Vijay Kumar Gaba

Thursday, September 12, 2019

The seeds of auto slowdown were sown much earlier

Conventionally, automobile industry performance is widely accepted as a lead indicator of the overall economic performance of any economy. No wonders if the recent slowdown in automobile demand is being represented as a mark of the slowdown in overall economic activity.

However, the reactions from policy makers - ministers, MPs, senior advisers & bureaucrats, etc - are perplexing.

They have mostly sought to trivialize the issue of slowdown either by outright rejection or some lame explanation. The suggestion of the finance minister that use of app based taxis may be a key reason for slowdown in demand of automobile has been criticized widely on social media as a completely illogical. These unmindful assertions from the official side have raised doubts over the policy makers' understanding of the current state of Indian economy. These doubts may impact the already faltering business and consumer sentiments.

In this context it is important to note that—

(a) The GDP growth rate in India peaked at 9.6% in FY07. Since then, the popular target growth rate of 8% has been achieved only twice inFY11 and FY17.

(b) The monthly growth rate in sales of automobiles in India had peaked in 2010 at around 60% yoy. Since then it has ranged between -10% to 20% with a declining tendency.

(d) The share of private consumption in India's GDP consistently declined since 2000, from a peak of 70% to below 60%. Since 2012, it has mostly ranged between 57-60% of GDP.

(e) The fall in private consumption has distinctly coincided with the rise in household debt that has risen consistently from 2% of GDP in 1998 to over 10% of GDP in 2019.

(f) In past 25yrs, since 1995, India’s economy has grown at an average rate of 6.8%. However, the total employment in economy during this period has grown at just 0.3% CAGR. Moreover, the real wages have grown at significantly lower rate than the economic growth. The anecdotal evidence suggests that the real wages in private sector may be mostly stagnant for past 3 years. The affordability quotient of household is obviously lower.

(g) Post GST implementation, the operating efficiency of truck fleet has reportedly improved materially. Some unconfirmed reports have suggested that pre GST a truck took 10-12 days to make Chennai to Mumbai round trip. With implementation of GST and removal of check posts on state borders, the same round trip takes 4-5. So a lorry that was making two trips up & down in a month is now making 6 trips. The demand for trucks is obviously impacted. Improvement in railways is also reflecting on CV demand. The full operationalization of dedicated freight corridors will further impact the CV demand.

Restrictions on mining, slowdown in demand from housing construction sector, slowdown in imports, and delay in purchase decisions due to BS6 implementation schedule, etc also reflect on slowdown in CV sales.

(h) Moreover, the slowdown in auto sales is not a India specific phenomenon. Its more of a global trend. As per a Forbes report-

"The world car market is about to take its biggest hit since the financial crisis of 2008, according to a report from Germany’s Center for Automotive Research (CAR), with sales diving more than 4 million in 2019.

The fall, triggered by U.S. sanctions policy and led by a huge fall in China’s sales, will extend over four years and be exacerbated by harsher CO2 regulations and the challenges this implies from the enforced take up of electric vehicles in Europe.

The forecast, authored by CAR’s director Professor Ferdinand Dudenhoeffer, doesn’t include the impact from a possible crisis when Britain leaves the European Union (EU), or if the U.S. imposes tariffs on European vehicle imports.

Dudenhoeffer said world sales in 2019 will fall to 79.5 million from 83.7 million last year, and won’t recover to 2018’s levels until 2022 when sales will rise back to 84 million." (see here)

Ola and Uber are obviously the last things to impact the demand of personal vehicles. It may be worthwhile to note that only 30-35% of India is urbanized and Ola & Uber so far address about 30% of this urbanized India.

Shortage of parking space in cities and spread of Metro network might impact the growth of automobile sales more than Ola and Uber.

Wednesday, September 11, 2019

You must survive to enjoy the fruits of you labor!

As per the Hindu lunar calendar the ancestors' fortnight (पितृपक्ष), will start from tomorrow. As per the ancient Hindu traditions, all Hindus are obligated to serve Brahmins (Scholars) and feed crows during this fortnight. It is widely believed that serving Brahmins and feeding crows in this fortnight pleases souls of the ancestors and thus redeems the person performing this ritual from the debt of ancestors.

