Consumer Spending Is Likely To See A Revival During Festival Time: Free Press Journal 14th September 2024

 India houses a population of around 140 crore. Of this, based on the 2011 census, around 80% are Hindus which gives a potential consuming class of 112 mn. This class is important because for the festival season which has already started with Raksha Bandhan in August, and a more localised Ganesh Chaturthi in September, there would be two other big events of Dussehra and Diwali in the coming months. The 112 million group would mean around 28 million households.

The People Research on India’s Consumer Economy (PRICE) estimated that in 2020-21, 4% of the households were rich, 30% in the middle class, 52% in the aspiration class and 14% as destitute. Assuming that the top three income categories of population spend Rs 50,000, Rs 20,000 and Rs 10,000 on these four festivals on a conservative basis, this would mean a spending of Rs 3.75 lakh crore this season. Assuming people belonging to other religious groups also spend money on their festivals ending with Christmas, the overall kitty could be as large as Rs 4.0-4.5 lakh crore. A more aggressive number would be a multiple of 1.5 which can be Rs 6.75 lakh crore. This excludes homes and vehicles that would be purchased based on leverage and would not directly add to demand for consumer goods and services.

This is a very large sum that should be spent and would be typically on clothing, sweets, travel, amusements, donations in places of worship, decorations, fireworks, etc. There is a large circular flow of money because this is the time when individual households also pay a bonus for the domestic help which also help the “destitute” (earning less than Rs 1.25 lakh per annum) spend money on these occasions. Hence the festival economy has a far-reaching impact on the state of economic growth.

First, such spending is agnostic to location as both urban and rural economies get a boost as these traditions are followed across the country. In fact as the harvest of the kharif crop would commence during September and carry on till December, there would be an inflow of farm income to the cultivator homes. The monsoon has been good this year and it is expected that with a normal crop, the disposable income of farmers should increase. It must be pointed out that last year, this was not the case and a lower crop did impact farmer income. Another positive is that the reservoir levels have risen to higher levels than last year which will support the rabi sowing which begins towards the end of the calendar year.

Second, the demand for products and services would spread to all producing units. While the larger brands would have an impact on those in the urban areas where the population tends to have large spending capacity, the units in the MSME sector will receive a boost as a large part of the spending is on relatively lower value products. This includes paper products, lights, religious emblems and statues, savouries, etc. Therefore all the B2C or business to consumer activity would witness a boost this season.

Third, the spillover effects of higher demand for goods will be witnessed in the retail segment. The organised retail sector as well as kiranas will receive a boost during this season. The same will hold for ecommerce platforms which have grown manifold in the last five years. The volumes which are transacted on these platforms are impressive, and with deep discounts being offered during the festival time, will accelerate sales growth.

Fourth, the service sector involving tourism which includes both hotels and restaurants as well as transport services will witness an upswing. This is already being seen in the air fare rates which show a seasonal upward trait in the time period around the festivals. It was seen that post covid there was a tendency for such spending to increase manifold. To begin with it was “pent-up demand” but subsequently it appears to have become a habit in the middle class group too. Growing affluence combined with these festivals also coinciding with the holiday season for children make a perfect combination for higher spending.

Fifth, the FMCG sector is posed to display a sharp recovery this year. This is something the sector has been waiting for quite some time with lower disposable income and inflation coming in the way. It does appear that inflation is moving downwards which should help to restore demand that had ebbed in the last 2-3 years. Some of favourite gifting ideas at the household level are dry fruits, chocolates, cookies, branded savouries etc.

Sixth, the festival season is also the time when households enter into deals with real estate companies to buy a home. Hence it is normally a book time for the real estate business which sees an uptick in bookings for new dwellings. The same holds for the automobile industry where there is an increase in bookings of two wheelers and cars as festivals are auspicious occasions when such assets are purchased.

