Mumbai, our own international financial centre, has certain distinct features which are hard to miss. Have you ever stopped to count them? There are ten such outstanding features which may be highlighted here though there are obviously several others that are omitted. The first sign that you are in Mumbai is the abundance of spitting which is visible everywhere. You may find one walking on the road spitting; or from a train, taxi, auto or even a chauffeur driven car. Class is no constraint when it comes to relieving your throat in the city. You only need to hear the clearing of a throat to dive to the other side.
The second sign is that everyone is invariably rushing in and out and pushing those in the vicinity. This is evidently a hangover from traveling in local trains where one is constantly being jostled around that we forget that even in parks where one is taking a walk or a mall where we are shopping, there is no possibility of missing the train. But, we still push.
The level of impatience is visible even when we are driving, whether on the inner roads or the arterial ones where the same vein flows in the people. They are busy blowing the horn even when the entire traffic comes to a standstill and there are long lines of stationary vehicles in front and behind you.
The fourth sight is that of the beggar economy which looms large on the roads where the business has no age bar. Right from 1 to 80 years, the streets have these professionals who earn up to Rs 100 a day who accost you for alms with a blend of pity and threat – depending on the gender of the beggar.
The fifth sight, which one can argue seriously about being Indian rather than Mumbaish is the concept of the Any Time Toilet (ATT) which are well spread across the metropolis from Malabar Hill to Virar where people relieve themselves anytime of the day in the most nonchalant manner. While there are laws to stop this activity, it always goes past unpunished.
The sixth distinct flavor of the city is the series of roadside stalls which dish out the most pungent eatables from the popular bhel puri and sev puri to the well greasy vada pavs and pav bhaji. Mumbaikars just drool over this stuff and even though the vendors are bathed in sweat, and use these hands to belt out the fare, we are not concerned. Have you thought of the odour emanating from the urinals at Churchgate station which mingles with that from the over crowded Chinese and burger stalls? The beaches and sea fronts of Mumbai and other popular haunts (are there any others?) have become legendary for these eateries.
The seventh specialty which follows not just from eating on the road, but as a deep ingrained habit is to litter the city. Garbage piles are just amazing as they nourish the large canine populace and the discarded herbivores which share a perfect harmony that could put human communities to shame. True to spirit we do not hesitate to throw anything in our hands from a bus ticket to polythene bags anywhere on the roads – the bins are supposed to be there but have been pinched several years back.
If you get away from the garbage, the eight omnipresent activity is digging enables experiences of camel-like rides on the roads of Mumbai and have meant flourishing business for the orthopedics. Tracking road construction is an education marvel: fresh roads of bitumen are changed to concrete and then to cement and then to interlocking bricks by the authorities. But they all come apart in the rains irrespective of the texture. Then the telecom operators, electric companies, Mahanagar Gas, and water works do their digging and leave the holes to be filled up, by which time the monsoon descends and keeps this process an ongoing activity.
Once you retreat to the solitude of your housing complex, the ninth wonder hits you when you try taking a walk. There is a perpetual stream of water combined with mud that flows from someone’s balcony with the floor changing every time. Any discussion within the housing society is like chasing a shadow.
Lastly, if you retire to your bedroom, you will be woken up by little brats who have smashed your window or your vehicle parked downstairs- there are no garages anyway as the builder has constructed more flats where there must be parking space. The kids manage their cricket anywhere and have a standard reply – sorry uncle/aunty; we will pay for the damage. The money does not come anyway and years later you have a star proudly talking of how he smashed windows when he was a kid – they will never compensate for them in their lifetime.
When you live in Mumbai, you hence learn to become resilient to disease, immune to filth, tolerant to mankind and a bit philosophical. At times we learn to still glorify the city and highlight the indomitable spirit of Mumbaikars – maximum city is what it was called, right?
Thursday, January 31, 2008
Blend Fiscal with Monetary Policy: Financial Express: 31st Jan 2008
Addressing inflation at this juncture may have been necessary but may not be sufficient
Against the background of the financial crises, stock market as well as subprime, there is a school of thought which believes that an economic slowdown is inevitable in the US. This is supported by an article in The Economist (‘Faulty powers’, January 26, 2008) which questions the potency of monetary policy in addressing growth under some circumstances, and, drawing from Alan Blinder’s findings (Centre for Economic Policy Studies, Working paper Number 100, June 2004), recommends the use of both fiscal and monetary policy to spur growth. The basic view is that when there is a crisis of credibility, which is neutral in response to interest rates and liquidity, banks just do not lend. Hence, from a stage during the boom when everybody was cheerfully lending money to everybody, today nobody wants to lend to anybody. This being the case, one needs to naturally look more closely at fiscal policy as a growth stimulus. In fact,
Mr Strauss Kahn, IMF’s new head, has done a volte-face and moved away from fiscal consolidation to “a new fiscal policy approach” based on pump priming.