Hindu religious traditions also mandate that a grand feast must be organized by all Hindus within 3weeks of the death of their parents, spouse or children. In this grand feast Brahmins, Dogs, Crows and the poor are served with delicious food. Brahmins and poor are also given cloths, cash and other gifts.

I am not competent enough to comment about the traditions of other religions and cultures, but I am sure similar traditions are practiced by the followers of other religions also.

The anecdotal evidence that I have collected from my interactions with numerous villagers and urban poor, this feast (श्राद्ध) could be one of the top 10 reasons behind perpetual indebtedness, bonded labor and socio-economic distress of numerous rural Indian household.

Regardless of the religious significance and/or relevance of these rituals, I find it pertinent to to highlight that "the feast" will be held regardless of you. In case you want to enjoy the feast, you need to survive till good times arrive; otherwise it will be for the Brahmins, poor, cows and crows to enjoy the feast.

Relating this analogy to the economics, markets and politics—

In past two decades corporate India has invested huge amount of money in creating capacities. Many of these capacities, especially in infrastructure and real estate sector, have been created without bothering about the prevailing demand conditions. Consequently, a significant amount of these capacities became economically unviable. Promoters who created these capacities, bank managers who funded these capacities, and investors who provided equity to these promoters and lenders - are all in distress.

There is no argument against the need for these capacities. The demand will also come in next few years. But the question is who will enjoy the feast. The bank managers would have retired, sacked or shunted out for his poor performance. The promoters would have diluted his equity substantially at distress price or forced out by IBC. The equity investors would have booked the loss.

The Brahmins and Crows - the new bank manager in whose tenure these capacities will become viable adding to bank's profitability, investors who will buy equity at distressed prices and acquirers who would then be managing the show - will feast on the misery of others.

The traders in stock markets usually have this tendency to protract recognizing their losses. These losses could be due to wrong choice of stock, sudden change in external environment, or any other reason. But the first reflex of most traders is to average the cost by buying into the fall in prices. More often than not the traders end up losing more money than they would have lost had they booked the loss at first hint of trouble. The pain of loss rises exponentially when they see the whole market recovering, except the stocks they own.
It must be understood that to benefit from whatever good a government does, the political parties running that government will benefit from that good only if they survive to see the result of their good deeds. Otherwise, the party that will form the successive government will enjoy the benefit.

The moral of the story is simple - You must survive to enjoy the fruits of you labor!

Friday, September 6, 2019

Debating the slowdown - 3

Continuing from yesterday (see here)

To understand whether the current economic slowdown is structural or cyclical; and whether the problem stems from the demand side of the supply side, I must understand the meaning of this jargon. Not being an economist, I would like to define this jargon from my own prism to suit my layman understanding.

Structural economic slowdown, in my view, means that current economic activity is the best that can be achieved within the current social, legislative, political and economic context. To achieve higher growth that the present level, material improvements (know as structural reforms in common parlance) would be needed in all these spheres at policy, administration and execution levels.

Cyclical economic slowdown on the hand means a temporary disequilibrium between the forces of demand and supply resulting in demand destruction.

A disproportionate change in demand usually occurs due to excess liquidity, change in rates, changes in fiscal incentives, fear of unusual supply changes in near future, etc. Such change in demand that is not matched by proportionate change in supply invariably leads to changes in prices and eliminates the demand from the marginal buyers or marginal producers.

Similarly, a disproportionate change in the supply may occur due to excessive capacity building in anticipation of future demand; disruptions in supply caused by natural events, legislative changes, geo-political conditions or civil unrest etc.

The cyclical slowdown is reversed as the forces of demand and supply return to the state of equilibrium through policy intervention and/or rebalancing of market forces. Usually no material policy changes are needed to manage the cyclical slowdown.

In my view, the slowdown witnessed in Indian economy is structural and would need material improvements in social, political, legislative and economic context of the country.

