Vijay Kumar Gaba: recession

Showing posts with label recession. Show all posts

Thursday, May 4, 2023

Fed hikes 25bps

The Federal Open Market Committee (FOMC) of the Federal Reserve of the US announced another 25bps hike, taking its key fed fund rate toa target range of 5.00 to 5.25%. This unanimous decision of the FOMC is the 10^th straight hike in the past twelve months. With this hike, the effective fed fund rate is now highest since the global financial crisis. Besides the hike, the Fed also maintains the plan to shrink the balance sheet each month by $60 billion for Treasuries and $35 billion for mortgage-backed securities.

…claims banking system “strong and resilient”

Noting the concerns in the financial markets, especially those arising from the failure of Signature Bank, Silicon Valley Bank and First Republic Bank, the FOMC emphasized that "The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks."

…reiterates “growth modest”, “job gains robust” and “inflation elevated”

The FOMC noted that recent data suggest that growth has been modest while “job gains have been robust” and inflation is “elevated.” Reiterating its commitment to the 2% inflation target, the Committee cautioned about the further slowdown in economic growth due to tighter credit. FOMC post policy meeting statement read, “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.” This is very similar to what the FOMC had stated in previous policy statement in March 2023, which had come just after the collapse of Silicon Valley Bank and Signature Bank.

…stops short of saying “pause”

The latest FOMC statement omitted the previous wording ““some additional policy firming” and instead said it “will take into account various factors “in determining the extent to which additional policy firming may be appropriate”. Analysts largely interpreted this change as a signal for pause from the next meeting in June 2023; though no one suggested that any policy easing may be imminent.

Wednesday, October 19, 2022

Stay in bunkers till sirens are blowing

As I mentioned yesterday (see here), the current conditions are very different from the conditions in the 1980s when the US Federal Reserve under the chairmanship of Paul Volcker, managed to kill inflation with a deeper recession, but without pushing the world into an economic depression. But this does not imply that we have nothing to learn from history.

A key learning from the past 150 years of economic history is that every major economic cycle has been a function of a different set of factors like war; decolonization; politics triumphing over economics; major demographic shifts; major technological evolution (industrial or technical revolution); etc. The policy responses to various economic cycles have depended upon the mix of factor that were responsible for the cycle.

Industrial revolution, destruction due to world wars and then reconstruction effort; emergence of Communism (command economies) and cold war; decolonization of European colonies; population boom (baby boomers); conflict in middle east and emergence of American hegemony (end of Bretton Wood, beginning of petro dollar, invasions in Vietnam, Afghanistan etc.); end of cold war, falling of Berlin Wall, dissolution of USSR, induction of China into WTO and relocation of American and European manufacturing to Asia; democratization of internet & advent of digital commerce, dematerialization of money, commodities & trade; and pandemic, etc. have been some of the events which catalyzed major economic cycles (up and down) in the world.

In the post war period, until the mid-1990s, the role of the major central bankers was limited to regulation of monetary policy. They regulated the money policy, not necessarily in tandem with the fiscal policies, to manage the economic cycles. The monetary policy responses were marked in most periods of economic imbalances, averting major economic disruptions. Up-cycles (economy overheating) were also treated with due alacrity as were the down-cycles (recessions). However, since late 1990s, the central bankers have been assigned the additional duty to support economic growth also.

This additional (and often contradictory) assignment perhaps distorted the function of monetary policy in the past two decades. The central bankers were expected to not only support the economic growth but also ignore the instances of economic overheating. They were expected to stimulate demand during periods of low growth and sit on the fringes (or even keep fueling the furnace) during the growth phase. This has made the global financial system fragile and susceptible to frequent disruptions.

This tendency of the central bankers during past two decades is now a source of concern for markets. The massive monetary and fiscal stimulus, palpably to mitigate the impact of Covid pandemic; prolonged phase of widespread inclement weather conditions; intensified Sino-US cold war and invasion of Ukraine by Russian forces triggering a global energy & food crisis, has unleashed a massive global inflation crisis.

