Vijay Kumar Gaba

The Reserve Bank of India has increased the policy repo rate six times in the current financial year (FY23). It has continued to withdraw excess liquidity from the financial system through various means and has mostly maintained a hawkish demeanor, insofar as the policy outlook is concerned.

In spite of (i) aggressive rate hikes; (ii) withdrawal of excess liquidity from the system; (iii) sharp correction in global commodity prices (especially energy); (iv) restoration of supply chains that had got damaged during pandemic resulting in severe supply shortage of key raw materials and inputs; (vi) three consecutive normal monsoon seasons yielding bumper crops; and (vi) slow growth – CPI inflation has persisted above the RBI tolerance range of 4 to 6% and credit growth has accelerated and remained strong. Obviously there is a disconnect somewhere. Even one third of the members of the Monetary Policy Committee of the RBI do not agree with the policy stance of the RBI and have voted against rate hikes.

Personal loans and working capital demand driving credit growth

In a recent report rating agency CARE Ratings highlighted that “Credit growth has generally been trending upward throughout FY23 and remained robust in recent months even amid the significant rise in interest rates.” The report pointed that “Retail and NBFCs have been the key growth drivers for FY23. Besides, demand for capex too is expected to drive industry credit growth.” As per the agency, “Incremental credit growth has risen by 12.2% so far in FY23. In absolute terms, credit expanded by Rs.14.5 lakh crore from March 2022. The growth has been driven by continued and sustained retail credit demand, strong growth in NBFCs and inflation-induced working capital requirement”.

Personal loans, driven by housing and vehicle loans, continue to be one of the fastest growing segments of credit growth. Even in December 2022, “Personal loans grew by 20.2 per cent (y-o-y) in December 2022 from 14.9 per cent a year ago, largely driven by housing and vehicle loans.”

 

 Banking system liquidity turns negative from a large surplus

The banking system liquidity has been quickly evaporating in FY23. From a large surplus a year ago, the banking system liquidity has turned negative in recent weeks. As of January 27, 2023, the banking system liquidity deficit stood at Rs.18,916 crore as against a surplus of Rs.6.4 lakh crore at the beginning of FY23.

Credit growth outpacing deposits

For the fortnight ended January 27, 2023, deposits with scheduled commercial banks (SCBs) stood at Rs177.2trn. The current deposit base is higher by Rs12.5trn as compared to the beginning of FY23. Bank deposits growth continues to lag the credit growth resulting in gradual rise in credit to deposit ratio.

 

Conclusion

From a plain reading of the above mentioned data points and corroborating evidence, I am drawing the following conclusions:

·         The economic growth continues to be highly skewed (K shaped)

The top decile of the population seems to have emerged economically stronger from the pandemic. Record high spend on foreign travel; record sales of high end cars; 9yr high sales of premium homes; are just a few indicators of this trend.

On the other hand, the middle classes have struggled to sustain their pre-pandemic lifestyle. Their savings are depleting; credit card outstanding and rolling credit is rising; and high inflation is hitting their consumption.

The reliance of poor people for essentials like food, shelter, healthcare, education on government is intensifying. Over 800million people are now availing free food.

·         Rates could rise further

Persistent inflation, neutral to negative liquidity, high current account deficit (INR under pressure), slowing household savings rate, and credit demand outpacing the deposits imply that the overall environment for rates remains bullish. We may see deposit and lending rates rising further; while the policy rates stay elevated. A pause by RBI may not result in lowering of rates in the short term.

·         Growth to remain suboptimal, private capex may remain in slow lane

There is evidence that high real rates may have started to constrict economic growth in India. The real GDP growth in FY24 is forecasted to be 5.8% to 6% by most economists and analysts, though RBI has projected an optimistic 6.4% in its latest monetary policy statement. Private capex may thus remain in the slow lane despite optimistic projections.

·         Banks’ margins may take a hit

In the past one year Indian banks have enjoyed strong margins as loans were repriced in tandem with the policy rates. The deposit rates usually get repriced with a lag. We shall see deposit rates rising in the next few quarters impacting the margins of the banks.

·         Economic inequalities may rise further

With inflation, high rates, slower economic growth (poor employment generation) continuing to hit the middle classes and poor hard, we shall see the economic inequality continuing to rise further. The consumption of the premium segment may sustain and grow faster as compared to staples and essentials.