Damage to economic structure

In my view, the seeds of this slowdown were sown during the NDA regime led by Atal Bihari Vajpayee (1998-2004). The tenure started with the big blast (May 1998 nuclear test) and was punctuated by major initiatives like NELP (hydrocarbon exploration), SEZ (key reforms in land, labor and tax laws in select zones), NHDP (highways), PMGSY (rural roads), AAY (food security for poor), SGRY (employment for rural poor), SSA (primary education for all), airports privatization, port privatization, Electricity Act 2003, spread of mobile telephoney, 100% FDI in core sectors, etc.

These initiatives excited the global investors at a time when Indian IT professionals were making big impression on global technology canvass. A supportive regime, Y2K problem, easy credit post LTCM and Asian crisis (rates lowest since 1970s) and depressed commodity prices (inflation lowest in decades) helped big investment initiatives.

The problem was that many of these programs were initiated hurriedly without putting an adequate institutional mechanism in place, thus leaving the scope for misuse (of discretionary powers by minister and bureaucrats), litigation (ownership of natural resources), misappropriation (of natural resources by scrupulous allottees), non-compliance (environment and sustainability norms) and wide viability gaps (absence of immediate demand) and thus planting the seeds of financial stress, economic slowdown, mistrust and corruption. Subsequent UPA government watered and nourished these seeds well.

The advanced demand for infrastructure (as distinguished from "need" for infrastructure) impacted sustainability of many large businesses and eventually resulted in near collapse of PSBs and widespread collateral damage to the entire supply chain.

In particular, the road and power sectors are still reeling under the stress.

Damage to the social structure

It is clear that our society has defied the classic Maslow's evolutionary pyramid. It is moving directly from sustenance to aspirational consumption. The demand thus created is neither desirable nor sustainable.

I see that in rural and semi-urban areas, motor cycle has replaced bicycle as a mandatory dowry item. These days, it is almost impossible to marry your daughter if you cannot afford a motorcycle and smart phone in dowry. Many old aged villagers argue that it is a collateral damage of better road and telecommunication connectivity. The road and information highways have taken the markets to people in remotest of the areas, but little efforts have been invested in enhancing the skill and awareness level of the people. Employability and earning potential has not improved commensurate with the aspirations. The social structure is thus damaged.

Secondly, the youngest demography in the world is like a vast reservoir of unexploited energy. If not channelized properly, it can destroy the very core of our social fabric. The rising number of poorly educated, inadequately skilled underemployed, unemployed and employed in disguise youth is no strength for the economy. It is indeed a serious weakness.

On one hand, India is failing in her duties towards the international community (see here); on the other hand we seems to be fast running out of ideas for managing this vast and invaluable resource for our economic good. Rise in petty crimes, instances of civil unrest, deterioration in general compliance standards are just few prominent consequences.

People are spending on motor bikes, smart phones, SUVs, tractors, wedding & birthday celebrations, compromising on food, health, education & training, and shelter needs.

This is raising three damaging trends in the socio-economic milieu of the country:

(a) Even the people who are better off in absolute monetary terms frustrated and cynical than ever.

(b) There is an increasing tendency to depend on the State for meeting basic needs.

(c) The consequent financial stress is gnawing into traditional Indian ethos, where defaulting on debt is considered one of the greatest sin. These days it is not uncommon to see people not only willfully defaulting on loans but also encouraging others to do so.

Distortions created by political structure

The pseudo socialist and quasi feudal nature of our democracy often leads to wasteful expenditure. The policies and plans focused on winning an elections rather than achieving sustainable economic growth and development result in serious misallocation of capital and sub-optimal of resources.

We have seen politicians creating undue and totally unsustainable demand for color televisions, smart phones, laptop computers etc. by manipulating the process of democracy.

We need a political organization that fully assimilates the aspirations of the people, addresses specific local problems, promotes mutual trust & harmony, bars incompetence and knavery from public office, and insures that the best is selected and prepared to rule for the common good.

