The primary factors driving industrial growth are investment and foreign trade growth, not growth in capital issues, foreign investment or the Sensex, says Madan Sabnavis
The negative growth in industry in the month of October has caused umbrage as this is the first time in over a decade that we have actually witnessed a decline in industrial growth. Add to this the decline in exports and the picture is quite disheartening. Several reasons have been offered for the lower rates of growth in industry. Some of them are lower consumption levels, investment, government expenditure, trade and so on. On the other hand, policy measures have been invoked to redress the same.
The purpose here is to take an impassioned view of the relationships between industrial growth and certain variables for which we have a priori reason to believe that there could be a relationship between the two. Therefore, we can look at, say, the growth in consumption, which theoretically would be related with industrial growth as it provides critical demand to stimulate growth. The coefficient of correlation between the two could be looked at for the last 18 years to ascertain whether or not the two are related. This way one can see whether there is prima facie a relationship between high industrial growth and these variables. The coefficient of correlation, it must be remembered, only says whether there is directional relationship and does not talk of causation. Hence, while we all know that high industrial growth causes GDP growth, the number per se only says that in the last 18 years, the thought that high industrial growth was associated with high GDP growth was good.
Tables 1 and 2 give the correlation coefficients between industrial growth rate and other variables where the relationship was significant and not-so-significant. For a set of 18 observations (ie, after reforms set in), a significant coefficient would be above 0.44.
Table 1 shows that the top 5 variables that have a strong correlation with industrial growth are growth in imports, exports, GDP, level of FII and growth in bank credit. While imports and exports are definitely linked with industry as imports are used for industrial production while exports prospects feed back into demand stimulus for industry, the same cannot be said about FII investments. For both FII and FDI levels, it may be said that higher industrial growth affects these levels in terms of foreign flows into the country either in the secondary market or as investment. The same holds for the Sensex and capital issues, where the level would be related with industrial performance. Growth in the services sector can be linked inexorably with that in manufacturing as organised services such as finance, transport, communication and trade would need positive impulses from the industrial growth front. Further, while higher growth in credit is another pre-requisite for industrial growth, inflation is not.
Table 2 however is more revealing as it goes at times against the grain of common perception. Let us go back to the rudimentary text book where output is the sum of C(onsumption), I(nvestment), G(overnment), E(xports) and I(mports). This holds for any sector. The table shows that consumption growth does not have a strong relationship with industrial growth — which means that we need more of the other factors to help in growth. Government expenditure also does not impact industry in the same year — this means that all the fiscal stimulus packages would really take time to work out as the impact is indirect. Trade however is significant.
Therefore, the primary factors are really investment and foreign trade growth. Further, the growth in capital issues, foreign investment and the Sensex are not associated with industrial growth. This means that the rate of change in these variables is not correlated with the industrial growth rate.
Given this picture, how can we relate the present circumstances with the industrial scenario? On the supply side, we have witnessed growth in bank credit rising and imports, which means that industrial growth has taken place up to October. Sentiments are low as gauged by FII, FDI and capital market indicators. There is a shoulder shrug as far as investment is concerned as we do not have clear indications — bank credit partly reflects growth but lower capital issues could negate this performance. The government stimulus package does not appear to have the strength to change things, nor would private consumption. As exports growth is not too impressive, the demand stimulus would not be there. The imports route will work provided the demand is there, as imports only talk of the supply side. The low growth of the energy sector shows that there are roadblocks ahead.
All this points towards difficulties in the times to come and conjectures of this sector’s growth should logically be conservative in general.
Sunday, December 28, 2008
Tuesday, December 23, 2008
The best blunder award goes to: Financial Express: 23rd December 2008
The year 2008 has been a major blow in reputation for investment bankers, analysts, economists, rating agencies and regulators. The fact that no one can predict a crisis is known, but the fact that people were so consistently wrong was appalling. Consider these ten blunders.
The first institutional blunder was the approach to financial sector bailouts. Bear Stearns started it all in 2007 and the crisis resurfaced when the housing twins Freddie Mac and Fannie Mae raised an eyebrow. Subsequently, we witnessed Lehman Brothers sink even as Merrill Lynch escaped by the skin of the teeth, while AIG brought back the ‘milk of human kindness’ in Mr Paulson. The government evidently was unsure of whether or not moral hazard had to be eradicated or whether there was a larger duty to the public or the failed institution.
