of the vehicle is one of the primary objectives of this facility.

To use this facility, the users need to furnish (i) copy of registration papers of the vehicle; (b) photograph of the vehicle owner; and (c) KYC documents of owner such as ID and address proof of the vehicle owner, alongside the FASTag application.

I totally fail to understand why and how FASTag is different from a prepaid Metro Card? Considering the rules for concessions (e.g., for special vehicles and vehicles owned by citizens living close to toll booths etc) it may be important to identify a unique FASTag to such vehicle. But then the KYC requirement must be on exception basis for vehicles or persons seeking concessions, rather than requiring everyone to go through this process. Besides, why vehicle owners' KYC is needed for FASTag is difficult to comprehend.

In my opinion, this means either of the following two things:

(a) The government does want to track the movement of all vehicles but does not want to admit this for the fear of litigation. This is clearly an invasion in the privacy of the people. I am not a legal expert, but I do believe that this invasion in citizens' privacy is clearly a violation of the constitutional guarantees.

In the famous Aadhar case (Justice K.S. Puttaswamy (Retd) vs Union of India) the 9 judge bench of the Supreme Court unanimously declared that "The right to privacy is protected as an intrinsic part of the right to life and personal liberty under Article 21 and as a part of the freedoms guaranteed by Part III of the Constitution."

The opinion of the SC judges in the said case clearly established that the "privacy of citizens is a fundamental inalienable right, intrinsic to human dignity and liberty."

Justice Chandrachud noted that "Formulation of a regime for data protection is a complex exercise that needs to be undertaken by the state after a careful balancing of requirements of privacy coupled with other values which the protection of data subserves together with the legitimate concerns of the state." For example, the judge observed, "government could mine data to ensure resources reached intended beneficiaries."

Obviously, the policy makers and bureaucrats who framed procedures for FAStag are fully aware of the consequences of the privacy violation concerns, but still want to snoop on peoples' movement, without disclosing to them that they are being tracked toll plaza to toll plaza; or

(b) The government does not intend to use this facility as a tracking mechanism, but the bureaucrats who were assigned to frame the rules and procedures could not get out of their idiosyncratic "controlling mindset"; and mechanically prescribed maximum possible paper work. Otherwise, in this digital age, why the government or any of its authorized agencies should be required to collect registration paper (RC) of a vehicle that is registered with the government motor vehicle department and the RC and KYC documents of the owner have already been submitted to the government at the time of registration.

The bigger issue in my view is the mindset of the executive. The public servants in our country steadfastly refuse to believe their status as such. They love to continue with the colonial legacy of British with the "the master servant relationship" deeply entrenched in the psych.

(To fully assimilate what I am trying to imply here one must witness the visit of elected representatives, civil servants, senior police officers, senior army officers and their family members to a temple. These people are usually escorted to the deity ahead all hundreds of common people waiting in queue, as if they are Kings of the Land and everyone else is a poor subject.)

While making policy and procedures the convenience of the citizen and businesses is perhaps the last thing in their order of priorities. For example, if FASTag policy and procedures were ease of doing business oriented, these would provide door step delivery of FASTag to anyone who sends an SMS (within 48 hrs) to the designated agency from the mobile registered with motor vehicle department at the time of registering the vehicle or making driving license, on cash on delivery (CoD) basis.

To ensure "ease of doing business" and "ease of living", the government must change the basic template of policy making. The new template must accept supremacy of "the people" over "public servants". Any new policy or procedure, or change in existing policy or procedure, must pass the test of "ease of doing business" and "ease of living". Even one hour of likely inconvenience to any citizen must be fully justified in writing.

Wednesday, November 27, 2019

A trip to motown

To understand the current state of automobile market in India, we met numerous people in the supply chain, users and prospective buyers over the last few days. Both rural and urban markets were covered in 4 states - UP, Haryana, Punjab and Delhi.

The key takeaways from my discussions could be noted as follows:

(a) A sizable number of existing 4W passenger vehicle (4WPV) users has postponed their replacement decision in past one year. Most of the users who have replaced their vehicles in past one year have up traded. SUV still remains a preference in rural area.

