India Budget: Can the Budget provide a delta to the China plus one effort? Economic Times 13th January 2025

India Budget: The China plus one or C+1 thought is now almost 5 years old when it was felt that there was scope to step in when China was targeted by the USA in particular for opaque trade dealings. The pandemic changed the narrative as all countries were busy protecting their turfs; and as the world got out of the lockdown, China closed doors. Now with China back in the fray, the talk has veered towards the plus one policy again.

 Four things need to be kept in mind when talking of China plus one strategy as the paradigm is not as easy as it looks. The first is that India and other countries have worked on this concept even before the pandemic but have made limited progress. There is evidently a need for introspection.

Second, all countries are in the fray to leverage such a possible opportunity and hence there is a lot of competition in this space. Any strategy will have to take into account what other countries are doing. Third, the USA will be a different entity that the world will be encountering as the new regime is going to be tough on all countries from where imports are sourced.

Hence, while China has been singled out specifically, others will have to protect their own interests to begin with.

Last, post pandemic, several countries are looking to do more within their geographies as dependence on other nations for goods did prove to be a major barrier when the pandemic struck. All this means that a concerted effort has to be put in by not just the Government but also industry. The Government can at best support with facilitative policies.

How can Budget make India benefit

In such a situation, how does India go about the act of being a part of China plus one? To begin with there is a need to segregate exports into those which are largely final goods and those that are major inputs which come under intermediates. This will actually make the task easier when it comes to becoming a part of global supply chains. Final goods include products like readymade garments, electronic goods like mobile phones, automobiles, processed oods etc ..

Those that come as intermediates would be engineering parts, auto ancillaries, chemicals, etc. Here the options are either investing in other countries or becoming a major supplier to the world. Investing in other countries through the subsidiary or joint venture route is an option which several companies are exploring and this is borne out by the outward FDI data.

Given this distinction, what can the Government do? Such a task is actually work in progress as it needs a series of facilitative policies over a period of 2-3 years which makes goods more competitive. This is important because SMEs contribute to over 40% of exports which needs more concerted effort from the Government as they are not in a position to push forth their products on their own. In this context, the budget could possibly take up some issues both from the point of view of general expo ..

The budget has already announced an outlay of Rs 2 lakh crore in 2020 as the PLI scheme which was to not only make 15 odd industries more competitive but also boost exports. There would be need to study as to why this has had limited success in industries like renewables-related and mobile phones and not really caught on in others. While this would admittedly take time, it would be compelling to have a PLI exclusively for MSMEs which are targeting products that are part of the high export buoyan ..

Second, in the field of credit there is room for more announcements. The ECLGS scheme worked very well during covid and there would be some justification for having similar guarantee programmes for MSMEs to enable cheaper flow of credit. To this can be added an interest subvention scheme so that a direct subsidy is given for the MSME-PLI based industries. This can be a direct support just as is done for agriculture. This is important because countries like Vietnam are known to provide a large bo ..

Third, the old model of export processing zones could be revisited and revived to specifically focus on products which can be spelled out. A model of providing end-to-end solutions for these industries based on a cluster approach will be useful for the firms that are dealing with these products. This will also include, among other incentives, a single window clearance which cuts off bureaucratic delays.
Fourth, the structure of customs duties could also be reviewed and altered downwards as it can be helpful to exporters. Alternatively, further announcements in the field of replenishment can be considered.

Fourth, the structure of customs duties could also be reviewed and altered downwards as it can be helpful to exporters. Alternatively, further announcements in the field of replenishment can be considered.

Fifth, the budget can think of reviving the credit rating of MSME enterprises which were quite successful in the past on account of the subsidy element. A rating helps to lower the cost of borrowing. Considering that GST has formalised the economy to a large extent, data availability is less of a challenge for doing such ratings. In fact, having a rating also nudges units to keep improving to move up the ladder.

While this can be the push given by the Government, the initiative has to come from the companies where they need to innovate and drive forward the agenda. China plus one does provide an opportunity for sure. But the final push has to come from Indian enterprises in this competitive environment.

How ‘final’ are GDP estimates? Financial Express 13th January 2025

 Drawing firm conclusions on GDP numbers based on NSO’s first advance estimates is tricky. 

The 6.4% GDP growth estimate of the National Statistical Office (NSO) has drawn myriad responses on the state of the economy. It has now been used as a basis for conjecturing the final numbers which will come out in May. Several forecasters are talking of a scaling down of this number. At times there is a bit of an exaggeration with economists talking of a significant slowdown. A couple of points are relevant here.