The second blunder, in regulation. While investment banks and hedge funds do not have a regulator, banks do. Basel-II takes pride in bringing about discipline across banks and the Fed has made it difficult to skip the rope. Then how come Citibank landed in trouble.
The third, a panic response from the Fed which has once again lowered interest rates to 0.25% at a time when the economy is on the verge of a recession. Now, Mr Greenspan has been named the culprit for the present problem by pursuing a policy of liberal interest rates. It looks like that Mr Bernanke may be starting another bubble—though we are not sure which one this will be.
The ECB and BoE would take the fourth place as being central banks without an independent mind, as they have lowered their indicative rates too, but only after the Fed took the lead. But wasn’t the Euro supposed to actually challenge the dollar and take the lead?
The RBI in India fared no better. Higher inflation prompted interest rates and the cash reserve ratio to be increased. This was at a time when inflation was caused by lower supplies and high oil prices.
Sixth, the government of India has introduced a fiscal stimulus package of Rs 30,000 crore. But no one believes that it will work. Besides, even if it does, it would take time as government expenditure will take time to be approved and tendered (this is very important here) and it would be mid-2009 before we see any action.
The seventh blunder is the behaviour of the Opec. After much dithering it has decided to lower its output by a little over 4 million barrels a day to stabilise prices. They would like a price of $75 per barrel, which seems distant today.
But, the puzzle really is that the prices are down today because of a slowdown, and by cutting output to ostensibly raise prices, it would actually lead to slide in prices as demand falls further. Quite clearly, it is unsure of what has to be done.
The eighth puzzle has been the fall out of the series of bailouts. So far the bailouts have been for distressed financial institutions. But, we had the big three auto companies in the US actually approach the government for a bail out, and why not? After all these people actually bring about production and the auto along with the reality sectors are the leaders in growth. So where should the government stop when it comes to bailouts?
The ninth institutional shock was domestic and the usual suspect, ICICI Bank featured again as deposit holders made a bee line for the ATMs to withdraw money because of a rumour that there was a run on the bank. The dynamism that propelled the bank to stardom with their strong presence in the derivative segment this time and agri loans earlier became a liability, as the RBI went out of the way to reassure everybody that all was well.
And lastly, a blow to the economy was dealt by the terror attacks on the Taj and Oberoi as this was an attack on the commercial capital. Debates centred on whether or not these attacks would affect the Indian economy—with the general conclusion being that the city and business was resilient (whatever that means).
The first institutional blunder was the approach to financial sector bailouts. Bear Stearns started it all in 2007 and the crisis resurfaced when the housing twins Freddie Mac and Fannie Mae raised an eyebrow. Subsequently, we witnessed Lehman Brothers sink even as Merrill Lynch escaped by the skin of the teeth, while AIG brought back the ‘milk of human kindness’ in Mr Paulson. The government evidently was unsure of whether or not moral hazard had to be eradicated or whether there was a larger duty to the public or the failed institution.
The second blunder, in regulation. While investment banks and hedge funds do not have a regulator, banks do. Basel-II takes pride in bringing about discipline across banks and the Fed has made it difficult to skip the rope. Then how come Citibank landed in trouble.
The third, a panic response from the Fed which has once again lowered interest rates to 0.25% at a time when the economy is on the verge of a recession. Now, Mr Greenspan has been named the culprit for the present problem by pursuing a policy of liberal interest rates. It looks like that Mr Bernanke may be starting another bubble—though we are not sure which one this will be.
The ECB and BoE would take the fourth place as being central banks without an independent mind, as they have lowered their indicative rates too, but only after the Fed took the lead. But wasn’t the Euro supposed to actually challenge the dollar and take the lead?
The RBI in India fared no better. Higher inflation prompted interest rates and the cash reserve ratio to be increased. This was at a time when inflation was caused by lower supplies and high oil prices.
Sixth, the government of India has introduced a fiscal stimulus package of Rs 30,000 crore. But no one believes that it will work. Besides, even if it does, it would take time as government expenditure will take time to be approved and tendered (this is very important here) and it would be mid-2009 before we see any action.
The seventh blunder is the behaviour of the Opec. After much dithering it has decided to lower its output by a little over 4 million barrels a day to stabilise prices. They would like a price of $75 per barrel, which seems distant today.