The governments and markets continue to expect the central bankers to control prices and stimulate growth. In the past 9-10 months the central bankers have however focused more on price control, mostly at the expense of economic growth; conscious of the fact that most of the factors causing inflation may be beyond their realm. Juxtaposing this central bankers’ predicament to the fact that most of the government may have already run out of the fiscal ammunition to stimulate growth, it is not too difficult to assess the depth of the quagmire global market are sinking in.

This entire narrative of India escaping the global turmoil (decoupling); market bottoming; a shallow recession etc. seems rather optimistic to me. I believe that the global policy reset will be a protracted and painful effort for almost everyone across the globe. Of course this reset journey will be dotted with phases of relief and false hopes, when it would appear that all is well and we are back to business as usual.

But the recent instance like fiscal policy fiasco in UK; BoJ’s and PoBC’s reluctance to join the global monetary tightening bandwagon; and fissure in RBI’s MPC over effectiveness of monetary tightening have shown that policymakers are mostly clueless and they shall be using trial and error method to control the situation. Each new trial would trigger a wave of hope; and each error would trigger a wave of despair. Legends like Russell Napier are expecting a major shift in political paradigm in this phase. He expects a major shift to 'command economy', de-globalization and an end to era of free markets that we have seen in the past three decades. (read here)

We can argue that the domestic investors in India may not be impacted materially by this global reset as we have a stable financial system; strong domestic economy; manageable debt at government; corporate and household level; and favorable demographics, among other positives.

My view is that all this is true. But all this was also largely true in 2000 (dotcom bubble); 2008 (global financial crisis) and 2020 (pandemic); nonetheless our economic growth slowed down; corporate and financial stress increased; stock markets corrected 50%; risk premiums on our bonds rose sharply; and investors panicked and incurred huge losses, in each of these instance. A similar pattern repeating this time cannot be completely ruled out. So it is better to stay in the bunker and shun adventurism, at least till the sirens are blowing full force.

It is true that these periods of turbulence usually throw brilliant opportunities. But to avail these opportunities you need to survive till the peace is fully restored. A few brave men will take their chances; but I am a normal person with very ordinary resources. I will avoid adventure of any kind and try to survive this period of reset.

…to continue tomorrow

Thursday, June 16, 2022

It’s upto Lord Indra and Lord Ganpati now

The Federal Open Market Committee (FOMC) of the US Federal Reserve decided to hike the benchmark bank rate by 75bps to 1.5% - 1.75% on Wednesday. The Committee also reiterated that the Fed will continue to shrink its balance sheet by US$47.5bn till August 2022 and from September the unwinding will be stepped up by US$95bn/month. The FOMC noted that there is no sign of broader slowdown in the economy, while lowering its GDP growth forecast for 2022 to 1.7% from 2.8% earlier. The FOMC statement reiterated the strong commitment to achieve the 2% inflation target. The Fed Officials projected raising it to 3.4% by year-end, implying another 175 basis points of tightening this year. The projection shows a rate cut in 2024.

In the post meeting press meet, Chairman Powell commented that “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting.” The Chairman added that ““It does appear that the US economy is in a strong position, and well positioned to deal with higher interest rates.”

The US markets reacted favorably to the FOMC decision. The benchmark S&P500 ended 1.46% higher and 10yr benchmark yields fell 3% to 3.29%.

Lately, I have been reading a lot of views and opinions about the likely outcome. There are strong arguments for a long corrective phase in the US Economy, just like Japan witnessed post the fiscal and monetary profligation of the 1970s. This Volckerish view anticipates a hard landing for the US economy; tremors across the world and gradual decoupling of global markets from the US markets. The other, equally stronger view is aggressive Fed hikes and tightening taming inflation but not without material demand destruction (recession) followed by a deflationary cycle. This Greenspanish view implies a soft landing for the US economy, premature end to Fed tightening and restoration of “Fed Put” for quick market revival.

