2018-Macro outlook

Thought for the day

"Old men are dangerous: it doesn't matter to them what is going to happen to the world."

—John Milton (English, 1608-1674)

Word for the day

Facepalm (n)

The gesture of placing the palm of one's hand across the face, as to express embarrassment, frustration, disbelief, etc. Often used as an interjection, e.g., "She read the post and comments and did a facepalm.

Malice towards none

If a Muslim or Christian converts to Hinduism, who decides which caste and Varna (Brahmin, Kshtriya, etc.) he would take?

First random thought this morning

The summary dismissal of infamous 2G case by the special CBI court, highlights a number important issues. The most important in my view, is pathetic and blatant disregard for the "bail is a right" rule. Many accused, who happen to be famous and reputed people in their own field, were apparently incarcerated without any substantial reason or evidence. This was seen in the famous Aryushi case also, where the parents were put behind bars on flimsy grounds, without any tenable evidence.

There have been numerous cases where the morality of the issue involved and media TRP of the case has taken precedence over the legality of the material on record.

We need a stronger law on perjury, reparation for the wrongly accused, and constitutional autonomy (on the lines of Election Commission) for the federal investigating agencies (CBI, NIA, and ED).

2018-Macro outlook

The improvement seen in macroeconomic indicators, like twin deficit, inflation and rates during past couple of years, seems to have peaked. Though the consensus forecast so far is not indicating any dramatic deterioration in the macroeconomic environment, most of the economists are hedging their bets by highlighting the political risk. Particularly, in the aftermath of the Gujarat election results, a common fear is that the government may go soft on disruptive reforms and policies may be given a populist hue ahead of key assembly elections in 2018 in run up to the 2019 general elections.

Globally also, there is a general sentiment of economic optimism. From the Fed's action in 2017 and guidance for 2018, most economists are drawing comfort that the normalization of the monetary policy may not be disorderly.

With this background, my outlook for the likely macroeconomic environment in 2018 is as follows:

(a)   Inflation: The consumer inflation may continue to remain above the RBI target of 4% for most part of the year. The core inflation may rise on the back of higher raw material prices and wages. Imported inflation shall remain elevated as global commodity prices remain strong.

(b)   Fiscal Deficit: The government may persist with FRBM targets compromising with public investment and consumption. Expect the present trend of delay in payment of subsidies, tax refunds and contractors' payment to continue in 2018 as well. The systemic liquidity may thus remain constrained most part of 2018.

(c)    Rates: Expect benchmark yields to average above 7% for the year. RBI may hold policy rates during 1H2018, but if inflationary pressures persist a hike could be considered. Deposit rates may firm up further as systemic liquidity remains tight.

(d)   Current Account: Expect current account to worsen on the back of rise in energy import and sluggish export growth.

(e)    Savings: Household saving may grow at slower pace as real wage growth remains poor. Corporate savings though may be higher due to continued deleveraging and rise in free cash flows.

(f)    Investment: The government investment expenditure may see some slow down due to fiscal constraints and higher allocation to social sector ahead of elections. Private capex may see recovery in some sectors as like consumption and commodities. Poor capacity utilization may however keep overall investment growth under check.

(g)    Exchange Rate: USDINR may remain stable as higher yields continue to support inflows. Funding BoP should not be a problem at all.

(h)   Growth: Expect higher rates to hit real GDP growth in first half. In 2H2018, we may see growth recovering to 7.25% as GST benefits begin to kick in.

2017 in perspective

Thought for the day

"Take care to get what you like or you will be forced to like what you get."

—John Milton (English, 1608-1674)

Word for the day

Daily-Breader (n)

A commuter

Malice towards none

Besides UP CM, PM and BJP President, can you name two more BJP leaders who campaigned in Gujarat and Himachal Pradesh?

For sure, there must be many. The question is why aren't they visible to us!

First random thought this morning

Suddenly there is a rush in stock market to buy stocks of the company who may benefit from rise in rural income. People are buying FMCG producers, farm equipment and farm input manufacturers, automobile OEMs, as if from tomorrow morning Modi government will start depositing the promised Rs15lacs in the savings accounts of everyone.