Back home, the RBI Governor, Dr YV Reddy, has preferred to keep interest rates unchanged for ostensibly different reasons. He believes that Indian growth this year is doing fine at 8.5%, and the apparent slowdown in industrial growth is not real. In fact, it would come down further from the 9% plus levels as the year progresses, once the high base effect kicks in. With capital goods growing by over 20%, there is no reason to believe that investment has slowed down, which would have otherwise been a concern.
Now, back at Davos, P Chidambaram was gung-ho about tax collections, which have been growing thanks to better compliance and corporate performance (excise, customs and corporate tax collections). But he was not willing to promise tax relief in the forthcoming Budget because expenditure has also been going up, mainly on account of higher interest payments and subsidies. The reason is monetary, as the servicing burden of MSS bond issuance has grown heavier to stabilise the rupee. The FM also indicated a preference for lower interest rates, and normally one would have expected the RBI to follow such advice. Not doing so raises some fundamental questions.
The first is whether or not growth is an issue today. Going by the RBI, there is no growth problem. In fact, the system is flush with surplus liquidity, and if one wants to borrow, one can. Banks are giving in around Rs 20,000 crore daily via the reverse repo window. The government’s borrowing programme, meanwhile, is almost complete. So funds are there for the asking, albeit not any cheaper.
The second question is that if there are such surpluses, then why are they not being loaned? Banks are opting for government paper, which earn less even if they are risk-free (ignoring market risk). It is possible that banks are unwilling to lend—especially to the mortgage-dominated retail segment. But this is not really evident. Further, Companies are raising funds in the capital market and may not be interested in taking on bank debt. There may, thus, be a demand issue.
Any which way, the third question is why is it that banks are not lowering their interest rates, considering that based on the law of demand and supply, the price of capital should come down when supply exceeds demand? Banks always wait for signals from the RBI. If the RBI does not lower rates, they are unlikely to do so. But why should this be the case if interest rates are determined by banks on their own accord? If one looks at the banking structure, today the credit-deposit ratio is around 70%, and interest rates here are set by banks themselves. The RBI’s repo/reverse repo rates affect the banks only to a small extent. Instead, they have a heavy influence on the bond market, which affects the rest of the deposits, the 30%. This is how deposit and lending rates get aligned, even though 30% of funds should not be driving the rest, the 70%.
The last question is whether fiscal policy needs to be more proactive. This is debatable because in the last four years, the government has gone in for consolidation and not used the Budget as a means to stimulate growth. The time has probably come for fiscal policy to be used along with monetary policy to tackle the twin issues of growth and inflation. Inflation is latent today, given the policy of administered prices in key sectors, and hence monetary policy needs to be restrictive to eschew potential inflation. Until such impulses get absorbed by the system, fiscal measures should work alongside to help growth.
Rudimentary theory says that we need two instruments to tackle two problems. When it comes to inflation or growth, RBI has... to toss a coin and choose one of them—it’s inflation today. The Budget ought to address the other this February end.
Against the background of the financial crises, stock market as well as subprime, there is a school of thought which believes that an economic slowdown is inevitable in the US. This is supported by an article in The Economist (‘Faulty powers’, January 26, 2008) which questions the potency of monetary policy in addressing growth under some circumstances, and, drawing from Alan Blinder’s findings (Centre for Economic Policy Studies, Working paper Number 100, June 2004), recommends the use of both fiscal and monetary policy to spur growth. The basic view is that when there is a crisis of credibility, which is neutral in response to interest rates and liquidity, banks just do not lend. Hence, from a stage during the boom when everybody was cheerfully lending money to everybody, today nobody wants to lend to anybody. This being the case, one needs to naturally look more closely at fiscal policy as a growth stimulus. In fact,
Mr Strauss Kahn, IMF’s new head, has done a volte-face and moved away from fiscal consolidation to “a new fiscal policy approach” based on pump priming.
Back home, the RBI Governor, Dr YV Reddy, has preferred to keep interest rates unchanged for ostensibly different reasons. He believes that Indian growth this year is doing fine at 8.5%, and the apparent slowdown in industrial growth is not real. In fact, it would come down further from the 9% plus levels as the year progresses, once the high base effect kicks in. With capital goods growing by over 20%, there is no reason to believe that investment has slowed down, which would have otherwise been a concern.
Now, back at Davos, P Chidambaram was gung-ho about tax collections, which have been growing thanks to better compliance and corporate performance (excise, customs and corporate tax collections). But he was not willing to promise tax relief in the forthcoming Budget because expenditure has also been going up, mainly on account of higher interest payments and subsidies. The reason is monetary, as the servicing burden of MSS bond issuance has grown heavier to stabilise the rupee. The FM also indicated a preference for lower interest rates, and normally one would have expected the RBI to follow such advice. Not doing so raises some fundamental questions.