Besides, there are multiple views that completely deny the independence of the US Fed from domestic politics and geopolitics. One view, though not convincing enough, portends that the US Fed will be forced to abandon its tightening stance before the mid-term polls begin in the US. The other view is that the inevitable end of current hostilities between Russia and Ukraine would mark the end of the global supply chain woes, resulting in reversal of cost pushed inflation; and the global central bankers’ focus will return to financial stability and growth.

Honestly, with each page of additional reading my confusion has compounded exponentially. In fact, I am confused, like never before, about the basic economic concepts like interest rates, inflation, free markets etc.

What I studied in school was that “inflation” is the rate of rise in prices of goods and services over a defined period. For example, if I could buy a basket of groceries for Rs1000 in June 2021; and I have to pay Rs1100 for the same basket in June 2022; the rate of annual inflation for June 2022 is 10%. If the same rate of inflation persists, the price I would need to pay for the same basket in June 2023 would be Rs1210.

If my income grows at the same rate during this period, I will continue to buy the same basket and there would be no change in my lifestyle (just for example). If my income does not grow by 10%, I will have to cut my consumption or borrow money to maintain my lifestyle. In the first case, the demand for groceries would fall and the seller will be forced to cut prices and the inflation will come down and I will be able to afford the same basket of groceries after some time. In the second case, the inflation for groceries will not come down as the demand sustains; but the demand for money (credit) will rise resulting in higher price for money (interest rates). This means in a simple environment higher interest rates and higher inflation could have positive correlation and move in tandem.

However, the inflation-interest rate correlation will turn negative if (in the above example) I borrowed money in the year 2021 itself and I cannot make additional borrowing to meet higher cost of groceries. In this case, even if my income grows to match the grocery inflation, I will have to cut my consumption to meet the rise in my interest expense.

This implies that other things remaining the same, and it being a free market economy, the correlation of inflation and interest rates would depend on the extent of extant leverage in the economy.

The situation however gets complicated when the largest consumer and borrower (the government) is in a position to control the price of money (interest rates) and/or goods & services. For example, if the government (or central bank) increases money supplies and also cuts the price of money (interest rate) the consumption demand could become artificially high, resulting in higher consumer price inflation. The problem gets further complicated if the government is able to manipulate the purchasing power of the currency (exchange rate) and thus also artificially contain the consumer inflation.

The present situation in the US, as per my understanding, is like this:

The US Fed has increased the money supply (M2) by more than ~3x in the past 13years; while maintaining the price of money (interest rates) close to zero. The exchange rate of USD (DXY Index) has appreciated by about 25% during this period. The inflation was therefore artificially suppressed for over a decade.

The “shutdown” of the global economy in the wake of the pandemic breakout, made the cheaper money and expensive currency irrelevant as the real goods and services were in short supply. The war in Europe further complicated the situation of goods and services supply.

Now, the US central bank is trying to find a lower demand-supply (price) equilibrium by (a) reducing the money supply; (b) increasing the price of money (to contain the consumption demand) while (c) maintaining the currency exchange rate at high level (to ensure cheaper imports).

The debate now is about the trajectory of (i) consumption demand destruction; and (b) improvement in supply of goods and services. A steep fall in demand and steep improvement in supply chains could normalize the situation without much damage to the basic fabric of the economy. However, if the trajectory is flatter, the pain may linger on for years or may be decades.

The other solution could be to control the consumption and prices of goods and services also (Marxist model). This will obviously destroy the basic fabric of the US economy as it stands today.

Insofar as India is concerned, our situation is fairly simple. We have limited leverage and the government intermittently controls the prices of money as well as goods & services, especially during the period of crisis. We just need to pray to Lord Indra for good rains and pray to Lord Ganpati for giving some sanity to Mr. Putin and Mr. Zelenskyy. If these two prayers are answered favorably, we shall be in a position to decouple from US markets and charter our own course (or find a more favorable benchmark to follow). Rest all is ok.

Wednesday, August 19, 2020

Preparing for chaos - 2

Continuing from yesterday (See Preparing for chaos)

I believe that severity of any geopolitical event, financial crisis, economic event, natural calamity, industrial disaster, technological evolution, pandemic, etc. must be assessed in terms of its impact on the human lives. Any event that severely impacts the asset prices but its impact on human lives is limited to a small segment of people does not qualify to be a called a global crisis in my view.

