Do it yourself

Tuesday, July 23, 2019

Finding ways to improve business sentiments

Some food for thought

"Lord, Lord, how subject we old men are to this vice of lying! O, what a goodly outside falsehood hath!"

—William Shakespeare (English writer 1564-1616)

Word for the day

Cosplay (n)

The art or practice of wearing costumes to portray characters from fiction, especially from manga, animation, and science fiction.

First thought this morning

As per trending news on media, Mukesh Ambani, chairman of Reliance Group, has not got any salary hike in past 11years. He is drawing a salary of Rs15cr/per annum since the global financial crisis. The rickshaw pullers who transport me to and from metro station have also not hiked their per trip charge for past 11years. Porters in Sadar Bazaar, the wholesale market of Delhi, who carry heavy stuff on their head or back, have also hardly got any raise in past 11 years. My banker friends are also complaining that they never got the pre crisis level bonus again. The recruiters are able to recruit an average fresh management graduate, engineer, CA or lawyer almost at the same initial salary as 2008.

The data seen in isolation may suggest that we are almost a developed economy, where inflation and wages have been absolutely stable for past decade. Ram Rajya is all around, where the richest Asian and a poorest man (rickshaw puller) are contended with no wage hike.

But then enters the demon. Since 2008 we have two pay commission reports and the salaries of government and public sector employees have grown multifold, despite rising deficit, inefficiencies and redundancies.

The question is what model of economics are we following?

Chart of the day

Finding ways to improve business sentiments

Last weekend, a noted journalist, a reputable entrepreneur, couple of top bankers, couple of large corporate and numerous financial market participants echoed one common theme - currently the business sentiment in the country is very poor and government must immediately do something to improve the sentiments. The underlying message was loud and clear - the government is not doing enough to improve the growth environment in the country and the recent budget has been a cruel dampener for the sentiments.

Collectively the commentators did highlight the problem adequately. However, no one appeared, at least publically, offering solutions to kick start the sagging growth and uplift the business confidence. "Cut rates" and roll back super rich surcharge were common catchphrases.

I think a deeper study of past economic cycles could highlight what actually marks the bottom of an economic cycle and what efforts leads to higher growth and better business sentiments.

One dear fund manager friend highlighted the following points:

Revisited 2001-04 period to understand the drivers of economic recovery. Sharp rise in current account surplus was the single biggest factor. There’s no other such period of CAD surplus in last 30 years. Improvement in CAD was due to both decline in trade deficit by 50% from 4% to 2%. Also surge in remittances from gulf on higher oil prices along with surge in software export helped achieve CAD surplus.
Fiscal deficit during 2001-04 was nearly 1.6x of current level.
In FY03, HDFCB cost of deposits fell 100bps along with gsec yields collapse. FD rates fell 200bps to below 5.5%. This fall happened despite fiscal deficit of 5.9% by center in FY03
India returned to CAD deficit from FY05 led by surge in capital goods imports among others as well rise in crude oil prices
Bank asset quality improved dramatically during this period driven by spike in loan growth and modest decline in gross NPA. Ratio of Gross NPA fell from 11% in 2002 to 9.5% in 2003 , 7.4% in 2004. It bottomed at 2.4% in 2008. Bank advances grew at an avg of 20-25% during this period.
There is not evidence to suggest that the efforts of the incumbent government had much to do with the recovery. GDP growth was quite weak and fiscal quite high. Inflation was low as growth was very low and FX was getting stronger . Surge in CAD was due to IT and remittances for which Vajpayee government cannot be credited. In fact the budgets presented by the then finance minister Jaswant Singh were severely criticized for lacking in measure to spur growth.
GDP grew 4% in FY04 but surged to 8% in FY05 as agri grew 8% on monsoon recovery
Tax to GDP were fairly low all throughout. However between 2000 and 2012, govts gained from spectrum auctions and mining auctions. The present government has no such luxuries. Hiking effective rate of tax (ERT) is perhaps the only option available viable option. Massive disinvestment can help (not the book entry type done in recent past). Sharp fall in crude prices and accelerated FDI in e-commerce etc could also add some comfort.
Contained inflation was the only notable achievement of Vajpayee government, and it is true for the present Modi led government too.

My argument to him was that 2001-04 has to be seen in light of 1998-2000. Post Pokhran test in 1998, there were economic sanctions that impacted capital goods imports materially. Then we had this huge Y2K event that brought unprecedented billions of USD in remittances to India.

To overcome economic slowdown due to sanctions, Vajpayee government had unleashed massive infra projects and reforms like Golden quadrilateral, KG-6 under NELP, UMPPs, SEZs, and telecom etc.; though most of these projects were done without assessing the "demand". FRBM was suspended. 2002 onwards sanctions were eased. But all these spending under PPP model laid the foundation of current NPA cycle Though not without causing few years of high growth in UPA1 regime.

A cursory glance at data highlights the following to me. Analysts and economists may want to do a deeper research to find out what would actually work under the current circumstance.

Business confidence trends

In past 20years, the business confidence in India has mostly remained neutral. We have seen two episodes of big fall in business sentiments 2000-01 and 2008-09. These falls were followed by huge spikes in 2001-02 and 2009-10 respectively. We had also seen a spike in 2012-14 period, but in past 3yrs it has remained mostly neutral.

All three episodes of spike in Business confidence have coincided with spike in consumer inflation, perhaps indicating return of pricing power for businesses:

Fiscal stimulus also has helped business confidence. Both in 2002-03 and 2009-10 material rise in fiscal deficit was seen. Though in 2013-14 improvement was in sentiment was accompanied by improvement in fiscal benefit.

Fall in interest rates may perhaps be the single most important factor in improvement in business sentiment.

