How Trump can affect the world economic order : Business Line 15th November 2024

 

The President-elect’s ‘America First’ policy and tariff hike threats against China could affect global trade and inflation

There has been considerable speculation on what the Trump administration, which will take over in January, would mean to the rest of the world, including India. During the election campaign, several messages were conveyed. But how seriously does one take such rhetoric? While his articulation tends to be aggressive, it is consistent and not different from what it was in his first stint. Nevertheless, some conjectures can be made on what lies in store.

The ‘Make America Great Again’ or ‘America First’ campaign is likely to be at the forefront of all policies. First, the issue of immigration has been high on the agenda of the Republican Party which has overtly stated that jobs need to be created more for the local population.

While the target appears to be the southern border, strict laws for the world are a likely corollary. This can make it challenging for US companies to hire relatively cheaper workers from outside. And, this could have an impact on India’s IT sector, for which US is a major destination. There can be some concerns here for India’s services exports, which have grown at remarkable rate in the last few years. The fine-print of the policy which sifts skilled and unskilled workers would be important. Stringent policies on hiring of immigrant labour can lead to a labour crunch internally, leading to higher wage-pull inflation.

Second, there has been a frontal attack on China for using unfair means to dump goods in the US. This would mean high tariffs on goods from China. The extent of increase would vary across goods to ensure that it would make sense for domestic buyers to choose locally produced goods. What is being spoken of is 10-20 per cent additional tariff on all imports, 60-100 per cent for those from China, and even higher for auto imports from Mexico. Given that the US is the largest export destination for non-oil products from India, we must pay attention to any action taken on imports in general. While the US reducing dependence on China for goods can be an opportunity for India, Trump’s rhetoric with respect to other countries would also be critical.

Third, the threat of higher tariffs on China has already spurred the country to roll out stimulus measures, which can have implications for global trade. China would look to other markets, and hence India has to be prepared with counter-measures to ensure that cheap goods are not dumped.

The overall growth pattern of China will be important because global commodity prices will be driven by this. As China seeks to grow faster, commodity prices would ratchet upwards. China’s stimulus measures are already leading to a reversal in the trend of low commodity prices.

Fourth, higher tariffs in the US would mean higher inflation. Higher inflation would also come in the way of how the US Fed sees the economic trade-off between growth and inflation. Trying to support growth through tariffs would end up pushing up inflation which, in turn, will come in the way of lowering interest rates. This is a conundrum the Fed faces, especially as the dot plot already indicates that there would be another 100 basis point cut in rates in 2025, which will be the first year of the new President.

Fifth, Trump has always been for lower corporate taxes and is considered to be pro-industry, and this is why there has been overwhelming support for him from the corporate sector. But lower taxes and maintenance of healthcare will mean larger deficits and borrowing costs. And this is already being reflected in terms of bond yields moving up. There will be additional pressure on the Fed when it comes to tackling inflation.

Imported inflation

The RBI has often reiterated that the decision on repo rate is based on domestic inflation considerations. But actions taken in the US have the potential to affect global inflation too, which will feed into the system through imported inflation and hence cannot be ignored, especially when core inflation is already inching upwards.

Sixth, the status of the dollar will be uncertain. Higher inflation will mean higher interest rates for longer periods, which will keep the dollar stronger. And this is already visible since the election results were out.

However, there are also arguments for a weaker dollar, to ensure there is an export advantage for the US. Either of these two situations would mean work for central banks across the world. A stronger dollar will mean that central banks have to defend their currencies. A weaker dollar would mean ensuring that countries do not lose their competitive advantage.

From the point of view of markets, Trump regime could mean more volatility. As far as FPI flows are concerned, they would tend to be less predictable. A stimulus earlier by China saw major withdrawals from emerging markets. Actions as well as intentions announced by the US would tend to drive sentiment, which in turn has the potential to have an influence on global currencies.

The world would have to be prepared for a new normal with Donald Trump taking over. His stance at the time of campaign was no different from the action taken when he was President earlier. Therefore, consistency can be expected, though the extent could get tempered given the new world economic order. But for sure, all governments and central banks have to remain vigilant when the world’s largest economy targets the second largest.

