Vijay Kumar Gaba: Inequalities

Showing posts with label Inequalities. Show all posts

Tuesday, February 21, 2023

Summers could be hotter this year

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.

Wednesday, May 11, 2022

Now or never

If we have to list the reasons for the loss of growth momentum in our economy in the past decade or so, the following three would be amongst the top reasons:

1. Credit euphoria preceding the global financial crisis and the subsequent meltdown

The credit euphoria preceding the global financial crisis and the subsequent meltdown severely damaged India’s financial system. The banking system was crippled with enormous amount of bad assets; many key infrastructure projects were either abandoned or suffered inordinate delays; employment generation capabilities were impaired; private savings began to decline structurally; and overall investments also slowed down.

It has taken almost a decade for the Indian banking system to clean its books and return to the path of growth, stability and profitability. Private savings and investments though still have a lot to catch up.

2. Disruption through policy changes without adequate mitigation strategy

At least two major policy decisions were taken in the past decade that disrupted the status quo materially, viz., demonetization of high denomination currency notes constituting over 80% of the currency in circulation; and implementation of nationwide Goods and Services Tax that subsumed a number of indirect taxes. These two changes had a significant impact on the unorganized segment of the economy. Numerous cottage, marginal and small enterprises that were outside the main industrial value chain of the economy lost out to their larger organized peers. It was almost a repeat of the 1991 liberalization that made many protected and patronized businesses unviable. Incidentally, no lessons were drawn from the painful transition during the 1990s.

The structure of the Indian economy has changed significantly since the early 1990s when the first round of transformative economic reforms was implemented. The share of agriculture & allied services has reduced from over 33% in 1990-91 to less than 17% now; whereas the share of industry has grown from 24% in 1990-91 to over 28% and the share of services has grown from 43% to 55%. However, unlike the economic transitions in the now developed economies, our planners have failed to ensure a proper transition of agriculture labor to the industry and services.

The public sector that was a major employment provider to urban labor started to downsize post economic crisis in 1998-99. The share of industry in the economy did not improve much in the past two decades. With technological advancement the employment elasticity of industrial growth also diminished materially. The task of employment generation for unskilled and semi-skilled labor was thus left mostly to the construction sector. As this sector suffered the most in the post GFC meltdown, it was for the unorganized cottage and marginal enterprises to support the lower middle class and poor households. The decision to implement demonetization and GST had no explicit provision to support this sector.

Consequently, the reliance of the poor and lower middle class on fiscal support (food, health, education, travel etc.) has increased materially impacting private consumption and overall growth.

3. Disruptions due to the pandemic

The outbreak of global pandemic (Covid-19) in early 2020, disrupted the economic activity world over. Most of the countries were locked. The global supply chains were disrupted. The labor displacements and travel restrictions have been debilitating. The process of normalization is continuing, but it is far from complete.

Domestic economy witnessed huge displacement and reverse migration of labor; loss of livelihood for millions; loss of opportunity for millions as digital apartheid pushed them out from the education and skill building ecosystem; rise in wealth and income inequality; and lower productivity due to restrictions. Besides, the broken supply chains ensured higher inflation in almost everything.

Arguably, all these reasons are transient in nature and the economy should be able to revert to the path of stable growth in due course. However, the two key considerations here are – (i) How fast could we complete the transition to the new order; and (ii) how could we minimize the damage to the socio-economic structure of the country. The more we delay completing the transition, the deeper and wider the pain will spread. And if we fail to take mitigating steps to minimize the pain, the damage to the growth ecosystem could be structural, impeding the growth efforts for decades.

Also, this must be understood in the context of the fast maturing demographic profile (see Gorillas in the Room) and worsening inequalities (see Economy – Uneven recovery to pre-pandemic levels, accelerators missing).

Friday, May 14, 2021

‘K’ is the key word for now

In past one year, ‘K’ has emerged as one of the most popular letters in economic jargon. Unlike past economic crisis when ‘R’ (recession and recovery) and ‘D’ (depression and deflation) were popular letters, this time a multitude of dichotomy created by pandemic is subject of popular narrative. In fact, I believe that these dichotomy in various trends was always present, but the pandemic has just exacerbated these, making them look more prominent.

