Vijay Kumar Gaba

Thursday, January 23, 2020

Unemployment ...before it become unmanageable

Two piece of information regarding the employment condition in the country came to my notice yesterday. The first piece was encouraging. The latest data released by the Employees State Insurance Corporation says "A whopping 19.6 lakh new employees were added to the payroll of Indian companies in November 2019. This is the second highest monthly addition of new employees in the formal sector after 19.86 lacs addition in July 2019.

The second piece of information was rather disturbing. As per the latest release of the Centre for Monitoring Indian Economy (CMIE), the employment rate in the country rose to 7.5% during September - December 2019 period. Reportedly, this is the highest rate of unemployment in 45 years. The unemployment has recorded consistent increase since 2017 (post demonetization).

As per the CMIE data release:

(a) The unemployment in the urban areas is at 9%, much higher than the rural areas and the national average.

This could be due to two factors: (i) lower economic activity in the industrial sector; and (ii) high incidence of disguised employment and under employment in the rural areas.

(b) The unemployment rate in the urban youth, especially educated one, is very high. While youngsters in the age group of 20-24 years reported an unemployment rate of 37%, graduates among them reported a much higher unemployment rate of over 60%. The average unemployment rate for graduates during 2019 was 63.4%. This trend is alarming but correlates well with the multiple waves of urban youth unrest in the country during past few years.

This trend may be interpreted in the following three ways:

(i) Not enough quality jobs are being created in the formal sector. Most of the new jobs that are being created are low paying and do not require technical or professional skills.

(ii) The quality of education is deteriorating faster. More and more grduates passing out of colleges are actually unemployable.

(iii) The economic growth is becoming much less employment intensive due to higher use of technology.

In whichever way we interpret the data, the fact can no longer be denied that unemployment of youth is perhaps the most serious socio-economic challenge India faces presently; and it needs to be addressed before the things become unmanageable.

In my view, urgency of the problem must be understood from the following three dimensions.

1. A large part of the fabled India story is built upon the "demographic dividend". Unless the youth of the country could be employed productively, this dividend could not be exploited. In two decades, India shall begin to grow old. Unless we exploit this demographic divided today and create enough wealth for the future, it will be very tough for Indian economy to sustain even marginal rate of growth in 2040s and 2050s.

2. Being the home of the largest number of youth population in the world, it is fiduciary responsibility of India to nurture, protect and grow this invaluable resource as a trustee of humanity.

3. Persistent unemployment of youth could potentially push our youth towards crime and drugs and turn our nation into a land of uber chaos, much worse than what we have seen in many Latin American countries.

Wednesday, January 22, 2020

A 180 degree turn - - from saviour to a threat

A decade ago, the global economy slipped into a deep abyss, contracting by more than 2.5% in 2009, as compared with a over 4% growth recorded during 2004-2007 period and a still positive growth of over 2% recorded in 2008. The extent of the slowdown could be gauged from the fact that over 100 countries (including 33 developed countries) all across the world recorded contraction in GDP during 2009.

The global financial markets had frozen; large banks were collapsing; some European and Latin American countries were on the verge of defaulting on their sovereign obligations and needed to bailed out by IMF.

Amongst all this chaos a group of four developing countries Brazil, Russia, India and China (BRIC) emerged as the savior. These countries recorded sharp growth recovery in 2010 and saved the global economy from slithering into a deeper recession, which many feared could have been much worse than the great depression of 1930s.

A decade later, all four BRIC countries are struggling with the growth. As per the latest growth statistics Brazil, India and China are all growing at a pace much less than 2010. The global institutions that lauded these economies for being engine of global growth in 2009-10, are now holding emerging economies, especially India, responsible for pulling down the global growth.

IMF on Monday downgraded its growth estimates for India for next 2 years. As per IMF, Indian economy is now expected to grow by 4.8% in 2019; 5.8% in 2020 and 6.5% in 2021. These estimates are subject to fiscal and monetary stimulus by the government and subdued oil prices due to lower global demand growth.

Accordingly, the global growth would reach 3.3% in 2020, compared to 2.9% in 2019, which would be the slowest pace of recovery since the financial crisis a decade ago. This slow recovery in global growth in 2020 is highly contingent upon improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for underperforming emerging and developing economies such as Brazil, India, and Mexico.