I put the financial crisis of 2008-09 in this category. The impact of that crisis was largely limited to financial markets and investors. It had almost no implications for the human life per se. It actually impacted more populated developing economies positively as the unprecedented amount of liquidity manufactured in developed markets found its way to emerging market assets enhancing the wealth effect in there.

Similarly, the events like 9/11 attacks in New York city, 26/11 attacks in Mumbai city, Nuclear accidents in Chernobyl & Fukushima, Tsunami in southern India, massive earthquake in Nepal, numerous cyclones in USA etc all were massive events, especially in terms of their economic impact - but their impact on human lives was mostly limited. These events therefore do not qualify to be global crisis, and usually do not have transformative impact on the global order - markets, businesses, protocols, systems, geopolitics etc.

The events like two World Wars, the great depression of 1930s, outbreak of Spanish Flu etc on the other hand have material impact on human lives world over leading to material changes in the global order.

In my view, the outbreak of COVID-19 pandemic qualifies to be a global crisis that will have transformative impact on the global order. Treating this event as a usual socio-economic event would be a grave mistake, in my view.

I believe that the world will be a materially different place in five year from now. However, notwithstanding the technological advances and development of advanced forecasting techniques, it may not be accurately predict the contours of the global order in 2025. The learnings from great depression may only inform us that changes will be dramatic. However, these may not guide us about the nature and direction of the changes, because the present circumstances are very different from 1930s. For example-

The war expenditure and reconstruction activities post WWII helped to a great extent in bringing the economies back on the path of growth. The destruction in present case would only be in asset prices and moral of the people. The world is struggling with excess capacities in most areas, including the basic needs of food, energy, and housing.
The great depression occurred when the benefits of industrial revolution were still accruing. In post WWII numerous new inventions were made to make substantial productivity gains. The benefits of the scientific and technology advances were afforded to a larger proportion of the society. The growth in that sense was democratic and egalitarian. In past 20yrs, the focus of scientific research and technology development is mostly on increasing the speed of execution and reducing the size of products. The growth is aimed at widening the already wide disparities.
The economics in 1930s was mostly physical. People, money, material, information etc all travelled physically from one place to the other. Presently, the world is totally dematerialized.

Notwithstanding the unpredictability of the situation, investors are obliged to foresee the future and orient their portfolios to align with the emerging scenarios.

...to continue

Tuesday, August 18, 2020

Preparing for chaos

The undeniable fact is that FY21 could see most pervasive contraction in global economy in post war era. The economic impact of novel coronavirus led lockdown is deep and wide, engulfing most economies, most sectors and most people. The impact may not be evenly spread as services sector have suffered more due to restrictions on mobility; and consequently the developed economies with larger share of services in their economy have also suffered more. The economies based on commodity exports have also suffered extensive damage due to lower demand and logistic challenges. The economies based on agriculture may be the least impacted as demand and supply chain for food have been least impacted due to pandemic.

If we consider the impact of pandemic from socio-economic distress view point, the poorest countries perhaps would end up suffering the most. Poor health infrastructure, cut in global development aid, sharp cut in remittances, fall in exports, etc have hit the poorest the most.

The economists world over are intensely debating whether the economic recession of FY21 would eventually evolve into a global economic depression, a phenomenon not experienced in post war era; or it will remain a deep recession.

It may be pertinent to note that -

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades." In US, the official definition of US is decline in real GDP for two consecutive quarters.

The term depression has not been defined clearly in economics literature. In the common parlance the term is used to describe a period of prolonged and severe economic recession. As per famous economics writer Gregory Mankiw, "the most famous economic downturn in the U.S.’s (as well as the world’s) economic history was the Great Depression, often described as starting in 1929 and lasting at least through the 1930s and into the early 1940s, a period that actually includes two severe economic downturns. Using the NBER business cycle dates, the first downturn of the Great Depression started in August 1929 and lasted 43 months, until March 1933, far longer than any other twentieth century contraction. The economy then expanded for 21 months, from March 1933 until May 1937, before suffering another downturn: from May 1937 until June 1938, a period of 13 months, the economy again contracted."

