Counting the costs of direct cash transfers: Business Standard 22nd April 2013

As a rule, the government likes creating new structures without fully understanding their implications and then disbanding them once criticism inundates the newspaper columns. A lot of time and money is invested in creating these structures and, often, these costs could be higher than the cost they are trying to lower to begin with. The direct cash transfer (DCT) scheme runs a similar risk, since our enthusiasm levels are currently high, and we could go off the track unless certain preconditions are addressed.

It is generally felt that DCTs are a more efficient system than, say, physical subsidies. This does hold when conditions are ideal and back-end structures are in place. Otherwise, there could be contradictions that will make the DCT scheme unsuccessful.

DCTs come into play for two kinds of transfers. The first is where a new structure is created for transferring cash-for-cash transactions. This holds for, say, salaries, pensions and scholarships and so on. The existing scheme has various departments sending cheques to the recipients, who, in turn, deposit them in their own accounts. The second pertains to cash-for-kind transfers. Here, instead of providing the good to the household, a cash transfer of an equivalent amount takes place and can be used to buy the product.

The concept of DCT is based on the much-publicised Aadhaar project where a unique identity (UID) has been provided to people. Since every UID has an account linked to the person, such a transaction would be automatic provided the disbursing authority is linked with the banking systems. Given the volumes involved, this would be a logistical challenge. The advantage for cash-for-cash transactions is efficiency and reduction of leakages provided the identification process is robust. Prima facie, there is nothing amiss here.

When it comes to cash-for-kind transactions, the situation is different because we have to give up the existing structures since substitution takes place. There are essentially five "Ss" that have to be tackled before bringing about any change in the transfer system.

The first is "structures". We have an elaborate procurement system for food grain that is motivated by, one, procurement for distribution and, two, creation of a buffer. The procurement policy is an open-ended one where farmers can sell a fair average quality to the Food Corporation of India (FCI) at a predetermined price. The idea here is to protect the farmer's income. Have we thought of what will happen to this policy or FCI (an institution set up for this purpose) when we provide cash transfers, and FCI will then have to address only the issue of buffer stocks?

Second, "systems" have been created for distribution - the public distribution system (PDS). If we have a "conditional cash transfer" in which money given has to be used to buy grain from fair price shops, then the status quo would be preserved - along with the current inefficiencies. However, if it is not a conditional transfer system, then new issues emerge. There are around 500,000 fair price shops across the country that on an average employ one million workers. By introducing cash transfers and disbanding PDS, there will be an issue of unemployment, since it will be hard for these people to reinvent their stores that are mostly located in rural areas. Today, when there is opposition to foreign direct investment in retail, we are talking of the local kirana shops. There will be a lot of noise when we think of displacing these one million workers. Do we have a solution here?

Third, "selection" is an important consideration for a successful DCT scheme. The problem with PDS, besides the ubiquitous leakages, is adverse selection. A lot of people who are not poor take in these entitlements. This becomes acute as we move to kerosene and liquefied petroleum gas. The new scheme on UID is no different from the existing policy of self-declaration; since no proof of income is asked for it runs the risk of adverse selection. In fact, there are a large number of people holding on to the coloured ration cards and not drawing rations. In the new dispensation of the scheme, this could mean free money for them. Do we have a way of screening households or else will we be back to also helping those who do not require assistance?

Fourth, the government is talking aggressively of food "security" with an ambitious target of covering two-thirds of the population. Clearly, there is a major contradiction here. If we are to provide cash transfers, then how do we reach the food grain to the needy, which requires PDS?

Fifth, there has been debate on the food "subsidy" burden. The subsidy is the difference between the economic cost and the issue price for wheat and rice. The economic cost varies between Rs 17 and Rs 24 a kg, and the issue price is around Rs 5 to Rs 8 a kg. This is when the food grain is sold at a fixed price. Now, once the people are paid cash, they have to buy food grain on their own from the market. Based on government data, the price of wheat and rice varies from Rs 15 to Rs 35 a kg in different parts of the country. Two practical problems arise here. The cash to be paid in lieu of subsidy will be substantially higher than the present subsidy amount. Second, with inflation being variable, fixing the prices and, hence, subsidy level across states will be difficult, and one can see a lot of politics coming in the way of arguing for higher levels of allocations.