The legislative problem

Since 1976, our governments have been constitutionally mandated to be "Socialist". Any legislation or policy of the government must pass the test of socialism before being implemented. This constitutional commitment often conflicts with the ideas of free markets, global competition, liberalization, etc. To avoid this conflict the governments mostly try to include a multitude of safeguards any policy framework that is intended to promote free markets and competitive enterprise.

Consequently, we find most of our economic legislations complex and ambivalent, adding the element of unpredictability to the economic decisions. Frequent revisions, roll back and totally avoidable litigations is the outcome of this conflict.

We would need to address all these problems before our economy can move to a higher orbit of growth.

I would like to share my thoughts on material improvements (reforms) that may be considered to make structural corrections to the economy next week.

Thursday, September 5, 2019

Debating the slow down - 2

Continuing the debate on growth slowdown from yesterday (see here), I would argue that the economic growth trends in an economy like India (which is large, diverse and runs a multiparty democratic system) would usually take a longer time to establish. It would be unreasonable to attribute the slow down or acceleration in growth completely to any plan, strategy, measure (legislative or administrative) etc that has been implemented in recent times.

Construction of core infrastructure like power plants, highways, ports, coal mines, etc usually entails a long gestation period that in many extends to more than 5yrs (full term of a government). The full impact of these projects on growth is therefore felt only after these are completed and commissioned. The current acceleration in growth therefore is mostly result of the efforts made in past many years. Similarly, a significant change in the economy like (i) opening more sectors to global competition; (ii) withdrawal of subsidies; (iii) GST etc would usually have immediate adverse impact on the weaker/smaller businesses, employment, asset quality of lenders, consumption, savings, growth rate etc. However, the positive results of these measures would be felt only after some years.

Therefore, in my view attributing acceleration or deceleration in short term growth to the incumbent government is inappropriate, notwithstanding the political rhetoric.

I have said it many times before, and would like to reiterate that the economic policy direction of all government in past 35yrs has remained mostly the same. All governments have pursued the same agenda of liberalization, globalization, inclusion and social equity. For example consider the following:

1. The process of meaningful tax reforms was started by the then finance minister V. P. Singh (Congress 1984-89) by rationalizing the tax slabs, lowering maximum marginal tax rates substantially, rationalizing wealth tax and introducing CENVAT. The recommendations of Raja J. Chelliah Committee (1991-93) on tax reforms constituted by the government (Congress 1991-96) have since formed the basis of tax reforms in India. All successive governments have implemented these recommendations. No government has sought to reverse or alter the process started by Congress government (1984-89). These recommendations formed the core of all the versions of Direct Tax Code. The origin of the tax proposal like lower tax rate with lesser exemptions and no wealth tax proposed in could also be traced to that.

Committees formed under the chairmanship of other members of Raja Chelliah committee like Govinda Rao, Partha Shome and Vijay kelkar etc. subsequently updated the recommendations to provide further impetus to the entire process of tax reforms in the country.

It was the Finance Minister of H. D. Devegoda led United Front government who presented the most talked about "dream budget".

2. The recommendations of Narsimham Committee (1991-92) appointed by Dr. Manmohan Singh, the then finance minister in the Congress government, have largely formed the basis of financial and banking sector reforms in the country. Most successive governments have implemented the recommendations consistently. In fact, P. Chidambram, the then finance minister in United Front government (1998) had re-appointed the Narsimham Committee to make recommendations about the second generation banking sector reforms. The report was submitted in 1999 to the NDA government which accepted the recommendations.

3. In 1991-92, the then government moved decisively to end the distinct socialist bias in the economic policy, that constricted India's economic development and integration of India's economy with the global economy.

Economy and markets were opened for foreign investors. Forex regime was liberalized under LERMS. MRTP restrictions were materially eased. Under new industrial policy a large number of industries and sectors were freed from licensing requirements. Capital controls were substantially eased, and office of capital controller (CCI) was abolished. Capital markets were liberalized. SEBI and NSE were established. The role of public sector was redefined and the process of disinvesting government stake in PSEs initiated. Civil aviation and telecom sectors were opened to private sector. New age private banks were allowed to operate as full service operators. Election process was dramatically improved and enhanced. WTO membership in 1995 also changed a lot of things for India.