Obviously, there may be no active expert in the world, who has firsthand experience of handling an economic depression. If the current downturn does evolve into a global depression, it may be as chaotic as it was in the 1930s, simply because it will be a new phenomenon for everyone.

In Indian context, FY21 would likely be the first year of negative GDP growth in past 40 years. In fact since independence, there have only been four instances of negative GDP growth in India - FY58 (-1.2%); FY66 (-3.7%); FY74 (-0.3%) and FY80 (-5.2%). Most experts who have any firsthand experience of handling a recession either as a policy maker, regulator, banker, bureaucrat or politician may have retired or expired. Very few like Dr. Manmohan Singh, who have firsthand experience of handling multiple economic recessions are presently available in the country. Their views, suggestion and advice must be taken seriously by the government of the day.

I am a total novice insofar as the macroeconomics principles are concerned. Nonetheless, I will be happy to share my thoughts on this issue in later posts; particularly as I see them impacting my investment strategy.

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.

Friday, September 20, 2019

Overcome the inertia first, rest will follow

Since 2014, Prime Minister Narendra Modi has been consistently exhorting the foreign investors to invest in India to take advantage of 3Ds - Democracy, Demography and Demand; a unique strength not possessed by any other major economy of the world.

After 5years of NDA rule under his leadership, many are now challenging this claim.

A large section of domestic and foreign media, and many senior political observers & commentators have raised questions over the present health of the democracy in India. We may heavily discount their stance as deeply prejudicial and driven by ulterior motives, but rejecting it outright may not be totally logical.

The Union Labor Minister himself recently raised question over the quality of human resources in the country, especially the northern states where about two third of the youth population lives. Most business leaders, both from manufacturing and service industries, have frequently expressed grave concerns about the employability of the engineering and management graduates. A host of government and private studies have shown that the level of average students at middle school level in most populous states like UP and Bihar is unacceptable. In many cases class 6 students failed to answer 2nd standard questions. The government has failed miserably in formulating a nation youth policy or even an integrated education policy. If this trend continues, the demography could soon become a liability rather than strength of India. (Also see)

The third dimension, i.e., demand has always been an inarguable strength of Indian economy since early 1990s. The common refrain was that India is so short on the supply side that you could sell virtually everything here. I remember attending an investors' conference in late 1990s, where The CEO of a large automobile company presented that demand is something business manager in India do seldom care about. That was the time when a large FMCG company had launched a 25gm pack of Multani Mitti (Fuller's earth) for Rs40. A Google search would show that even today there are numerous listings on various ecommerce sites for this product at crazy prices.

Earlier this week, the principal economic adviser in the union ministry of finance Sanjeev Sanyal admitted that "The current economic situation is unique in India. All these years, we saw a slowdown in India because of supply-side constraints. This time, we are witnessing a genuine demand-driven slowdown." (see here)

The question is whether Indian Economy has lost its key strength (3Ds) in past five years.

I would not like to make it a political debate and reduce it to BJP vs Congress slugfest. In my view, the weakening of 3Ds is a reality and a deeper independent research study is required to assess since when, how and why the Indian economy lost its key strength. My gut feel is that this trend started more than a decade back and still continues.

On a structural note, I believe that the 3Ds of economic growth are intricately intertwined. The weakness in demand could be arrested and reversed only if some deep rooted reforms are implemented to strengthen the democracy and demography.

Nonetheless, the government may take some short term measures to begin the process from somewhere.

In this context, it may be pertinent to note that the businesses, consumers and markets, all are getting more frustrated with each set of "support measures" being announced by the government to lift the sagging sentiments. The measures announced by the government are misdirected, half hearted, inadequate and in most cases just repackaging of the already prevalent schemes and incentives. This gives a feeling that either the government is not able to comprehend the magnitude of the problem, or it is totally helpless.