To make the DCT scheme effective, we need to fix these five "Ss" first or else we would be running conflicting parallel systems. We also need to evaluate the exact benefits of the cash-for-cash transfers before embarking on the more onerous cash-for-kind transfers. Besides, the cash-for-cash transfers alter the mode of payments without addressing the issue of selection. It is, therefore, advisable that we move one step at a time and not get carried away.

Why India’s credit rating is intact. Financial Express 13th April 2013

Despite slower GDP, high fiscal & current account deficits, India is faring better than major economies
In the aftermath of the financial and sovereign debt crises there has been a tendency for global rating agencies to follow a conservative path to credit rating. Such an approach has had its own share of controversies, especially when the US was downgraded. Some aver that rating agencies are playing safe by downgrading countries to hedge against possible default. The fact that new countries are getting on-stage to enact a crisis has made it challenging for the rating agencies.India has been under the scanner for some time now with each and every action being watched closely. As the rating will come up for review, the apprehension is palpable. The view here is that we are past the ‘worst’ and, therefore, there is little reason to alter India’s credit rating as the economy does exhibit some strong proclivities and, more importantly, our policy stance has shown character in the last 6-8 months. Intuitively, if the rating was not altered last year, there is no reason for the same today as things have only improved in most areas, albeit at a different pace.First, while GDP growth has come down in FY13, it should be realised that the same has happened across the world. China has witnessed a decline of 1.7%, Korea 1.7%, Singapore 3.9% and Indonesia 0.3%. The fact that our GDP growth would be around 5%, notwithstanding stagnation in industry, indicates the resilience of the economy.Second, inflation has been more due to structural factors than policy-induced measures. Core inflation has been less than 5% and the Reserve Bank of India (RBI) has followed an aggressive anti-inflationary stance throughout the year. Inflation has come down over the last three years and one reason why it remains high is partly on account of the revision in oil product prices to contain the subsidy bill—something which the rating agencies have been asking the government to do. Quite clearly, inflation should not be a worry for the CRAs.Third, the fiscal deficit has been contained at both the Centre and state levels, which is commendable, even though it has been at the cost of cutting down on project expenditure. More importantly, the subsidy bill has been controlled through revision of fuel-related products prices. Besides, fiscal deficits are very high in the developing world—the US (5.4%), Japan (9%) and the UK (7.8%). More importantly, the debt-to-GDP ratio is much lower for India compared with the US (101%), the UK (89%), Japan (211%), France (90%) and Italy (127%). Importantly, at around 50% of GDP, total liabilities of the government are largely held by domestic institutions (just 1% is held by FIIs) and hence does not pose any risk to the outside world.Fourth, while the current account deficit (CAD) has increased, a lot may be attributed to the global slowdown where exports, software receipts and remittances have come down. Imports too have slowed down, but as oil, coal