If we accept that our markets were fairly valued on 18th December, than every sudden 20% rise in price of a stock must be matched by 20% increment in the earnings forecast, over and above the previous forecast!

Oh what fun it is to ride an one horse open sleigh!

2017 in perspective

The 2017th year of the Christ, was quite an eventful year for the global economy and financial markets especially. For the first time since global financial crisis, the financial markets appeared excited.

A large number of global indices scaled new highs. Industrial commodities staged a smart recovery. Europe did not present any challenge to the global economy. No significant Brexit driven disruption were seen. Politically French and German elections did not throw any surprise. China ushered into a new "Xi Era". The new kid on the block, Bitcoin, surprised almost everyone with the ferocity of its ascent. OPEC and Russia solidarity survived beyond most expectations, leading to stable energy markets.

Central Bankers sounded more confident about recovery and appeared ready to embark on the path to normalize the monetary policy exceptions made to ward off the global financial crisis. Most notably, US Fed hiked rates thrice and guided for contraction of its balance sheet.

Despite all skepticism, Trump survived all challenges, and is all set to deliver on his major poll promise of tax reforms. He could also make significant progress on immigration reforms.

Middle East mostly remained peaceful. All hotspots like Iran, Gaza, Iraq, Turkey, Syria, Yemen, et. al. remained contained and did not present any threat of escalation.

North Korea was perhaps the only irritant that bothered global peace a few times during the year. But that threat perception also seems to have dissipated in recent weeks. The markets are mostly ignoring any fresh provocation from the maverick Kim Jong Un.

For records:

(a)   Benchmark Nifty gained ~28% during the year. Its best performance since 2014. The return in broader markets did much better. Small cap ~50% and Midcap ~42% outperformed the benchmark significantly. The top small and midcap fund returned 75% for the year, whereas the top large cap fund returned 45%. The managed assets industry had one of the best year in more than a decade.

(b)   Global commodities are ending the year marginally lower on yoy basis. However, most commodities witnessed sharp rise in 2HCY17, after falling to multiyear lows in 1HCY17. Crude and Copper were two notable gainers.

(c)    Benchmark bond yields rose ~10% (yoy), with 10yr Gsec yields rising from 6.6% to 7.2%. Bond and income fund returns were therefore averaged less than 5-8% for the year. Deposit rates witnessed marginal rise. Gold fund returned about 2.5% during the year.

(d)   The home price bottomed and showed a moderate growth as new launches fell sharply.

Politically, BJP led by PM Modi strengthened its position significantly. BJP formed government in the largest state UP with overwhelming majority. It also joined the government in the second most populous state Bihar, as JDU parted ways with alliance partners RJD & Congress and joined NDA. It won Gujarat assembly for the record sixth time, retained Goa, regained Himachal Pradesh by defeating incumbent Congress and managed to form governments in Manipur and Arunachal Pradesh, significantly consolidating its position in the strategically important North Eastern region.

As of this morning, BJP rules 14 States on its own and another 5 states with its NDA allies. The principal national opposition Congress Party is now confined to just four states (out of which three would go to election in 2018) and one union territory.

With this background and perspective, I shall share my assessment, outlook and strategy for 2018 in coming days.

It's all economics stupid!

Thought for the day

"Nothing profits more than self-esteem, grounded on what is just and right."

—John Milton (English, 1608-1674)

Word for the day

Deasil (adv)

Clockwise or in a direction following the apparent course of the sun: considered as lucky or auspicious.

Malice towards none

Manish Tiwari + Kapil Sibal + Digvijay Singh + Manishankar Aiyer + et. al. = Sambit Patra

First random thought this morning

The desperation shown by BJP in the ongoing Gujarat elections is completely beyond comprehension.

This election is a fight of survival for the Congress Party. Whereas for BJP it should have been just another election. If Congress were to lose this election, like Bihar, UP, TN, WB, they would have lost another state forever, as the a local alternative is likely to emerge by 2022. Whereas, if PM had not invested his personal ego there, the BJP could have been easily assigned the adverse outcome to the local leadership's failure in carrying forward NaMo's legacy.

But as things stand today, Congress is at win-win situation, and BJP may just get an pyrrhic victory.

It's all economics stupid!