But, the puzzle really is that the prices are down today because of a slowdown, and by cutting output to ostensibly raise prices, it would actually lead to slide in prices as demand falls further. Quite clearly, it is unsure of what has to be done.
The eighth puzzle has been the fall out of the series of bailouts. So far the bailouts have been for distressed financial institutions. But, we had the big three auto companies in the US actually approach the government for a bail out, and why not? After all these people actually bring about production and the auto along with the reality sectors are the leaders in growth. So where should the government stop when it comes to bailouts?
The ninth institutional shock was domestic and the usual suspect, ICICI Bank featured again as deposit holders made a bee line for the ATMs to withdraw money because of a rumour that there was a run on the bank. The dynamism that propelled the bank to stardom with their strong presence in the derivative segment this time and agri loans earlier became a liability, as the RBI went out of the way to reassure everybody that all was well.
And lastly, a blow to the economy was dealt by the terror attacks on the Taj and Oberoi as this was an attack on the commercial capital. Debates centred on whether or not these attacks would affect the Indian economy—with the general conclusion being that the city and business was resilient (whatever that means).
Tuesday, December 16, 2008
Purchasing Power: DNA: 17th December 2008
The ultimate hallmark of successful globalisation in economics is when all nations are placed in a similar corner on account of a single factor. In the growth phase, there is a disparate performance across countries.
The developed nations always fare better which provokes critics to say that the gains of globalisation are always unequal. However, when there is a downturn, everyone suffers. Globalisation becomes a kind of a leveller. This is the case with all economies today with every country trying to cope with the pains of the financial crisis which has spread like a contagion.
The policy response across the globe has been cohesive — slashing of interest rates. The basic idea is that when demand is sluggish, the only way out is to provide a stimulus through lower interest rates which enable industry and individuals to borrow more, which will push up demand and hence growth. This is the classic monetary policy approach to a downturn.
Two issues arise here. The first is whether or not individuals will spend more money because loans are cheaper. Mortgage rates have been lowered by banks for loans of up to Rs20 lakh. The decision to take a loan will actually depend on the condition of the borrower. Is the borrower today really in a state to take a loan?
This is important because a dwelling purchased with a loan has to be serviced for a period of, say, 10 to 20 years. The present state in the private sector is grim with job loss threats and cuts in salaries looming large. The last thing on one’s mind will be to take on more debt for a protracted time period. The public sector may be better off with the Pay Commission hikes, but as most arrears will not be paid immediately, there would be some hesitation on their side too. Hence, at the individual level, expenditures may be deferred.
If we look at companies now, will they borrow more? Investment decisions are based on consumption expectations and existence of spare capacity. While evidence suggests that capacity utilisation may have crossed 80 per cent in the capital goods segment, the same is not evident for consumer goods. There is spare capacity which has been affected by the downswing in demand due to lower purchasing power. The better kharif harvest has not been translated into higher spending. Thus, today we have a situation where interest rates have been lowered and liquidity is adequate. Yet, while growth in bank credit is steady, there is no pressure on funds. Clearly, industrial demand has to pick up to fill this lacuna.
While the government is aware of the possible lags involved in monetary policy measures working out, it has simultaneously drafted policy on the demand side, which is quite different from what governments worldwide have done. It has embarked on an expansionary policy in the Keynesian genre — when economies slow down, governments should spend more as this generates investment, more jobs and higher consumption. The measures announced were in the direction of higher spending on the Plan account and more funds for rural sectors. This was topped by an across-the-board reduction by 4 per cent in excise duties.
The India Infrastructure Finance Company will raise Rs10,000 crore to boost the infrastructure sector. The total package of over Rs30,000 crore is to set the tone for growth from the point of view of consumption.
The government has actually taken that stance that it is no longer worried about the fiscal deficit. One may recollect that the government had arrived at a fiscal deficit level of 2.5 per cent of GDP for 2008-09. This had not taken account of loan write-offs and the Pay Commission burden. Now with the excise duty cut and higher Plan expenditure resulting in an additional cost of Rs30,000 crore and the higher food subsidy of Rs20,000 crore, the original target will be exceeded by 40 per cent, leading to 5 per cent fiscal deficit. But, under such circumstances, it can be justified as being necessary.