and gold imports were high, the trade balance has increased. What has the government done here? First, it has increased the duty on gold to lower imports. Second, unlike in the past when a high CAD signified a crisis-like situation, what has become important is what the government does in terms of policy framework to get in capital inflows. This is where the government and RBI have been proactive in attracting FII and FDI investment. The fact that around $25-30 billion has come in the form of FDI and FII flows bears testimony to the faith reposed by foreign investors in the Indian economy. These investors are putting their money in markets, which are expected to grow. Hence, their revealed preference for India is evidence of their faith in the country.Fifth, notwithstanding the chaos in the CAD, forex reserves have been stable at between $290-300 billion and the exchange rate range bound between R53-55/dollar. Besides foreign investment a lot of support has come from the ECB too where RBI has enhanced scope for companies looking to borrow from overseas market. Although the rising external debt is a concern, the debt service ratio at around 6% is quite bearable. Therefore, the pro-forex policies followed by the authorities have helped in stabilisation.Sixth, the banking sector, though under some temporary strain due to rising NPAs, is very well capitalised. The fact that all banks are fully compliant with Basel II norms is encouraging. More importantly, credit is well dispersed and exposure to sensitive sectors is low. The rising NPAs and restructured assets could be taken to be more of a phenomenon that goes with the business cycle. The latter has been more in the sectors that have linkages with projects getting held up due to an impasse in resolution of certain Bills relating to, say, the environment or land.Seventh, RBI has gradually started lowering interest rates keeping in mind the inflation levels, and the calibrated approach should be appreciated. Interest rates have been lowered by 100 bps last year, and the infusion of liquidity through CRR cuts and open market operations has addressed liquidity concerns. Such adept handling of liquidity has enabled RBI to manage the borrowing programme of the government without coming in the way of availability of funds for the private sector.Eight, the government had announced a series of policy measures to resuscitate the economy since September 2012. While some issues remain unresolved, they should not come seriously in the way of development given that the government has shown urgency to clear several projects that have been held back on account of administrative reasons. Over 340 projects have been identified and the setting up of the Cabinet Committee on Investments (CCI) would help in expediting these projects.Nine, the concern on the coming elections is another issue that has to be addressed. India has been working with coalition governments in the last decade, which has also been the time when growth has been fairly high. The formation of another such government should not really affect the direction of reforms, though admittedly the pace would vary. Therefore, political considerations should not come in the way of rating of the sovereign, as even in the past, the present opposition parties have gone along with reforms.Hence, while the Indian economy is certainly attempting to make an exit from a low equilibrium trap, the structures that have been erected to bring about the turnaround need to be appreciated.