The next few months will be critical from the point of view of several industries which have the household as their target customers. The real estate and auto industries would be the larger segments where the value of business would be of high value. The others will be contingent on how widespread is this upsurge in demand. Given that there was a lull in spending in the last couple of years partly due to higher inflation, normalisation of conditions should help in reviving demand this year. With the monsoon being normal, the demand is likely to be broader based across regions. The price points should be more acceptable as companies get into the “festival discount” mode which is visible already for housing as well as automobiles. It does appear that all the prerequisites for a consumer boom are in place this time which will improve capacity utilisation in these industries which in turn should set in motion the virtuous cycle of investment.

Has the cash reserve ratio outlived its utility, and could it be dispensed with over time? Economic Times 18th September 2024

 In India, cash reserve ratio (CRR) is at 4.5%, and banks keep aside around ₹10 lakh cr in cash. CRR doesn't earn any interest, and is an accepted cost while calculating marginal cost of funds-based lending rate (MCLR). Some believe that CRR may have outlived its utility and could be dispensed with over time. From a central banker's perspective, it needs to be there as it is an important tool for monetary policy.

Theoretically, CRR is a reserve maintained in the fractional reserve system, which serves as a basis for credit creation. Reserves are necessary in a liquidity crisis as banks can dip into this any time. From monetary policy perspective, it's a valuable tool for controlling the ability of banks to lend. An increase in CRR will reduce lendable resources, while a reduction will free resources. Even on the cost issue, banks should not be complaining about idle funds not earning revenue as the system.generates almost 10% of stable levels of free-floating demand deposits on which no interest is paid.

On the other side, arguments include CRR practically never being used, as RBI takes over immediately in a crisis. So, dipping into CRR is a possibility, though not a probability. Further, when the crisis is big, the amount may be too small to provide any support, as has been the case with some cooperative banks that went under.

RBI uses the liquidity framework that involves variable rate repo (VRR), and variable rate reverse repo (VRRR) auctions, to ensure that liquidity is balanced. This is a stated policy. Therefore, tinkering with CRR isn't required. Also, given that RBI has resorted to open market operations (OMO), where government securities are bought and sold more often than changed CRR, it stands to reason that the former is more effective when balancing liquidity.

Both are permanent measures, and have similar impacts. Finally, theory always says that price adjustments are more efficient than quantitative measures, and CRR falls in the latter category regarding regulation.

It is useful to see how the global systems look at CRR. The US dispensed with CRR after Covid.

In Japan, it's 0.8%, while Euro nations have pitched for 1%. In the developing world, Brazil has an astonishing 21% and Turkey 25% CRR. However, the latter has several economic challenges and is so at this level. China goes with 7%, Russia 8.5%, while the Philippines is higher at 9.5%, almost the same as Indonesia (9%). Malaysia is down the scale by 2%, as is Sri Lanka, which has faced several economic challenges.

 

By emerging markets standards, India's 4.5% CRR looks reasonable, even as it's on the higher side when compared with developed countries. Can there be a compromise solution? If there is a sense that a certain part of the bank's net demand and time liabilities must be kept aside for some prudential purpose, then a way out is to remove CRR but increase SLR.

This special increase can be called a 'precautionary SLR', which currently takes SLR up to 22.5%. For banks, this is better than a zero interest-bearing CRR. This precautionary SLR can be kept under held-to-maturity (HTM) bucket to provide comfort against mark-to-market (MTM) valuation changes. This way, the idle funds become revenue-accruing for the system.

The CRR lever can still be used by RBI to augment or lower liquidity in the system by changing the reserve requirement. And because they are government securities, it would be easy to sell them in the market during a crisis. Also, this will provide another source of demand for government securities in auctions.

 

India’s growth in a sweet spot: Financial Express: 5th September 2024

 The Q1 GDP data ironically bodes well for the economy, even though the growth rate at 6.8% is lower than last year. The main reason for optimism is, it does appear that most of the boxes which represent the prerequisites for high stable growth of above 7% for the year have been ticked.

The seeming contradiction can be explained by the internals of the numbers. GDP is defined as the sum of gross value added (GVA) and net taxes. GVA is the actual growth in production in different sectors that are represented by eight segments. The movement from GVA to GDP is based on the net addition of taxes — the difference between commodity taxes (mainly goods and services tax) and subsidies.