The first is whether or not growth is an issue today. Going by the RBI, there is no growth problem. In fact, the system is flush with surplus liquidity, and if one wants to borrow, one can. Banks are giving in around Rs 20,000 crore daily via the reverse repo window. The government’s borrowing programme, meanwhile, is almost complete. So funds are there for the asking, albeit not any cheaper.
The second question is that if there are such surpluses, then why are they not being loaned? Banks are opting for government paper, which earn less even if they are risk-free (ignoring market risk). It is possible that banks are unwilling to lend—especially to the mortgage-dominated retail segment. But this is not really evident. Further, Companies are raising funds in the capital market and may not be interested in taking on bank debt. There may, thus, be a demand issue.
Any which way, the third question is why is it that banks are not lowering their interest rates, considering that based on the law of demand and supply, the price of capital should come down when supply exceeds demand? Banks always wait for signals from the RBI. If the RBI does not lower rates, they are unlikely to do so. But why should this be the case if interest rates are determined by banks on their own accord? If one looks at the banking structure, today the credit-deposit ratio is around 70%, and interest rates here are set by banks themselves. The RBI’s repo/reverse repo rates affect the banks only to a small extent. Instead, they have a heavy influence on the bond market, which affects the rest of the deposits, the 30%. This is how deposit and lending rates get aligned, even though 30% of funds should not be driving the rest, the 70%.
The last question is whether fiscal policy needs to be more proactive. This is debatable because in the last four years, the government has gone in for consolidation and not used the Budget as a means to stimulate growth. The time has probably come for fiscal policy to be used along with monetary policy to tackle the twin issues of growth and inflation. Inflation is latent today, given the policy of administered prices in key sectors, and hence monetary policy needs to be restrictive to eschew potential inflation. Until such impulses get absorbed by the system, fiscal measures should work alongside to help growth.
Rudimentary theory says that we need two instruments to tackle two problems. When it comes to inflation or growth, RBI has... to toss a coin and choose one of them—it’s inflation today. The Budget ought to address the other this February end.
Tuesday, January 15, 2008
Keep watch on credit risk of new private banks: Economic Times, 16th January 2008
The lesson imparted by the subprime crisis is that there is a need to re-focus on ‘credit risk’ along with ‘market risk’ and ‘operational risk’. These risks have become progressively more important as we have traversed the road to Basle II. The story is similar to what has happened in almost all financial crises in the past two decades or so. There is inadequate assessment of risk as financial institutions lend large sums to a certain sector. They borrow funds at high costs and disburse them to the growth sectors and compromise on credit quality assuming that the run will continue. The exotic world of derivatives may provide an escape route, but someone will be left holding the baby when things fail. Are there any such signs in India today? The new private banks (NPBs) have a story to tell as their performance has been remarkable in the past seven years. They are aggressive in their operations be it in raising deposits or lending for housing, credit cards, SME, agri etc. compared to the public sector banks (PSBs). Their share in total advances has increased from 6% to 16% between 2001 and 2007, while the share of PSBs has come down from 80% to 73%. Their growing market share has been applauded by all and their models have become benchmarks. However, their level of aggression could raise some eyebrows as their business models are open to question as the risk carried on their books could tend to be non-conventional. They have been more aggressive in the past five years compared with the public sector banks (PSBs) in terms of innovation, and probably efficiency. There is, however, a prior reason to believe that the credit risk being carried may be on the higher side based on certain indicators when juxtaposed with those of the public sector banks. Firstly, advances of NPBs rose by 39.9% as against 29.1% for PSBs in FY07, and correspondingly their gross NPAs rose by 55.2% as against a fall of -5.8% for PSBs. The elasticity of NPAs to growth in advances is 1.38 as against -0.19 for PSBs. Within different sectors their NPAs to priority sector rose by 125% (2.6% for PSBs) and that to non-priority sector by 38.6% (-18.8%). These banks have been targeting the agri and SME sectors quite aggressively and have not fared too well on the quality issue. Secondly, the quality of their respective portfolios is disparate in terms of risk that is being carried. Sub-standard assets of NPBs rose by 110.1% as against 24.6% for the PSBs. The loss and doubtful debts assets increased by 15% as against a fall of 19.4% for the PSBs. Quite clearly, an aggressive foray into lending in the last few years to claim market share has had an impact on the overall composition and quality of their assets. Thirdly, the NPBs have also a larger exposure to the sensitive sector, which comprises commodities, real estate and capital markets. NPBs had as much as 34.5% of its total advances to this sector, with the highest being in real estate where 32.3% was parked. This ratio was lower at 16.5% for PSBs. Growth in these segments is worrisome as their very nature should put one on guard.
