Some food for thought
"An appeal to fear never finds an echo in German
hearts."
—Otto Van Bismarck (German Leader, 1815-1898)
Word for the day
Hamartia (n)
The character defect that causes the downfall of the protagonist
of a tragedy; tragic flaw.
First thought this morning
From the campaign of both the national parties, it appears that
both have made 2004 elections as their primary reference point.
In 2004 BJP ran a blitzkrieging "India Shining" campaign
to highlight the infrastructure development and nuclear power status earned in
6years of Vajpayee regime. However, the campaign eventually proved to be a
disaster for BJP, as it impressed only middle class urban voter and did not
resonate at all with the rural voters. Though, Vajpayee was a very popular PM
across the country, and even across the border, the rural population failed to
connect with the campaign based on investments in roads, ports, telecom, civil
aviation, railways etc. They were easily lured by the socialists, communists
and Congress with the promises of immediate payouts. Congress was not only able
to form government with socialists (SP, RJD, BSP) and communists, but ran it
quite successfully for full five year term.
Learning from the mistakes of 2004 India Shining campaign, BJP
is trying hard to stay connected with the rural population through a variety of
schemes, promises and actual cash payout under PM Kissan scheme.
For urban middle class, dismayed by Demonetization, higher incidence
of taxes, poor employment opportunities, BJP is trying to compensate with a
heavy dose of patriotism. The party is leaving no stone unturned to convince
them that nation's security is threatened by external forces and their
"sympathizers" within the country; and therefore middle classes need
to make sacrifice in national interest. BJP is also forcefully selling TINA,
disparaging and deriding opponents as "incompetent", "anti
national", "corrupt", "anti poor", "dynast",
"communal", "pretentious", "threat to nation",
etc.
On the other hand Congress is trying hard to emerge from abyss.
It's campaign is prima facie based on the premise that like 2004, BJP is
failing in connecting with rural voters, It is taking the moral high road with
promise of an inclusive development agenda. It has apparently engaged a variety
of experts to draft its manifesto for 2019 election.
The media reports suggest that Mrs. Sonia Gandhi was
"displeased" with Congress President Rahul Gandhi's picture on the
cover page of the manifesto. The media mangers of Congress apparently want to
convey to the allies, potential allies and voters that Rahul Gandhi's
candidature for PMship is not a done deal yet and Congress may opt for an
"independent" technocrat (like Dr. Manmohan Singh in 2004) if it is
elected to power. The name of Dr. Raghuram Rajan is being deliberately pushed
on social media to let people draw ideas and notions.
Whether these strategies will work or not, we would know only on
24th May. But, if you want to wager, the chances of Congress getting more seats
than BJP this time are zilch, in my view.
Ultra Virus MPC
Obliging the consensus, the Monetary Policy Committee of RBI
(MPC) eased monetary policy further by cutting policy rates by 25bps and
retained "neutral" monetary policy stance. The rate cut was approved
by a 4:2 majority decision, like in February 2019.
The primary argument for cutting rate is the "need to
strengthen domestic growth impulses by spurring private investment which has
remained sluggish".
The following points in the policy statement are worth noting:
(a) The MPC statement
reads, "These decisions are in consonance with the objective of achieving
the medium-term target for consumer price index (CPI) inflation of 4 per cent
within a band of +/- 2 per cent, while supporting growth (emphasis
supplied)."
The Monetary Policy Framework Agreement between the Union
Government and RBI, signed on 20 February 2015, made inflation targeting and
achieving price stability the responsibilities of RBI. The framework was given
a statutory sanction through amendment in the RBI Act of 1934 through the
Finance Bill of 2016.
MPC was established under this framework, with an exclusive
objective of inflation targeting.
As per this framework, "Supporting growth",
is certainly not one of the functions of RBI. The act to cut rate to
"support growth" could therefore be termed as "Ultra
Virus"!
However, since acting Ultra Virus by RBI is seen as something
"routine administrative issue" by the finance minister and RBI
governor, we shall not discuss this matter any further.