The common understanding is that the market price of an asset is function of demand and supply for such asset at that point in time.

The demand and supply for physical assets, e.g., real estate, metals etc., is relatively less volatile and therefore more predictable, as compared to the financial assets.

The financial assets are more liquid, mostly dematerialized (not needing any physical transfer), well regulated and easy to transact. The market for these assets therefore see wider participation. Especially in case of stock markets, people from cross sections of the society transact. A vast majority of these traders/investors may not have any relation to, or practical experience of, the underlying businesses they are transacting in.

Even the professional portfolio managers mostly rely on the opinions of the business analysts who may only have "the acquired" knowledge of the underlying businesses. In fact a lot of analysts are seen acquiring the business knowledge purely through the "management guidance" and related "material easily available on internet" or from various "research vendors". The conviction in "the equity trade" is therefore usually much lower than transaction in the related physical asset. (Trivia: Imagine you being treated by a self trained medical professional, who acquired skills through internet searches and interacting with other medical professionals, some of which were like him only)

The demand-supply equilibrium in this case is therefore too unpredictable and may shift dramatically in very short term, apparently for no relevant reason.

It is not surprising that in the case of stock markets, many times the demand and supply equilibrium does not necessarily reflect the underlying business fundamentals. The collective wisdom of the participants here is materially influenced by the emotions and constraints of third parties.

For example, the actions of a fund manager may be influenced by the emotions of the ultimate investor. Similarly, the action of a trader may be materially influenced by the lender who has financed his transaction.

This divergence of market price and business fundamentals is seen by many as an opportunity to make extraordinary profit, based on assumption that market price and business fundamentals will eventually converge. In common market parlance these people are referred as "contrarian investors".

Many contrarian investors have made big fortunes from their investing style. But the fact is that in many cases, the money they made may have just been a function of their ability to stay invested through the market cycle, rather than anything else.

Sharp market movements due to political events, is just another case of a completely unrelated and irrelevant factor influencing the market prices.

If anyone mentions the political changes (or lack of it) as a risk for a business and therefore market, he/she may just not have any understanding of the basic principles of investing.

For example, if someone believes that a particular company based in Gujarat is doing well because of the patronage of BJP government in the state, and may face trouble due to change in political regime, he should never have invested in such a business, in the first place. A business that is contingent upon political patronage to survive and grow, could not be investment grade by any standard.

Similarly, if someone believes that NDA lose in 2019 elections could be disastrous for the economy, and therefore stock markets, is only too naive. There is absolutely no empirical evidence of a particular party or person driving the economy or markets in a democratic setup, anywhere in the world.

In fact, an in-depth research would show that most government economic policies are driven by businesses, and not vice versa.

Beyond political rhetoric, analyze the following instances:

(a)   FDI in insurance and pension was politically a massive contentious issue for over two decades. But, when it did happen, there was not even a token protest. The reason is that for two decade, FDI in insurance was only a theoretical probability. Given the level of accessibility (roads, communication connectivity, banking etc) and affordability, no one would have been seriously interested in investing in this business.

Same is true with FDI in retail trade also. Imagine how a global retail store would have functioned in India with pathetic internet speed, poor electricity supply, multitude of complex taxation laws, movement restrictions etc.

(b)   How GST could have happened 10yrs ago, when the fiber connectivity was still poor and banking infrastructure pathetic.

(c)    Gujarat could not have become an export hub for automobile and import hub for hydrocarbons, if the ports at Mundra, Dahej and Kandla were not developed. The Narmada dam and Bt Cotton have changed the fortune of Gujarat farmers, not any political party. (If someone wants to argue that any particular party made Bt Cotton and Sardar Sarovar happen, I am not at all interested in listening. I find this argument perverse and violent.)

In past two weeks, no one has asked me about the deteriorating macroeconomic fundamentals and falling FPIs interest in Indian equities. All that I see in my mail box is who will win Gujarat elections and how market will react to this.

I have patiently answered all the queries. But my strong belief remains that elections are totally irrelevant and unrelated event. Totally not worth bothering about.

Some random thoughts

Thought for the day

"He that studieth revenge keepeth his own wounds green, which otherwise would heal and do well."