Will it be another false start? Financial Express: 10th April 2013

A way to make bonds attractive so that investors move away from gold is to provide a tax break on interest to bond-holders
Inflation-indexed bond (IIB) is the new flavour of the season. Two factors have regenerated interest in a product that has been experimented with twice, but failed. First, it is believed that people are buying gold as a hedge against inflation, which is depleting our forex reserves. The logic goes that by providing alternative instruments for savings, which provide cover for inflation, people will migrate back to the financial sector. Second, the Union Budget for FY14 has declared that the government will introduce such bonds to provide such a cushion for investors and the government is trying to push these ideas forward. Evidently, it is believed that there is a strong case again, even though the concept did not quite click earlier.IIBs were introduced with different variants in the past—one which indexed principal only and the other where interest payments were also cushioned. There is a move to have such issuances of G-secs soon to institutional investors to begin with and later bring it down to the retail level. The working of the concept is quite rudimentary. If a bond has a face value of R100 and a coupon rate of, say, 10%. If inflation rises to 10%, then the bond is valued at R110 and the interest paid is R11. Intuitively, it can be seen that in all such transactions there is a zero-sum game involved and if the investor is gaining, then the borrower is losing as additional money has to be paid. Textbooks always say that inflationary times are good for borrowers because they pay negative real rates while lenders are at a disadvantage. So, to begin with, the government will be forking out more money if the scheme takes off. The private sector borrowers will not be too keen to load a cost which is otherwise notional in nature as it will be considered to be quite unnecessary given that no other financial instrument actually is indexed directly with inflation.The important issue is how the product is structured. From the point of view of the investor, what matters are the returns, safety of principal and liquidity. Currently, a bank deposit has all these features in nominal terms. Government savings have limited liquidity as certificates and PPFs cannot be cashed in at all times. The IIB has to necessarily address all these issues.Now, if the government issues R10,000 crore of G-secs for, say, 10 years, an average inflation rate of even 6% per annum over this period will mean that the principal value gets inflated to something close to R18,000 crore. Add to this the interest payments—which today would be a plain vanilla R6,000 crore—will get converted to approximately R8,000 crore. This will get reflected in higher interest outgo for the government as well as enhanced principal repayments if that is how the deal is structured. The government has to automatically take a hedge back-to-back in interest rate futures (where the securities dealt with are its own) or else the budgetary numbers would go out of hand.In case both the principal and interest payments are covered, it should be a very good option, especially since inflation never goes into the negative zone. The choice of inflation rate is critical here. Often the CPI inflation number is at least 200 bps above the WPI. But there are times when the opposite holds true too. To make it work at the retail end, it has to be benchmarked to the higher index if possible or the CPI if they cannot be alternated.An interesting question that arises is what happens in case inflation comes down or goes into the negative zone. But to cover the contingency, the product has to be structured such that the downside is covered and a floor is maintained all through. This is an issue in developed countries where inflation can turn negative, in which case the nominal return would decline. In India, we have never had to face such a situation.IIBs encounter another challenge in terms of liquidity. This is a problem for all debt market instruments where liquidity is limited. The G-sec market is liquid in just a handful of securities with tenures of 5 or 10 years and at times a couple of other tenures. The corporate debt market is illiquid by all standards. Where would this place IIBs? For those holding these bonds till maturity—like those who hold gold for long tenures, there would be little incentive to enter the secondary market and hence buyers would be limited as even market makers will find it hard to do business. If market makers do not find it attractive on the buy side, then those who want to exit may have a problem. Given that there is limited retail interest in the bond market, IIBs will face this challenge of liquidity.A way out will be for banks to introduce inflation-indexed deposits (IIDs), which will definitely appeal to the deposit holder. But given the higher cost involved, there would be little incentive to do so, especially since even today the borrowers are complaining of high interest rates which cannot be increased proportionately.Therefore, we do run the risk of these bonds not taking off again. One way to make bonds attractive so that investors move away from gold is to provide a tax break on interest to the holder of the bond. This will not be inflation-proof, but still provide an incentive. Gold actually has this advantage because there is no audit trail of sale of gold, which makes it virtually tax-free. Hence, while the idea is commendable, the issuer would probably be only the government. Getting institutions to buy such bonds actually serves no purpose, if the idea is to deter gold savings. At the retail level, IIDs would be preferable to IIBs, but the former will not work for banks. And given the fiscal strains, the government too would have to review its options if the response is good as the fiscal balances would be pressurised.Will this mean another false start?