The first is that after averaging 8% for the last three years, the growth number this year had to be lower and hence when the government stood by its forecast of 6.5-7% for the year and the Reserve Bank of India (RBI) lowered it to 6.6% in the December policy, it was expected. Therefore, slower growth was already a known fact and the number only was on the table for discussion. Now, the NSO has drawn up these forecasts based on extrapolations. Hence this is just an improvement over what it does at the beginning of the year when there is absolutely no data available and the forecasts are based on models which make several assumptions. This advance estimate is based on the knowledge of the first half of the year or eight months’ data for the variables involved. Therefore, it is not based on any specific collation of data from various entities. This year has been unusual as elections were held, which has held back spending by the government and had an impact on private investment too.

But such a forecast is necessary because it has to be used in drawing up the Budget. The revised fiscal ratios will be based on a revised GDP number in normal terms, which will be around `2 lakh crore lower than what was estimated at the beginning of the year. The past is important because for FY26, the GDP forecast has to be made. It can be around 10.5% again, which will then feed into the Budget model where tax ratios are juxtaposed with these GDP numbers.

The Excel files of economists have already run fresh forecasts based on the 6.4% number for both FY25 as well as FY26. The important question here is, how good are the first advance estimates of the NSO considering that they come when only nine months of the year are over and are available for an even shorter period?

To give us an idea, the table provides the forecasts for GDP at four points of time. There is a first advance estimate in January, followed by the second advance estimate in February and the provisional estimates out in May. There is also the ultimate number which comes with a lag of a year — which is what will be seen in any time series chart of India’s GDP growth rate.

The first thing that strikes the reader is that the final numbers tend to be at some variation with the earlier estimates. This means that while more data comes in and the assumptions or extrapolations are replaced with actual data, revisions would be made that can lead to different conclusions. In 2016-17 for instance, which was the year of demonetisation, growth was projected at 7.1% on three occasions but ended up at a high of 8.3%.

The final estimates have shown varying patterns compared with the first advance estimate. In four of the seven years, the final numbers were better including 2020-21 during Covid-19. On two occasions, it came in lower while it was spot on for 2022-23. Therefore, it would be hard to ascribe a direction for the final GDP growth numbers based on past data. This is because the revisions would be coming from different sectors at various points of time. Therefore, it may be difficult to assume that the final number will be better though it is tilted in this direction based on the seven observations.

In fact, even the May provisional estimate may not provide the certainty in the estimate as data is still in the process of being absorbed. In the last four years, the provisional estimates were better than the first advance estimates on three occasions.

Therefore, drawing any firm conclusions on the final GDP growth numbers based on the NSO’s first advance estimates is tricky. The economy has a very large unorganised sector on which data is not readily forthcoming, which leads to several imputations. The goods and services tax has brought about significant progress in terms of formalisation of the economy where several micro, small and medium enterprise (MSME) units have got registered. Similarly, borrowings by MSMEs from the financial system would entail providing data on their finances, which also helps in getting closer to their value addition to the GDP numbers.

It is not surprising that several forecasts have been lowered after the NSO brought out its first advance estimates. There is always a “follower” reaction whenever there is any estimate on growth by either the government, the NSO or the RBI. The rationale would be puzzling given that the economic environment prevailing till January was known and did not trigger any revision in forecasts or even overall view on the state of the economy. It would be of interest to see how the second advance estimates in February would view the economy.

Let's take cues from Piketty to raise India's tax revenue : Mint 10th January 2024

 https://www.livemint.com/opinion/online-views/india-should-take-cues-from-piketty-on-enlarging-its-tax-mop-up-budget-2025-expectations-thomas-piketty-taxes-revenue-11736330788099.html

India's lipstick effect: Forbes 2nd January 2025

 The economics of the beauty industry in India is being shaped by post-Covid consumer demand and corresponding supply, the chief economist of Bank of Baroda, and author, Corporate Quirks: The Darker Side of the Sun, writes

he Indian economy is slated to grow at around 7 percent for the next couple of years, including FY25. At the same time, there have been some pertinent concerns raised on urban demand not quite keeping up. The rural economy, however, is slated to do better due to the good monsoon and kharif crop. If one were to look at sectoral growth trends, the picture is mixed. Those related to infrastructure tended to do better than consumer-related products. High inflation, in particular food inflation, has been a dampener.