How To Gauge Consumer Spending This Time? Free Press Journal 9th November 2024

 

While there is still need to exercise caution in forming judgements on overall consumption including urban spending, the commentary on Q3 sales will throw light on the final picture

With some of the leading FMCG companies raising a red flag on demand conditions in the second half of the year, there is some concern on the growth path of the economy for FY25. This is understandable as any projection of high growth was premised on a sharp recovery in consumption. As the IMD has indicated that monsoon is above normal and well spread, it was logically assumed that the cog in the wheel, i.e. rural consumption would turn positive. This is the basis for being more sanguine about Q3 of the year as the period coincides with the post-harvest cum festival season.

The issue which has been flagged is urban consumption which does not appear to be in the take-off mould. In the last couple of years the picture was fogged to an extent by the pent-up demand phenomenon where there was an upsurge in spending. While the lower end products did not quite see the same traction it did not matter as the sales of higher priced goods were up. This was the phenomenon of premium products selling well in the market. The higher income groups have been impervious to any external effects; and post covid have been on an upward spending spree. This has manifested in buying more high-end goods. In fact, the number of BMWs, Audis and Mercedes cars on the roads has increased and reflect the wealth of this class. But lower down the pecking order, things have been different.

Quite clearly when segmenting society in terms of targeting goods and services, it is no longer a dualistic approach of rural and urban. There is also an income group which comes into the picture where there are three distinct classes. The affluent would be at the top while the middle order encompassing a large mass, which includes those employed in relatively low-income jobs get covered. At the bottom are the poor who are just on subsistence and would be surviving mainly due to the largesse of the central and state governments. Even with the rural folks, it is not just agriculture which matters as the allied activity comprises almost half of the workers as well as output and hence a classification here is relevant. And then there is the non-farm class which is primarily the MSMEs in petty manufacturing and service activity. Therefore, a more nuanced look is needed to understand why things are the way they have shaped up.

There are several factors at work which drive consumption. The first is the case of repressed consumption in the past in the last couple of years which can lead to higher spending especially at the lower- and middle-income levels. The current picture is that there has been less compromise made on expenditure on services like better living which includes travel, tourism and dining. But the same on goods has been limited. Second is inflation which has cumulatively taken a toll on real income. While incomes have been rising the real value is denuded due to inflation. This leads to less spending on discretionary goods. As food inflation has been high with the products being necessities, there has been a cutback on other goods.

Third, while employment numbers do indicate that more people are getting jobs, there has been concentration in those involving lower skills. Here typically incomes are low and can be seen in sectors such as construction sites or logistics where delivery has seen an upsurge in job creation. The spending power is limited after accounting for rentals in cities and the phenomenon of sending money back to families in the hinterland. Fourth, there has also been a case of jobs being lost in the organised sector and this is manifested in the layoffs announced publicly by several companies. This is due to downturn in business as well as shift to greater use of technology. Either way this means the threat of loss of jobs is always there. Aligned to this phenomenon is the salary increases which have been modest since covid where companies have not been giving hikes of double-digit numbers as their performance has tended to be under the weather for a longer period of time. The top echelons reap the benefits of stock options and have made substantial gains due to the stock market boom.

Last the access to finance has become a little tougher ever since the RBI came up with stricter norms for unsecured loans which has pushed up the cost. Therefore, leverage based consumption has ebbed which is again a factor working at the margin.

Now there is less clarity on how these factors will work out in the next couple of months. While data for October is not yet available there is a view that the spending from the urban side could be low key this year. One reason for the picture to be blurred is that September was a month that did not see much traction in sales for automobiles as well as consumer goods due to the custom of not purchasing such products during this phase which is considered inauspicious by some sections of society. This year all the festivals have come earlier which has come in the way of sales. Hence there is some hope that there would be a revival in sales which again could be more from inventories built-up rather than fresh production.

Hence the picture is quite blurred today though the major comfort which comes from a critical proxy variable i.e. GST collections is reassuring. The fact that collections in the first 7 months of the year are higher than that of last year is reason to believe that conditions are stable. The fact that a large part of consumption has shifted to the online mode means that what is observed at the brick-and-mortar outlet and shopping malls do not give a reliable wholesome indication of the picture. The higher discounts offered by the major portals has already weaned consumption away from the physical outlets.

Therefore, while there is still need to exercise caution in forming judgements on overall consumption including urban spending, the commentary on Q3 sales will throw light on the final picture. All underlying conditions of good monsoon, better kharif crop and declining inflation (which is rate of change of prices and not absolute change in prices) seem to be in place. However, higher absolute prices for food products and low pace of growth in employment in the organised sector are still areas where the picture is not too clear.