The International Monetary Fund's (IMF) Chief Economist Gita Gopinath reportedly told media in Davos that "We’ve had a significant downward revision for India, over a 100 basis point for each of these years. It’s probably the most important factor for the overall global downgrade of 0.1 percent."

I have no doubts whatsoever that India and China which together house close to 3bn people, would certainly regain the economic momentum and become the engine of global growth again. But it would be foolish on my part to admit that the next couple of years are going to be extremely challenging, especially for India.

In view of the popular demands from the government in the forthcoming budget, Ms. Gopinath cautioned that the government must take steps keeping the fiscal room in mind. She said, “In the case of India, it is important that the fiscal targets are met, at least from a medium-term perspective. It is also important that when spending is done, it’s done on public investment as opposed to consumption spending.”

Ms. Gopinath cited that the poor credit growth, which is a direct fall out of the NBFC crisis, is one of primary reasons for below par economic growth. She highlighted that "In terms of the major issues to deal with, it’s the weakness in credit growth. How do you get credit growth back up while making sure at the same time that there will not be a second round of non-performing assets in the future? I think that’s the balance the government has to work towards."

Tuesday, January 21, 2020

Rising inequalities put question mark on sustainability of capitalism

Recently, the rights group Oxfam released a study titled "Time to Care", just ahead of the annual Meet-Greet-Eat-Retreat (MGER) event of the world's rich and powerful in Davos, the famous ski resort of Switzerland. The study once again highlights the burgeoning economic inequalities in the world and its potential impact on the global socio-economic conditions.

The report highlights that presently the personal wealth of 2153 global billionaires is more than the combined wealth of 4.6billion, which is about 60% of the planet's human population.

In Indian context, the conditions appear to be even worse. As per the report, the combined wealth of top 63 richest persons in India is more than the annual budget of the country, which was Rs24.42trn n FY19. The report further states that India's richest 1% people hold more than 4x the combined wealth of 953 million people who make up for the bottom 70% of the country's population.

The statistics are staggering by any standard.

Within overall parameters of the economic inequality, the gender inequality is even more alarming. As per the report, it would take a female domestic worker 22,277 years to earn what a top CEO of a technology company makes in one year.

The report further states, that women and girls put in 3.26 billion hours of unpaid care work each and every day -- a contribution to the Indian economy of at least Rs 19 lakh crore a year, which is 20 times the entire education budget of India in 2019 (Rs 93,000 crore).

The report suggests that even a meager 2% (of GDP) direct public investments in the care economy could potentially create 11 million new jobs. The women who are forced to "take care" of the household spend billions of hours cooking, cleaning and caring for children and the elderly. They get little time for education, skill building to be able to earn a decent living or have a say in how our societies are run, and who are therefore trapped at the bottom of the economy.

Another study presented by Edelman, highlighted that this unsustainable skew in global wealth and income, may be fast eroding the confidence in the system of capitalism itself.

The rise of socialism on both sides of the Atlantic may just be a harbinger of this trend.

Back home, the rise in the cases of civic unrest in past few years needs to be viewed from this angle also. The Patidar agitation in Gujarat, the farmers' protest in Maharashtra, the tribal protests in central India, the student protests across the country over a variety of issues may have one underline theme, i.e., economic stress and poor visibility of livelihood and growth.

In my view, it would be completely wrong to assume that the recent student's protests are merely to oppose recent amendment in the Citizenship law, or proposed population enumeration exercises.

The fact is that a common Indian youth is disillusioned, totally frustrated and deeply distressed.

First, the education they are getting is very expensive and mostly sub-standard.

Second, the employability quotient of youth graduated from most of the universities is abysmal.

Third, there are not enough job opportunities even for those who are competent. The conditions are truly pathetic beneath the facade of elite IIMs, IITs and ISBs.

Dismissing the protests merely as anti BJP propaganda would be monumental blunder on the part of the administration and the entire political establishment.

Friday, January 17, 2020

Finding the contours of the economic slowdown

The recently published foreign trade data (see here) further confirmed the persisting slowdown in Indian economy.

As per the data, the non-oil non-gold imports during April-December 2019 period contracted ~8% yoy. The oil import in the same period was down ~12% yoy. If we consider ~17% rise in oil prices during this period, the fall in volume of oil import is much higher. Overall the merchandise imports contracted ~9% yoy in USD terms and ~8% yoy in INR terms during the first nine months of current fiscal.