Now interestingly, playing in the background is the ‘lipstick theory’ which broadly says that when the conditions are challenging for households, they take recourse to consumption of beauty products and services that improves the ‘feel good’ factor. How is one to interpret this phenomenon in our context, where it is believed that the recovery is shaped by the letter ‘K’?

The ‘lipstick’ theory or impact has been witnessed in the country post Covid, notwithstanding the fact that headline inflation has been high. There are several economic forces that have been working in this direction. First, the return to normal post Covid has meant that individuals have gotten back to their physical place of work, which in turn has made physical grooming an integral part of office life. With most companies now insisting on workers coming back to their desks, even if for a specified number of days in a week, the desire to ‘look good’ has returned. It may be recollected that during the lockdown phase of the pandemic, where work-from-home was the norm, all business was driven by Zoom and Microsoft Teams meetings. The change now has meant a return to normal.

 Second, the pent-up demand phenomenon has been witnessed everywhere in the economy. It started with people going out and buying physical goods and then spread more significantly to services in FY24 and FY25 (ongoing). This can be seen in the PMI (purchasing managers’ index) numbers too. An enhanced demand for services has included travel and tourism, as well as hospitality. Intuitively it can be seen that once people start moving out to revel in these services, there is a tendency to also dress-up for the same, which has led to demand for beauty products. In fact, an interesting phenomenon post Covid has been a rapid rise in the supply of entertainment, which can range from movie releases to international concerts like those of Coldplay or Dua Lipa, besides the conventional classical music and Indian language concerts. This has enhanced the ‘outings’ of almost the millennials and Gen-Z groups. This has also increased demand for such products as appearance is more important than the subject when attending these concerts.

Third, the pricing of these products has also been rather different from other products. To begin with, beauty product companies did not raise prices even though input costs rose in 2022, when there was an attempt to hold back on price hikes to ensure that customers were not affected. Subsequently, there has been an attempt to increase the prices, albeit gradually, as can be seen within the category of inflation on ‘personal care and effects’. But this has been well absorbed by users. The main reason is that while consumption increases, the expense bill is still small given the quantities that are used. This does not reflect in family budgets, unlike the vegetable or cereals basket. Hence, in a way, consumers have fairly inelastic demand to these products and services. In fact, the higher price may induce the demand through the ‘snob effect’.

Fourth, the income distribution pattern of the country has changed. While there is high inequality, those at the bottom and mid segments have witnessed improvement in their incomes and several jobs have been created at the lower level in industries, like delivery services. Therefore, the consumption class has increased. Here, the famous theory of ‘demonstration effect’ enunciated by Thorstein Veblen (formalised by economist James Dusenberry) has a role to play, where individuals would like to follow what the ‘other influence groups’ do. This has led to demand, especially for services in beauty parlours, which includes services like tattooing and grooming, and also includes male customers. A couple of decades back, such products and services were largely consumed by women.

Last, with demand for such products increasing, there has been a sharp increase in their supply. This can be seen by both the mushrooming of beauty parlours even in slum areas, besides the rural and semi-urban regions, as well as the rise of the informal sector producing these beauty products. This has made these products and services more affordable, as the prices tend to be lower than those of the organised sector.

 Therefore, the lipstick effect or theory has worked quite decisively in the Indian context, with both sides of demand and supply working well, with each force-feeding into the other. This symbiotic relationship holds promise for the future too as the economy continues to grow and create more jobs where consumption of such products becomes a habit.

 

Key Global And Indian Economic Themes For 2025: Free Press Journal: 3rd January 2025

 As we step into 2025, five crucial economic themes will dominate the global landscape. These themes, with their respective sub-themes, will shape the global economy over the year, even as the world remains in a state of flux. While global growth is expected to be steady, decisions made in the West and China will have significant repercussions on other economies, particularly emerging markets like India.

1. The Policy Approach of the USA
The first theme is the policy approach of the United States, which remains a key driver in global economic affairs. Despite the decreasing level of globalization, where nations interact more as individual players than as one cohesive group, the shadow of the USA looms large over every corner of the world. This influence is not just about warnings against de-dollarization or the imposition of tariffs but also about the broader economic policies that a new US President may initiate. These policies will inevitably affect countries worldwide, particularly through trade relations, inflation, and fiscal policies.

Donald Trump, who has made his economic stance clear during his election campaigns, is expected to implement many of his proposals. His position on migrant labor, for instance, could lead to a labor shortage in the US, pushing wages higher and fueling cost-push inflation. Additionally, his plan to cut taxes for corporations, although designed to stimulate investment, will likely increase the US deficit and borrowing, resulting in higher interest rates and global inflationary pressure.