Fourthly, the financial models that underlie the build-up of these assets deserve comment. The cost of deposits for NPBs rose from 3.6% to 4.7% in FY07, while that for PSBs rose only by 20 bps. Evidently, in order to claim a larger share of the deposits pie, they have increased the rates on deposits. Also, the NPBs have stacked short term deposits of less than one year (60% of total deposits) as against PSBs with 29%. This subjects them to the risk of re-pricing which could be at higher interest rates as was the case last year. PSBs on the other hand have around 29% of their deposits locked in tenures of over three years as against only 4% for NPBs, which provides stability to the P&L account. Lastly, the rate of return on advances also increased by 100 bps from 7.3% to 8.3% between FY06 and FY07. This would not have been a cause for concern, but for the fact that this lending has been to relatively high risk sectors. This is the classic case of possible relaxation of credit risk standards which comes at a higher cost especially on the retail side. Real estate loans qualify for this phenomenon where individuals in the sub-prime saga got loans easily without due diligence. Higher interest rates here could be a buffer, but cannot by itself prevent the build-up of an infected portfolio. With aggressive growth strategies being associated with greater risk, there is an ideological issue that needs to be sorted out. Should banks over stretch prudential credit norms for the sake of business, considering that they are dealing with public money? On the other hand, every business entails risk, and it’s true even for the banking sector. But the risk cannot always be evaluated accurately. Where does one draw the line?
Fourthly, the financial models that underlie the build-up of these assets deserve comment. The cost of deposits for NPBs rose from 3.6% to 4.7% in FY07, while that for PSBs rose only by 20 bps. Evidently, in order to claim a larger share of the deposits pie, they have increased the rates on deposits. Also, the NPBs have stacked short term deposits of less than one year (60% of total deposits) as against PSBs with 29%. This subjects them to the risk of re-pricing which could be at higher interest rates as was the case last year. PSBs on the other hand have around 29% of their deposits locked in tenures of over three years as against only 4% for NPBs, which provides stability to the P&L account. Lastly, the rate of return on advances also increased by 100 bps from 7.3% to 8.3% between FY06 and FY07. This would not have been a cause for concern, but for the fact that this lending has been to relatively high risk sectors. This is the classic case of possible relaxation of credit risk standards which comes at a higher cost especially on the retail side. Real estate loans qualify for this phenomenon where individuals in the sub-prime saga got loans easily without due diligence. Higher interest rates here could be a buffer, but cannot by itself prevent the build-up of an infected portfolio. With aggressive growth strategies being associated with greater risk, there is an ideological issue that needs to be sorted out. Should banks over stretch prudential credit norms for the sake of business, considering that they are dealing with public money? On the other hand, every business entails risk, and it’s true even for the banking sector. But the risk cannot always be evaluated accurately. Where does one draw the line?
Have the Futures Markets Delivered? Business Line, 15th Jan 2008
Four years into the operation of commodity markets in India, a pertinent question to ask, is whether or not they have delivered adequately. More so, because while there was considerable fanfare with which these markets were resurrected after much debate, there is a modicum of scepticism underlying their operations today. Some critics have even questioned their existence. The issue can be addressed by juxtaposing it with the objectives of reintroducing commodity futures in 2003. The market was to lead to efficient price discovery, involve more hedgers and bring home the benefits to farmers. How far have the markets redeemed themselves?Price influence
The year started off well for the market with business volumes increasing at a rapid rate. Subsequently, there was a ban on trading in wheat, rice, tur and urad ostensibly on account of their contribution to inflation. Interest in trading in agri products naturally ebbed as players were apprehensive of trading in this segment. Consequently, trading in agri commodities came down and the share of these products in total volumes traded fell to less than 20 per cent.
Today, interest is generally in metals and energy, which are safer avenues from the trading perspective as the perceived possible influence on prices is negligible, as price discovery is a global phenomenon. Hence, they make good trading and investment options.
Agri futures
Subsequent to the ban, the prices of wheat, rice and tur rose quite sharply in the market as supplies were lower. In fact, rice saw a sharp increase in price though it was not traded on the exchanges. While urad prices came down, this was indicated by the futures prices at the time of the ban. It is now quite accepted that futures trading was not responsible for inflation; and the market is awaiting the final word from the Abhijit Sen Committee.
Let us objectively evaluate how the markets have performed. First, price discovery has been quite efficient, especially for the agri products. Price signals that have been sent in case of wheat, pulses, spices and oilseeds have been fairly accurate. In the case of wheat, in both 2006 and 2007, accurate signals were sent, which were actually used by the government to raise the minimum support price (MSP) for the purpose of procurement.
Second, there is evidence that price volatility has come down in all the liquid contracts, which is but natural when large volumes are traded, where the noise levels are reduced.