(b) Almost 65% prospective 4WPV buyers (mostly first time buyers) of entry level vehicles have postponed their decision to buy. Most of these prospective buyers are not likely to buy in next 6 months also. The postponement of decision is due to a variety of decision - economic uncertainty (job, profession or business), poor availability of credit, buying vehicle decision linked to buying or shifting house which has got postponed, wait for new model, were some of the common reasons.

(c) Only 20% of the prospective 4WPV buyers of higher variants have postponed their buying decision. Most of these prospective buyers plan to buy a new vehicle in next 6 months. Most prominent reason for their decision postponement was cited as waiting for new model.

(d) Less than 30% existing and prospective 4WPV users were aware of the impending changeover to BSVI emission norms.

(e) Fuel price does not appear to be a key factor in decision making for anyone. However, insurance cost is a matter of concern, though not a deterrent.

(f) The situation in 2W passenger vehicle (2WPV) is quite the opposite. Here a small minority of the existing users have postponed the replacement decision; while almost 60% of prospective buyers have postponed their buying decision. Economic uncertainty and poor credit availability are cited as the primary factors in postponement decision. Nonetheless, most of the existing users seeking replacement and prospective buyers have expressed their intention to buy a new 2WPV in next 6-12months. Only 18% of 2WPV users indicated that they may up trade to a 4WPV in next 12 months.

(g) All the local motor repair workshops reported material decline in business in past 12 months.

(h) All dealers of second hand passenger motor vehicles indicated 30-40% decline in transactions over past 12 months. Most local dealers are yet not worried about the impact of the growing presence of large national players in this trade.

(i) The spare parts dealers reported huge jump in sale of unbranded and spurious parts post GST. Almost all dealers reported 25-30% fall in revenue over past 12 months. It is felt that there may be 20-25% elimination in this space before the business normalizes in next 6-9months.

(j) The dealers of both 4WPV and 2WPV indicated sizable rundown in inventory over past 3months. However, only a few of them indicated intentions to rebuild the inventory in next 3 months. Almost all of them highlighted decline in NBFC finance to be one reason for poor demand. About 20% of these dealers indicated intentions of quitting the business over next 24months.

For commercial vehicles and tractors the sample we got was meaningless.

We intend to cover the states in west and south over next three months for taking a view about investing in auto sector stocks.

Tuesday, November 26, 2019

Lack of commitment as investment strategy

There are usually three types of customers for any product or service:

(i) Dog type - The customers who are attached to the people and/or the brand. For example, the people who prefer their hairs to be cut by the same person in a large saloon; to be served by the same waiter/waitress in a restaurant; to buy the same brand of clothes, food, etc. These customers would usually not mind paying higher price or waiting longer to get the product or service of their choice.

(ii) Cat type - The customers who are attached to a place rather the people or brand. For example, the customers who prefer to shop from a specific store, watch movies at a particular theater, spend their whole life in one house, etc. These customers also usually would not bother about the offerings of the competitors.

(iii) Rat type - The customers who are always looking for a favorable deal. They usually have no loyalty to any place, brand or people. They keep actively looking for the best deals and buy the products/services from the places/people who offer them best value for their money/effort.

In past couple of decades, the proportion of the third type of customers (Rat type) has risen disproportionately, almost everywhere.

Employees are less attached to their jobs and employers are less attached to their employees.
People do not mind changing places (cities, states, countries) in search for better professional opportunities.
Cheaper Chinese products are preferred to expensive German products, despite poor durable life.
Cheaper and lighter MDF furniture is preferred over heavy long lasting pine wood or sheesham wood furniture.
Easy to install and change ceramic tiles are more preferred to marble flooring.
Ready to cook & eat food and beverages are gaining currency even in traditional societies.
The youth prefer live-in relationships over matrimony as the intensity of commitment is much lower in such relationships. Even the jurisprudence is evolving to accept such less committal relationships as valid contractual obligations for parenthood and property sharing and inheritance.
Politicians have given up commitment to any particular ideology and are willing to go to nay extent for getting a better "deal".
The house or private labels of the large retail formats (Big Bazaar, Spencer, Reliance Retail etc.) are growing faster than many established FMCG and textile brands as these invariably come at cheaper prices or with attractive deals (1 for 1 free!).
Many successful business models are purely based on this rise in "deal seeking tendency" of customers, e.g, MakeMyTrip, Trivago, Zomato, Policy Bazaar, Paisa Bazaar, etc.