In my view, the first thing government must earnestly focus on is to stimulate the economic activity at the lowest level in economy.

To break the negative feedback loop, the traders, investors and businessmen must be encouraged, nudged and coaxed into increasing their level of activity materially. We need to increase the velocity of money. Some small concessions having only notional fiscal impact can do the trick, in my view.

For example, consider the following examples, as suggested earlier also:

(a) In most parts of the country, the Ready Reckoner or Circle Rates (minimum property rates considered for levying stamp duty) are much higher than the prevailing rates of property. The government must consider bringing this minimum threshold to 10% below the prevailing market rate to stimulate transactions in property market.

(b Capital gains of upto Rs25lacs on all constructed properties may be exempted from income tax for two years, i.e., AY21 and AY22.

(c) Capital gains on sale of gold may be exempted, provided the entire sales proceed is invested in buying one or more constructed property (residential or commercial).

(d) Concessional Housing advance by companies to their employees in next 2years may not be treated as perquisites during the term of the advance.

(e) Trading in agri commodities may be exempted from cash transaction limits completely for 2yrs, i.e, till March 2021. Post that restrictions may be applied in graded manners over next 5yrs.

(f) GST input credit for automobile purchase may be allowed for six months, i.e., October 2019 to March 2020.

(g) Upto 50% discount may be offered on power tariffs to all green field industrial units that are approved before March 2020 and begin commercial operation before March 2022.

(h) Long term corporate bonds (10yrs or more original maturity) may be treated at par with equity for capital gains taxation purposes. Periodic Interest on such bonds may be taxed @10% without any limit.

(i) CSR spend in setting up rural schools and health centers may be made tax deductible at 125% of the amount spend. The operating and maintenance expenses on such schools and health centers may also be made tax deductible.

(j) An aggressive scrappage policy for old automobile (10-15yrs) may be implemented forthwith.

Wednesday, September 11, 2019

You must survive to enjoy the fruits of you labor!

As per the Hindu lunar calendar the ancestors' fortnight (पितृपक्ष), will start from tomorrow. As per the ancient Hindu traditions, all Hindus are obligated to serve Brahmins (Scholars) and feed crows during this fortnight. It is widely believed that serving Brahmins and feeding crows in this fortnight pleases souls of the ancestors and thus redeems the person performing this ritual from the debt of ancestors.

Hindu religious traditions also mandate that a grand feast must be organized by all Hindus within 3weeks of the death of their parents, spouse or children. In this grand feast Brahmins, Dogs, Crows and the poor are served with delicious food. Brahmins and poor are also given cloths, cash and other gifts.

I am not competent enough to comment about the traditions of other religions and cultures, but I am sure similar traditions are practiced by the followers of other religions also.

The anecdotal evidence that I have collected from my interactions with numerous villagers and urban poor, this feast (श्राद्ध) could be one of the top 10 reasons behind perpetual indebtedness, bonded labor and socio-economic distress of numerous rural Indian household.

Regardless of the religious significance and/or relevance of these rituals, I find it pertinent to to highlight that "the feast" will be held regardless of you. In case you want to enjoy the feast, you need to survive till good times arrive; otherwise it will be for the Brahmins, poor, cows and crows to enjoy the feast.

Relating this analogy to the economics, markets and politics—

In past two decades corporate India has invested huge amount of money in creating capacities. Many of these capacities, especially in infrastructure and real estate sector, have been created without bothering about the prevailing demand conditions. Consequently, a significant amount of these capacities became economically unviable. Promoters who created these capacities, bank managers who funded these capacities, and investors who provided equity to these promoters and lenders - are all in distress.

There is no argument against the need for these capacities. The demand will also come in next few years. But the question is who will enjoy the feast. The bank managers would have retired, sacked or shunted out for his poor performance. The promoters would have diluted his equity substantially at distress price or forced out by IBC. The equity investors would have booked the loss.

The Brahmins and Crows - the new bank manager in whose tenure these capacities will become viable adding to bank's profitability, investors who will buy equity at distressed prices and acquirers who would then be managing the show - will feast on the misery of others.