Prices have also tended to converge in case of most contracts — which is the ultimate test of price efficiency in this market. Third, there are companies that are hedging on the exchanges as depicted by the ratio of hedger’s positions to open interest, especially in some agri products. Awareness
Fourth, the picture from the farmer’s side is mixed. Direct participation is negligible because of the barriers in terms of direct access, processes and contract size etc. But, the business of futures trading involves extensive price dissemination campaigns, which are out in full flow. Newspapers, TV channels, radio, usage of electronic ticker boards etc, have been used by the exchanges to popularise these prices among participants.
The regulator — the Forwards Market Commission (FMC) — has initiated extensive awareness campaigns with the exchanges to have programmes for the farmers where the intricacies of trading are discussed.
There are studies which show that farmers are using the prices to enhance their bargaining power. Last, by enabling deliveries, which could go beyond 50,000 tonnes every month, there is a parallel system in place for physical handling of the goods, which is significant as there are certain standards being set for the quality, handling and grading processes, which is currently underdeveloped and would take another five years to become all-pervasive. Therefore, the markets have satisfactorily redeemed the charter that was laid before them four years ago.
It must, however, be reiterated that futures trading is not a panacea for the ills of agriculture. Futures markets provide a platform for farmers to sell and/or hedge their price risk by enabling physical delivery. They are good indicators of expected cropping supplies and are, hence, useful for policy formulation.
Further, the price discovery process must be evaluated form the point of view of whether or not they reflect the fundamentals and not so much from the point of view of whether the farmers are getting a higher price. Caution required
This must not be missed because when we take sides we may arrive at erroneous conclusions when the result is not to our liking.
To draw an analogy from the traffic on the street, the futures markets provide signals of the steep bends ahead, but are not responsible for them. It is left to the motorist to take care. This is the spirit with which these markets must be evaluated.
The year started off well for the market with business volumes increasing at a rapid rate. Subsequently, there was a ban on trading in wheat, rice, tur and urad ostensibly on account of their contribution to inflation. Interest in trading in agri products naturally ebbed as players were apprehensive of trading in this segment. Consequently, trading in agri commodities came down and the share of these products in total volumes traded fell to less than 20 per cent.
Today, interest is generally in metals and energy, which are safer avenues from the trading perspective as the perceived possible influence on prices is negligible, as price discovery is a global phenomenon. Hence, they make good trading and investment options.
Agri futures
Subsequent to the ban, the prices of wheat, rice and tur rose quite sharply in the market as supplies were lower. In fact, rice saw a sharp increase in price though it was not traded on the exchanges. While urad prices came down, this was indicated by the futures prices at the time of the ban. It is now quite accepted that futures trading was not responsible for inflation; and the market is awaiting the final word from the Abhijit Sen Committee.
Let us objectively evaluate how the markets have performed. First, price discovery has been quite efficient, especially for the agri products. Price signals that have been sent in case of wheat, pulses, spices and oilseeds have been fairly accurate. In the case of wheat, in both 2006 and 2007, accurate signals were sent, which were actually used by the government to raise the minimum support price (MSP) for the purpose of procurement.
Second, there is evidence that price volatility has come down in all the liquid contracts, which is but natural when large volumes are traded, where the noise levels are reduced.
Prices have also tended to converge in case of most contracts — which is the ultimate test of price efficiency in this market. Third, there are companies that are hedging on the exchanges as depicted by the ratio of hedger’s positions to open interest, especially in some agri products. Awareness
Fourth, the picture from the farmer’s side is mixed. Direct participation is negligible because of the barriers in terms of direct access, processes and contract size etc. But, the business of futures trading involves extensive price dissemination campaigns, which are out in full flow. Newspapers, TV channels, radio, usage of electronic ticker boards etc, have been used by the exchanges to popularise these prices among participants.
The regulator — the Forwards Market Commission (FMC) — has initiated extensive awareness campaigns with the exchanges to have programmes for the farmers where the intricacies of trading are discussed.
There are studies which show that farmers are using the prices to enhance their bargaining power. Last, by enabling deliveries, which could go beyond 50,000 tonnes every month, there is a parallel system in place for physical handling of the goods, which is significant as there are certain standards being set for the quality, handling and grading processes, which is currently underdeveloped and would take another five years to become all-pervasive. Therefore, the markets have satisfactorily redeemed the charter that was laid before them four years ago.
It must, however, be reiterated that futures trading is not a panacea for the ills of agriculture. Futures markets provide a platform for farmers to sell and/or hedge their price risk by enabling physical delivery. They are good indicators of expected cropping supplies and are, hence, useful for policy formulation.
Further, the price discovery process must be evaluated form the point of view of whether or not they reflect the fundamentals and not so much from the point of view of whether the farmers are getting a higher price. Caution required
This must not be missed because when we take sides we may arrive at erroneous conclusions when the result is not to our liking.