Playing Gate-keeper: There are two sides to every billionaire’s story, and viewing only one can be misleading: Financial Express November 3, 2024

 Before reading this book, a question we need to ask is whether or not the judgment of a corporate leader should stop at professional achievements. Does personal life matter or the associations that a person may have? If the person has achieved distinction by probably lobbying to get certain laws passed, is there anything amiss here? And last, if the person at some stage of career decides to give a large part of wealth for general welfare, even though there could be some business round-tripping, should it taint the image?

To digest the book written by Anupreeta Das, titled Billionaire, Nerd, Saviour, King, one needs to answer these questions. While there are several tech entrepreneurs who would qualify under this heading, this book is all about Bill Gates. The author has a sub-title which goes as ‘the hidden truth about Bill Gates and his power to shape our world’. This indicates that the author is going to be very critical of Bill Gates, and this is actually the train of thought that pervades the 320-odd pages. In the book, Gates comes across as a person who is a slave-driver employer and very demanding, even getting abusive if things do not go his way. Hence employees have to give their best, keeping aside things like a work-life balance. The book says Gates’ philanthropic work in terms of money given has been questioned based on motivations and the fact that the foundation funds may be finite can raise some questions on intent.

The first page of the introduction in the book talks of his association with Jeffrey Epstein, who was a convicted sex offender and a pariah who died in jail. The reader would evidently start reading the book with a bias that could turn to prejudice along the way when viewing Bill Gates. His achievements at Microsoft could get dimmed in this process.

Gates was a drop-out from Harvard in 1975 who co-founded Microsoft as a teenager. His early life is described as one of relentless coding through the night after promising a company ‘software that he hadn’t yet written’. The company went public 11 years later, and a year after that Gates became a billionaire at the age of 31.

His image got sullied due to legal issues that came up, as Microsoft allegedly misused monopoly power to the extent that anti-trust suits were filed. Microsoft’s refusal to allow Netscape access to Windows 95 sparked a long-running antitrust battle with the government, where it was accused of monopolising the web browser market. By 2001 Microsoft had been sued more than 200 times in the US because of monopolistic conduct highlighted by the justice department. Gates genuinely felt this was absurd as Microsoft generated myriads of jobs as well as added wealth to America, in a way reflecting his arrogance. In the hearings and question sessions, he openly stated that the government was only stifling innovation, which would hurt the country.

A major area that Das has written about is the philanthropic work of Gates through the foundation set up in 2008 at a time when he stepped out of Microsoft. The core of the critique here is that the money involved has given the foundation disproportionate power over how public issues and policy are framed. The focus on using technology fixes and absence of democratic accountability affected final outcomes. The book implies based on the sequence of events that getting into philanthropy was a way to change the image of a ruthless capitalist to a saviour of the underprivileged.

An interpretation of his actions has been that the charity has been used as a political tool, taking advantage of tax breaks, besides creating an image for the self. The author writes that in India, Gates has not been apolitical but aligned with the Modi government and some of his programmes did not quite work. Das has a gone a long way to show probably only the darker side of Gates to reveal how billionaires wield their power, manipulate their images, and use philanthropy as a tool to become heroes. In the course of these actions they help repair their damaged reputations while directing policy to derive their preferred outcomes.

The author has written this book after interviewing several people who have worked with Gates. These include both current employees of Microsoft as well as the former staff, besides those from the Gates Foundation. The author also spends several pages on his relationship with his wife as well as Warren Buffett, who was a contributor to the foundation.

Given the title of the book and the implicit bias that will strike the reader continuously in the first few pages, there is little praise for Gates’ achievements as the creator of Microsoft or the good that has come from the work of the foundation. Hence it is a very one-sided view that can only add to prejudice and not a fair evaluation of the persona. A more balanced approach would have been appropriate given that a lot of good has come from Gates. Therefore, the reader should keep this in mind when forming judgments because it does tend to present only the darker side. Some of the titles of the chapters bring out the unconcealed prejudice— ‘why we hate billionaires’ and ‘cancel bill’ or ‘rockstar to robber baron’. However, if one really dislikes billionaires anywhere in the world, then this is a book to pick up and read for reaffirmation!

Implications of RBI's securities buyback: Business Line 28th October 2024

 

The Mumbai Metro Is An Exemplar Of Improper Planning: Free Press Journal: 26th October 2024

 Today the drive to the financial capital via the western express highway best explains everything about the growth model. Motorists tend to use the service road to enter this financial hub. It is lined with little houses with asbestos roofs and unauthorised constructions at the first-floor level. They have withstood the tough monsoons and absence of care over decades. The authorities had erected curtains along the almost 2 kilometre stretch when the G20 was on to ensure that foreign dignitaries did not get to see what lay behind these covers.