The growth estimates for Q1 were always going to have a downward bias due to the base effect of higher growth last year. The 8.4% growth last year provided this base effect. When one looks at the growth in GVA, there is a lot of comfort as it was 6.8%. This means that GDP growth was lowered to 6.7% due to low growth in the “net taxes” component. This was on expected lines and most sectors witnessed growth roughly as forecast.

There were two positive surprises. The first was manufacturing, which did better than expected notwithstanding that corporate profitability has been low-key this quarter. Gross profits, it should be mentioned, is an important component of value added, with salaries and wages being the other component. The 7% growth is a good sign because as demand moves in the upper trajectory, this level of performance can be sustained. The second is the “public administration, defence, and other services” component, which grew by 9.5%.

The negative surprise was agriculture and allied activities, which grew by just 2%. A higher number could have been expected because the rabi crop was very good last year. It appears the party was spoilt by heatwaves which affected the “allied activities” that include horticulture, besides fodder, animal husbandry, etc. With the monsoon being normal, there should be a reversal in some of these trends.

There have been several encouraging signs in this data set. To begin with, growth in consumption was impressive at 12.4%, the highest since Q2 of FY22 when pent-up demand pushed up growth to a high of 17.5%. This is important because consumption has been one of the missing links to the growth story. Here, rural demand has lagged; and the argument put across often is that high inflation and lower income have stymied demand. This has changed of late, with inflation also seemingly coming under control at less than 5%. Urban demand so far has largely been confined to the premium segment, but this could be changing going by the data.

The second engine that has started to fire is investment. There have been divided views on whether the private sector has started spending on investment. Reserve Bank of India (RBI) data does show some increase in capacity utilisation by March, but this could be a seasonal factor as the rate tends to peak before dipping in June. Growth at 8.8% in gross capital formation and 9.1% in gross fixed capital formation is quite impressive. As the government spending on capex was muted due to the elections this quarter, it can be concluded that most of this growth was in the private sector. Therefore, the GDP growth number of 6.7% is more than satisfying.

What can be the reason for optimism with this growth rate? The government has projected 6.5-7% growth for the year, while the RBI is looking at 7.2%. The latter looks more likely as conditions are favourable. First, the consumption story should work out even better in the coming months. The rains have been more than favourable and sowing data shows that the kharif crop, with the exception of cotton, would be generally better than last year. This means food prices should get tempered. While it may take time to get reflected in the inflation numbers, it would still mean higher rural income.

Second, given that consumption will be increasing and that will lead to better capacity utilisation, the pace of capital formation should also improve. This in turn should lead to some improvements in investment in the consumer goods segment. So far, most of the investment has been in infrastructure-oriented companies. It may be expected to become more broad-based during the rest of the year. Add to this the government capex programme, which will accelerate as already seen in July, and this will ensure overall capital formation gets a boost.

Lastly, on the production side, with GVA on track, the net taxes will hold a clue to faster growth. In the first quarter, tax collections were buoyant. However, subsidy outflows were front-loaded to an extent. This will get corrected along the way, and hence the net tax collection growth, which was muted in Q1, will return to normal.

Therefore, there are strong indications that growth in the economy will be strengthened further. There are also emerging possibilities of the RBI lowering the repo rate, which could be in the fourth quarter provided inflation looks subdued. This can be a positive for industry, at a time when investment looks to improve. It can be said that the Indian economy is truly in a sweet spot for growth and can maintain a number of above 7% this year and move further upwards thereafter.

Would a more diverse monetary policy panel spell better RBI rate calls? Mint 2nd September 2024

 https://www.livemint.com/opinion/online-views/rbi-monetary-policy-committee-inflation-rate-hikes-economists-monetary-policy-repo-rate-indian-economy-11725178071351.html

When all eggs are in one basket: BOok review in Financial Express September 1st 2024

 Today, there is a lot of talk on India becoming part of global supply chains where countries are dependent on us for intermediate as well as finished goods. The concept of outsourcing is based on the premise that countries follow the principle of comparative advantage where they buy goods that they are not efficient in producing and sell those where they do better. This was the model which led the USA as well as other countries to make China their primary source for production.