In the nine month period during April-December 2019, the merchandise exports were lower by ~2% yoy. During this period non-oil non-gems & jewelry exports were almost flat yoy.

The services exports (up ~5.6% yoy) and imports (up ~7.5% yoy) during nine month period April-December 2019 have however recorded decent growth as compared to the merchandise trade.

Consequently, the trade balance is much lower as compared to the previous year. The overall trade balance for April-December 2019-20 is estimated at USD 57.66bn as compared to USD 89.46bn in April-December 2018-19.

As per the latest data published in September 2019, the current account deficit (CAD) of India was USD6.3bn or 0.9% of GDP in the 2QFY20 (vs 2% of GDP in 1QFY20). Given the lower trade deficit and decent capital flows, the CAD might have shown further improvement in 3QFY20. To some extent, the strength in INR could be attributed to this factor.

However, the moot point is whether the market should cheer the improved CAD data and consequently stringer INR or be worried about (a) the falling imports, especially engineering and consumer goods imports which implies slow down in consumption and (b) stagnant to contracting exports in the entire post global financial crisis (GFC) period!

Another aspect about the economic slowdown that needs to be examined is the contribution of the each of the following factors:

(a) The administrative, procedural and legislative changes like GST, IBC, UBI, RERA etc that are aimed at supporting higher growth in mid to long term but may have checked the growth momentum in the short term.

(b) The social policies of the government that are aimed at promoting national security and integrity but may have triggered an environment of mistrust and non-cooperation.

(d) The global trade slowdown due to trade wars, geopolitical tensions and uncertainty over Brexit etc.

(e) The cyclical global economic slowdown due to fatigue after long expansion period since GFC.

This exercise may help finding the right solutions and alleviating the atmosphere of despair and pessimism.

Thursday, January 16, 2020

Common investors may avoid PSEs for investment

As per media reports the government is seeking huge dividends (Rs190bn) from oil PSUs to meet its fiscal shortfall (see here). It is also reported that some companies might have to borrow money to pay the required amount of dividend as the cash balance with them may not be sufficient to meet the demand. Obviously the payout will at the expense of cutting capex and impairing the future growth potential.

In summer of 2016 also, the "Finance Ministry" had directed all profit making PSUs to use their surplus cash to buy back shares and pay handsome dividend, besides considering issuing bonus shares or going for stock split. (see here) Since then the benchmark Nifty50 has gained over 42%, while the Nifty CPSE has lost over 9%, underperforming the benchmark by massive 51%.

I have said it many time before, and I would like to reiterate this again - for a common investors, finding any reason for investing in a public sector enterprise (PSE) is extremely challenging; notwithstanding whatever government suggests or claims.

From the experience of MTNL, NBCC, Coal India, etc. it is clear that despite their dominant monopoly status, these companies are vulnerable to failure due to policy intervention; simply because the government in India is socialist by the constitutional mandate and an enterprise majorly controlled the government cannot have even profit optimization as its primary objective.

Most of the PSEs in India’s suffer from one or more the following limitations, that makes them unfit for investment by a common investor.

(a) The management lacks transparency and accountability.

(b) The management is corrupt, incompetent and/or instable.

(d) The companies operate under a highly inconsistent policy environment.

(e Many companies do not have control over pricing of their products, which is dictated by the government usually under political considerations.

(f) Some companies like power distributors are often forced to deal will bankrupt customers.

(g) The senior executives are appointed on the basis other than expertise in the area of operation.

(h) Most of the companies may be saddled with excessive bureaucracy without any control over the appointments, promotions and compensation.

(i) Most companies are egalitarian in their operating mission and more often work for social cause rather than optimization of profit.

(j) The companies need political sanctions for managing their capital structure.

Moreover, the ground reality of our economy today is that we are hugely dependent on foreign capital to ensure growth. It is therefore inevitable that government will have to keep relaxing foreign direct investment norms and open more and more areas of the economy to stiff global competition. Under these circumstances, many public sector undertakings with their inefficient capital and wage structure may crumble.

Besides, the majority shareholder (government) has consistently and blatantly oppressed the minority shareholders in these companies – by not allowing them to fix the prices of their products, raise capital when required, make investments where and when desirable and disallowing the managements to restructure their costs (especially employee cost) during downturns.

Under these circumstances, there is little rationale for a common investor to invest in PSEs or CPSE ETF. However, for the professional investors who understand the risk and know how to take advantage of trading cycles, it may be a different ball game altogether.