To draw an analogy from the traffic on the street, the futures markets provide signals of the steep bends ahead, but are not responsible for them. It is left to the motorist to take care. This is the spirit with which these markets must be evaluated.
Monday, January 14, 2008
The Nano Effect: DNA, 14th January 2008
Nano is significant for reasons that go beyond the obvious. More importantly, its success will be a reflection of the social transformation that can take place which will add weight to the process of economic reforms in the country.
The Rs1 lakh car may end up costing more, but will appeal to the common man. The definition of the common man is always tricky. People are judged by their possessions and way of living.
Class segmentation can be based on what one owns, which includes an automobile and dwelling as permanent possessions, and credit cards and shopping preferences, which characterise their way of life.
Consumer durable goods are now commonplace as even a poor slum-dweller in Dharavi has a TV set even though he or she may not have access to clean drinking water. Shopping malls have changed consuming patterns across urban areas. Nano would be the first inroad actually made into the automobile segment, which is significant.
Our consuming society is segmented into several classes: the super affluent (industrialists, film stars and CEOs), the affluent (private sector employees), the upper middle class (public sector employees and senior government officials), the middle class strivers (lower level government employees), the survivors (self employed, maids) and the poor (who cares?).
The first and the last get left out from all such analyses as they are either too rich and can get anything or too poor and cannot even dare to dream.
Which class will look at the Nano? The affluent classes may fancy it for their kids but the charm will disappear soon and the product cannot survive on the basis of ‘toy value’.
The upper middle class may also not be too interested except as a second vehicle. The car has been targeted as one for the common man, and this class would like to think it is above that. So we are left with the ‘strivers’ and ‘survivors’ who would actually keep this chain alive.
Out of the 220 million families in the country, 90 million are poor and 30 million affluent and upper middle class. This leaves 100 million in the other two categories, of which around 25 per cent would be the ‘strivers’, or 25 million families.
This is the initial target customer and would also hold out hope for the ‘survivors’. Presently the ‘survivors’ would at best own a two-wheeler which is probably financed by a bank. Nano offers them hope.
Nano is symbolic of the CK Prahalad theory of there being fortune at the bottom of the pyramid. The Tatas are just leveraging this concept and will probably take advantage of being the first mover.
To date, motor cars have been targeted at the affluent class, which looks for upgrades. The upper middle class would move over from a second-hand car to the middle-end cars.
This one clearly appeals to one who would upgrade from a two-wheeler to a four-wheeler or would skip the two-wheeler step and graduate directly to a car.
Reforms have generally been looked at as having benefited only the upper middle classes onwards, which is worrisome. Producers have geared consumer goods towards the other classes, but so far, there has been little done on the fixed assets side. The Tata foray helps to bridge this gap.
The less affluent will actually see themselves coming a step closer to the rich not just in terms of wearing Levis and Reeboks, but also by owning an automobile.
This will strengthen the safety valve which is provided by the middle class in an evolving society such as ours, which so far has been one of aspiration. Now it will be a part of the ‘economic Sanskritisation’ process that is taking place.
Is there a downside to this image? Banks and other finance companies will see big business opportunities here and will entice borrowers with funds to purchase the car.
There will be a tendency to overspend on their part and build up debt, which may not be a prudent development for this class. Credit cards offered on the roadside have already created a large number of debtors who have limited servicing ability.
This one will only add to it. They would tend to save less, which again may not be good for a class which by definition has to make greater provisions for the future given the commitments towards education, health and access to social amenities. Therefore, for this class, there is a downside of enticement with a high financial cost when priorities change.
But in capitalist business where individuals are free to choose, the fault does not lie with the producer but with the consumer. The question is where does one draw the line?
The Rs1 lakh car may end up costing more, but will appeal to the common man. The definition of the common man is always tricky. People are judged by their possessions and way of living.
Class segmentation can be based on what one owns, which includes an automobile and dwelling as permanent possessions, and credit cards and shopping preferences, which characterise their way of life.
Consumer durable goods are now commonplace as even a poor slum-dweller in Dharavi has a TV set even though he or she may not have access to clean drinking water. Shopping malls have changed consuming patterns across urban areas. Nano would be the first inroad actually made into the automobile segment, which is significant.
Our consuming society is segmented into several classes: the super affluent (industrialists, film stars and CEOs), the affluent (private sector employees), the upper middle class (public sector employees and senior government officials), the middle class strivers (lower level government employees), the survivors (self employed, maids) and the poor (who cares?).
The first and the last get left out from all such analyses as they are either too rich and can get anything or too poor and cannot even dare to dream.
Which class will look at the Nano? The affluent classes may fancy it for their kids but the charm will disappear soon and the product cannot survive on the basis of ‘toy value’.