Leveraging post offices for banking: Financial Express 2nd April 2013

The extensive network of post offices makes integrating banking services with them a good idea, but they lack critical infrastructure and man-power skills
The concept of converting Indian post offices to bank branches of the ‘P&T Bank of India’ sounds interesting given our objective of having more new banks with a thrust towards financial inclusion. As post offices are located in more places than any other public facility, it seems tempting to espouse this conversion. However, before accepting this idea, it would be fair to really weigh the implications of such a move. The argument for having them serve as bank branches goes this way. There are around 1.55 lakh post offices, of which around 90% are in rural areas. Compared with the 90,000 odd branches of scheduled commercial banks, this is more impressive given that rural branches account for around a third of them, which, including semi urban branches, would come to around 60%. Post offices already deal with customers in terms of garnering deposits and certificates of various kinds. They have around 260 million plus accounts compared with the 810 million odd accounts held in the commercial banking system. There are separate accounts for MGNREGA accounts as well as savings bank accounts, which makes it quite widespread. Also, this access makes it easy to combine financial transactions of government programmes, especially so since there is a lot of talk on having direct cash transfers. Their accounts are valued at round R6.2 lakh crore as of March 2011, which is impressive given that banks had deposits of around R52 lakh crore. Add to this the post office insurance policies that are handled by this department of around 17 million with a cover of around R1.3 lakh crore, and prima facie it appears that we have a reflection of a ‘universal financial institution’ in place. But this is where the bright picture fades. The P&T department had a loss of over R6,000 crore in FY11 with all products selling at a loss. Clearly, the department is not geared to working on commercial lines and works based on the directives of the government of India. This leads one to the beginning of the train of thought, which argues that converting post offices into bank branches may not be a very good idea and may not probably work.First, while there is a good network of post offices, their size and facilities would not warrant such a conversion given that they are ill-equipped to handle any sophisticated transactions. The analogy can be carried to petrol stations that are located everywhere in the country but cannot really be converted into bank branches. Even the idea of having ATMs in these petrol stations has been abandoned over a period of time since there were not enough footfalls and the project became non-viable.Second, post offices have literally worked liked mechanical organisations where the staff sat back and waited for customers to come in. The customer has never mattered for the staff and the mindset has been one of being inefficient and always seeking favours—the baksheesh culture still runs in these offices right from cashing in certificates to delivery of letters at the doorstep. Third, the quality of staff is not of the order that could be remotely associated with banking. Of the 4.7 lakh staff in this department as of March 2011, there were around 600 Grade-A gazetted officers and another 7,000 odd Grade-B staff. The Grade-C clerical staff amounted to 2.01 lakh and another 2.58 lakh came in as postmen—called ‘Dak sewaks’. This means that not more than 2% of the staff would actually fall under the category of being qualified. And banking is not a field that anyone can take up as it needs one to understand the products and the regulations. Fourth, the post offices have collected deposits and certificates of money which have then been passed on to the state and central governments as part of the public account transfers. Can we really think of this post office staff actually getting into the act of lending money to those who require it after doing a due diligence? The answer is very clearly a big no. The question then is what will these post offices do with the money they collect? One option is to invest only in Gsecs, which is what narrow banking was all about. Given that it is a loss-making department, this does sound a viable option. If so, will we be happy with such an arrangement considering that when we speak of inclusive banking, we are also looking towards channelling lendable resources to the more vulnerable sections of society? Fifth, the infrastructure needs tremendous improvement. Even within public sector banks, it has taken over 20 years for most of them to achieve a high degree of core banking penetration. Given the limited expertise with staff and absence of facilities like electricity in remote villages where these post offices are located, post office banking may not work out. Therefore, it does appear that there are more compelling reasons to believe that post office banking is still some distance away. The concept of converting post offices to bank branches is certainly thought-provoking as there are lots of them in the country and their own area of business could be diminishing as private couriers, mobile phones and internet facilities have caught on. Intuitively, it looks like the space can be used for reaching out where the present financial system does not. Using a third-party route would probably make sense to begin with, where a bank can have its own official operate from this centre, which can provide the P&T department revenue while the bank can go a step closer towards meeting its inclusive banking targets. In fact, on deeper thought, the new banks that will get a licence should consider this option as they would have to meet this commitment right from the start. Therefore, just like how banks sell third-party financial instruments in the branches, the post office space could be leased out for this purpose. However, for this, a reality check has to be conducted to ascertain if these distant offices really offer the space and basic amenities for such a set up. Otherwise, it may be a non-starter.