The traders in stock markets usually have this tendency to protract recognizing their losses. These losses could be due to wrong choice of stock, sudden change in external environment, or any other reason. But the first reflex of most traders is to average the cost by buying into the fall in prices. More often than not the traders end up losing more money than they would have lost had they booked the loss at first hint of trouble. The pain of loss rises exponentially when they see the whole market recovering, except the stocks they own.
It must be understood that to benefit from whatever good a government does, the political parties running that government will benefit from that good only if they survive to see the result of their good deeds. Otherwise, the party that will form the successive government will enjoy the benefit.

The moral of the story is simple - You must survive to enjoy the fruits of you labor!

Wednesday, September 4, 2019

Debating the slow down - 1

The dismal GDP growth data for 1QFY20 released last Friday has fueled a multitude of debates in the country. Most of these debates could be classified in three categories, viz.,

1. Political Debate: Whether the incumbent NDA government led by PM Modi has failed in handling the economy properly?

The debate encompasses a variety of issues, e.g., (i) whether demonetization and GST have impacted the growth momentum so severely that it may take many years to recuperate from the side effects; (ii) whether the government is focusing on too much on political issues ignoring the evident socio-economic concerns; (iii) whether the Narendra Modi administration has adequate talent to manage a economy in serious crisis; and (iv) whether UPA government led by Dr Manmohan Singh managed the economy well or is it due to the vacuum created by that government that the current government is trying hard to fill?

The former Prime Minister Dr Manmohan Singh has actively joined the debate by suggesting that "Our economy has not recovered from the man made blunders of demonetisation & a hastily implemented GST. I urge the government to put aside vendetta politics & reach out to all sane voices to steer our economy out of this crisis".

2. Economic Debate: The economic debate has many dimensions. Market economists, development economists, bankers, policy makers, market participants from financial markets, and business community are debating different dimensions of the Growth Conundrum.

Development economists are debating whether the current slowdown is (i) a demand side problem or a supply side problem; and (b) a structural or cyclical phenomenon.

Market economists are wondering whether the government has fiscal space to stimulate the economic growth through accelerating public investment & consumption and affording meaningful fiscal concessions to the consumers and businesses. "Need for aggressive Reforms" is a common jargon used in discussions but it continues to be vague as the specific suggestions are generally not made.

Bankers are debating whether rate cuts and other monetary stimulus can help achieving faster growth, especially when banking sector is still struggling with the asset quality issues and transmission of already effected monetary easing is not taking place adequately.

Financial market participants are discussing what does the GDP number means for credit growth, asset quality, auto & cement sales, flows, INRUSD, bond yields etc. They are also concerned with "avoidable" tinkering with tax rules especially in the current environment of global uncertainty.

Business Community is debating what concessions and relaxations the government could and should provide to help the struggling sectors like MSME, Real Estate, Automobile, etc. Incentives for exports, rationalization of excessive compliance norms, and "tax terrorism" also figures frequently in their discussions and debates.

3. Social Debate: The social debate is overwhelmingly focused on failure of the government in creating adequate number of jobs in past 5yrs. Rising unemployment that is leading to many distortions like low savings, rising household debt, higher petty crime rate; poor consumption growth etc.

In next few days, I shall reflect on some of the key dimensions of the slow economic growth.

Wednesday, August 21, 2019

Policy Paralysis vs Policy Haste

Policy Paralysis vs Policy Haste

In 2014, NDA led by BJP's prime ministerial candidate Shri Narendra Modi won a huge majority in the Lok Sabha. "Policy Paralysis" of the extant UPA government led by Dr. Manmohan Singh was one of the primary planks on which NDA election campaign was built.

A large majority of people, especially businessmen and capital market participants, had then celebrated the victory of NDA with great fervor. Assuming that the India's economic model based on Nehruvian Socialism (a distorted version of classical Keynesian model) will pave the way for the so called "Gujarat Model". Though not many people had clarity about what the much talked about Gujarat Model of growth is all about, and whether that template of socio-economic development could also be applied to the rest of India.

