Do it yourself

Wednesday, July 17, 2019

Some more evidence of recessionary pressures building up

Some food for thought

"If you have tears, prepare to shed them now."

—William Shakespeare (English writer 1564-1616)

Word for the day

Remora (n)

An obstacle, hindrance, or obstruction.

First thought this morning

In past two months the BJP led NDA governments have done few uncharacteristic things. That must have confused a lot of political strategists advising the opposition parties.

For example, (1) Transgender rights bill has been introduced in the parliament; (2) unprecedented high number of top bureaucrats has been arrested/suspended in corruption cases; (3) no major BJP leader has uttered the "Ram Mandir" or "Ayodhya" word post election results; (4) BJP accounted for 93% of all corporate donations in run up to the elections, still BJP has refused to concede to any demand of corporate lobby in the recent budget; (5) Women right to work at night and domestic workers' rights bills cleared by cabinet for introduction in parliament; (6) Goa government has decided to renew liquor licenses which were not renewed following the SC directive in December 2016; (7) Anti Pakistan rhetoric has been completely killed, though there is no canvassing for peace with Pakistan too. Recent caution by the Army chief did not evoke any material response from BJP leadership; (8) Taking a lesson from its mistakes in North East, BJP is not showing any hurry in toppling Karnataka and MP governments and letting these fall under their own weight.

It is not even 3 months, and opposition parties are already perplexed. It's certainly going to be an interesting term of 5years.

Chart of the day

Some more evidence of recessionary pressures building up

After Yesterday's post (see here) many readers have highlighted more evidence of a recessionary undercurrent in India economy. For example-

Kotak Research in a note to its clients on Monday, commented-

"We wonder if the Indian market and ‘growth’ stocks will trade at current high multiples if the current slowdown in the Indian economy was to be more prolonged than the market’s current expectations. The Indian market has hardly seen any correction despite growing growth worries as the market has found comfort in the (1) accommodative monetary policies of major central banks, (2) lower domestic bond yields and (3) hopes of an economic recovery."

Bond yields down to post DeMo levels

Bench mark 10yr GOI bond yields have crashed to 6.35%, a level not seen since economic slowdown triggered by demonetization in winters of 2016. Such sharp fall bond yield is usually read as an indicator of recessionary tendencies.

Core inflation at 31months low

The June 2019 Core WPI inflation (manufactured products excluding food products) softened further to 0.8% in June (1.2% in May); on a sequential basis, it fell by 0.2% (-0.1% in May). Important to note that only 9 out of 22 items in manufactured products registered an increase in price in June 2019.

June imports down 9%

Imports to India were down ~9% yoy to USD 40.29 billion in June 2019, Many categories like pearls, precious & semi-precious stones (-23.64%), petroleum products (-13.33%), machinery, electrical & non-electrical (-9.03%), coal, coke & briquettes (-3.44%), and electronic goods (-1.66%) registered fall in imports. April-June 2019 imports are down 0.29% to USD 127.04 billion.

Business confidence at 3yr low

India’s slowing economic growth, water shortage and regulatory hurdles have taken its business sentiment in June to the lowest level since 2016, a survey by market research firm IHS Markit showed on Monday.

The aggregate of private sector companies forecasting output growth during the current year fell to 15% in June from 18% noted in February. This level was hit three years ago. Capital investment confidence in India is among the weakest of all countries for which comparable data are available, ahead of only China and the UK. The survey also found companies were concerned about potential depreciation in the rupee pushing prices for imported materials higher, lack of skilled labor, tax hikes, financial difficulties and customers increasingly insisting on discounts.

Consumer confidence down sharply

Consumer Confidence in India decreased to 97 Index Points in the third quarter of 2019 from 105 Index Points in the second quarter of 2019. Consumer Confidence in India averaged 103.35 Index Points from 2010 until 2019, reaching an all time high of 116.70 Index Points in the fourth quarter of 2010 and a record low of 88 Index Points in the third quarter of 2013.

Globally also, the investors and fund managers are growing increasingly concerned about the recessionary/deflationary pressures building up. As per the latest credit investors' survey of BoFAML, in July "Recession/Deflation", "Asset Bubbles" "Currency War" emerged as the fastest growing concerns of credit investors. Concerns over "Trade War", 'Geopolitical risk", eased from the levels noted in lat survey in May 2019.

Comfort for stock markets

While the businesses, employees, fiscal managers et al struggle with the recessionary fears, stock markets may be drawing some comfort from the current spate of poor economic data. The collective wisdom of market appears expecting material monetary easing and some form of fiscal stimulus to support the sagging stock prices.

Bridged gap between the bond and equity yields indicates a favorable environment developing for stock investors.

Tuesday, July 16, 2019

Are we ready for a recession?

Some food for thought

"'Tis one thing to be tempted, another thing to fall. "

—William Shakespeare (English writer 1564-1616)

Word for the day

Peccable (adj)

Liable to sin or error.

First thought this morning

Sunday, the 14th July 2019, was a day that will be remembered for long. Two brilliant games of sports were played on this day.

In the first game, ICC Cricket World Cup New Zealand played England in the finals, first ever for both the teams. The match ended in a tie and even the super over could not break the tie. The match was given to England on the basis of more boundaries scored.

