Tuesday, December 4, 2018

Bank Credit vs. Govt Priorities

First thought this morning
Thousands of farmers from various states gathered in New Delhi last week. Many of these farmers had come from faraway places like Telangana, Tamil Nadu, and Maharashtra etc. Every farmer in the crowd had a compelling story to tell. These stories mostly revolved around two primary themes: (a) Farming has become an unviable business for marginal and landless farmers (who incidentally account for over 50% of the total population in the country); and (b) The government schemes for welfare of these farmers are either ill-conceived or poorly implemented.
A simple five minutes courtesy chat with any of the farmers was adequate to suggest that we are nowhere close to achieving the ambitious targets of inclusion set by the government.
One of the major positive outcomes of this protest march, in my view, was that university students, who are mostly disconnected from the realities of the rural economy, came out in large numbers and earnestly tried to understand the farmers' issues. This will surely go a long way, as these students will eventually become the policy makers tomorrow.
Secondly, though most opposition parties tried to hijack the highlight from farmers' issue to further their vested interests, the participant farmers brilliantly maintained the peace and decorum. This is unprecedented, very unlike the farmers' protests we have seen in the past, e.g., by BKU etc.
Though the farmers carried red flags with communist symbols, none of them appeared to be politically motivated. Attempts by a section of politicians and their supporters to trivialize their protests as mere ploy to affect the ongoing elections is unfortunate and deplorable.
Chart of the day

 
Bank Credit vs. Govt Priorities
The recently issued data for sectoral deployment of bank credit has thrown some very interesting points. I find the following points worth noting and pondering over.
The credit profile of banks does not match the government priorities
(a)   The total bank credit has grown at the rate of 8.8% during the five year period from October 2013 to October 2018. However, during this period:
(i)    Credit to industry has grown at just 2.7% CAGR. Loans to medium scale industries have decelerated at the rate of (-)4% CAGR, while loans to micro and small enterprises have grown at just 3.6% CAGR.
As proportion of gross bank credit, the loans outstanding to micro and small enterprises have fallen to 4.5% in October 2018 as compared to 5.8% in October 2013.
For medium enterprises, the decline is even worse, from 2.4% in 2013 to just 1.3% in 2018.
(ii)   Credit outstanding to tourism sector (a focus area) has not grown at all in past five years. As a proportion of gross bank credit, it has fallen to 0.5% in 2018 from 0.7% in 2013.
(iii)  Credit to shipping has also declined at the rate of (-)7% CAGR in the 5year period ended October 2018.
(iv)   Credit to NBFCs has grown @14%CAGR during past 5years. As a proportion of gross bank credit it hs grown to 7% in 2018, from 5.5% in 2013.
(v)    Personal loans have grown @16% CAGR in 5yr period ended October 2018. These loans now stand at 25.3% of gross bank credit vs. 18.4% five year ago.
Out of personal loans credit card outstanding have recorded maximum growth at 28.9%CAGR in past five years. These now stand at 1% of gross bank credit vs. 0.4% in 2013.
This read with the growth of disbursement to NBFCs, may make the picture even more interesting.
Education loans have grown @3.5%CAGR, and now less than 1% of the gross bank credit.
(vi)   Priority sector credit has grown at the rate of 9.3%CAGR in past five years. But lending to industry in this segment has grown just @3.6%CAGR.
Priority sector housing credit has recorded lower growth @6.7%CAGR. Whereas overall housing loans have grown @15.8%CAGR.
(vii)  Loans to agriculture & allied activities have registered a higher growth of 11.3%CAGR during five year period ended October 2018.
Overall credit to this sector now stands at 13.2% of the gross bank credit, against 11.7% five years ago. This is despite many episodes of loan waivers.


 

Friday, November 30, 2018

Stay cautious, regardless

Some food for thought
"I'm not afraid of storms, for I'm learning how to sail my ship."
—Louisa May Alcott (American Novelist, 1832-1888)
Word for the day
Keek (v)
To peep; look furtively.
 