The upper middle class may also not be too interested except as a second vehicle. The car has been targeted as one for the common man, and this class would like to think it is above that. So we are left with the ‘strivers’ and ‘survivors’ who would actually keep this chain alive.
Out of the 220 million families in the country, 90 million are poor and 30 million affluent and upper middle class. This leaves 100 million in the other two categories, of which around 25 per cent would be the ‘strivers’, or 25 million families.
This is the initial target customer and would also hold out hope for the ‘survivors’. Presently the ‘survivors’ would at best own a two-wheeler which is probably financed by a bank. Nano offers them hope.
Nano is symbolic of the CK Prahalad theory of there being fortune at the bottom of the pyramid. The Tatas are just leveraging this concept and will probably take advantage of being the first mover.
To date, motor cars have been targeted at the affluent class, which looks for upgrades. The upper middle class would move over from a second-hand car to the middle-end cars.
This one clearly appeals to one who would upgrade from a two-wheeler to a four-wheeler or would skip the two-wheeler step and graduate directly to a car.
Reforms have generally been looked at as having benefited only the upper middle classes onwards, which is worrisome. Producers have geared consumer goods towards the other classes, but so far, there has been little done on the fixed assets side. The Tata foray helps to bridge this gap.
The less affluent will actually see themselves coming a step closer to the rich not just in terms of wearing Levis and Reeboks, but also by owning an automobile.
This will strengthen the safety valve which is provided by the middle class in an evolving society such as ours, which so far has been one of aspiration. Now it will be a part of the ‘economic Sanskritisation’ process that is taking place.
Is there a downside to this image? Banks and other finance companies will see big business opportunities here and will entice borrowers with funds to purchase the car.
There will be a tendency to overspend on their part and build up debt, which may not be a prudent development for this class. Credit cards offered on the roadside have already created a large number of debtors who have limited servicing ability.
This one will only add to it. They would tend to save less, which again may not be good for a class which by definition has to make greater provisions for the future given the commitments towards education, health and access to social amenities. Therefore, for this class, there is a downside of enticement with a high financial cost when priorities change.
But in capitalist business where individuals are free to choose, the fault does not lie with the producer but with the consumer. The question is where does one draw the line?
Wednesday, January 9, 2008
Betwixt Ideology and Theory: Financial Express: 9th January 2008
The finance minister’s statement asking banks to lower their interest rates is significant for two reasons: one, ideological, and the other, theoretical. The finance ministry is the overseer of the RBI, which is the monetary authority, and to that extent expects obeisance from the latter. The ministry is also responsible for the Budget, by which the government plans its revenue and expenditure. The ministry, hence, is affected by movements in interest rates as they affect its own arithmetic. It is in the ministry’s interest that the RBI has appropriate policies in place that are justified as being necessary to support investment and growth.
The ideological issue to be addressed is the distinct conflict of interest between fiscal and monetary policies, where it appears that fiscal policy takes precedence by virtue of the regulatory hierarchy. The FM’s statement, therefore, is important. It comes four weeks before the credit policy is to be announced, while the Budget would be in another eight weeks. In the past, too, FMs have dropped similar hints after announcing the Budget, saying, for example, that the RBI would have to follow up with appropriate measures in the credit policy statement that comes two months after the Budget.
The FM’s exhortation to banks to lower interest rates can thus be seen as a mild directive to the RBI to see this through. While the FM’s statement could be perceived as being appropriate from the point of view of spurring investment and growth, it can also be interpreted as a ministerial imposition on the RBI. After all, banks lower interest rates when policy rates are changed by the RBI, and announcements on this are the central bank’s prerogative; while it is true that interest rates are determined by banks on their own ever since they were deregulated in the mid-1990s, the RBI’s policy rate changes have a strong bearing on any such action. An increase in CRR or the reverse repo rate, for example, tends to increase interest rate levels in the country. On the other hand, the FM has to also take a position on interest rates, and hence runs an interpretation risk whenever such statements are issued.
An independent and autonomous central bank could be the solution here. But this is a difficult decision for the government to take, considering that across the world there is this conflict which has not been resolved, with governments invariably preferring to have their say in monetary policy formulation.
The practical aspect of this view has more economics to it in evaluating whether or not a cut in interest rates is really desirable in the current situation. The theoretical function of interest rates is to address the twin objectives of growth and stability. Lower interest rates are associated with growth, while higher interest rates are directly connected with stability. The Indian Economy’s current growth is poised at a robust level of around 9%, notwithstanding the level of interest rates, which is steady. Lower interest rates would encourage spending (that is, both consumption and investment). However, banks have become a bit more cautious with their lending operations following the US subprime crisis, and have taken a conservative approach to retail loans. Retail loans, especially mortgages and credit cards, were two leading sectors in the credit profile of banks that were responsible for the explosion in credit growth last year. While the cost of funds does matter, banks have also been more vigilant. Therefore, they have preferred to channel their funds to government securities.
