RBI has done what it could to assuage the markets. RBI, as we all know, can only provide direction to interest rate movements but cannot force banks to follow suit. Nor can it force banks to lend more money to any sector. The lowering of the repo and reverse repo rate is a clear signal to banks to reduce rates for industry in particular. The fact that inflation is benign has helped the central bank to take this decision. The focus is evidently on growth, now that the global economy is expected to recover only in 2010; and attaining a growth rate of 6% for India under these circumstances is going to be a challenge.
The credit policy has been geared to provide direction to future monetary activity, and hence deserves to be analysed within the parameters laid down. To begin with RBI has assumed that non-food credit would grow by 20% in this year. Last year, the outstanding credit stood at around Rs 28 lakh crore, which means that incremental credit will be Rs 5.6 lakh crore. Deposits are expected to grow by 18%, which again on a base of around Rs 38 lakh crore means an increase of Rs 6.8 lakh crore in incremental deposits. Of this 5% would be kept aside for CRR, which in turn would make around Rs 6.5 lakh crore available to banks.
The difference between the two would be Rs 0.9 lakh crore, which under normal circumstances would not be an issue for the economy. However, net government borrowing for the year is expected to be Rs 3.1 lakh crore. This leaves behind a gap of Rs 2.2 lakh crore for the year, if things work out this way. Where will this money come from?
RBI has mentioned pushing in around Rs 1.2 lakh crore (which is equivalent to around 3% points cut in the CRR) through unwinding of MSS bonds and OMO purchases, but that will still leave behind a gap of Rs 1 lakh crore. As banks have an investment deposit ratio of over 30%, the sale of bonds to the extent of Rs 70,000 crore should not really matter as it would still mean the maintenance of the SLR of 24%, with the balance being financed through the MSS route. This means that RBI will have to lower the CRR further during the year to provide liquidity, or else be prepared for a higher interest rate regime.
It may be recollected that lower interest rates last year did create a liquidity problem for banks which had to raise their deposit rates in order to garner funds. Growth in deposits this year has been taken to be lower at 18% compared with almost 20% last year. Under these circumstances, it would be difficult to actually think of lowering interest rates during the year.
RBI is, in fact, talking of fairly modest economic growth and has hence posited a credit growth rate of 20% this year. To eschew a liquidity crunch, it has to hope that this number does not materialise or that deposits increase faster. But, intuitively one can see that a lower economic growth rate is associated with a lower savings rate as households, which is the dominant savings group actually diverts its income to consumption, or rather maintenance consumption. This will make it hard to enhance the deposits growth rate.
Another imponderable is the government deficit. One is not quite sure if this number will be maintained and a clear picture will emerge once the new government is in power. This is critical because with the government being against monetisation of the deficit, any further borrowing will only strain the system.
The major concern for industry is the delivery of credit, especially with there being surplus funds of around Rs 1.2 lakh crore in the system today. Prudence will dictate that RBI should try and take use these surplus funds through an accelerated borrowing programme so that the funds do not lie idle with the banks. As this is the slack season when typically there is less pressure on funds, the period post august could be the time when industry could be involved in the credit process.
Therefore, the overall liquidity situation and interest rate movements will require constant monitoring this year as all the three variables: deposits, credit and government borrowing have been projected based on certain assumptions, which could change.
Wednesday, April 22, 2009
It is not Economics: Financial Express: 18th April 2009
There are essentially three sets of parties or groups that are in contention for power in these elections. The Congress-led alliance, BJP-led alliance and what is nebulously called the Third Front. On economic issues, is there a choice for the voter? And how much do we agree with the economic manifestos?
Consider the economic performance of the last two governments. The BJP-led NDA had actually coined the phrase, ‘India shining’, as every possible sector in its perception, was looking up in 2004. Yet, it was voted out of power for a different set of reasons. The Congress-led UPA government has had four successive years of good economic numbers, something which has been repeatedly emphasised on different forums to drive home the view that there has been excellence in this area. Yet, the last year, ie. 2008-09, has been a disappointing one with low growth, high inflation, highest fiscal deficit, high current account deficit, depreciating rupee, low export growth, declining forex reserves and rising external debt.
The rational way to look at this is simply that the government of the day can take only limited credit or blame for economic performance. In general, all governments in the recent past have followed similar economic policies, depending on the circumstances. All of them try and ensure that tax income increases and spending is judicious. All of them try and make credit cheap while trying to protect the common man. Inflation is a concern and always evokes similar responses. Similarly, monsoon failures are not the creation of governments.