If it ain’t broke, don’t fix it: Financial Express 30th March 2013

Subsuming all sectoral regulators into one functional agency could lead to challenges of consistency in approach
The way the government works is quite clear. There are a number of ministries that address various sectors and the minister-in-charge is appointed by the party in power. The bureaucrats who execute the mandates are civil servants who just do their job. Some ministries such as finance appear to be more important as they handle the area of funds allocations. However, while various ministries have their own aspirations and goals, the Budget subsumes all through a consultative process. Subsidies involve the agriculture, consumer affairs and petroleum ministries. Expenditure programmes involve the rural development and road transport and so on. All differences across ministries are settled once the Budget is drawn up.Now, carry this analogy to the financial sector, and the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) can be evaluated. The FSLRC reports are voluminous with a lot of work having been done in understanding the complex financial systems in the country. The final view taken, to be put succinctly, is to turn everything around from where they are. In such an approach, there can be nothing right or wrong. And there are always different models that can be quoted as supporting a view in a certain group of countries.Briefly, FSLRC looks at consolidation of regulators in the market oriented space, with RBI maintaining its own position when it comes to banking, but giving up the role of debt management. However, a new set of agencies are hence created that will have, besides RBI, a united agency (taking in Sebi, FMS, Irda and PFRDA), a new SAT (FSAT), Resolution Corporation, FRA (financial redressal agency), debt management office, and FSDC. What has been done is the creation of new agencies based on ‘functions’ rather than the existing one which is based on ‘domain’. Will this work?The idea of having separate regulatory structures was that there is a certain domain knowledge that resides in institutions that have been created like Sebi, PFRDA, Irda and FMC, which are able to better understand and develop them. For example, pensions is something new in the country and creating a regulatory structure does involve core competence through focused attention and action that cannot come from being a part of the united agency.This is similar to saying that the ministry of consumer affairs understands consumer welfare more than the ministry of agriculture, which looks at the interests of the farmers. Quite clearly, by merging agriculture and consumer affairs together, there would be a distinct conflict—is the farmer or consumer more important. In the same way, if we look at the market-oriented regulators—Sebi and FMC—the latter’s decision affects physical markets (mandis). The mindset has to be different. Sebi would typically not mind a bull run if all the rules are being obeyed as this is the market reality. However, the FMC would not be happy if the price of, say, sugar kept going up in the futures market because of market forces, because finally it does get back to the cash market where high prices may not be acceptable. Therefore, specific expertise and mindsets are necessary. Irda would be looking more on a conservative basis to develop the insurance market, while Sebi may argue for insurance companies to be bolder in the equity and debt segments so that these markets develop.Being a part of the same organisation will tend to create biases. Having all activities subsumed in a functional agency could lead to challenges of consistency in approach as a problem in insurance is different from one in pensions or securities for which special agencies are better suited to address them.An observation made in the report on the existence of regulatory arbitrage is interesting, as also the conflicts that arise due to multiple regulators overseeing the market participants. It is precisely because of the existence of separate regulators that the system becomes stronger in terms of transmission of systemic risk. A problem in, say, the securities or commodity futures market remains in the domain and does not get transmitted, which would have been the case in case of a unified field. This provides enormous resilience to the system in general.The issue on separation of the public debt management function from RBI has been debated for long. The continuation of the status quo makes sense as RBI is in the best position to handle public debt as it is fully monitoring the monetary sector. The fact that GSecs are being driven by the market forces ensures that RBI cannot influence the market in terms of pricing. Therefore, the apprehension that RBI has a basis towards low rates to support government borrowing is unfounded. Having a separate office would, in fact, make monetary management difficult as RBI will not have real-time information on public debt.Therefore, just like how ministries are not merged, the same principle should hold for the constituents of the financial sector. There can be a case for a super regulator today just like we have the PMO that oversees all the ministries whose job will be one of facilitation and coordination, with each element retaining its independence. Today, all the regulatory bodies are under the purview of the ministry of finance, except the commodity market, where the FMC has been a part of the ministry of consumer affairs. However, if the FCRA Bill is passed, and the FMC becomes an autonomous body then it can be brought under the purview of the super regulator, which could be created afresh with representation from all concerned ministries. This way, there could be better coordination between the regulators and the markets would grow in an orderly way.The present system has worked well with market players and instruments coming under multiple regulators. To iron out the differences that exist, we only need to weave the fabric closer together, and not go back to the basics and change the yarn and design.