Then during 1998-2004, another Reset was effected the government, taking the process started in 1991-92 to a much higher orbit.

The government gave up most of its monopolies. Private sector participation, in core sectors like coal, power, roads & highways, oil & gas, insurance, etc. was allowed. Digital connectivity was provided a massive thrust through New Telecom Policy, along with road and rail connectivity. PM rural road program (PMGSY) has been one of the best government programs in independent India. National connectivity projects like development of Golden Quadrilateral under PPP model, Delhi Metro Rail Project (that became a role model for many mass rapid transport systems (MRTS) in India and abroad, were initiated. The process of disinvestment in PSEs was enhanced substantially. Sarva Siksha Abhiyan was a massive effort (and successful) to bring children to school.

4. The BJP led NDA government enacted the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003. The arch rival Congress led UPA-I government implemented the same in 2004 in letter and spirit. This still forms the very basic of fiscal discipline both at central and state levels, though implementation was suspended in 2009 in the wake of global crisis and need for stimulus. In FY13 stimulus withdrawal commenced and all subsequent Finance Ministers have committed to achieve the targets without fail.

5. The minority government of Chandrashekhar introduced disinvestment policy first time in 1991. Every successive government since then has not only accepted the policy in principle but also tried to actively integrate it into the evolving economic model. Almost all of them have consistently failed in implementing the policy in right spirit.

6. The idea of single national market (GST) was mooted by the UPA-1 government as a natural progression from VAT regime implemented during NDA-1 regime. The NDA-2 government implemented the idea.

The point is that the Reset of 1990s did not result in growth acceleration till FY2004. The reform measures in fact resulted in material growth deceleration as there was huge rise in Bank NPAs; two major DFIs (ICICI and IDBI) were eliminated, the third one (IFCI) was decimated; the largest DII UTI was eliminated; all private airlines faced closer or sell out; many new age banks had to be merged with larger peers; thousands of unviable steel and cement plants had to b shut down; many textile mills went out of business; unemployment rose to new heights and BoP worsened.

The eventual outcome was a strong new economy which is - globally competitive in areas like ITeS, Automobile, Pharmaceutical, etc.; interconnected through a wide network of highways; sufficient in power production capacity to fuel growth; a recognized nuclear & space power commanding respect from all significant global players; an attractive market for global automobile and appliance manufacturers; a preferred investment destination amongst emerging market peers.

The period from 2004-2010 witnessed significant rise in long term growth trend, before the global financial crisis changed many things and warranted another reset. That reset began from 2013 and still continues. This period has seen significant deceleration in growth. The existence of many businesses is threatened. The unemployment is high and rising. The financial stress has remain elevated.

But the expected outcome would be a transparent, strong and much less riskier financial system; globally accepted business and accounting practices; stronger, larger and scalable businesses; higher number of organized sector employment opportunities; improved infrastructure; strong and widely acceptable business failure framework.

Insofar as the long term growth trend is concerned, as evident from the below chart, the deceleration started from FY08 and continues. In my view, it will bottom in next two years at much higher level than FY03 level. The acceleration from FY22 onward may also surpass the FY08 peaks; and the uptrend shall last much longer than the previous 5yr (FY04 to FY08) period.

The key risk is failure of the government in securing the confidence of people, especially the youth. A widespread civil unrest against the establishment (not likely in my view) may invalidate my hypothesis completely.

To continue tomorrow.

Wednesday, September 4, 2019

Debating the slow down - 1

The dismal GDP growth data for 1QFY20 released last Friday has fueled a multitude of debates in the country. Most of these debates could be classified in three categories, viz.,

1. Political Debate: Whether the incumbent NDA government led by PM Modi has failed in handling the economy properly?

The debate encompasses a variety of issues, e.g., (i) whether demonetization and GST have impacted the growth momentum so severely that it may take many years to recuperate from the side effects; (ii) whether the government is focusing on too much on political issues ignoring the evident socio-economic concerns; (iii) whether the Narendra Modi administration has adequate talent to manage a economy in serious crisis; and (iv) whether UPA government led by Dr Manmohan Singh managed the economy well or is it due to the vacuum created by that government that the current government is trying hard to fill?