—John Milton (English, 1608-1674)

Word for the day

Wanderjahr (n)

A year or period of travel, especially following one's schooling and before practicing a profession.

Malice towards none

How to bring Vikas in India?

Grow Taiwanese mushrooms that sells @US$1200/kg.

First random thought this morning

The allegation of BJP leadership that Pakistan is trying to influence Gujarat elections has distinct reflection of the recent episode of US-Russia spat of interference in presidential elections.

But from a different viewpoint, this also indicates complete Congressization of BJP. During 1970s and 1980s, it was very common for the Congress leadership to blame everything wrong occurring in the country on "external forces", implying Pakistan.

Some random thoughts

Unsuitable boy

From reading recent research reports on Indian companies and industry segments, I get a feeling that the Chinese authorities' commitment to conserve environment is one of the key drivers behind the bullish sentiments.

I understand it like this.

There is this good looking guy who is very indulgent, has proven criminal tendencies, and is financially very unstable. Sick by his ways of life, his wife decides to divorce him. Hearing the news, the parents in the locality queue up in front of his house with request to marry their daughters.

Ominous, undesirable, unsustainable, ridicules.

Taking the easy road

In the blockbuster Hindi movie DDLJ, the heroine is deeply in love with a guy against the wishes of her father. Her mother is afraid of her husband’s retribution and advises the two lovers to elope. But the hero, who is equanimous and noble, tells her that the path suggested by her appears easy but it would lead nowhere. He would rather prefer the path of courage, honesty and integrity which though arduous definitely leads to the desired goal.

Swami Jagadatmananda in his famous work “Learn to Live” extolled the readers - the sincerity and honesty of the means to achieve a goal is equally important as the goal itself.

Our government however usually does not concur with this thought. It rather prefers to take the easy road.

Banning the condom TV commercials between 6AM to 10PM, one such easy way of getting out of a tough situation. The right way could have been to discuss with the latex manufacturers and marketers to make commercials educative and plain, rather than seductive. The effort should be complemented by making it mandatory for all schools to educate children (12yr and above) about safe sex.

Padmavati is another such tough situation from which the government is trying to wriggle out taking the easy road.

Not guilty till caught

A number of teen deaths have been reported from across the country which were motivated by the mobile game Blue Whale. (Mis)Use of mobile phones for watching pornography has also been a matter of intense, legal, legislative and social debates.

TRAI has fixed minimum age of obtaining a mobile connection as 18yr (the legal age for entering into a legally enforceable contract).

Age conditions (minimum 13yrs of age) are in place for using popular social media apps like Whatsapp and Facebook.

Regardless, a number of TV commercials show school going minor children owning and using mobile phones.

It is also a common practice amongst school teachers to form a Whatsapp group of their students, even if the students are of less than 13yrs of age and hence not legally permitted to use mobile phone and social media apps.

Recently, I happened to meet minor son of a very senior police officer posted at IT Cell. The child has a personal mobile phone and is present on all social media sites!!

I confronted the officer that recent amendments to the Motor Vehicle Act, make the parents responsible, if their unlicensed minor child is found driving their vehicle. Why a similar law should not be made to punish the parents who allow mobile connections taken in their name to be used by their minor wards.

I wonder what is the punishment, if a child lies about his/her age to open a Whatsapp or Facebook account?

The point I am trying to raise is that "Compliance" needs to be developed as a habit in citizens and not as a "Condition", if we want to have a civilized society that respects each others' rights and everyone adheres to their duties and obligations.

Crimes like domestic violence, crime against women, tax evasion, disregard for traffic rules, violation of environmental laws, littering at public places, will exist and perhaps continue to rise till the belief in the principle of "not guilty till caught" is allowed to sustain.

Set the clock right

Thought for the day

"Truth never comes into the world but like a bastard, to the ignominy of him that brought her birth."

—John Milton (English, 1608-1674)

Word for the day

Dundrearies (plural noun)

Long, full sideburns or muttonchop whiskers

Malice towards none

"When nothing is done, nothing is left undone."

—Zen Proverb

First random thought this morning

From W. C. Bonnerjee (1885) to Acharya J. B. Kriplani (1947) to Rahul Gandhi Gandhi (2017), the Indian National Congress has travelled a long distance.