Further, issues like loan waivers, higher pay packages for government employees, higher subsidies, etc are standard populist principles followed by most governments across the world. But, being in the opposition, the parties will oppose such measures, but would change their position when in power. The approach to divestment, foreign investment including banking and insurance is actually the same across the board (except the Left parties). The reality is that all governments have to perforce be pursing the goal of liberalisation under the force of globalisation, and only the pace will vary.
Now, election promises also appear to be similar. The BJP, always considered a party of the middle class, has promised tax benefits for interest on bank deposits and has gone back to the famous NTR ‘rice programmes’. The Congress is also on the same plank and talks of similar programmes (each party is trying to.underprice rice). The Congress and BJP are both talking of economic inclusion, which is not really new. But neither has actually focused on measures that make agriculture resilient to weather. Every government makes huge allocations and always shows how the number of kisan credit cards increased, and how much has been spent on irrigation and road development.
This leaves really the Third Front parties. While there is a formal set of parties that constitute this front, there are others like the SP and RJD which could be anywhere. This is a set of parties that have differing economic ideologies. At one end, there is the TDP which is called the party for CII and the IT sector, and, at the other, we have the SP which is out to get rid of English and computers. In between there are the socialist parties which have worked with the capitalist right and also opposed reforms whenever inconvenient. Therefore, the Third Front would pose a conundrum in case it forms the government, though chances of retrogression are minimal.
Hence, it can be said that all parties are, at different levels, actually on the same economic plank. It is not surprising that while each one is trying to score over the other through the interpretation of numbers, they are still falling back on the conventional election tools: religion, caste and hate, which, in retrospect, may prove to be the real determinants of the final outcome.
Consider the economic performance of the last two governments. The BJP-led NDA had actually coined the phrase, ‘India shining’, as every possible sector in its perception, was looking up in 2004. Yet, it was voted out of power for a different set of reasons. The Congress-led UPA government has had four successive years of good economic numbers, something which has been repeatedly emphasised on different forums to drive home the view that there has been excellence in this area. Yet, the last year, ie. 2008-09, has been a disappointing one with low growth, high inflation, highest fiscal deficit, high current account deficit, depreciating rupee, low export growth, declining forex reserves and rising external debt.
The rational way to look at this is simply that the government of the day can take only limited credit or blame for economic performance. In general, all governments in the recent past have followed similar economic policies, depending on the circumstances. All of them try and ensure that tax income increases and spending is judicious. All of them try and make credit cheap while trying to protect the common man. Inflation is a concern and always evokes similar responses. Similarly, monsoon failures are not the creation of governments.
Further, issues like loan waivers, higher pay packages for government employees, higher subsidies, etc are standard populist principles followed by most governments across the world. But, being in the opposition, the parties will oppose such measures, but would change their position when in power. The approach to divestment, foreign investment including banking and insurance is actually the same across the board (except the Left parties). The reality is that all governments have to perforce be pursing the goal of liberalisation under the force of globalisation, and only the pace will vary.
Now, election promises also appear to be similar. The BJP, always considered a party of the middle class, has promised tax benefits for interest on bank deposits and has gone back to the famous NTR ‘rice programmes’. The Congress is also on the same plank and talks of similar programmes (each party is trying to.underprice rice). The Congress and BJP are both talking of economic inclusion, which is not really new. But neither has actually focused on measures that make agriculture resilient to weather. Every government makes huge allocations and always shows how the number of kisan credit cards increased, and how much has been spent on irrigation and road development.
This leaves really the Third Front parties. While there is a formal set of parties that constitute this front, there are others like the SP and RJD which could be anywhere. This is a set of parties that have differing economic ideologies. At one end, there is the TDP which is called the party for CII and the IT sector, and, at the other, we have the SP which is out to get rid of English and computers. In between there are the socialist parties which have worked with the capitalist right and also opposed reforms whenever inconvenient. Therefore, the Third Front would pose a conundrum in case it forms the government, though chances of retrogression are minimal.
Hence, it can be said that all parties are, at different levels, actually on the same economic plank. It is not surprising that while each one is trying to score over the other through the interpretation of numbers, they are still falling back on the conventional election tools: religion, caste and hate, which, in retrospect, may prove to be the real determinants of the final outcome.
Sunday, April 19, 2009
Seven deadly cliches of elections: DNA: 16th April 2009
A close inspection has revealed that there are seven cards that are invariably played every time we move towards the polling booths.