Economic growth has almost immediately improved after the improvement in business sentiments sets in. Though it more looks like a chicken egg syndrome.

Current account improvement does not seem to have any material correlation with the business sentiment. It is therefore important to deeply analyze the correlation of global economic cycles with domestic business sentiments and growth cycle.

Friday, July 19, 2019

Use PSE for public good

Some food for thought

"I may neither choose who I would, nor refuse who I dislike; so is the will of a living daughter curbed by the will of a dead father."

—William Shakespeare (English writer 1564-1616)

Word for the day

Ideogram (n)

A written symbol that represents an idea or object directly rather than a particular word or speech sound, as a Chinese character.

First thought this morning

I chanced upon a twitter handle @theworldindex. It has some very interesting data about various countries in the world. Though there is no way to authenticate the data, but intuitively I can say it does not sound too off the mark in many cases. The following is some data I found interesting to note and actionable for the government.

Chart of the day

Use PSE for public good

There are hundreds of not for profit organizations that have been set by government in post independence period. These organizations are funded and managed by the state. Most of these organizations have done commendable work in the area of poverty alleviation, equality, inclusion, social justice, research & development, health, education, science & technology, business development, regional development etc.

Similarly, there are hundreds of commercial public sector undertakings owned and managed by the central or state governments. The primary objective of establishing these commercial undertakings in public sectors was to kick start the industrialization in the independent Indian state, since the British left behind an abysmal industrial infrastructure, poor private enterprise and dearth of capital. Government started with investing majorly in infrastructure and core industries like steel, power, oil & gas, cement, heavy engineering, railways, road transport, shipping, civil aviation, telecom, insurance, banking etc. Substantial investment was also made in strategically important defence equipment manufacturing and allied services. Later coal and many private banks were also nationalized. In due course the government made material investment in food supply chain (fertlizers, sugar, food distribution), consumer products, retail & wholesale trade, to achieve price stability, better availability, equitable distribution etc.

As the objectives were gradually met, in early 1990s an in-principle decision was taken to divest the stake in non-strategic undertakings in public sector. The process was begun with disinvestment in some loss making non-strategic undertakings. VSNL, CMC, Maruti, BALCO, IPCL, Hindustan Zinc, etc were sold to private sector. Stake in many profitable undertakings were diluted through public offerings and strategic sales, e.g., banks, insurance companies, MTNL, energy companies, etc.

Besides, the monopolies of the government in sectors like roads, power, telecom, oil & gas, civil aviation, ports, defence manufacturing etc. have been diluted to allow larger private participation (both domestic and international). The private sector has built adequate capacities in sectors like civil aviation, telecom, roads, power etc. to leave the role of government redundant. Most government enterprise in sectors, where free private competition is allowed, struggle to stay profitable because of their inefficient organizational structure and tedious decision making processes. There is no point letting these enterprises continue in operation, especially when the very objective of their existence has already been achieved. MTNL, BSNL, Air India, NALCO, STC, MMTC, SAIL, NBCC, NCL, RINL, Pawan Hans, SJVN, TCIL, Hindustan Paper, Hindustan Copper, Bharat Pumps, BHEL etc. are some of the examples.

In my view, it is high time that the government must constitute a High Power Council (on the lines of GST Council) comprising of representatives from all stakeholders (Political parties, state governments, employees unions etc.) to study and recommend a total overhaul of public sector enterprises in central, state and joint sectors. The Council may recommend sale, dilution, closure, asset sale, and/or change in objectives of these enterprises.

I would like to offer following suggestions in this regard:

(1) The farm sector in India needs massive investment in technology, R&D, land reforms, training and reorganization. In that sense the situation of farm sector is very much similar to what the situation of industrialization was at the time of independence. Private capital is available but not willing to flow in farm sector due to a variety of regulatory and practical constraints. The government should kick the process of investment in farm sector. The government should acquire all farm holdings below the viable size and consolidate these into large sized farms. The respective land owners and/or and landless farmers tilling the acquired land should be employed at minimum wages plus a share in profit. The money for this venture may be raised by selling most of the industrial undertakings in the public sector, as their purpose of being in public sector has already been served.

For the larger farm holdings, the government should encourage the farmers to partner with the food processing industry on cooperative model. The factories must be taken to farms.

(2) Companies like MTNL, BSNL, Air India, STC, MMTC etc should be converted into social organizations.

(i) MTNL and BSNL may be merged. The work force may be rationalized or adopted in other government departments where vacancies are lying for years.

The merged entity may be mandated to provide cheap 5G data to MSME, Educational institute, tech startups in metros; and connect all villages to national digital highway. All educational institutions (primary schools to IITs/IIMs) may be connected digitally and Right to Uniform Education may be implemented through this digital platform.

(ii) Air India may exclusively be used as feeder to the private airlines. It may bring people from smaller and far away destinations to the major hubs for onward journeys. It may be used as air ambulance service for ferrying critical patients to the major cities. It may also be used as a cheaper cargo service dedicated for Indian ecommerce ventures. A small cess of Rs50 per domestic air passenger can contribute Rs85-100billion for Air India's social programs.

(iii) STC and MMTC have tremendous experience of operating in foreign countries. Their expertise could be used for a variety of purposes. For example, they can be sourcing and C&F agents for Indian trading startups. They can also work as foreign placement agencies for Indian workers. They can operate foreign tours for Indian travelling overseas, to save them from being cheated by unscrupulous travel agents.

(3) The government must consider limiting the number of public sector banks to just 5, one for each region. All other banks may sold and proceeds may be used to build two large development financial institutions, one for funding large infrastructure projects and the other for funding technology innovations.