If we apply this theorem to the investing in equities, we shall see a sustained decline in buy and hold strategy and higher trading. The people who cannot do the frequent churning by themselves might increasingly entrust the job to professional traders and fund managers.

At this point in time I am avoiding any opinion on the issue of Buy & Hold vs. Active Investment vs. Passive Investment. But I guess It'll be not long when I am forced to take a stand on this.

Friday, November 22, 2019

My take on popular market narratives

I find the following four narratives are presently dominating the financial market research in India:

(1) Slowing economic growth

India's economic growth hit a six-year low of 5% in 1QFY20. The consensus estimates indicate that the growth may further slip even to below 5% in 2QFY20. Some estimates are forecasting that the 2QFY20 GDP growth, to be announced next week, may be closer to 4% rather than 5%. The full year growth number, after accounting for base effect and recovery in 2HFY20, are also expected to remain closer to 5% rather than 6%.

The slowdown in economic growth is widespread, encompassing all the segments and sectors of the economy. Agriculture, industry and services have all slowed down. Investment and consumption demand is multiyear low; and so are savings, investments and credit growth.

The financial research is adequately capturing the slowdown since August when 1QFY20 GDP growth numbers were announced. However there are still differences about the future outlook. A significant section of the market appears convinced that the slowdown shall bottom out in 2HFY20 and a sustained recovery may be seen from FY21. On the other hand, many economists still have doubts about the FY21 recovery. This section appears convinced that road to recovery is bumpy and to regain a 7% growth trajectory, India would require many structural reforms over next 2-3yrs.

In my view, based on my interactions with various stakeholders, any meaningful recovery in the economy may not begin before 2QFY21, and FY21 growth will be closer to 6% rather than 7%. Unless of course the government changes the denominator by making FY18 as the base years.

(2) Divergence in economic growth and equity prices

While the economic growth is sliding to multiyear low, the benchmark equity indices are trading close to all time high levels. This divergence of economy and equity prices is a popular topic of discussion amongst various market participants.

I have no view on this issue. Nonetheless I would like to highlight the following two small points:

(i) The total market capitalization of stocks listed at NSE was Rs15.2trn in January 2018. Almost two years later, it was at the same level yesterday.

(ii) The nominal GDP of India grew 24% during two year period FY17-FY19. The market capitalization of NSE grew by the same percentage from April 2017 to March 2019.

So the argument that equity prices are outpacing GDP growth may not be entirely true. It is the skew in the market cap that is perhaps the cause of intrigue for research analysts.

(3) Fiscal challenges

The consistent decline in household savings and rise in household debt; poor GST collections; and rise in social sector spending and urgent need for the fiscal stimulus has made the task of fiscal balancing very challenging. It is therefore a subject of intense debate how the government will be able to manage to increase the public spending to stimulate the economic growth. Large scale disinvestment, release of RBI reserves and perhaps new avenues of taxation (estate duty etc.) are some of the ideas being discussed.

In my view, higher effective of taxation seems inevitable, even if the government is able to execute its ambitious disinvestment program. However, I am not overly worried about fiscal deficit number, so long the government is transparent about the accounts (deferred subsidies, withheld refunds and suppliers' payments, direct borrowing by NHAI and Railways etc. and revenue earned through book entries, e.g., through PSU buyback, inter se sale of PSU stakes etc.)