The drive through the inner roads reveals that it is the lower middle class which resides and these settlements have only common toilets. The drive along the bumpy lane leads to a high class IB-school which has chauffeurs waiting outside in their BMWs, Audis and Mercedes cars. One would pass the little used metro station which has strays taking shelter before reaching a high-end housing complex named after a European city. Further down before one reaches a five-star hospital, there is open defecation as the hamlet does not have running water and there are myriads of slums. The entry to the financial capital takes a turn for the grandiose as almost every financial institution is located here. Chaotic traffic and several Michelin star restaurants dot the way as one can get lost in this unreal world. How do we plan our cities, as this could be the story anywhere in the country?

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Mumbai Aqua Line Metro Misery: Glitches, Gimmicks, Gaps

Every year all governments — centre, state and municipals spend a lot of money in building infrastructure. The word to use is spend and not invest, which is typical of how capex is structured in the country. There are ambitious targets which are met. The best engineers are given contracts to execute projects. But — as can be seen in Mumbai — there are horrendous time overruns which also leads to cost overruns and vitiates the effort in terms of time and money expended.

The Mumbai metro project was to be completed by October 26 in a period of 15 years. There are to be around 16 lines spanning over 500 kms. The opening of the only underground metro has been celebrated as being quite singular. This is the famous Colaba-Bandra-Seepz line which is to run for 33.5 km long underground metro line. The first 12.44 km has been opened. It has been developed at a cost of over Rs 32,000 crore. The present stretch is open from SEEPZ to Bandra Kurla Complex which is the financial hub of the country. A journey taken during peak time will reveal that there are not too many users of this line. The problem is with the design of the metro line.

Metro lines everywhere in the world operate on the concept of inter-connectivity wherein there are easy transfers to other lines. This enables commuters to cross over across different zones which in Mumbai would mean the western, central and New Mumbai links. While there are only a few lines operational, introspection would call for ensuring there is this connectivity. In fact, there is a pressing need to have a connection to the existing railway lines operated as the Western, Central and Harbour lines by the Indian Railways so that these lines are effective. Further, there is need to ensure that once a person emerges from the metro station, there is road transport available. The aqua line fails on all these scores. The metro lines are under the jurisdiction of MMRDA and MMRCL which are in charge of developing different lines. While it is not clear if they have been talking to each other while designing the network, there is definitely absence of coordination with the suburban railway authorities which come under Indian Railways.

The present station which leads to the financial centre is way off and requires a 15-30 minutes’ walk to the offices which are sprawled across this region. There is no option of using public transport to reach the office nor a taxi-auto service given that the roads do not allow turns given the congestion. The larger question is whether this line will serve any purpose to ease travel. In fact, ideally the aqua line should be connected to what is called the red line or Line 7 which is operational and goes down the western express highway.

In retrospect this sounds a rudimentary idea which should have occurred to those who planned this line as this is the basic concept of metro railway network. While it is true that there will always be commuters who travel once all the lines are operational in the next five years, given the size of the population, it does not reflect well on planning.

Interestingly the mono-rail service which runs between Chembur and Mahalaxmi started in 2014 but had to close down for several reasons including the usage. It has recommenced operations but capacity utilisation is still low at around 20-25%. It is not surprising that the frequency of these trains has been reduced to lower operating costs. But it defeats the purpose of having such a system in place. The losses are supposed to be over Rs 500 crore. There should have been lessons to be learnt when the metro system was drafted.

There is reason to believe that while the authorities are good in starting various projects, there is not much effort which goes into these final details. Mumbai is a city known for not having footpaths, and it does look like the authorities do not have this high on the agenda as scant attention is paid. The state of roads during the monsoon season is well known to the point that the public face potholes with stoicism which comes from accepting the fact that the megapolis will never change.

As the country embarks on the journey to become a developed economy, there is need to stress on quality of growth. Reaching the threshold of $ 14,000 per capita income will happen as the size of the cake expands. But the qualitative aspect would require a different mindset. More importantly, we need to focus on quality along with quantity to bring about real development.