So, will these measures work? The answer is a big yes as lower interest rates and higher spending are just the antidotes for recessionary conditions. However, the time-impact is not going to be instantaneous.
Demand for consumer goods will not increase until buyers are more upbeat about their jobs. The auto and white goods sectors have to wait for a while. Real estate prices have to move southwards for the spending spiral to begin. Monetary policy will work with a lag as, at present, there is surplus liquidity which when absorbed as investment would involve gestation lags of at least three months. Tax refunds could have been considered but once again there is the risk of such refunds taking time and being stacked as savings. This simply means that we need to be patient and settle for lower growth this year (RBI has already indicated so). But, tomorrow may be brighter than today — that is the immediate hope.
The developed nations always fare better which provokes critics to say that the gains of globalisation are always unequal. However, when there is a downturn, everyone suffers. Globalisation becomes a kind of a leveller. This is the case with all economies today with every country trying to cope with the pains of the financial crisis which has spread like a contagion.
The policy response across the globe has been cohesive — slashing of interest rates. The basic idea is that when demand is sluggish, the only way out is to provide a stimulus through lower interest rates which enable industry and individuals to borrow more, which will push up demand and hence growth. This is the classic monetary policy approach to a downturn.
Two issues arise here. The first is whether or not individuals will spend more money because loans are cheaper. Mortgage rates have been lowered by banks for loans of up to Rs20 lakh. The decision to take a loan will actually depend on the condition of the borrower. Is the borrower today really in a state to take a loan?
This is important because a dwelling purchased with a loan has to be serviced for a period of, say, 10 to 20 years. The present state in the private sector is grim with job loss threats and cuts in salaries looming large. The last thing on one’s mind will be to take on more debt for a protracted time period. The public sector may be better off with the Pay Commission hikes, but as most arrears will not be paid immediately, there would be some hesitation on their side too. Hence, at the individual level, expenditures may be deferred.
If we look at companies now, will they borrow more? Investment decisions are based on consumption expectations and existence of spare capacity. While evidence suggests that capacity utilisation may have crossed 80 per cent in the capital goods segment, the same is not evident for consumer goods. There is spare capacity which has been affected by the downswing in demand due to lower purchasing power. The better kharif harvest has not been translated into higher spending. Thus, today we have a situation where interest rates have been lowered and liquidity is adequate. Yet, while growth in bank credit is steady, there is no pressure on funds. Clearly, industrial demand has to pick up to fill this lacuna.
While the government is aware of the possible lags involved in monetary policy measures working out, it has simultaneously drafted policy on the demand side, which is quite different from what governments worldwide have done. It has embarked on an expansionary policy in the Keynesian genre — when economies slow down, governments should spend more as this generates investment, more jobs and higher consumption. The measures announced were in the direction of higher spending on the Plan account and more funds for rural sectors. This was topped by an across-the-board reduction by 4 per cent in excise duties.
The India Infrastructure Finance Company will raise Rs10,000 crore to boost the infrastructure sector. The total package of over Rs30,000 crore is to set the tone for growth from the point of view of consumption.
The government has actually taken that stance that it is no longer worried about the fiscal deficit. One may recollect that the government had arrived at a fiscal deficit level of 2.5 per cent of GDP for 2008-09. This had not taken account of loan write-offs and the Pay Commission burden. Now with the excise duty cut and higher Plan expenditure resulting in an additional cost of Rs30,000 crore and the higher food subsidy of Rs20,000 crore, the original target will be exceeded by 40 per cent, leading to 5 per cent fiscal deficit. But, under such circumstances, it can be justified as being necessary.
So, will these measures work? The answer is a big yes as lower interest rates and higher spending are just the antidotes for recessionary conditions. However, the time-impact is not going to be instantaneous.
Demand for consumer goods will not increase until buyers are more upbeat about their jobs. The auto and white goods sectors have to wait for a while. Real estate prices have to move southwards for the spending spiral to begin. Monetary policy will work with a lag as, at present, there is surplus liquidity which when absorbed as investment would involve gestation lags of at least three months. Tax refunds could have been considered but once again there is the risk of such refunds taking time and being stacked as savings. This simply means that we need to be patient and settle for lower growth this year (RBI has already indicated so). But, tomorrow may be brighter than today — that is the immediate hope.