(4) Earnings revival

The 2QFY20 corporate earnings have been mostly in line with already moderated estimates. The tax cut announced in August did help to some extent. However, the corporate commentary has remained downbeat and does not inspire much confidence for earnings revival in the coming quarters. The common theme therefore is that we may likely see further moderation in the earnings estimates for FY21 and even FY22.

There are few analysts who believe that earnings revival is imminent, but majority does not appear to be concurring with that. Earnings growth is therefore mostly a contrarian idea.

In my view, the earning revival will be very stock specific. Active investment may therefore be a better idea in FY20.

Thursday, November 21, 2019

A paradigm shift

The recent order of the Supreme Court may finally end one of the ugliest chapters in the corporate history of independent India. With sale of Essar Steel Limited to ArcelorMittal S. A., the new paradigms in the Indian corporate business and financial market spheres that had been taking shape since past few years may get formalized and gain wider acceptance.

The businessmen shall accept that they may no longer remain in control of their businesses if they fail in honoring their debt commitments; and shareholders shall realize that if lenders of a business lose money, nothing shall be left for the equity shareholders.

There is a lesson for the small investors who buy stocks of defaulter companies because they are trading at very low price. Under the new paradigm the equity shareholders should expect to get anything only and only if the lenders are able to realize full value of their loans. The theoretical definition of equity shares (Upon liquidation of a business, the equity shareholders are entitled to receive the value left after satisfying all the liabilities) may stand true under the new paradigm.

In this context, it would be pertinent for the readers to rewind the story of Essar Steel

Promoted by the Bombay based Ruia family, Essar Steel initially commenced operations of as a construction firm in 1976 as Essar Constructions. Its name was changed to Essar Offshore & Explorations in May '87 and later to Essar Gujarat in Aug.'87. It became Essar Steel in 1995. It was supposed to be one of the most modern steel plants in the world at that point in time. The company issued equity shares to the public at a huge premium.

However, despite getting huge amount of interest-free money through share premium, the company consistently reported huge losses, (while the main competitor Tata Steel was showing good profits) resulting in erosion of the entire networth of the company. The company became sick and went for a CDR (corporate debt restructuring) program. 40% equity capital was written off under the CDR scheme. The CDR package of Essar Steel was popularly termed as the worst ever from lender/shareholder point of view and best ever from promoter point of view. Many lenders had not only to forego all interest amounts but had also to compromise on principal amount.

Post CDR, company started showing profits but, much lower than market expectations considering very low interest cost and highest ever realization in steel. The company had a paid up capital of over Rs. 500 crore, book value of over Rs. 25 and a net profit of over Rs. 700 crores, but it did not pay any dividend after 1997 thus managing to keep the share prices suppressed. The Promoters subsequently increased their stake in the company to over 74%.

It is interesting to note that promoters did not infuse any fresh capital to revive Essar Steel but kept on increasing their share holding in the telecom venture Hutch, which was sold later to Vodafone at very high profit.

Moreover, the promoters managed to buy a second hand Steel Plant in Korea at a very attractive price. This Plant was placed under an unlisted group entity Essar (Hazira) Ltd. and not brought under Essar Steel Limited. At the same time the promoters also made investments in other steel plants abroad in their unlisted company Essar Global Ltd.

The regulatory paradigm shall also change to adapt to the new circumstances. Since the chances of any recovery for equity shareholders of defaulting companies are insignificant in most cases, it would be better if a special window is created for trading in shares of all companies which are under IBC process or facing winding up proceedings. The traders (I am deliberately not using the word investors here) who wish to buy lottery tickets must know upfront what they are getting into.

Wednesday, November 20, 2019

How not to transform India

Last month the hon'ble President of India issued a very important piece of subordinated legislation titled "the National Institution for Transforming India (Staff Car Driver) Recruitment Rules, 2019" (see here). These rules have been issued in suppression of "the Planning Commission (Staff Car Driver) Recruitment Rules, 2010". The objective of issuing these Rules apparently is to prescribe the method of recruitment, age limit, qualifications and other matters relating to the recruitment of car drivers for the staff members of the National Institution for Transforming India (NITI Aayog).