In the first nine months of the year, while deposits have grown by 12.8% (11.2% last year), credit has increased by 10% (15.2%) and investments by 18.9% (4.7%). This has been aided by the issuance of MSS bonds necessitated by excess capital inflows. There is, therefore, reason to believe that growth is buoyant and that the cost of funds has not been a limiting factor. Also, in bull market phases, as observed by analysts, interest rates tend not to constrain investment activity.
Now, let us turn to inflation. Inflation is low at below 4%, which is fair enough. However, the ministry of petroleum is talking of raising the prices of petroleum products. Prices of manufactured goods are looking up, as are those of primary products. Overall inflation could soon be higher than the placid 3.5% rate we are witnessing presently. And for monetary policy to be effective, as it operates with a time lag, the RBI must look at expected inflation rather than current inflation. Any reduction in interest rates would have to be deferred till there is clarity on future prices. Also, with elections coming up in 2009, the next financial year will be critical from the point of view of inflation.
To conclude, no lowering of interest rates is required right now, as the present levels are consistent with the objectives of high growth of around 9% and stable inflation of below 4%. But the answer to the question of whether interest rates be lowered later this month by the RBI, is a probable yes. Seldom do FM’s requests go unanswered.
The ideological issue to be addressed is the distinct conflict of interest between fiscal and monetary policies, where it appears that fiscal policy takes precedence by virtue of the regulatory hierarchy. The FM’s statement, therefore, is important. It comes four weeks before the credit policy is to be announced, while the Budget would be in another eight weeks. In the past, too, FMs have dropped similar hints after announcing the Budget, saying, for example, that the RBI would have to follow up with appropriate measures in the credit policy statement that comes two months after the Budget.
The FM’s exhortation to banks to lower interest rates can thus be seen as a mild directive to the RBI to see this through. While the FM’s statement could be perceived as being appropriate from the point of view of spurring investment and growth, it can also be interpreted as a ministerial imposition on the RBI. After all, banks lower interest rates when policy rates are changed by the RBI, and announcements on this are the central bank’s prerogative; while it is true that interest rates are determined by banks on their own ever since they were deregulated in the mid-1990s, the RBI’s policy rate changes have a strong bearing on any such action. An increase in CRR or the reverse repo rate, for example, tends to increase interest rate levels in the country. On the other hand, the FM has to also take a position on interest rates, and hence runs an interpretation risk whenever such statements are issued.
An independent and autonomous central bank could be the solution here. But this is a difficult decision for the government to take, considering that across the world there is this conflict which has not been resolved, with governments invariably preferring to have their say in monetary policy formulation.
The practical aspect of this view has more economics to it in evaluating whether or not a cut in interest rates is really desirable in the current situation. The theoretical function of interest rates is to address the twin objectives of growth and stability. Lower interest rates are associated with growth, while higher interest rates are directly connected with stability. The Indian Economy’s current growth is poised at a robust level of around 9%, notwithstanding the level of interest rates, which is steady. Lower interest rates would encourage spending (that is, both consumption and investment). However, banks have become a bit more cautious with their lending operations following the US subprime crisis, and have taken a conservative approach to retail loans. Retail loans, especially mortgages and credit cards, were two leading sectors in the credit profile of banks that were responsible for the explosion in credit growth last year. While the cost of funds does matter, banks have also been more vigilant. Therefore, they have preferred to channel their funds to government securities.
In the first nine months of the year, while deposits have grown by 12.8% (11.2% last year), credit has increased by 10% (15.2%) and investments by 18.9% (4.7%). This has been aided by the issuance of MSS bonds necessitated by excess capital inflows. There is, therefore, reason to believe that growth is buoyant and that the cost of funds has not been a limiting factor. Also, in bull market phases, as observed by analysts, interest rates tend not to constrain investment activity.
Now, let us turn to inflation. Inflation is low at below 4%, which is fair enough. However, the ministry of petroleum is talking of raising the prices of petroleum products. Prices of manufactured goods are looking up, as are those of primary products. Overall inflation could soon be higher than the placid 3.5% rate we are witnessing presently. And for monetary policy to be effective, as it operates with a time lag, the RBI must look at expected inflation rather than current inflation. Any reduction in interest rates would have to be deferred till there is clarity on future prices. Also, with elections coming up in 2009, the next financial year will be critical from the point of view of inflation.
To conclude, no lowering of interest rates is required right now, as the present levels are consistent with the objectives of high growth of around 9% and stable inflation of below 4%. But the answer to the question of whether interest rates be lowered later this month by the RBI, is a probable yes. Seldom do FM’s requests go unanswered.
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