How about a Global Bankruptcy Fund? Business Line 17th December 2008
A Global Bankruptcy Fund can be set up to rescue failed institutions by either taking on the bad assets or liabilities or providing a loan.
Contrary to the adage that a dead man tells no tales, every financial crisis provides lessons to be learnt. However, each one is different and the lessons appear to have more anecdotal value.
Two thoughts emerge from the analysis of the current global financial crisis. We need to first have better regulation and, second, create a system that can take care of these damages. Also, crises are bound to be engendered as innovation gains in prec edence; and while the Schumpeterian theory of creative destruction cannot be eschewed, the damages can be mitigated if these twin goals are pursued. At the same time, if risks are not taken, the financial world would be stagnant and will offer few choices. Need for a global regulator
The BIS has shown the way of how all banking systems in the world can come to terms with a single code of rectitude. The same needs to be replicated in the rest of the financial world, where prudential norms need to be established for hedge funds, investment banks, derivatives (securitisation) markets and other non-bank financial intermediaries. This would really mean regulators for all financial segments will ensure there are norms set for each and every financial player in any country. While this by itself cannot prevent a crisis, the magnitude of impact can be lessened. Therefore, just like how we have the RBI, the FMC, the SEBI, the NHB etc in India, there needs to be a regulator for every line of business. This will lead to greater transparency.Transparency in operations
But, given that crises are all-spreading, there is need for a global regulator too, which could be a single entity to oversee financial developments. Like the BIS, the regulator could actually set the rules in terms of leverage, capital adequacy, investment norms, and so on for financial markets that could be pursued in different countries. A simple example being no financial institution can take an exposure of more than ‘X’ per cent of its assets or income on any off-balance-sheet account. Or, all inter-financial sector lending should be ‘purpose-’ and ‘rating-’based; just like how a bank knows how the funds lent to a borrower are going to be deployed, the same should be known when Bank ‘X’ lends to, say, Lehman. The objective is to have a trail of all financial flows and transparency in operations so that all the intermediaries are aware of the quantum of risk being undertaken — with this level being monitored, though not necessarily fixed by the regulator or super-regulator.
The second thought arising from the series of financial crises is that we should think of creating a new organisation or fund, called, say, the Global Bankruptcy Fund (GBF), to tackle all these disturbances. Just like how central banks play the role of lender of last resort, there should be a global lender of last resort. The function of such a fund would be to rescue failed institutions by either taking on the bad assets or liabilities or providing a loan. To make this work, the following structure can be followed.Suggested structure
Analogous to the IMF, which was set up to help countries get out of balance of payments disequilibrium, the GBF would have the responsibility of bailing out institutions from a sticky state. The institutions would necessarily have to take membership of the fund and pay a subscription as well as an annual charge. These charges could be linked directly to the size of the institution or the risky assets carried on its books — both balance sheet and off-balance sheet items.
To ensure that there is fair play, the financial results would have to be audited by a panel (similar to the US GAAP followed by the banks). The fees collected would be invested by the GBF to earn revenue that would be used to maintain the organisation. The initial seed capital could be provided by various participating country governments. These funds would be used when required to aid the members in times of distress.
The creation of this fund would help alleviate the pain caused when there is a crisis, though the crisis cannot be averted. However, members would be better off, because the fact that they are members of the GBF will by itself ensure that they can borrow or deal in the markets on better terms as the comfort factor would be higher. Further, the rating agencies could always use this as a consideration when rating any financial entity.
Can the IMF be restructured to facilitate this operation? By taking on this role, the organisation can be made more relevant.
Contrary to the adage that a dead man tells no tales, every financial crisis provides lessons to be learnt. However, each one is different and the lessons appear to have more anecdotal value.