The enigma of 5: Financial Express 23rd March 2013

Just like a score of 5 made Niro’s team ecstatic in Silver Linings Playbook, Indians are learning to live with 5% GDP growth and deficit
In the climax scene of the movie Silver Linings Playbook, the protagonists enter a dance competition where other couples score high 8s and 9s. When Bradley Cooper and Jennifer Lawrence come on floor with their passionate, though hilarious moves, the average score awarded is 5. Their entire team, including Robert De Niro, gets ecstatic as this was what their bets were—a score of at least 5. The programme announcer is shell shocked with surprise; and with confusion on his face exclaims, “Why are they so excited about a 5?”Let us take the analogy back home on the economic front and we can ask ourselves, why are we excited about 5? There seems to be renewed feeling of zest and optimism as the financial year comes to an end and we start on a new year. Everyone is gung-ho on how things can only improve in FY13. Even our Budget has assumed a higher growth rate closer towards 7%.Now, let us look at the 5s that we are living with. GDP growth for FY12 is expected to be rather low at 5%, which is the lowest rate since FY03. The declining quarterly trend is disturbing—the Q3 number at 4.5% is the lowest in the last 15 quarters. Discussions today are centred on whether 5% is an understatement, and the perspicuous few who see green shoots in the arid topography are arguing that it would be higher at 5.2-5.3%, though industrial growth is crawling around the 1% mark. Anyway, this is a major comedown from the 8% growth numbers we had taken for granted.We are quite happy with the fiscal deficit number of 5.2% last year and 4.8% for the coming year—an average of 5% again, though we are not quite sure how the assumptions of growth will be achieved and the targets of disinvestment and spectrum sale will be attained. The Budget is based on certain strong assumptions, which has to be the case for any FM, and one can only cautiously view the possible achievement of the set targets. There surely is great resolution showed last year to get this number right, but the cuts in expenditure that were invoked helped a lot, which we cannot afford for another year as we are looking for a Keynesian impetus from this end. Disinvestment in FY13 seems to be more of a forced variety and not the type that took place a couple of years ago when Coal India was divested.If we turn to our current account deficit, it stands at 5.4% of GDP in Q2, which again is some kind of a new record high in any quarter. Last year, at 4.2% of GDP, the current account deficit was the highest recorded in the last three decades or so. While everyone has voiced concern, the disturbing element is that there is no solution here as all components are exogenously determined and hence cannot be controlled by any regulatory body. The problem is not that serious today because we have had capital flows protect this imbalance, which has made our forex reserves stable. It is not surprising that any policy to do with FII flows has to be looked at with double caution as we cannot antagonise these investors.We can just as well spoil the party by asking why we are so excited by the number 5. In fact, inflation remains as high as ever with CPI inflation being around 11%. After a lot of talk of targeting CPI inflation, we have reached the point of no return. We first said that interest rates can bring down CPI inflation. That did not work. Next we said that inflation rose because people were consuming more. That is a reason but not a solution. The novel concept of protein consumption also did not quite help ease the pain, especially so since output did not show a commensurate decline. In fact, the economic reasons espoused fell flat when cereals have shown the highest increase in prices even as we boast of having the highest output levels of wheat and rice. The fact that the FCI is stocked with nearly 63 million tonnes of foodgrains demolishes a lot of the supply bottlenecks clichés that have been given.What, then, makes us cheerful? Is it just the announcement effects of the Budget and the assumption that RBI will lower interest rates during the year because the high internet rate regimes have not lowered inflation anyway? RBI has acquiesced to the demand and lowered rates this time, but has warned that this cannot be interpreted as the beginning of a new trend. Or are we now used to high inflation of 7% WPI and double-digit CPI inflation that nothing really matters. The answer is, really, a combination of all of them.Growth has come to such a level that things can only look upwards from now on. FY13 will be one year when growth would have happened with no contribution from industry. This being the case, any progress in manufacturing should necessarily be good for the country. Similarly, inflation is now at around 7% or 11%, whichever way we look at it. From now on, given a normal monsoon, things cannot get worse as the base effect will help, even though we have imposed the fuel burden on ourselves for the entire FY14. Looking at the current account deficit, exports will pick up as the global economy cannot do worse, and from a negative growth rate there can be a marginal pick up. Also, imports, while increasing, will be subdued as growth will be only marginally upwards. Therefore, assuming stable oil prices, things can get better or remain the same—but cannot deteriorate further.This being the case, it is only but natural for one to expect to see green shoots. But we need some action at the ground level. The government has suddenly sprung into action in clearing projects, which should have really been done earlier—but then, as the adage goes, better late than never. So, while we can be justified in being sanguine, we should also be realistic in the present state. A 6% growth with 6-7% inflation and 4% CAD look more reasonable when looked at conservatively. If any number gets better, then one can feel good. It is better to wait for good things to happen, rather than lay the foundations of the proverbial castles (in the air).