Besides the thrill of a brilliant battle of bat and bowl, two key take away from the match. First, India lost just two games in their pursuit in this championship. Both the teams which defeated India proceeded to finals and produced some amazing cricket. So instead of blaming some players and tactics, we just need to accept that both finalist played better than India and won. Second, the ICC rule book was there for everyone to read even before the tournament had started. Obviously no one bothered about the rule "team with highest boundaries wins", because no one believed that this kind of situation is even possible. But here we are. Now blaming ICC for framing absurd rules is meaningless and inappropriate. The debate on this rule must have happened when it was first drafted.

This is true with many of our public policies, laws (especially tax laws) and inadequacies. Till the time something does not hit us, we don't bother. For example, how many of us have bothered to complain to the authorities that in case of a fire, it would be difficult for the fire tenders to reach our building/house because there is some obstruction 1 mile away!

In the second game the top ranked Serbian Novak Djokovic beat the 3rd ranked Swiss Roger Federer in the longest running final match of Wimbledon Tennis championship to lift the coveted trophy for the third time. USA which ruled the lush grass courts at Wimbledon in 1990s, winning 8/10 Men's singles titles during 1991-2000 has not won any title since Pete Sampras defeated Australian Patrick Rafter in 2000. Since 2009 defeat of Andy Roddick in finals, no American Man has even reached the finals. In Ladies category, William sisters (Serena and Venus) are holding fort for USA since 2000, winning 12/19 singles titles amongst themselves. But in last three years they have lost in finals, each time. There are many economic theorists who have found decline in tennis dominance to be a lead indicator of decline in economic stature of a country and vice versa. Would be intersecting to find, if it comes true for USA in next couple of decades!

Chart of the day

Are we ready for a recession?

I attended a get together of some professionals and businessmen (mostly wholesale traders of a variety of goods) over the last weekend. Occasion was to discuss the Union Budget for FY20. Discussion on budget ended with 2 small formal presentations of 15 minute each. Mood of participants was generally despondent. Almost all participants indicated that their sphere of activity is facing recession like conditions. Level of activity is low and revenue is down for second consecutive year.

This was a small group, but quite representative as it included traders of auto parts, textile, fruit & vegetables, and food grains; importers of electronic items and toys, clothes, furniture & other home decor items; chartered accountants servicing a wide range of MSMEs, Bankruptcy professionals and ERP consultants. These people interact with businesses across the country and abroad on day to day basis and are fully aware of conditions of the ground, which in their view is grim.

Feedback completely corroborated the feeling I have got during my recent travels to hinterland. On my back I took a cycle rickshaw to nearest metro station. The rickshaw puller complained that he is running rickshaw on this same route for past 8years for same charge, i.e., Rs20 per one way trip. His inflation adjusted revenue per trip has more than halved in past 8years, and so have the number of trips due to competition with E-Rickshaws. He and thousands of his peers are certainly living in recessionary environment. Many farmers have complained the same. Beside a few cash crops, the rise in MSP of crops has been generally less than the rise in input cost and their household inflation. Consequently, in their view, their condition has not improved at all in past decade.

A large number of MSME have also reported total lack of pricing power resulting in lower margins and stress.

Two questions have been agitating my mind since past 3 days, ever since I got out of that meeting.

(1) Is the dichotomy in our stock market performance in past 1 year, as highlighted by many experts, in fact the true picture of our economy?

In past one year or so, a few stocks at the top of the stock market have performed well, while more than 80% of the listed universe has performed poorly. Consequently, though we see the benchmark indices at healthy levels, the investors in general are disillusioned and despondent. Similarly, while we see a handful of new economy companies and some large enterprises reporting decent growth and/or capital flows, a large majority of enterprises appear stressed and skeptical. This in fact may be true for many other economies and stock markets also.

(2) Officially Indian economy has not experienced a recession since FY1980. In fact, since independence only on four occasions India's GDP has contracted, i.e., FY58 (-0.5%); FY66 (-2.7%); FY73 (-0.5%) and FY80 (-5.1%).

FY58 recession was led by BoP crisis that forced our government to seek US and IMF help for the first time.
FY66 was consequence of war with China and a very poor monsoon.
FY73 was a mix of 1971 war with Pakistan, Oil price jumping by 400% after Iran crisis.
FY80 was again an energy shock (crude prices rising by 100%).
The BoP crisis, Iraq war and subsequent energy shock, and a massive securities scam brough the GDP growth rate down to just 1% in FY92, but we avoided slipping into negative territory.

Since 1992 we have seen multiple stock market crashes (1994-95, 1998, 2000-01, 2008-09 etc) droughts, energy shocks, global crisis (dotcom, subprime), phases of extreme political uncertainty (1996-1998 three elections in three years), Kargil war (1999), economic sanctions post Pokhran nuclear test in 1998), episodes of extreme corruption allegations leading to policy paralysis (2010-2013) etc. However, our economy has been reported to have managed to stay afloat with decent rate of growth.

Totally ignoring the suspicions raised over the authenticity of the economic data; I find that Indian economy has developed strong resilience to withstand cyclical global shocks and domestic events like drought, political uncertainty and large scams.

Regardless, it also raises a pertinent concern. Post Maruti generation has never experienced how a broad based economic recession looks like. Most of the senior analysts, bankers, administrators and politicians might also have forgotten since 38yrs is a really long period. The question whether there is a need for a mock recession drill to assess our preparedness for a recession. This may include stress testing businesses for a sharp fall in revenue and profits; banks for sudden rise in NPAs; fiscal system for a impromptu significant stimulus and monetary system for massive easing.

Remember, each episode of recession in past has been followed by massive jump in inflation as highlighted by widening divergence between real and nominal growth, besides material INR depreciation.