Two thoughts emerge from the analysis of the current global financial crisis. We need to first have better regulation and, second, create a system that can take care of these damages. Also, crises are bound to be engendered as innovation gains in prec edence; and while the Schumpeterian theory of creative destruction cannot be eschewed, the damages can be mitigated if these twin goals are pursued. At the same time, if risks are not taken, the financial world would be stagnant and will offer few choices. Need for a global regulator
The BIS has shown the way of how all banking systems in the world can come to terms with a single code of rectitude. The same needs to be replicated in the rest of the financial world, where prudential norms need to be established for hedge funds, investment banks, derivatives (securitisation) markets and other non-bank financial intermediaries. This would really mean regulators for all financial segments will ensure there are norms set for each and every financial player in any country. While this by itself cannot prevent a crisis, the magnitude of impact can be lessened. Therefore, just like how we have the RBI, the FMC, the SEBI, the NHB etc in India, there needs to be a regulator for every line of business. This will lead to greater transparency.Transparency in operations
But, given that crises are all-spreading, there is need for a global regulator too, which could be a single entity to oversee financial developments. Like the BIS, the regulator could actually set the rules in terms of leverage, capital adequacy, investment norms, and so on for financial markets that could be pursued in different countries. A simple example being no financial institution can take an exposure of more than ‘X’ per cent of its assets or income on any off-balance-sheet account. Or, all inter-financial sector lending should be ‘purpose-’ and ‘rating-’based; just like how a bank knows how the funds lent to a borrower are going to be deployed, the same should be known when Bank ‘X’ lends to, say, Lehman. The objective is to have a trail of all financial flows and transparency in operations so that all the intermediaries are aware of the quantum of risk being undertaken — with this level being monitored, though not necessarily fixed by the regulator or super-regulator.
The second thought arising from the series of financial crises is that we should think of creating a new organisation or fund, called, say, the Global Bankruptcy Fund (GBF), to tackle all these disturbances. Just like how central banks play the role of lender of last resort, there should be a global lender of last resort. The function of such a fund would be to rescue failed institutions by either taking on the bad assets or liabilities or providing a loan. To make this work, the following structure can be followed.Suggested structure
Analogous to the IMF, which was set up to help countries get out of balance of payments disequilibrium, the GBF would have the responsibility of bailing out institutions from a sticky state. The institutions would necessarily have to take membership of the fund and pay a subscription as well as an annual charge. These charges could be linked directly to the size of the institution or the risky assets carried on its books — both balance sheet and off-balance sheet items.
To ensure that there is fair play, the financial results would have to be audited by a panel (similar to the US GAAP followed by the banks). The fees collected would be invested by the GBF to earn revenue that would be used to maintain the organisation. The initial seed capital could be provided by various participating country governments. These funds would be used when required to aid the members in times of distress.
The creation of this fund would help alleviate the pain caused when there is a crisis, though the crisis cannot be averted. However, members would be better off, because the fact that they are members of the GBF will by itself ensure that they can borrow or deal in the markets on better terms as the comfort factor would be higher. Further, the rating agencies could always use this as a consideration when rating any financial entity.
Can the IMF be restructured to facilitate this operation? By taking on this role, the organisation can be made more relevant.
Tuesday, December 9, 2008
A Gentle Push: Financial Express: 10th December 2008
John Maynard Keynes had advocated fiscal stimulus as a way out of a recession. While his theory has been contested, a number of countries have used it to revive their economies. Almost everybody becomes a Keynesian when the chips are down. The logic is infallible. If growth is down because people are not spending, let them do so through policy action.
There is, however, an unexplained conundrum: where has all the money gone? We know that the stock markets are down, which means that people are not investing here and are in a sell-off mood. Mutual funds are trying their best to stop redemption as investors are asking for their money back. Investments in debt instruments have fallen and above all, the rise in bank deposits has been tardy. Sales of automobiles are down and will remain so as the jobs scene looks grim in the country. No amount of cheap lending can revive this market for the time being. Further, while the RBI has tried its best to make people borrow more for housing, it will not help as the industry is on a sticky wicket with new owners on the decline. If people are not saving and are also not spending, then where is the money?
While we appear to be fairly sanguine about growth of 7% this year, the government evidently would like to see a number closer to 8%. Now, how can we view this stimulus package of over Rs 30,000 crore? The excise cuts need to get reflected in lower prices for the consumer. Only then will they work in terms of improving spending. Also their impact would be more at the margin for consumer durable goods, as the demand is inelastic for non-durable goods. While interest rate subvention would improve the profitability of the exporting companies, the impact on exports per se may be limited. They are more likely to be influenced by the depreciating rupee.
IIFCL is to raise bonds for refinancing bank lending to infrastructure, which is a good measure, but would take time before an impact. Refinancing such loans releases capital for banks to lend more on infrastructure or industry. This slew of measures will work with a lag, and the positive influence is more likely in the next fiscal.