First, the incumbent government extols the economic performance during its term. The UPA has used the Union budget as a propaganda document quite cogently. It is a different matter that coincidentally, the last year of the UPA rule registered the lowest growth with highest inflation (don't be fooled by the near zero WPI number, the CPI is still in double digits), highest fiscal and current account deficit, highest rate of depreciation of the rupee and so on. Ironically the NDA had the best numbers in 2003-04 and yet lost the elections despite the"India Shining" slogan.
The smart politician has told you that India's performance is better than other nations. Besides, the global financial crisis was responsible for these numbers. But the same global upswing did not lead to those good numbers in the first four years. It was the government's policies or rather despite the now infamous wheat mess, telecom muddle, sugar confusion and so on that these achievements were possible. The good numbers are due to them while the bad ones have the foreign hand guiding them.
The second bromide concernsGandhi. Everyone brings back the Mahatma even though his simplicity is in contrast to thewealth of most of our leaders. Today policies have to be capitalist and wealth is their driving force. Yet, we bring back this unknown ideal which is accepted by one and all even though the doctrine is practically defunct today.
Third, the name of Nehru comes in which is synonymous with so-called secularism. Everyone has to be a secularist and all parties talk of secularism and the need to fight communal tendencies even as everyone has his own definition of what the concept is. The BJP on the other hand talks of pseudo-secularism which they say is the brand followed by the other parties which hold different standards for Islam and Hinduism. The BJP's moderates are those who are still apologetic of Ayodhya.
While communalism could invite the wrath of the courts, the same does not apply to casteism, the fourth card played by all parties. We have a right to appeal to your caste, especially if it is a lower one. At this time, everyone is with the Dalit.
Ironically, Mayawati will project Brahmin heavyweights as if to say that she has no prejudices. In rural India, it is always candidates with the same caste that are pitted against each other.
The fifth card relates to the series of alignments that take place. One never knows which parties are aligned with the BJP or the Congress. Lalu Yadav, Mulayam Singh Yadav, Naveen Patnaik, Jayalalithaa, Karunanadhi, Omar Abdullah, Ajit Singh, Deve Gowda, Chandrababu Naidu were at some time with the BJP and then with Congress and then with someone else. At times they do not want a foreign PM, and on other occasions she is Mother India.
The sixth card is for the ubiquitous third front -- a group of opportunistic parties which can ensure that no one gets a majority. Individually they stand for anti-industrialisation (communist), pro-industry (TDP) and statue-building (Mayawati). They will then join the government on 'issue- based' grounds. Alternatively, they will stay out and threaten to pull the rug. The CPI and CPM have high nuisance value and should not be aligning with either the BJP or the Congress because their ideals are different. But for the sake of stability they help form a government and then dangle the proverbial sword of Damocles.
Lastly, all parties try and lure voters. While cash and saris is disallowed, promises to reduce taxes are allowed. Soall parties appeal to the middle class with these sops as they are above religion and caste. The shuffle of these cards will tell us which way the tide will go but to see the full hand you have to wait till May 16.
First, the incumbent government extols the economic performance during its term. The UPA has used the Union budget as a propaganda document quite cogently. It is a different matter that coincidentally, the last year of the UPA rule registered the lowest growth with highest inflation (don't be fooled by the near zero WPI number, the CPI is still in double digits), highest fiscal and current account deficit, highest rate of depreciation of the rupee and so on. Ironically the NDA had the best numbers in 2003-04 and yet lost the elections despite the"India Shining" slogan.
The smart politician has told you that India's performance is better than other nations. Besides, the global financial crisis was responsible for these numbers. But the same global upswing did not lead to those good numbers in the first four years. It was the government's policies or rather despite the now infamous wheat mess, telecom muddle, sugar confusion and so on that these achievements were possible. The good numbers are due to them while the bad ones have the foreign hand guiding them.
The second bromide concernsGandhi. Everyone brings back the Mahatma even though his simplicity is in contrast to thewealth of most of our leaders. Today policies have to be capitalist and wealth is their driving force. Yet, we bring back this unknown ideal which is accepted by one and all even though the doctrine is practically defunct today.
Third, the name of Nehru comes in which is synonymous with so-called secularism. Everyone has to be a secularist and all parties talk of secularism and the need to fight communal tendencies even as everyone has his own definition of what the concept is. The BJP on the other hand talks of pseudo-secularism which they say is the brand followed by the other parties which hold different standards for Islam and Hinduism. The BJP's moderates are those who are still apologetic of Ayodhya.