Trump’s aggressive tariff approach, especially towards China, is another factor to watch. His rhetoric suggests that no country, not even traditional allies, will escape his wrath, with a 10-20% tariff on all imports from various countries. This will exacerbate inflation and will compel the Federal Reserve to consider a different approach to interest rates. Bond yields, which are often affected by US Treasury bond movements, will likely continue to fluctuate, making global markets more volatile.

2. The China Factor
The second theme revolves around China, whose economic recovery post-Covid will be a pivotal aspect of global economic dynamics. The Chinese government, having enacted both fiscal and monetary stimulus, is eager to rejuvenate the country’s economy. However, its relationship with the USA remains fraught, particularly concerning exports. Any drastic action by the US against Chinese exports could disrupt global supply chains, creating a ripple effect that would affect economies worldwide.

China’s growing assertiveness in other regions, particularly in Africa and parts of Asia, could be the result of its efforts to offset any trade restrictions imposed by the US. While India’s economy is more reliant on domestic demand, China’s growth remains highly export-driven. This means that India, too, will need to monitor China's actions closely, as any significant policy shift in China could impact the supply of key commodities, such as rare earth metals, that are vital for various industries worldwide.

3. The Union Budget of India
The Union Budget, set to be announced in February, will be another crucial theme in 2025. Unlike the previous year, where the budget was split into an interim and regular budget, this one will cover the full fiscal year, providing a clearer roadmap for the nation’s economic policy. The budget will focus not only on numbers but also on policy directions. For instance, the government’s fiscal roadmap, including its target for a 4.5% fiscal deficit ratio for FY26, will be keenly scrutinized.

With inflation having eroded the real purchasing power of many taxpayers, there will be an expectation for some form of relief on the taxation front. This could take the shape of income tax cuts or other relief measures designed to boost disposable income. Another area of focus will be the government’s capital expenditure plan. How much will be allocated to infrastructure and development projects? This will give insights into how the government plans to drive growth and create jobs in the coming year. Additionally, the government’s borrowing program will be under the spotlight, with the markets looking for any signs of fiscal consolidation.

4. The Credit Policy and Inflation Management
The fourth theme is the Reserve Bank of India’s (RBI) credit policy for FY25. The last credit policy of the fiscal year, which is expected to be more critical than the April policy, will be shaped by several factors. A major shift will be the appointment of five new members to the Monetary Policy Committee (MPC), whose perspectives on repo rates and the growth-inflation dynamics will be key in shaping policy. The guidance given on inflation and growth in this policy will set the tone for the next financial year, particularly regarding rate cuts.

While the inflation data may not change significantly, the RBI’s interpretation of this data will guide future actions. This will be important not only for the RBI’s monetary stance but also for borrowers and lenders, who will be watching for signals about future interest rates. If the RBI’s stance indicates that inflation is under control and the economy can bear rate cuts, there could be a downward trajectory in rates, helping ease borrowing costs. For now, it appears that deposit rates have peaked, and there is unlikely to be much upward movement in the short term.

5. GDP Growth Projections
The final theme concerns GDP growth projections for FY25 and FY26. Multiple estimates will emerge from January onwards, but the most significant projections will likely come from the government’s Economic Survey, the Union Budget, and the RBI’s own growth forecast. This year’s growth numbers are particularly interesting as the final number for FY24 was a surprising 8.2%, a significant upward revision from earlier estimates.

The expectations for FY25 are more tempered, with estimates ranging between 6.5% and 7%. This number will have profound implications for the government’s fiscal planning and the markets. The final growth number, expected in May, will provide clarity on the overall health of the economy and how well it has withstood global pressures.

Additionally, the combination of the growth forecast from the Economic Survey and the Union Budget will provide insights into the government’s expectations for FY26. These numbers will be important not only for economists but also for markets, including stock, money, and foreign exchange markets. The interplay between these projections and actual outcomes will be closely monitored by investors and policymakers alike.

In conclusion, these five themes—US policy, China’s economic recovery, India’s Union Budget, the RBI’s credit policy, and GDP growth projections—will play out through 2025. While some of these issues, such as the budget, are fixed events, others, like US-China trade dynamics and inflation management, will evolve throughout the year. The key question for India will be whether its economy can sustain a higher growth trajectory in FY26, driven by these themes and other emerging global factors.

As we enter this new year, these economic themes will provide the framework for much of the global discourse, influencing policy decisions, investment strategies, and market dynamics across the world.