The former Prime Minister Dr Manmohan Singh has actively joined the debate by suggesting that "Our economy has not recovered from the man made blunders of demonetisation & a hastily implemented GST. I urge the government to put aside vendetta politics & reach out to all sane voices to steer our economy out of this crisis".

2. Economic Debate: The economic debate has many dimensions. Market economists, development economists, bankers, policy makers, market participants from financial markets, and business community are debating different dimensions of the Growth Conundrum.

Development economists are debating whether the current slowdown is (i) a demand side problem or a supply side problem; and (b) a structural or cyclical phenomenon.

Market economists are wondering whether the government has fiscal space to stimulate the economic growth through accelerating public investment & consumption and affording meaningful fiscal concessions to the consumers and businesses. "Need for aggressive Reforms" is a common jargon used in discussions but it continues to be vague as the specific suggestions are generally not made.

Bankers are debating whether rate cuts and other monetary stimulus can help achieving faster growth, especially when banking sector is still struggling with the asset quality issues and transmission of already effected monetary easing is not taking place adequately.

Financial market participants are discussing what does the GDP number means for credit growth, asset quality, auto & cement sales, flows, INRUSD, bond yields etc. They are also concerned with "avoidable" tinkering with tax rules especially in the current environment of global uncertainty.

Business Community is debating what concessions and relaxations the government could and should provide to help the struggling sectors like MSME, Real Estate, Automobile, etc. Incentives for exports, rationalization of excessive compliance norms, and "tax terrorism" also figures frequently in their discussions and debates.

3. Social Debate: The social debate is overwhelmingly focused on failure of the government in creating adequate number of jobs in past 5yrs. Rising unemployment that is leading to many distortions like low savings, rising household debt, higher petty crime rate; poor consumption growth etc.

In next few days, I shall reflect on some of the key dimensions of the slow economic growth.

Friday, August 30, 2019

The idiosyncrasies of our growth model plague SDGs

A prima facie look at the Sustainable Development Goals (SDGs) and the programs and schemes announced/implemented so far by the government to achieve the SDGs (see here), and the performance of various state governments in achievement of these goals highlights some interesting points. For example, consider this—

(a) The 58 centrally sponsored schemes assigned to meeting of SDGs are apparently classified into three categories (i) Core Schemes (ii) Core of Core Schemes and (iii) other schemes. Almost all the Core and Core of the Core schemes are old and in operation since prior to the India committing itself to the SGDs in 2015. Some of these schemes like Sarva Shiksha Abhiyan, Mid Day Meals and PMGSY are more than 20yr old. MNREGA classified as Core of the Core itself is more than 10yr old.

(b) All government since the Vajpayee led NDA-1 government, have made related interventions through targeted programs at regular intervals. Many of these interventions have yielded commendable results.

(c) Apparently, there are only a couple of core schemes that have been devised and implemented after committing to the SDGs in 2015. In that sense, our performance is limited to reclassifying and some further strengthening of the existing schemes. In that sense, the commitment to SDGs has failed in enforcing a fresh look at the entire growth paradigm that has been popularly believed and acknowledged to be inadequate and lacking in many critical aspects.

The idiosyncrasies of our growth model like adhocism, lack of cohesiveness, and incongruence continue to remain plague the planning process. In fact there are many instances of programs supposed to be devised to achieve SDGs, disregard the sustainability concerns. The best example of such a program is widening of roads connecting important pilgrimage centers in the state of Uttrakhand.

(d) There is a huge gap in performance of various states insofar as meeting the development targets set under SDGs are concerned is concerned. Southern states, especially Kerala is far ahead of most other states. Eastern, North Eastern and Central States lag far behind. Western States have been performing well in recent years.