As per the rules, the entry level driver needs to be 10th pass with a valid driving license and 3yrs driving experience. Experience of serving as home guard or civil volunteer for 3yrs is desirable but not mandatory.

The only disqualification prescribed is that the candidate must not have practiced bigamy, unless the Central Government is satisfied that such marriage is permissible under the personal law applicable to such person and the other party to the marriage and that there are other grounds for so doing.

As per the pay scales prescribed under the said rules, the starting salary of the drivers of NITI Aayog shall range between Rs29,000 to Rs45,000 depending on the scale he is recruited in.

For me, the key take away from the above are as follows:

(a) The government certainly does not believe in less government more governance.

(b) NITI Aayog is no different from the erstwhile planning commission insofar as the bureaucracy is concerned. No transformative efforts may be expected from the National Institution for Transforming India.

(c) Of all things, prescribing bigamy as the "only" disqualification for a driver requires serious amount of explanations. I am unable to fathom any rationale of choosing bigamy over all other crimes.

(d) A cursory glance through matrimonial column of Sunday newspaper would show that the average salary of management and engineering graduates with 5-6yrs work experience is not more than Rs1,00,000-Rs125,000. A high school driver of NITI Aayog may also get similar salary after 10yr of tenure. There has to be something terribly wrong somewhere.

This prompts me to reiterate the following from what I had said couple of years ago:

"Two news items have frequently dominated the media headlines in past few years.

(a) How many thousand post graduates, people with professional degrees etc. have applied for a handful of clerical or subordinate (peon) job in various government departments.

(b) What new communities have raised demand for being classified as "backward" to become eligible for reservation in government jobs. Many times their protests have turned violent, disrupting public life and damaging public and private property.

The first item is interpreted by the public at large, either as an indication of the massive unemployment prevalent in the country; or as a symptom of the craze for jobs with opportunity for corruption. The second item is interpreted by various people to indicate different things. For example—

(i) he ruling party takes it as a conspiracy of opposition parties to destabilize the government and polarize the voters of the community demanding reservation, e.g., Jat community in Haryana, Patidars in Gujarat, Marathas in Maharashtra, and Gurjars in Rajasthan.

(ii) The communities already covered by the scheme of reservation, take it as a conspiracy of "upper castes" to undermine their rights and privileges.

(iii) The communities seeking reservation benefits do so to demand fulfillment of the constitutional guarantee for equality and life.

(iv) The others claiming to the victims of reservation policy, see it as a likely further infringement of their right to equality and diminished number of opportunities in higher education and jobs.

What I discovered after discussing the matter with a variety of people and stakeholders, is as follows:

1. The average salaries in government departments and PSUs have meaningfully higher than the private sector. Besides, the government jobs offer job security that is not available in most private sector jobs. The entry level subordinate job starting salary is close to Rs19000 these days. Not many MBAs and Engineers can get this kind of salary in private jobs.

2. For the highly qualified, entering the system as a subordinate is relatively easier. Once inside the system, they can easily move forward, as the insiders get preference over outsiders in almost senior level vacancies.

3. The increasing number of communities seeking reservation in jobs is directly linked to higher salaries, better career prospects and job security in government jobs.

4. Fiscally challenged government with only partially success in growing the tax base, has not been able to increase the number of jobs in government or public sector. In fact the government and Public sector jobs have been consistently shrinking in past two decades. This has further intensified the competition, hence greater political interference.

5. The government (past, present and future) has literally no solution to this problem.

Tuesday, November 19, 2019

Economic revival needs a coordinated effort att levels

Notes from my Diary

The first and often most crucial stage of finding solution to a problem is usually the "acceptance" that there is a problem. Till very recently the government and its various organs appeared mostly in denial steadfastly refusing to accept that—

(a) the country is facing a economic slowdown;

(b) the slowdown is structural in part and may not correct on its own without intensive policy intervention;

(c) the slowdown is wide enough to impact the most sectors of the economy and deep enough to impact almost sections of the society;

(d) the slowdown is caused by both domestic and global factors and may need comprehensive coordinated efforts at fiscal, monetary, trade, geo political and strategic policy levels; and

(e) the fastest rate growth is not fast enough for an economy having the largest number of unemployed, under employed, and employed in disguise youth in the world.