While communalism could invite the wrath of the courts, the same does not apply to casteism, the fourth card played by all parties. We have a right to appeal to your caste, especially if it is a lower one. At this time, everyone is with the Dalit.
Ironically, Mayawati will project Brahmin heavyweights as if to say that she has no prejudices. In rural India, it is always candidates with the same caste that are pitted against each other.
The fifth card relates to the series of alignments that take place. One never knows which parties are aligned with the BJP or the Congress. Lalu Yadav, Mulayam Singh Yadav, Naveen Patnaik, Jayalalithaa, Karunanadhi, Omar Abdullah, Ajit Singh, Deve Gowda, Chandrababu Naidu were at some time with the BJP and then with Congress and then with someone else. At times they do not want a foreign PM, and on other occasions she is Mother India.
The sixth card is for the ubiquitous third front -- a group of opportunistic parties which can ensure that no one gets a majority. Individually they stand for anti-industrialisation (communist), pro-industry (TDP) and statue-building (Mayawati). They will then join the government on 'issue- based' grounds. Alternatively, they will stay out and threaten to pull the rug. The CPI and CPM have high nuisance value and should not be aligning with either the BJP or the Congress because their ideals are different. But for the sake of stability they help form a government and then dangle the proverbial sword of Damocles.
Lastly, all parties try and lure voters. While cash and saris is disallowed, promises to reduce taxes are allowed. Soall parties appeal to the middle class with these sops as they are above religion and caste. The shuffle of these cards will tell us which way the tide will go but to see the full hand you have to wait till May 16.
Monday, April 13, 2009
Surpluses run the risk of quality deterioration: Economic Times: Faceoff, 8th April, 2009
To address this question, three issues need to be kept in the background. The first is that agricultural production follows a cyclical pattern, with amplitude of just a year. The second is that while we normally refer to food, the allusion is to rice and wheat; we forget an important component of our food basket, i.e., pulses, where there is a perennial shortage. The third is that food policy has to be viewed, whether we like it or not, as working within certain objectives like ensuring fair price and income to farmers (procurement and MSP), protecting consumer through assured supplies and bearable prices (PDS), holding on to strategic buffer stocks and the maintenance of a cropping pattern with respect to wheat and rice. Hence, procurement cannot be closed ended nor can MSP be lowered.
Surpluses should be welcome anytime as anything in large quantities cannot be bad. But, surplus food entails a cost, cannot be supported by existing storage facilities and runs the risk of deterioration in quality especially if we have successive years of surpluses.
Now, given that surpluses do arise, the solution is in developing a framework to optimise the handling of these stocks. Firstly, we need to strengthen the warehousing facilities; and the private sector can be involved here. Secondly, the surpluses should be stored in deficit states to avoid the pitfalls of transportation in times of shortage. Thirdly, surpluses should be a part of the government’s foreign trade policy where the surplus grains are exported. Fourthly, surpluses should be aggressively distributed through the food for work programmes. Fifthly, futures trading should be encouraged where the storing authority manages to hedge the price risk. The ban on futures trading needs to be reviewed. Sixthly, stocks beyond the maximum tolerable limits should be given as aid to the poorer nations. Lastly, the private sector can complement the FCI’s efforts in handling procurement and buffer stocks which can reduce the burden on the exchequer.
Simultaneously, the MSP system needs to be revisited wherein farmers should be encouraged to migrate partly to growing pulses which will balance the cropping pattern at the macro level.
Surpluses should be welcome anytime as anything in large quantities cannot be bad. But, surplus food entails a cost, cannot be supported by existing storage facilities and runs the risk of deterioration in quality especially if we have successive years of surpluses.
Now, given that surpluses do arise, the solution is in developing a framework to optimise the handling of these stocks. Firstly, we need to strengthen the warehousing facilities; and the private sector can be involved here. Secondly, the surpluses should be stored in deficit states to avoid the pitfalls of transportation in times of shortage. Thirdly, surpluses should be a part of the government’s foreign trade policy where the surplus grains are exported. Fourthly, surpluses should be aggressively distributed through the food for work programmes. Fifthly, futures trading should be encouraged where the storing authority manages to hedge the price risk. The ban on futures trading needs to be reviewed. Sixthly, stocks beyond the maximum tolerable limits should be given as aid to the poorer nations. Lastly, the private sector can complement the FCI’s efforts in handling procurement and buffer stocks which can reduce the burden on the exchequer.
Simultaneously, the MSP system needs to be revisited wherein farmers should be encouraged to migrate partly to growing pulses which will balance the cropping pattern at the macro level.
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