A cursory glance at the list of Congress Presidents from 1885-2017 (see here) shows that it is the only second instance that the party president post has moved from one relative to the other. The first instance was not truly handover as Rajiv Gandhi was elected party president after the demise of Mrs. Indira Gandhi. So the latest transfer of power is the truly first instance of dynastic transition. Things have not been as bad these are made to look. Nonetheless, the damage has already been done in 20yr leadership of Mrs. Sonia Gandhi.

Set the clock right

A lot has already been said, reiterated, doubted and clarified regarding the provisions of the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill). I do not think I can add any value by discussing the provisions of the Bill.

I would therefore like to address a related but larger issue.

In my view, what FRDI essentially seeks to do is to bring all financial institutions, regardless of their ownership structure, under a common surveillance mechanism, so that a prompt action could be initiated.

This is in line with the best global practices adopted post global financial crisis (GFC) a decade back.

This is also critical in view of the recurrent episodes of huge amount of NPA accumulation, threatening the financial stability and hampering the growth of the economy.

From this viewpoint, this legislative is not only important but necessary also.

Insofar as the provisions relating to "Bail-In" are concerned, in my view, the tradition in India, especially in post independence era, is to follow the legal and commercial practices prevalent in the western hemisphere, sometime promptly, but in most cases with a lag. Any financial and bankruptcy resolution in the developed world would normally have a 'bail-in" provision. In some cases it has already been used in past one decade. It is therefore inevitable that the depositors and savers in India will have brace up for this potential risk.

However, given that most of the banking and insurance business is likely to remain in public sector for next 10years at least, the implicit sovereign guarantee shall give some comfort to the depositors.

I would however like the government to clarify the following before implementing this Bill.

(a)   Has the Nationalization of Banks and Insurance business in India, outlive its stated objective? If the objectives have been met, why not close the chapter and privatize the PSBs, SBI and public sector insurance companies. And if the government has failed in achieving the objectives of adequate capitalization, financial inclusion, regional and social equity, depositors' security, and regulated lending, why not admit the failure and privatize it.

(b)   For past many decades, the poor people have subsidized the large bank borrowers, through long bouts of negative rates and frequent bail-outs. How do the government proposes to compensate them. Why not give the ownership of banks to employees and small depositors.

Comments welcome.

"Bail-In" keeping people awake at night

Thought for the day

"They also serve who only stand and wait."

—John Milton (English, 1608-1674)

Word for the day

Pervious (adj)

Open or accessible to reason, feeling, argument, etc.

Admitting of passage or entrance; permeable, e.g. pervious soil.

Malice towards none

In states representing more than 50% of the eligible voters, The Congress Party may not even come close to forming a government in next 10yrs at the least.

And some studio experts are intensely debating imminent revival of Congress Party's fortunes!

First random thought this morning

The incumbent government misses no opportunity to claim that national security and integrity is top priority for them and they have zero tolerance on this issue. They have allowed no opportunity to dissipate in showcasing their resolve behind the famous surgical strike in PoK.

There have been many instances where stringent action has been taken on students and artists under stringent Sedition law (Section 124-A IPC), even for making speeches inside university campuses.

But when they publicly accuse some senior politicians to be conniving with Pakistani elements, why do not they back it up with proceedings under Sedition law.

"Bail-In" keeping people awake at night

"Bail-in" is the latest in the series of "threats" presented by the incumbent government to keep people awake at night.

The concerns have arisen from some provisions of the Financial Resolution and Deposit Insurance Bill, 2017, (The FRDI Bill), which was tabled in Parliament this August, have given rise to concerns over protection for bank deposits in the proposed law.

The government recently implemented the Insolvency and Bankruptcy Code (IBC) that aims to promptly resolve the solvency issues of commercial entities in non-financial sector.

On the similar lines FRDI aims to make sure that if a bank, a Non Banking Finance Company (NBFC), an insurance company, a pension fund or a mutual fund faces insolvency, the matter could be resolved swiftly with least disruption to the financial system and various stakeholders. The resolution is proposed to be managed by a new entity namely Financial Resolution Corporation (FRC).