The basic problem is that thanks to the financial crisis and the backlash in corporate India, spending has come down with staff downsizing. This is a critical consumer class which will not be in a position to spend more at this point of time. The spending class is more likely to be government staff, when the Pay Commission terms are fully implemented. The only immediate impact would be on the fiscal deficit, where the ratio to GDP could inch towards the 5% mark if all the Budget and extraordinary Budget and off-Budget items are considered.
The second part of the booster being provided by the government is through the monetary policy. The problem one month back was with liquidity and the RBI eased the same by lowering the CRR. Through the repurchase of MSS bonds, liquidity was injected even as it left the system due to the FII withdrawal. But, interest rates have remained high as banks at the micro level had to garner deposits at higher rates. The signal now is to lower rates, which banks can do provided their cost of deposits comes down. The critical part will be to ensure that lower rates do not dissuade savers when deposits are not growing and people are not spending.
The entire package of the government is positive as it is biased towards growth. With inflation moving downwards mainly due to cooling of oil prices and better harvests coupled with a global recession, it is possible for monetary authorities across the globe to lower rates. The only question to be asked is as to when the effects would be seen. Monetary policy is typically slower when it tackles inflation and faster on growth, especially when funds are used for investment. Fiscal policy is more direct but expenditure works faster than tax cuts, which have their own time schedules to work themselves out. Hence, the best answer is a shoulder shrug.
There is, however, an unexplained conundrum: where has all the money gone? We know that the stock markets are down, which means that people are not investing here and are in a sell-off mood. Mutual funds are trying their best to stop redemption as investors are asking for their money back. Investments in debt instruments have fallen and above all, the rise in bank deposits has been tardy. Sales of automobiles are down and will remain so as the jobs scene looks grim in the country. No amount of cheap lending can revive this market for the time being. Further, while the RBI has tried its best to make people borrow more for housing, it will not help as the industry is on a sticky wicket with new owners on the decline. If people are not saving and are also not spending, then where is the money?
While we appear to be fairly sanguine about growth of 7% this year, the government evidently would like to see a number closer to 8%. Now, how can we view this stimulus package of over Rs 30,000 crore? The excise cuts need to get reflected in lower prices for the consumer. Only then will they work in terms of improving spending. Also their impact would be more at the margin for consumer durable goods, as the demand is inelastic for non-durable goods. While interest rate subvention would improve the profitability of the exporting companies, the impact on exports per se may be limited. They are more likely to be influenced by the depreciating rupee.
IIFCL is to raise bonds for refinancing bank lending to infrastructure, which is a good measure, but would take time before an impact. Refinancing such loans releases capital for banks to lend more on infrastructure or industry. This slew of measures will work with a lag, and the positive influence is more likely in the next fiscal.
The basic problem is that thanks to the financial crisis and the backlash in corporate India, spending has come down with staff downsizing. This is a critical consumer class which will not be in a position to spend more at this point of time. The spending class is more likely to be government staff, when the Pay Commission terms are fully implemented. The only immediate impact would be on the fiscal deficit, where the ratio to GDP could inch towards the 5% mark if all the Budget and extraordinary Budget and off-Budget items are considered.
The second part of the booster being provided by the government is through the monetary policy. The problem one month back was with liquidity and the RBI eased the same by lowering the CRR. Through the repurchase of MSS bonds, liquidity was injected even as it left the system due to the FII withdrawal. But, interest rates have remained high as banks at the micro level had to garner deposits at higher rates. The signal now is to lower rates, which banks can do provided their cost of deposits comes down. The critical part will be to ensure that lower rates do not dissuade savers when deposits are not growing and people are not spending.
The entire package of the government is positive as it is biased towards growth. With inflation moving downwards mainly due to cooling of oil prices and better harvests coupled with a global recession, it is possible for monetary authorities across the globe to lower rates. The only question to be asked is as to when the effects would be seen. Monetary policy is typically slower when it tackles inflation and faster on growth, especially when funds are used for investment. Fiscal policy is more direct but expenditure works faster than tax cuts, which have their own time schedules to work themselves out. Hence, the best answer is a shoulder shrug.
Subscribe to:
Posts (Atom)