Reforms, an accident that Manmohan Singh leveraged for making a New India: Forbes 29th December 2024

 https://www.forbesindia.com/article/news/reforms-an-accident-that-manmohan-singh-leveraged-for-making-a-new-india/94950/1

Manmohan Singh has been associated with economic reforms which were introduced in 1991, which, in turn, changed the overall landscape of the economy. For the new generation, everything that can be seen in terms of access to foreign brands in consumer goods and dining, ATMs and subsequent enhancements in system of payments, free pricing of IPOs and so on were not something that existed before 1991. The reforms process, hence, was a turning point for the economy where scarcity gave way to surpluses and markets resembled those of the most developed western economy. Singh, as finance minister, showed the way.

Interestingly, there is a little-remembered story behind the reforms process. While Singh is credited with bringing in reforms, it was the coming together of several factors that made them possible. To begin with, the Indian economy was going through tough times with forex reserves depleting. The serving minority government had the game plan of reforms ready, but could not implement the same as Yashwant Sinha, who was the finance minister under Prime Minster Chandrashekhar, could not present a full Budget with the reforms as only an interim one could be put on the table. The IMF [International Monetary Fund] loan that was absolutely necessary would not have come without the reforms and hence, the nation had to wait for the new government under Narasimha Rao to announce the same.

Therefore, the economic reforms which Singh implemented had three factors working. First, the plan was almost already in place under Sinha. Second, the IMF had laid down reforms as a condition for giving the loan and hence there was really no choice as such for India. Third, prime minister Rao gave full support for the same which was significant because there was a sudden and drastic shift in political ideology.

This background was important because Singh was known to be a socialist economist and not one predisposed to markets in his formative years in the profession. Being a professor in economics, the trend in the 70s and 80s tilted towards the socialist model of growth. He had also headed the Planning Commission which was the hallmark of a socialist state. Under these conditions, it was remarkable that Singh shifted his ideology and stance to the changing times and aligned to the free markets dictum which literally pulled the Indian economy up.

So, what are the reforms which were pathbreaking. Three sets come to mind which we probably take for granted. Foremost was liberalisation in industry where enterprise was given a free hand, and the restrictions placed on expansion and diversification were removed. This allowed for higher investment which led to growth.

Second, foreign investment was liberalised. In the 70s, a decision was taken to put severe restrictions on operations of foreign companies in terms of even repatriation which caused brands like IBM and Coca-Cola to close shop. The new package saw the emergence of the common brands we see today like Pepsi, McDonalds, Nike, Adidas, etc.

Third, the exchange rate regime shifted from a fixed rate to a flexible one over a couple of years and logically ended with current account convertibility. Today, one can comfortably buy foreign exchange for travel or education as the limits are more than liberal. This was radically different from the quotas that existed prior to reforms.

Fourth, this focus on liberalisation logically spread to foreign trade where restrictions on imports were relaxed. From total bans to quotas to a system where only tariffs are imposed; the trade system has evolved. Today virtually all legal products can be imported freely, including fruits and vegetables. 

The second set of reforms which were remarkable—and at times have gone beyond what has been done in even the most developed nations—was in the field of financial sector reforms. Starting with banking, where another former RBI (Reserve Bank of India) Governor Narasimham spearheaded the committee, a series of changes were witnessed. Adopting to global standards on prudential norms to opening the field for new private banks, the entire landscape of banking changed. Here, the RBI played a role in bringing about continuous incremental changes so that there were no shocks to the system. At the other end, the reforms brought about changes in the capital market which were much ahead of times, starting with giving more power to SEBI (Securities and Exchange Board of India) to grow the market which was required given the liberalisation that was brought in. This involved the establishment of NSE as an online stock exchange and opening the gates for foreign institutional investors (now called foreign portfolio investors) to invest in Indian markets.

The third set, which came directly under the purview of Singh, was the budgeting process. Fiscal reforms got in the concept of fiscal deficit and in course of time did away with the monetisation of the same. Putting tabs on growth in public debt became a goal and all budgets had numbers that had to be defended as the final deficit numbers had to be reined in.

To the credit of Singh, the package was one of big-bang reforms in all areas which ensured there were no inconsistencies; and all sectors witnessed the same degree of traction. This legacy has carried on through over three decades across different governments in power. This acceptance is a vindication of the idea that was to become the new India.

(The writer is chief economist, Bank of Baroda. Views are personal)

Reforms, an accident that Manmohan Singh leveraged for making a New India

Manmohan Singh's cotrarian thinking l

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