First thought this morning
Noted industrialist Anand Mahindra triggered an interesting debate on Twitter with his suggestion as to who should first be landing on Mars.
"A human landing on Mars is now not far away. I only hope the first wave of explorers will be poets & not real estate developers", Mr. Mahindra tweeted earnestly.
Taking the thought further, the enterprising Elon Musk added, "Engineers, artists & creators of all kinds. There is so much to build."
Agreeing to Mr. Musk's thoughts, Mr. Mahindra insisted, "Indeed. But let’s make sure the poets are in the first ark. Or there’ll be no one to make sense of why we’re there..."
Curious what normal people would say about this, I decided to check with few people, including NRIs in US, Canada, Singapore and Dubai.
No prizes for guessing their response. All of them unanimously want Indian politicians to migrate to Mars. A few from US want Trump's to join them too.
I do not know how to react to this. Is this level of skepticism good for any society? Why are not people looking forward to successful and positive people for inspiration? Why the negativity in the political arena is so overwhelming?
I also wonder, do we have any case for not banishing media (Social, Print, Electronic) from our day to day life and get back to books!
But while we are still hooked to media, happy to note Rakhi Sawant is apparently marrying next month in Los Angeles, and King Khan has agreed to bless the couple in person!
Chart of the day

 
Stay cautious, regardless
Interest rates are perhaps the most commonly used monetary policy tool globally. The central banks world over lay maximum emphasis on policy rates to achieve the objectives of their respective monetary policies. The financial markets and fiscal & development policy makers accordingly keenly watch the movement of policy rates.
Every public statement of central bank officials is minutely analyzed to discover the hints of changes, if any, in the central bank's policy stance. Significant trading best are placed based on the interpretation of these statements. However, there is no empirical evidence to establish the profitability or otherwise from instant market reactions to the purported "hints" dropped by central bank officials or any policy maker for that matter.
I am also trying to find any meaningful study that has been carried out to establish the relative superiority (or efficacy) of policy rates over other monetary policy tools used by the central bankers in achieving their policy goals.
In the latest occurrence of this phenomenon, the global markets have gone ballistic after a speech of the US Fed chairman Jerome Powell was widely interpreted to mean that the US central bank may pause hiking rates, as the policy objectives of price and growth stability has been achieved.
Indian markets is almost 5% higher since last RBI policy announcement, in which the Monetary Policy Committee decided not to hike the rates, and hinted that growth and prices may be cooling. In fact, steep fall in energy prices and less than projected inflation, has motivated lot of long positions in financials and rate sensitive stocks, assuming that RBI may stay put or even cut on 6 December 2018 meeting.
Not an economist myself, and certainly not a monetarist, I however wonder, how anticipation of growth peaking and showing definite signs of slowing could be a matter of celebration for equity investors. Particularly, when it is widely accepted that—
(a)   The current valuations of sectors and stocks leading the market charge (both in India and USA) is mostly on the higher side, almost flirting with bubble territory.
The argument that since the growth trajectory henceforth is going to be much flatter therefore higher price earnings multiples (PE Ratio) may be accepted as norm is not palatable to me because, this tenet is being applied selectively. Half the market that is trading below historical average valuations are being conveniently excluded from the benefit of this gratitude.
(b)   The current growth cycle has been mostly by credit driven consumption. Little new capacities have been added despite near zero interest rates for a very long period. The potential growth curve may have moved materially lower and growth is peaking at a level that will leave little incentive for anyone to add capacities in midterm.
Moreover, the elevated level of household credit and fiscal profligacy, even by the troubled economies like Greece, suggests that the central bank commentary may change like Mumbai weather - from a "sustained hike" to "need for accommodation (QE)" in no time.
In the meantime, there is a strange contest opening in India. Rhyming with "my shirt is whiter than thou", politicians in India are sparring over historical growth trends. If they believe that voters will look at GDP growth charts before going to polling station, they might be seriously mistaken. Moreover, the comment of former finance minister indicates that the life of NITI Ayog may be limited to the tenure of incumbent PM in office. This adds further to the unpredictability and uncertainties, Indian economy is currency facing.