‘Put’ option to aid bond market: Financial Express 24th October 2024

 An issue which has always been debated is getting more retail investors to invest in the corporate debt market. Retail interest is high in the equity segment either directly or indirectly through mutual funds. When it comes to corporate bonds, however, the interest is more through the mutual fund route. Few individuals invest directly in corporate debt. One of the factors that has kept back retail investors is the difficulty in selling the security before maturity. In case of equity or mutual funds, there is a window open at any time for a sale transaction. For a listed debt security it is theoretically possible to be sold, but there may not be buyers as few securities are liquid. The absence of liquidity is the biggest challenge where the secondary market is not active for most securities. Unlike equity which is unique to a firm, a company would have multiple bonds listed at any point of time depending on the number of public issuances. Further, most buyers are institutions who would hold the securities to maturity to match their liability tenures.

It is against this background that the Securities and Exchange Board of India’s (SEBI) recent move to allow companies to announce a voluntary “put” option should be seen. In simple terms, an issuer of debt has the choice to give the investor a choice to redeem the security before maturity at specific points of time post-issuance subject to a minimum holding of one year. There are requisite approvals to be secured from the board for this purpose. The valuation norms for this “put” option have been specified as also the minimum amount of the issue size under this umbrella. The regulation is comprehensive.

On the face of it, having a “put” option on such issuances is a very good idea. It is not mandatory as of now, but it may be considered depending on how things work out. The new regulation fills the lacuna in the system, which has kept retail investors away, and hence is progressive. This becomes analogous to a fixed deposit with a bank that can be withdrawn 

any time after it is opened subject to the minimum period and a penalty clause. The penalty clause here for a debt security would be similar as the value would not be the issue price but something different based on market conditions. Intuitively in a scenario of rising interest rates, the value could be lower. Therefore, from an investor point of view, this should read well as it mimics to a large extent the preferred bank deposit.

What could be the incentive for a company to have a “put” option? The first is that it would have access to a wider investor base. SEBI has made the concept optional to the issuer and also given the prerogative to choose the category of investors who qualify. It could be specified for only retail or all investors. Second, the “put” issuances would go with a different International Securities Identification Number (ISIN) and not clubbed with the existing mandatory limit placed by the regulator on the number of ISINs that can be issued in a year. It would thus enable the company to eschew the necessity of re-issuing a security if it has hit the limit of maximum permissible ISINs.

Third, the issuer may like to take advantage of the changing interest rate regime, and buy back their earlier security and issue a new one. This helps in treasury management. Fourth, depending on the market conditions, the issuer may price it better as it gives the option of early redemption to the investor. The coupon rate offered could be slightly lower with this option being provided. Fifth, for a lower rated company, such issuances with a “put” option would work better as investors can redeem before maturity depending on the prevalent conditions.

For all categories of investors the “put” option would work as it is not necessary to redeem but is an alternative. Individuals, in fact, already invest in some non-redeemable securities like the government floating bond. A better return for the investor on the corporate bond with the “put” option would be a better alternative, especially if the rating is high.

Therefore, SEBI’s move is very good and a big step in the direction of adding depth to the corporate bond market. It also opens the doors for retail investors to enter this segment. However, some awareness programmes should be carried out so that investors know how the bond market works. Unlike a bank deposit which has a fixed principal and interest, a bond which is redeemed in advance will have a variable value depending on the market conditions. Hence while the coupon rate is fixed, the capital redeemed before maturity will not be so. This is an issue also with investing directly in government securities, which is possible through the trading window offered by the Reserve Bank of India. The nuances need to be understood before investing.

A pertinent conundrum for the issuer is that once there is a “put” option, provisions have to be made periodically for possible redemption. This will mean having an active treasury which ensures funds are available. While this holds even for instruments that are redeemed on the due date, the exercise becomes periodic for such bonds. This could mean borrowing in the market or taking a loan from financial institutions to repay such debt in case normal business operations do not generate the requisite funds.

Developing the corporate bond market to include more retail players is a necessity. To do this, one has to mimic what happens in the conventional banking sector where deposits are offered with certain flexibility. The “put” option largely addresses a major concern for any household. Intuitively it can be seen that this idea will resonate well where the company is rated AAA or AA. The risk factor for a lower rated paper will always be overwhelming because a possible default will be a consideration. A way out would be to consider providing “bond insurance” much like deposit insurance where issuers would have to pay the insurer to provide cover of up to Rs 5 lakh as is the case with bank deposits. This could be an issue which can be further deliberated.

Equities reign atop the league table of investment returns: Mint 23rd October 2024

 https://www.livemint.com/opinion/online-views/currency-gold-silver-investment-portfolio-equities-fixed-income-instruments-inflation-crude-oil-chana-tur-dal-11729562693859.html