Thursday, July 25, 2019

Lesson from Greece

Some food for thought
"You have to sound sad first of all, then maybe later you can sound good."
—Steve Lacy (American Musician 1934-2004)
Word for the day
Abusage (n)
Improper use of words; unidiomatic or ungrammatical language.
 
First thought this morning
The incumbent BJP led NDA government seems to have perfected the art of managing denominators. Wherever they find difficult to improve the numerator, they have been changing the denominator itself, such that the resultant figure looks more acceptable and optically pleasing.
Starting with GDP, a number of time series have been modified to make the current set of data look progressive. The latest to join the list is the amount of rain that qualifies a monsoon season to be "Normal". Reducing the amount of rain needed for a monsoon season to classify it as Normal means changing the definition of drought itself. In economics terms it means lesser pressure on the governments to provide drought relief assistance. In social terms it means less panic amongst people dependent on monsoon.
Some psychological relief apart, how would it actually help someone is not clear yet.
Chart of the day
 
Lesson from Greece
The RBI governor made a totally irrelevant and meaningless comment recently. What he said implies that the liquidity measures taken by RBI in recent past is equivalent to 25bps rate cut. This prompted market participants to believe that MPC may actually not cut rate any further in their next meeting on 5-7 August. Consequently, the already depressed market sentiments sank a little deeper.
I believe that RBI governor is just one vote in 6 Member MPC and need not be considered the sole decision maker insofar as the monetary policy of the country is concerned. From the minutes of last MPC meeting, it is clear that the policy stance may remain accommodative in future. MPC had outlined that supporting economic growth is primary priority as the objective of price stability has been reasonably achieved.
I therefore do not see much reason to worry on policy direction front. However, there could be some concern over the trajectory of policy easing and monetary accommodation. I would prefer a forceful action that can provide adequate escape velocity to the economy struggling to break 7.5 - 8% growth barrier. If it means 150-200bps rate cut, let it be.
Since yesterday, my inbox is full with a forward showing how the Greek Govt 10yr bond yields have fallen below the US Govt 10yr bond yield. This is significant, because Greece was one of the key triggers for the global financial crisis. Greek economy slumped into deep in 2009-12. 10yr Greek bond yields rose to a high of 38% in 2013. Fiscal deficit was higher than 13-14%, and consumer confidence totally in distress. Greek government had to be bailed out by IMF at least twice.
Though, Indian and Greek economies are not comparable. But still it might be noteworthy for the policy makers to study the resuscitation of Greek economy in past five years.
1.    Bond yields have fallen to ~2%, lower then lows seen in pre crisis period.
2.    Greek economy is hardly growing, but it has escaped the recessionary trap.
3.    Current Account deficit that ballooned to over 15% of GDP in 2008 is now reasonable 2.5%.
4.    Fiscal profligacy that resulted in budget deficit slipping to as high as 15% of GDP in 2008, looks a lesson in ancient Greek history. In 2019 Greek government presented a surplus budget.
5.    Corporate tax rates that have risen to a high of 29% from 25% pre crisis level have begun to fall.
6.    Personal income tax rate at 45% and Sales tax rate at 24% remain elevated, highlighting the sacrifices made by Greek populace in economic recovery.
7.    Consumer confidence in inching back to the pre crisis level as lending rates have fallen to 15yr low of 4.5%, from a high of 7.25% in 2012. Policy rates in the meantime remain zero.
I am no economists or expert of economic policies, but the data prima facie highlights to me that high level of fiscal prudence and materially lower rates could help overcome the crisis of confidence and stimulate growth.
While the government has been rightly focusing on raising tax revenue, and curtailing government revenue expenditure, more efforts may be needed in raising non tax revenue to pay for public investment. Aggressive disinvestment is an obvious solution.
Cutting rates aggressively and providing a business environment that is conducive for accelerated growth, can stimulate consumer demand and consequently private investment, in my, may be, naive view.

 

 

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Wednesday, July 24, 2019

Crisis of Confidence

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
Qua (adv)
As; as being; in the character or capacity of. For example, The work of art qua art can be judged by aesthetic criteria only.
 