Wednesday, November 28, 2018

Perception vs. Reality

Some food for thought
"Governing a great nation is like cooking a small fish - too much handling will spoil it."
—Lao Tzu (Chinese Philosopher)
Word for the day
Yahoo (n)
A boorish, crass, or stupid person
 
First thought this morning
There are many windows in my abode, large and small,
facing each direction.
One window welcomes a brilliant new Dawn — every morning,
the other bids adieu to the golden chariot – every evening.
One brings cool easterly breeze,
the other ushers nourishing westerly winds.
Alas! I see nothing.
Sun rises and sets behind thick curtains,
without anyone noticing it.
Winds blow away from our house,
passing without touching anyone.
We like mechanically conditioned air,
avoiding any direct touch with Mother Nature.
Sometimes though a tiny window in bathroom is left open,
and Mother sneak in her blessings!
Chart of the day

 
Perception vs. Reality
Yesterday, I got an opportunity to attend a gathering of some reputed market experts. The topic of the discussion was emerging political scenario and its likely impact on financial markets. Since, no one could say with confidence what is going to be the outcome of elections, the discussion was mostly hypothetical and deeply influenced by the personal prejudices and political inclinations of the participants. Nonetheless, the consensus appeared that political establishments do influence the stock markets.
Being a small insect myself, I usually do not like to engage in debate with the experts, nonetheless, I find compelled to note the following. It is pertinent to note I have always insisted that politics in India has almost nil correlation with the performance of the economy and therefore stock markets. I am presenting this data just as some food for thoughts without implying anything. Please trust me.
The results of the general elections for the current Lok Sabha were declared on 16 May 2014. Since then, Nifty has compounded at an annual rate (CAGR) of 8.7%.
In this period the nominal GDP of India has grown at ~10.5% CAGR. The net national disposable income has also grown at almost similar rate. The nominal gross value addition in agriculture and related sectors in this period has grown at ~7.7% CAGR, while for industry GVA growth has been ~9.7% CAGR and Construction GVA has grown at ~10.8% CAGR.
The stock market has obviously underperformed the economic growth in past four years. This sounds counterintuitive, if I accept the argument of a strong majority government with dynamic leadership being inarguably good for stocks markets.
A granular look at the stock market performance since May 2014, further raises some doubts on unconditional acceptability of this hypothesis.
Going by the public assertions, three core areas of focus of this government have been self reliance (Make in India), inclusion (JAM), and aggressive infra development (Roads, Railways, Power, etc.). However, if try to correlate these focus areas to stocks market response, we get a different picture. Since 17 May 2014:
(a)   Infrastructure sector has given a negative return of (-)0.2% CAGR. This does not corroborate the construction sector GVA growth at 10.8% CAGR.
(b)   Public Sector Banks, who with wider reach must have been the largest beneficiaries of the financial inclusion efforts, have returned (-)4.9% CAGR.
(c)    The government promised full autonomy and professional management of PSUs. Thousands of investors were lured into buying CPSE ETFs based on this promise. NIFTY CPSE has returned (-)4.5% CAGR.
(d)   MNCs have returned the best return (16.6% CAGR) despite all talks of swadeshi and self reliance.
(e)    Private sector banks which are largely foreign owned have returned more than 15% CAGR.
(f)    Despite all the protection measures, metals have returned just 1.1% CAGR.
(g)    Consumption sector has returned 13.4% CAGR. This reflects consistent fall in household saving rates, despite 10.5% CAGR rise in disposable income. My anecdotal experience is that aspirational consumption is driving India consumer sector, and distorting the household balance sheets. Sharp rise in household credit in past few years supports my observation. The consumption boom may therefore be unsustainable unless matched with matching investments that will lead to higher household income in midterm.