As per the proposed legislation, as and when a need for FRC intervention arises in case of a financial firm, the proceeds from the sale of assets of the failed institution will be distributed in the following priority order: (1) insured depositors (i.e., deposit amount upto Rs one lac insured by Deposit Insurance Corporation), (2) resolution costs, (3) workmen dues and secured creditors, (4) wages to employees, (5) uninsured depositors, (6) unsecured creditors, (7) government dues and (8) remaining secured creditors, (9) remaining debt and dues, and (10) shareholders.

The lower priority of repayment to uninsured depositors (i.e., deposit amount over Rs lac) is what is bothering a lot of depsoitors, especially middle class depositors.

The understand the issue in proper context, the following need to be noted.

(a)   As of March 2017, about 62% of the gross household savings in India were in the form of bank deposits and another 25% was in the form of insurance funds.

(b)   The bank deposits have seen a sharp jump from 44% on March 2016 to 62% in march 2017, due primarily to demonetization.

(c)    Along with deposits, the financial liabilities of households in India have increased to the decade high of 31% (FY16 28%), post demonetization.

(d)   The average term deposit in India is about Rs3,53,000 and average savings bank balance is about Rs36,000 as per the latest data available from RBI.

(e)    About 70% of all schedule commercial banking bank deposits are held by SBI and Nationalized banks. Private banks hold about 24% and RRBs and Foreign Banks holding 4% each.

(f)    The Deposit Insurance Corporation has paid claims amounting to Rs5000 crores since 1962 and has a balance of Rs80,000, sufficient to cover about 92% of all account holders.

(g)    Approximately 30% of all bank deposits are insured, in line with the global standards.

(h)   If the deposit insurance in enhanced from present Rs1lac limit, the coverage will improve dramatically.

So should someone be worried about his money being used to "bail-in" the bank or NBFC he has deposited money with?

I guess not now. More on this tomorrow.

 

 

 

Choose your economic model

Thought for the day

"In fact, you couldn't give me anything to make me go back to being a teenager. Never. No, I hated it."

—J. K. Rowling (English, 1965-)

Word for the day

Literatim (adv)

Literally. Letter-for-Letter

Malice towards none

Mainstream media loves to designate every election in the country as the litmus test for NaMo. They have even extensively covered elections to Delhi University Student Union and Local Bodies in a number of states, hoping whatever.

They may please note my RWA is holding elections early next month:)

First random thought this morning

While all the parties to the Ayodhya dispute are eagerly waiting for the Supreme Court's judgment, no one is apparently ready to take verdict that goes against them.

This means what?

(a)   No one actually believes that this matter could be decided by the court.

(b)   No one is actually interested in this matter getting resolved. The pending court case is just a delaying tactic.

(c)    Both (a) and (b)

(d) None of the above

Choose your economic model

It is widely expected that the vehicle that transited most economies from underdeveloped to developing to middle income is fired by two engines - real estate and exports. Technology advancement and higher productivity have mostly played a supportive role in (a) enhancing export competiveness; and (b) raising affordability levels of households for buying houses.

For most larger economies the improvement in social indicators inclusiveness, sustainability, equity, quality of life etc. appear to have followed the economic development with lag (often in decades).

To keep things simple, I therefore like to assess the efficacy or otherwise of any economic development model on these two basis.

As the economy begin to open up in 1991, Indian exports started to rise noticeably. The growth however gained tremendous impetus from 2004 onwards. A lot of this I would like to contribute to the brave reform efforts made by the NDA government led by AB Vajpayee during 1998-2004.

Developing industrial and trade infrastructure at unprecedented pace through privatization of most core sectors was hallmark of that government. The technical capabilities developed, though under compulsion due to international sanctions post 1998 nuclear tests, during that period also aided the exports growth in engineering, technology and pharma sectors.

Stronger currency, stronger fiscal and stronger current account resulted in sharp decline in interest rates in the subsequent years. Low rates, higher employment level, rising wages, better connectivity and accessibility all combined to lead a strong growth cycle in real estate.

The subsequent government however could not manage the growth well, especially in terms of regulating the credit, resource allocation and managing fiscal balance. Fiscal profligacy (high subsidies and unproductive welfare spending) for political advantage soon frittered away the low rate advantage. The global financial crisis also played an important part as exports slowed down and capital flows were affected.