First thought this morning
Tumbling stock prices, sagging business sentiments, outcry on social media against anti business policies of the government have all failed to motivate a review of tax proposals in the Union Budget for FY20. The government and IT department are showing strong determination to retain the proposal to impose higher tax on super rich, including the foreign investors not registered in India as a corporate entity.
After three weeks of persuasion and threats, it seems the tax payers are beginning to reconcile with the new reality. The demands are now narrowing down to "at least exempt foreign sovereign funds from this surcharge" and "Please do not charge interest/penalty on June advance tax installment, which was paid before budget and did not consider this surcharge in calculations".
I am not sure how to react. Congratulate the government for holding its ground firmly, or regret choosing a government that is not bothered about the serious repercussions of a questionable decision.
Chart of the day

 
Crisis of Confidence
I received a number of comments on yesterday's post regarding sagging business sentiment in India (see here).
Except for their email addresses, I do not have any other information about the respondents. Therefore, it is not possible to make a qualitative analysis of their views. Nonetheless, a rudimentary view could certainly be formed based on these comments.
The commentators broadly appear divided in three camps, insofar as the factors affecting business confidence in India is concerned.
(a)   The largest camp believes that lower business confidence is function of excessive controls and compliance pressure imposed on businesses in past 5years. This group believes that despite great promises, the NDA government has not been able to obliterate the growth impediments that caused "policy paralysis" during late years of UPA2 government. For example-
The sustainability conflict has actually exacerbated in past five years with businessmen, policymakers, regulators, and judiciary taking divergent views, leading to avoidable, repetitive, protracted litigation. Decision of Bombay High Court to stay construction of Mumbai Coastal Road Project, is the latest example of this conflict.
Overreach of tax authorities to tax payers has crossed the line of harassments. Taxmen are supposedly under tremendous pressure to extract maximum revenue to fill the fiscal gap. This pursuit of tax maximization is bordering the line of extortion, making even honest taxpayers fearsome and frustrated. One respondent highlighted how the IT department did not acknowledged the self assessment tax paid by him and issued a huge demand notice. The reply to e-proceeding did not elicit any response for months. He was called to the IT office personally and bluntly told to pay the demand and claim refund later.
Similarly, there are several glitches in GST system, which are not in the priority of the department for correction. For example, the status of GST refunds for the bills which remain unpaid due to inability of the customer to pay or litigation/dispute is still not clear. Moreover, IT authorities are usually matching the GST return and revenue reported in the IT returns and making it a case of misreporting of income and tax evasion, liable for penal action.
(b)   People in second camp appear to be of the view that the sagging business confidence is function of two factors: (i) over-expectation from the government which have naturally been belied; and (ii) cyclical economic slowdown that has resulted from tight liquidity conditions, high real rates, stagnant real wages in private sector, NPA cycle, global demand slowdown, and rise in household leverage causing poor consumption demand growth. This group feels, that the cycle could be reversed by usual measure like rate cuts, more cash in consumers' hand (fiscal and monetary stimulus), tax incentives for private investment, easier liquidity and lenient credit terms.
(c)    People in third camp are in minority, but most vociferous. They feel that the businesses that have traditionally prospered on the back of state patronage, unfair exploitation of resources (labor, capital, natural resources etc) and tax evasion deserve to be handled with iron hand. These businessmen need to learn to play by the rule book, pay due taxes, comply fully with sustainability, corporate governance & other regulations, desist from excessive profiteering, pay market price for land, capital, wages, and other natural resources and obey the law of land in letter and spirit. If this means few quarters or even years of slower growth, the pain would be worth every pang of it.
My final take on the issue could be summarized as follows:
It would be a mistake to view the present state of poor economic sentiments as a simple economic problem catalyzed by mistrust between the government and businesses, higher taxation, tighter liquidity or down sloping demand cycle. The roots of the problem are much deeper. I feel, besides the usual economic problems listed above, the following factors could also responsible for the sagging sentiments, both for consumers as well businesses.
(a)   The fast changing technology landscape is making many businesses redundant. Largest ever number of medium and small sized businesses who do not have wherewithal to adopt new technologies are facing existential risk. Many large legacy businesses which have been lethargic in timely adoption of new technologies are finding it tough to compete with the smart businesses which adapted to the change early and raced ahead.
(b)   Globalization of Indian economy is happening at accelerated pace now. Every quarter some new area of business is being thrown open to global competition. The businesses that have been used to operate in protected environment with full state patronage are naturally finding it hard to compete with global businesses with access to larger capital, better technology and wider markets.
(c)    The fast changing technologies are also leading to higher rate of workers redundancies. Besides, the compulsion of businesses to become more flexible and lean is also causing the insecurity amongst the employees to rise. Rising job insecurities, erosion of wealth effect due to depressed real estate prices, and poor visibility of professional growth, and elevated household leverage could be some of the reasons for poor consumer sentiments.
Breakdown of dialogue between the government and businesses post Demonetization has deepened the mutual mistrust. The first step to resolve the crisis of confidence must be to bridge this gap and reestablish the dialogue. Making the economic development and growth a one way street, where only the government dictates the terms, may not work under the present circumstances.