It should be a matter of some comfort that the realization has begun to dawn upon the government that the economy is slithering down. The finance minister recently admitted that “It would be too presumptive of me to say it (the economic slowdown) has bottomed out.”

As reported by news agencies, "Sitharaman said it’s a bit too soon to say whether Asia’s third-largest economy would be able to stick to its fiscal deficit targets. However, the government’s asset sales program -- key to plugging a gaping hole in the budget -- is moving ahead comfortably, she said.

The RBI governor has also made similar statements in past couple of weeks.

However, there are still many organs of the government which are refusing to accept the problem. For example consider the following:

Recently a union minister dismissed a suggestion of slowdown citing the crowd of people at railway stations and shopping malls.
The bureaucracy has not been adequately sensitized about the urgent need for economic revival. They have rendered many of the measures taken by the government to arrest the economic slowdown less effective. For example, the riders and exclusions added in the proposals to restructure the corporate tax rates and launch a rescue fund for the beleaguered real estate sector have rendered these measures much less effective.
There seems to be no direction to the enforcement agencies to not initiate coercive action against businesses merely on the basis of suspicion of wrong doing; and to the judicial officers of the government for not protracting the litigations unnecessarily.
We have not heard chief ministers of most populated states like UP, MP, Bihar, and West Bengal etc. admitting the economic distress in their respective states.
The public sector bankers and officers have not been assured of full immunity for any action taken, loan sanctioned, investment made in good faith and within the set parameters.

Unless, all the organs of the central government and various state governments arrive at a consensus and initiate a coordinated policy response, it may be difficult to find a sustainable solution to the current episode of economic slowdown.

Interestingly, many brokerages have already seen the light at the end of the tunnel. The next six months are going to be interesting for sure.

Friday, November 15, 2019

Hopes converging to reality

A recently published paper by the RBI (see here) highlights the perceptible change in the macroeconomic outlook of the professional forecasters, in recent months.

The latest round (September 2019) of the professional forecasters' survey (PFS) indicates that professional forecasters are growing increasingly skeptical about the macroeconomic conditions and growth in near term. I believe that in the next round of PFS (November 2019) we shall see further downward revision in the estimates as the data continues to deteriorate.

In my view, the professional forecasters play a critical role in policy formulation and the quality of policy response to critical economic conditions. The fact that in the latest episode the professional forecasters have been quite slow in recognizing, underlines the inadequate policy response so far. The positive take away is that the realization of the gravity of situation is finally happening and it may hopefully reflect in the policy response faster.

The key highlights of the September 2019 round of the PFS could be listed as follows:

1. The forecast for GDP growth has been downgraded to 6.2% from 7.6% in May 2018. However, since the November forecast of many agencies and research houses is closer to 5% against 6% in September, it is reasonable to excpect that the November round of PFS will see further downward revision in GDP growth estimates.

2. The forecasters have sharply downgraded the FY20 personal consumption expenditure growth forecast to 5.5% in September 2019 against 7.6% in July 2019. The subdued Diwali season sales may lead to further downward revision in this estimate.

3. The investment climate is expected to remain poor in 2HFY20 also. The overall forecast for FY20 investment growth has been sharply downgraded to 6% against 9.2% in July 2019. It would not be reasonable to expect further downward revision in investment growth in the November 2019 PFS also.

4. Surprisingly the forecasters do not expect material deterioration in the fiscal balance. Despite persistently lower GST collections, cut in corporate tax rates and lower than budgeted personal tax collection so far, the forecasters see only 20bps rise in center's fiscal deficit to 3.3% from 3.1% estimated a year ago. No deterioration is expected in the States' fiscal deficit.