(b) MPC acknowledged
that easing stance of central bankers is driving financial markets around the
world:
"Financial markets continued to be driven by monetary
policy stances of key central banks and movements in crude oil prices. In the
US, the equity market witnessed some selling pressure in the last week of March
on weak economic data. Equity markets in EMEs gained, benefitting from
country-specific factors and easing of global financing conditions. Bond yields
in the US softened, slipped into negative territory in Germany and dipped
further into negative territory in Japan as central banks signalled softer stances.
Bond yields in most EMEs have been falling in tandem with those in AEs and on
the improving inflation outlook. In currency markets, the US dollar has traded
with an appreciating bias in recent weeks. EME currencies have traded with a
depreciating bias on country-specific factors and on fears of a weakening
economic outlook in China.
However, there is nothing in the policy statement to indicate
that RBI is worried about a bubble like situation developing in global
financial markets. We do not see any urgency to take some precautionary steps
like tightening credit for personal loans etc.
Would be interesting to read the minutes of the MPC meeting to
find whether Holding rates now to keep some dry powder in case need for larger
stimulus arises, like 2008, was discussed by the members.
At 6%, with core inflation close to 5.4%, the scope for further
cuts may not be material.
(c) Though the
current rate of inflation is well within the RBI target range, the MPC
statement offers many clues that inflation may not sustain at these levels. For
example, consider the following:
"According to the National Oceanic and Atmospheric
Administration (NOAA) of the US, El Niño conditions strengthened during
February 2019, which may affect the prospects of a normal south west
monsoon."
"Retail inflation, measured by y-o-y change in the CPI,
rose to 2.6 per cent in February after four months of continuous decline. The
uptick in inflation was driven by an increase in prices of items excluding food
and fuel and weaker momentum of deflation in the food group. However, inflation
in the fuel group collapsed to its lowest print in the new all India CPI
series."
"CPI inflation excluding food and fuel declined to 5.2 per
cent in January, but rose to 5.4 per cent in February."
"The inflation path during 2019-20 is likely to be shaped
by several factors. First, low food inflation during January-February will have
a bearing on the near-term inflation outlook. Second, the fall in the fuel
group inflation witnessed at the time of the February policy has become
accentuated. Third, CPI inflation excluding food and fuel in February was lower
than expected, which has imparted some downward bias to headline inflation.
Fourth, international crude oil prices have increased by around 10 per cent since
the last policy."
"Taking into consideration these factors and assuming a
normal monsoon (emphasis supplied) in 2019, the path of CPI inflation is
revised downwards to 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in
H2:2019-20, with risks broadly balanced."
(d) MPC noted that
the global economic activity has slowed down considerably since its last
meeting in February 2019; and the central bankers have therefore turned dovish.
"Since the last MPC meeting in February 2019, global
economic activity has been losing pace. In the US, the subdued performance in
the final quarter of 2018 appears to have continued into Q1:2019 as reflected
in declining factory activity. The Euro area slowed down in Q4:2018 on soft
domestic demand and contracting manufacturing activity."
"Economic activity also slowed down in some major emerging
market economies (EMEs). The Chinese economy decelerated in Q4:2018 on subdued
domestic and global demand impacting industrial activity."
(e) India GDP growth
for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in
H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.
Beyond the near term, several uncertainties cloud the inflation
outlook. First, with the domestic and global demand-supply balance of key food
items expected to remain favourable, the short-term outlook for food inflation
remains benign. However, early reports suggest some probability of El Niño
effects in 2019.
Should there be a swift resolution of trade tensions, a pick-up
in global demand is likely to push up oil prices. However, should trade
tensions linger and demand conditions worsen, crude prices may fall from
current levels, despite production cuts by OPEC.
Financial markets remain volatile reflecting in part global
growth and trade uncertainty, which may have an influence on the inflation
outlook.
The fiscal situation at the general government level requires
careful monitoring.