Most people had expected that the new regime will at least provide a proactive, clean, responsive, accountable and business/investment friendly administration that will ensure higher economic growth.

By the end of 2018, the general criticism of the PM Modi led NDA government was that—

(i) "Policy Paralysis" of Dr. Manmohan Singh government has been replaced with "Policy Haste". A number of policy decisions having deeper and wider repercussions (especially GST and Demonetization) have been taken without adequate preparation and consultation. This "Policy Haste" has led to the "Execution Paralysis" as the status quo has been disturbed materially without evolving the alternative mechanism;

(ii) NDA government has continued with the extant Nehruvian Socialism model rather than experimenting with the so called "Gujarat Model" at national level;

(iii) Frequent material changes have made the policy direction totally unpredictable, negatively impacting the business and consumer sentiments;

(iv) The key programs of the government are misconceived and poorly defined. Hence the outcome has been poor.

(v) Bureaucracy has been empowered too much without assigning corresponding matching accountability.

Notwithstanding the economic concerns and doubts about the sustainability of the NDA economic policies, the same NDA government returned to power with even bigger majority in May 2019. NDA swept metros like Delhi and Mumbai, industrial states like Maharashtra, Gujarat, Karnataka, and most populace states like UP, Bihar, MP, Maharashtra, and Jharkhand.

Less than 3months into the latest term, the government is again subject to the same criticism as before. It seems that people of Delhi and Mumbai, where BJP made a clean Sweep in 2019 general elections 3 months ago, were under the influence of a magic spell for few months. The spell has suddenly broken and they are finding their portfolio values diminished, property prices down and falling, businesses suffering losses, jobs vanishing, petty crime rising due to rising unemployment, and mood in general stressful.

Under the present circumstances, three points need detailed elaboration, viz.—

1. Whether the "Policy Haste" of the government is leading to "Execution Paralysis" at the operational level?

2. What proportion of the domestic growth slowdown is contributed by (i) policy action (or inaction); (ii) domestic cyclical slowdown; and (iii) global cyclical economic slowdown?

3. Are our economy and markets ready for the "Reset" that is becoming increasingly imminent?

Friday, August 9, 2019

India qualified for inclusion in playing XI

India qualified for inclusion in playing XI

In past one century, the global community has done many experiments to find a suitable global order. The year 2017 marked 100yrs of two very important global events.

In 1917, Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of USSR. In the following decades, many smaller independent European states would become subservient to a mighty Russian socialist army, and together become one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, USA would evolve into a formidable military and economic power that would lead the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed since preceding couple of centuries, began to dismantle. Many colonies of European empires would get freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, would get completely dismantle in the following three decades.

It took three decades for the new order to consolidate. The new order was characterized by UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), et. al. The globalization that was a norm prior to the first War was completely overpowered by the forces of nationalism and protectionism.

The new order lasted till the German Wall fell and USSR disintegrated. This unleashed a new wave of globalization. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

The events that have taken place in past one decade indicate that the extant global order may be crumbling under pressure, as the forces of nationalism and protectionism are rearing their head again.

There are two prominent debates that are currently going on. The first debate seeks to challenge the very premise - "whether the current state of globalization is reversible at all?" The second debate accepts the inevitability of the de-globalization, and is therefore focusing on the shape of the new order that would be emerging in next couple o decade. Two economic super powers China and USA are leading the forces of the change.

On previous occasion, when India was mostly a colonial or controlled & closed economy, we just played second fiddle to super powers and suffered some collateral damage from the major changes in the world. In fact one can reasonably argue that two great wars weakened the British Empire considerably, precipitating the independence of India, along with many other countries.

This time however our exposure to the global economy and geo-politics is much wider and deeper; and so would be the impact of any material change in the global order. It is critical that India demonstrates its competence and willingness to play a prominent role in the global affairs, economic, strategic as well as geo-political, to be accepted as a main player in the game. I see the recent events in relation to the state of Jammu & Kashmir in this light.

In my view India has played very well and qualified for inclusion in final playing XI as an all-rounder, i.e., an economic, strategic and geo-political major.