Several top manufacturers had their production facilities in China where labour was cheap and environment favourable. This helped in bringing about high growth in China. But what if China suddenly stops producing goods? This is the starting point of the book, How the World Ran Out of Everything by Peter Goodman. Covid had closed the doors of China as there was a total lockdown. Production exported as the shipping industry came to a halt. America, which is the world’s economic superpower, ran out of ventilators, medicines, toys and even toilet paper; and the talk of scarcity exacerbated the shortages.

Goodman discusses several issues that confront the world economy today. The overdependence on China on account of cost advantage turned out to be the bane for all producers. Interestingly, he shows that the American allegation of China robbing jobs is not a phenomenon created by the nation but by domestic companies. In order to cut costs, they set up facilities in a foreign investor-friendly country and made their shareholders happy. Hence the job losses were not because of Chinese immigrants, but shift in production overseas. The American companies were responsible for hiring fewer people.

No one could ever expect that something like Covid would strike the world and when it originated from China, the repercussions reverberated globally. Goodman also discusses in detail how the logistics industry was pushed back. The world ran short of empty containers that were required for transporting goods. Even if goods were shipped to the USA there was no docking space in the ports that had hundreds of ships lined up. For the ships which docked, there were no people to unload the goods. When this was managed, trucks and drivers were missing to take them into the country. All this contributed to wide-scale scarcity of goods that were earlier produced in USA, but now were being manufactured by Americans in China and shipped to these ports.

The author gives several examples of the auto industry, which also worked on the principle of ‘just in time’, which meant that inventories could be kept to the minimum to save on costs as production could be upped when required. An order for parts to the Chinese manufacturing unit would ensure that they were shipped immediately which obviated the need to store these products. Tim Cook of Apple had termed inventories as being ‘fundamentally evil’. This worked also for the mobile phones industries, which never expected there could be large-scale shortages of microchips that were used in their production. Taiwan Semiconductor Manufacturing Company had become indispensable to the global automobile industry manufacturing 80-90% of the chips going into cars across the world. Management consultants in their wisdom also had advised on cutting of labour costs; and hiring people part time when production had to be ramped up. Toyota was a very good example of a company that felt that too many employees on the permanent payroll was not the best option.

Covid showed how all these approaches were flawed. The world ran short of semi-conductors which affected both the auto and mobile industries. With fewer people on their rolls, companies could not get trained staff to their factories. All this inhibited production and led to severe shortages all over with the logistics crisis ensuring that there were no ships to move goods. This problem became global with the developed countries being affected more as they were the ones that off-shored production facilities to China.

Hence while the anti-China fervour was always there, Covid has raised the issue of companies using others’ territories for producing goods. In fact, given the rich natural resources in Africa, several companies are considering this option. Earlier it was case of political risk where any disruption could spiral the crisis. Russia is a good example where it has become a pariah and countries which have facilities here could face problems. This also means that there is a practical issue when it comes to globalisation which also has the principle of comparative advantage operating.

Goodman’s book will make both countries and companies to think their strategies harder.

Outsourcing can raise serious issues for any country or company. In that case how does the approach to become part of global supply chains fit in? Similarly for companies an issue to be sorted out is on inventory stocking and employee force. The tryst to enhance shareholder value worked very well for several decades. But when it came to crunch time, these policies flopped badly. Clearly a reset is required when nothing can be taken for granted.

The author concludes on a sombre note because by 2023 the supply chains had gone back to normal and there seemed to be no problem as such. There were hiccups when there was a problem for freight carriers on the Red Sea, but was only temporary. Companies are looking at using more of robots and AI for their production processes. Will this make labour more redundant? There is no clear answer right now because he shows that the ATM did not quite lower the need for tellers. But one can never tell.

This book surely will keep the reader engaged and spark internal debate in the mind as it takes her on the journey starting from Covid till 2023 with several throwbacks on how companies changed strategies to tailor-make them to the demands of shareholder. The ‘just in time’ and ‘lean and mean’ strategies, if persevered with, will be tested continuously, given that geo-political tensions are rife and erupting more often than before even though on a smaller scale.