In past few months, a ‘K’ shaped movement has been reported in many segments. For example, consider the following –

(a) The developed world, China and few other emerging economies appear to have mostly recovered from the pandemic shock; whereas numerous emerging and underdeveloped economies are still struggling to emerge from the pandemic related losses.

(b) Another manifestation of ‘K’ shaped movement is seen in the price movement. While the Purchasers’ prices (wholesale inflation) have seen sharp surge in past one year, consumer prices have not matched yet.

(c) The bond yields have also moved in a ‘K’ fashion over past one year. The gap between US 2yr and US 10yr treasury yields has increased from ~50bps to ~150bps over past one year.

(d) The wealth and income of people has also shown a ‘K’ tendency. While the top echelon of the society have accumulated record amount of wealth in past year; the millions who were just coming out of poverty have slipped back and many who were struggling to come out are even worse now. Numerous smaller business and self-employed people are staring at deep abyss of uncertainty and hardship, while many new unicorns are emerging from new technologies and newer ways of doing business.

In stock markets also, sector wise ‘K’ shaped performance is clearly visible. While consumers have underperformed materially, cyclicals are their running to their decadal highs. The dilemma for small investors is what strategy they should follow!

Friday, July 24, 2020

Slipping back into deep abyss

Continuing from Tuesday Repayment of Debt. Also see How will this tiger ride end?

The overall poverty level in the world has seen material decline over past three decades as highly populated countries like China, India, and Bangladesh pulled millions of people out of abysmal poverty conditions; even though, this period has also seen sharp rise in economic inequalities also.

The pace of poverty reduction has reduced since global financial crisis, as the flow of development aid from developed economies to the poor countries saw a marked decline; commodities dominated economies suffered due to persistent deflationary pressures; EM currencies weakened; and abundantly available credit at near zero interest rates helped the large global corporations and investors to increase their wealth disproportionately.

The global economic shut down induced by the outbreak of deadly COVID-19 virus is threatening to reverse the process of poverty alleviation. Millions of people who had been barely out of poverty conditions are facing the prospects of slipping back into the deep abyss. The fiscally constraint governments, anemic economic activity and feeble businesses would find it tough to support these people.

The key question to examine therefore is, If the global growth continues to remain low, how the poor and developing economies will bridge the development gap with developed countries and come out of poverty? And if this gap widens, what would it mean for the world order?

As per the World Bank, "Poverty projections suggest that the social and economic impacts of the crisis are likely to be quite significant. Estimates based on growth projections from the June 2020 Global Economic Prospects report show that, when compared with pre-crisis forecasts, COVID-19 could push 71 million people into extreme poverty in 2020 under the baseline scenario and 100 million under the downside scenario. As a result, the global extreme poverty rate would increase from 8.23% in 2019 to 8.82% under the baseline scenario or 9.18% under the downside scenario, representing the first increase in global extreme poverty since 1998, effectively wiping out progress made since 2017."

The report further emphasizes, "The number of people living under the international poverty lines for lower and upper middle-income countries – $3.20/day and $5.50/day in 2011 PPP, respectively – is also projected to increase significantly, signaling that social and economic impacts will be widely felt." Besides, "A large share of the new extreme poor will be concentrated in countries that are already struggling with high poverty rates and numbers of poor. Almost half of the projected new poor will be in South Asia, and more than a third in Sub-Saharan Africa."

As per another report of World Bank (Global Waves of Debt - Causes and Consequences), "...wave of debt began in 2010 and debt has reached $55 trillion in 2018, making it the largest, broadest and fastest growing of the four. While debt financing can help meet urgent development needs such as basic infrastructure, much of the current debt wave is taking riskier forms. Low-income countries are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China. Some of these lenders impose non-disclosure clauses and collateral requirements that obscure the scale and nature of debt loads. There are concerns that governments are not as effective as they need to be in investing the loans in physical and human capital. In fact, in many developing countries, public investment has been falling even as debt burdens rise.