The latest edition of the FIFA World Cup, arguably the most popular sporting event in the world, is currently being played in Qatar - a tiny Islamic monarchy in Middle East Asia. With a population of 2.9 million, Qatar is hosting approximately 2 million guests, denying them freedom of alcohol, narcotics and sex, considered three major components of FIFA events, besides football. Moreover, the schedule of FIFA World Cup was changed for the first time to November-December from the usual June-July; apparently to suit the weather conditions in Qatar, which is unusually hot during summer months.

It is intriguing for most why Qatar was chosen to host this event. Initially there were allegations of bribery and use of unfair means by Qatar authorities; but these were found baseless after a two year long investigation. However, if we consider the trend, the selection of Qatar to host the event might not look inexplicable after all. The three preceding editions of the FIFA World cup were held in South Africa (2010), Brazil (2014) and Russia (2018) – all emerging economies. The 2026 edition is scheduled to be hosted jointly by the US, Canada and Mexico. For the 2030 edition, most bids are jointly given by two or more countries involving at least one emerging economy, e.g., Uruguay-Argentina-Paraguay-Chile; Spain-Portugal-Ukraine; Saudi Arab-Egypt-Greece, etc.

Notably, the preceding three editions of the FIFA World Cup were hosted by the members of BRICS block. It is expected that the other two members (India and China) may also get to host the prestigious event in the next decade. Also, the number of participating countries has been increased to 48, to include more small countries.

Byju’s, the Indian Edtech company is one of the co-sponsors of FIFA World Cup 2022. Also, Lionel Messi, currently one of the most popular football players in the world, is also global brand ambassador for one of the initiatives of Byju’s. Notwithstanding the fact that India is not amongst the 48 teams participating in the event; it is estimated that more than 30000 football fans from India will be attending the event. Besides, many of the 75000 Indians staying in Qatar would also be attending matches there.

Obviously, FIFA has sensed where the economic balance of the global economy is tilting. It probably has the best sense of the purchasing power of people. It is moving to the places where demographics is improving in terms of younger soccer fans with better purchasing power; and moving away from the places where population is growing older and rising income and wealth inequalities are shrinking the target audience base for the game. FIFA also seems to prefer venues with easier VISA rules and comparatively decisive (authoritative) governments that can make commitments faster.

Of course, FIFA’s sense of global economy could be challenged; but there are multiple other signs suggesting that the balance of global economy is moving away from the nations that have dominated the global economy in the past centuries that saw colonization, industrial revolution and world wars moving the balance westward.

So, when Reliance group chairman Mukesh Ambani claims that the Indian economy will grow to $40trn by 2047, he may be mostly correct about the future trend; even if the number is an enthusiastic exaggeration. 

 With each passing day, the realization is growing that it will “years” not months or quarters before the normalcy returns to the global economy. Regardless of the statistics on global trade, national income and corporate earnings, the impact of pandemic on humanity, especially poverty, inequality, and suppression is overwhelmingly devastating. The pandemic has indubitably undone the decades of efforts in poverty alleviation and public health in numerous developing and underdeveloped countries.

As per a recent Bloomberg report based on a study conducted by the World Bank and Philippine’s local agencies, “almost half of shuttered businesses were unsure when they could reopen”. As per the report, “in emerging parts of Southeast Asia, where a wave of job losses and weak social safety nets mean millions are at risk of losing their rung on the social mobility ladder. The region is likely to come in second behind the Indian subcontinent in charting the number of new poor in Asia this year.” This points to a long, drawn-out recovery. Southeast Asia’s GDP is estimated to be to be 2% below the pre-Covid baseline even in 2022.

As per last year’s projections, South Asia was expected to add more than 50million people with $300bn in disposable income to middle class strata. This attracted many global corporations to invest huge amounts in building capacities in this region. With the poverty levels rising and prospects of growth acceleration fading, the viability of these capacities is now questionable.

As per the Bloomberg report, “As many as 347.4 million people in Asia-Pacific could fall below the $5.5 a day poverty line because of the pandemic, according to the United Nations University World Institute for Development Economics Research.  That’s about two-thirds of its worst-case global estimate, and underscores the World Bank’s forecast of the first net increase in worldwide poverty in more than two decades.”

As per HSBC research, The magnitude of the economic free fall in Southeast Asia’s five biggest economies was severe in the second quarter. Indonesia shrank 5.3% year-on-year, Malaysia 17.1%, Philippines 16.5%, Singapore 13.3% and Thailand 12.2%, data compiled by Bloomberg show. Vietnam, which was among the few trade-war winners, will see its three-decade economic ascent grind to a near halt this year. Contractions could persist through early next year.” That’s signalling a prolonged financial squeeze for Southeast Asians.