The consequences are half dead real estate sector, exports moving in slow lane, humongous pile of nonperforming assets, poor investment growth, stagnant real wages and falling employment level.

In past three years, the incumbent government has made some progress in sorting out these issues. Unproductive subsidies have been rationalized (even at the cost of political advantage), inflation has been mostly reigned, resource allocation has been mostly regularized, NPA mess has begin to sort out, real estate sector now regulated is coming out of slumber, export decline has been arrested, and may begin to look up.

 

But I would like to add here, it is the Vajpayee model of development and not the Gujarat model of development (if there is any) that has succeeded. The learned economist Dr. Manmohan Singh's model of development is seriously questionable, in my view. Comments are welcome.

 

 

"To cut" or "To raise"

Thought for the day

"It takes a great deal of bravery to stand up to our enemies, but just as much to stand up to our friends."

—J. K. Rowling (English, 1965-)

Word for the day

Gerontocracy

A state or government in which old people rule.

Malice towards none

Ravan was son of a Brahmin and devotee of Shiva!

So what's the point?

First random thought this morning

While Baba Ramdev was kept busy fighting war on MNC tooth paste, confectionary and cosmetic brands, the global mobile phone makers (mostly Chinese), automobile makers, and readymade garment sellers have "plundered" billions from "gullible" Indian consumers.

Moreover, even on cosmetics, hair oil, ayurvedic products like Chyvanprash etc., confectionary and grocery etc. also, Baba may be competing more with pure domestic players like Dabur, Emami, Parle, LT Foods, DFM, Baidyanath, Marico, etc., rather than P&G, Colgate and HUL.

Should someone call his bluff and restrain him for carrying out a mostly misleading campaign?

"To cut" or "To raise"

When the members of Monetary Policy Committee (MPC) of RBI meets today for the Fifth Bi-Monthly review of monetary policy for FY18, the question before it might be "to raise or not to raise" rather than "to cut or not to cut".

An overwhelming majority of experts is forecasting a status quo on rates.

A near unanimity amongst forecasters over the likely decision of MPC on policy rates is rather unusual. Overwhelming consensus on any issue involving human intervention always bewilders my strategist mind. Consensus on economic issues is even more perturbing as it is against the basic concept of market.

In my view, MPC is presently faced with unprecedented complexities in policy making. Though the stated objective is to manage inflationary expectations, MPC must deal with prospects of worsening twin deficit, slowing growth and likely global liquidity and rate events.

As the recent GDP data (2QFY18) showed that Private consumption growth (6.5% in Q2) was weakest after Sep 2015 despite festive season and some pick-up in rural demand. The consumer confidence pointed that the urban consumer sentiment has stayed weak over this period, which suggests that the impact of 7th Pay Commission has mostly been digested, and a decent stimulus may be needed to encourage private consumption.

Government consumption growth dropped sharply to 4.1% in Q2 (17.2% in Q1) as fiscal deficit concerns prompt some belt-tightening. The rate hike by some banks on bulk deposits amply highlight the tight liquidity conditions. This tightness in my view is mostly due to the government's fiscal management jugglery (delay or deny tax refunds, delay contractor payments, delay subsidy payments and defer consumption and investment). This will reflect badly on FY19 fiscal, which may face political pressures also as general elections draw near.

The 4.7% growth in investment demand (GFCF) was the best in 5qtrs but as a proportion of GDP it remains ominously low. Given the still very low capacity utilization level and fiscal constraints, the visibility of investment demand recovering in FY19, without a significant stimulus, appears low.

The stimulus in turn will depend on improvement in revenue collections, which may largely be a function of consumption growth and revival in export demand. Exchange rate may play a critical role here. Many experts believe that a more than 10% correction in INR value would be needed to improve the competitiveness of our exports.

While the need for a monetary stimulus (rate cut) may appear overwhelming, as the finance ministry officials have also been insisting, the specter of inflation is rising (may rise aggressively if INR depreciates 10%) and trajectory of rates in global markets is no longer heading south.

 

So, my sympathies with MPC, especially the market economists sitting on the committee, who would obviously want an aggressive easing.