The debt build-up also warrants close analysis because of slower growth during the current wave. In comparison with conditions prior to the 2007-2009 crisis, emerging and developing economies have been growing more slowly even though debt has been growing faster. Slower growth has meant weaker development outcomes and slower poverty reduction."

"The latest debt surge in emerging and developing economies has been striking: in just eight years, total debt climbed to an all-time high of roughly 170 percent of GDP. That marks a 54-percentage point of GDP increase since 2010—the fastest gain since at least 1970. The bulk of this debt increase was incurred by China (equivalent to more than $20 trillion). The rest of the increase was broad based—involving government as well as private debt—and observable in virtually every region of the world.

The study shows that simultaneous buildups in public and private debt have historically been associated with financial crises that resulted in particularly xviii prolonged declines in per capita income and investment. Emerging and developing economies already are more vulnerable on a variety of fronts than they were ahead of the last crisis: 75 percent of them now have budget deficits, their foreign currencydenominated corporate debt is significantly higher, and their current account deficits are four times as large as they were in 2007. Under these circumstances, a sudden rise in risk premiums could precipitate a financial crisis, as has happened many times in the past.

Clearly, it’s time for course corrections."

...to continue on Tuesday

Weekend readings

From American to European Exceptionalism

Has Big Pharma Finally Stepped Up?

Gold – That Shiny, Problematic Object

Projected poverty impacts of COVID-19

कोशिश करने वालों की हार नहीं होती / सोहनलाल द्विवेदी

Tuesday, January 21, 2020

Rising inequalities put question mark on sustainability of capitalism

Recently, the rights group Oxfam released a study titled "Time to Care", just ahead of the annual Meet-Greet-Eat-Retreat (MGER) event of the world's rich and powerful in Davos, the famous ski resort of Switzerland. The study once again highlights the burgeoning economic inequalities in the world and its potential impact on the global socio-economic conditions.

The report highlights that presently the personal wealth of 2153 global billionaires is more than the combined wealth of 4.6billion, which is about 60% of the planet's human population.

In Indian context, the conditions appear to be even worse. As per the report, the combined wealth of top 63 richest persons in India is more than the annual budget of the country, which was Rs24.42trn n FY19. The report further states that India's richest 1% people hold more than 4x the combined wealth of 953 million people who make up for the bottom 70% of the country's population.

The statistics are staggering by any standard.

Within overall parameters of the economic inequality, the gender inequality is even more alarming. As per the report, it would take a female domestic worker 22,277 years to earn what a top CEO of a technology company makes in one year.

The report further states, that women and girls put in 3.26 billion hours of unpaid care work each and every day -- a contribution to the Indian economy of at least Rs 19 lakh crore a year, which is 20 times the entire education budget of India in 2019 (Rs 93,000 crore).

The report suggests that even a meager 2% (of GDP) direct public investments in the care economy could potentially create 11 million new jobs. The women who are forced to "take care" of the household spend billions of hours cooking, cleaning and caring for children and the elderly. They get little time for education, skill building to be able to earn a decent living or have a say in how our societies are run, and who are therefore trapped at the bottom of the economy.

Another study presented by Edelman, highlighted that this unsustainable skew in global wealth and income, may be fast eroding the confidence in the system of capitalism itself.

The rise of socialism on both sides of the Atlantic may just be a harbinger of this trend.

Back home, the rise in the cases of civic unrest in past few years needs to be viewed from this angle also. The Patidar agitation in Gujarat, the farmers' protest in Maharashtra, the tribal protests in central India, the student protests across the country over a variety of issues may have one underline theme, i.e., economic stress and poor visibility of livelihood and growth.

In my view, it would be completely wrong to assume that the recent student's protests are merely to oppose recent amendment in the Citizenship law, or proposed population enumeration exercises.

The fact is that a common Indian youth is disillusioned, totally frustrated and deeply distressed.

First, the education they are getting is very expensive and mostly sub-standard.

Second, the employability quotient of youth graduated from most of the universities is abysmal.

Third, there are not enough job opportunities even for those who are competent. The conditions are truly pathetic beneath the facade of elite IIMs, IITs and ISBs.

Dismissing the protests merely as anti BJP propaganda would be monumental blunder on the part of the administration and the entire political establishment.