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Friday, February 14, 2020

Latest data reignites stagflation fears

Two data points released on Wednesday has again brought the specter of stagflation in India to the fore.

The rise in food prices and telecom tariffs pushed the retail inflation in January 2020 to 7.59%, the highest level seen since May 2014. At the same time the industrial production recorded a decline of 0.3% in December 2019.

I agree with the viewpoint that at macro level we may not be facing any threat of stagflation in near term. I also believe that (a) the headline CPI number may be close to peaking and may ease considerably post summer, as estimated by the monetary policy committee (MPC) of RBI; and (b) the headline growth number may be close to bottom and we may see a gradual recovery from 2HFY21 onwards.

Notwithstanding the macro viewpoint, it is pertinent to keep in mind that a large segment of the population may already be experiencing stagflationary conditions.

There is no denying that the employment conditions have worsened in past one decade and there is no hint available that this trend will reverse anytime soon. The labor participation rate in 2019 was lowest
The real wage rate growth for agriculture labor that forms a major part of overall workforce have been consistently declining since summer of 2017 and have seen de-growth in 2019. This could be due to significant rise in MSP of main crops over past two years. But nonetheless, the rural inflation has been consistently higher than the urban inflation while the rural wages have not seen commensurate growth.
Latest rounds of consumer confidence survey conducted by RBI clearly indicate that more households across major cities in India have seen their income decrease than increase in past one year. Moreover, majority of households perceive that employment outlook in India has sharply deteriorated. (for more details see here)

In my view therefore it would not be fair to assume that a large segment of Indian population is experiencing stagflationary conditions and this situation is likely to last for many quarters to come.

Thursday, February 13, 2020

Budgetary allocations - misplaced priorities

I had briefly mentioned about some lacunae in the intent expressed in the budget speech of the latest finance minister and elsewhere by the incumbent government, and the actual resource allocations made in the Union Budget 2020. (see here)

A careful analysis of the budgetary allocation prompts three issues that need to be seriously contemplated, viz.—

(1) The need to correct misallocation of resources, which is primarily a consequence of the misplaced priorities of the governments in the past many decades.

(2) Lack of political intent to do fresh (zero based) thinking on the national priorities in the current socio-economic context. The changes in budgetary allocation are therefore incremental and less effective. The instances of resource wastage are frequent and unfortunate, given the scarcity of resources.

(3) Food subsidy continues to be the highest allocation in the budget despite decades of poverty alleviation efforts. This highlights the major weakness of our political mindset, which continues to be feudal in nature - provision for the subject instead of enablement and empowerment of citizens has been the approach of almost all governments that have been power since independence.

The changed demographic of the country necessitates significantly higher allocation to the human resource development. This is not only a national requirement for any government in India but also a responsibility of India towards the global community being the home to the largest number of youth in the world.

The allocations to Depart of Higher Education (1%), Department to Youth Affairs & Sports (0.2%), Department of School Education and Literacy (0.06%), are almost ridiculous in the wider context, even if we consider the amount mobilized through Education Cess.

India is infamously known as diabetic capital of the world. Obesity, Hypertension, Tuberculosis (TB) and Cancer have also assumed almost epidemic proportions in most towns of the country. Under these circumstances, healthcare and social security of the citizens must be a top priority. The finance minister in fact highlighted in her budget speech that government want to eliminate TB in next five years. But the budget allocations to Department of Health & Family Welfare (1.17%), Ministry of AYUSH (0.02%) are certainly commensurate with the need.

Rs 47805cr is provided for the urea subsidy, which is believed to be one of the reasons for soil and water contamination and health related issues. Whereas on the other hand, appx Rs 9300cr has been provided for health, family welfare, health research and AYUSH.

Employment is widely believed to be one of major crisis in India's socio-economic context. The government was expected to give top priority to the employment generation efforts. The government had been expressing this as one of the top priorities. However the budgetary allocations totally belie this intent.

Ministry of Labor and Employment gets just 1% of the budgetary allocation. The departments considered critical for employment generation like MSME (0.88%), Textile (0.4%), Tourism (0.29%), Animal Husbandry and Dairy (0.16%), Culture (0.07%), Panchayati raj (0.001%) are given miniscule allocations.

Despite all the promises and pressing needs, the department of renewable new and energy gets 0.68%, against 5.15% for Petroleum & Natutal Gas.