Union Budget FY17: No good news for the household: Free Press Journal 1st March 2016

The Budget was high on expectations with the general feeling being that there would be a stimulus for the economy the Keynesian way so that we would have the government play the role of engine of growth. But this was not to be as the government has actually pulled two birds from itshat.

First it shocked the market by sticking to the FRBM path and announcing a deficit ratio of 3.5% for the year. Analysts were talking of 3.7% or 3.9% depending on their own theoretical inclinations.
Second, it has spoken of higher allocations in infrastructure especially roads and the rural economy which when combined with the railway expenditure plans, would be quite a handful. While this may be debated at the esoteric level, the question is what is there for the common man?
For a household which has been neck deep in inflation which has cumulated to around 30% in the last three years, what is important is disposable income. Here the Budget falls short and does not offer much solace to the income tax payer.

An amnesty has been provided to tax evaders, but the honest household in the service sector, which cannot escape tax, does not really get anything from the budget. Ideally the income tax exemption limits as well as tax slabs should be linked with inflation to provide a natural cover. This has not been done in any way.
Further, the avenues for savings have not been widened which was called for considering that the financial savings rate in the economy is coming down. One may also remember that the small savings are going to earn less income from interest in the new financial year which means that there will be less incentive here too.
Add to this the fact that deposit rates have been coming down; there will be little comfort for the common man in the service sector. It is possible that there could be gravitation to gold under these circumstances as financial savings become less relevant.
Surprisingly no additional incentives have been provided to the housing sector which has been the focus of previous budgets. It looks like that the era of giving incentives or benefits to the middle class is over or has taken a break for now.
At the same time, the various changes in the tax and duty rates will lead to higher prices for several products, which will add to the CPI price inflation. Therefore, there will be less relief for the households even though the impact will not be very high – but it will be in the upward direction. One should hope that the monsoon is normal or else there could be a replay of the inflation story in FY17. Hence, there is little for the common man as such.
However, in the rural areas there would be more employment opportunities as the government spends more on irrigation, NREGA, roads etc. This will help to strengthen the rural economy which will provide some additional purchasing power. This can be an idea for the corporate sector to tailor make their products for such markets so that sales can be pushed up.
This can be useful during the busy season in propping up sales growth. Also the crop insurance allocation should be implemented with several awareness programmes being held to educate farmers of the use of the same. Presently a large number of farmers are not aware of such schemes and hence are not able to derive much benefit from the same.
The other aspect of the budget which affects the public is the subsidy bill. The three main subsidies, food, fertilizer and fuel have been reduced marginally which indicates the further rationalization of the same by the government.
While it has been announced for fertilizers, the same may be extended to food and other fuel products in course of time. The message is that a large part of the middle class may be moved out from these subsidies which is a loss for these households at a time when neither their disposable incomes are increasing or savings avenues widening.
The interest subsidy or subvention would be higher which fits in with the theme of furthering the interest of farmers. The lower income households on the other hand would be net beneficiaries with the government also planning to provide for LPG connections to 150 lkh households at state cost.
Hence, on the whole the budget may not quite bring a smile to the middle class, which does get left out often from all programmes. With a definite rural bias, and a virtual neutral approach to the corporate sector, the budget does work on bridging the difference between the rich and the poor. Piketty surely should be pleased here.

A mixed bag at best:: Business Standard 1st march 2016

The Budget was not supposed to be revolutionary but was expected to address the issue of growth. On this, the proposals blow hot and cold. A Keynesian expansion was expected to prop the economy, and was logical considering that the government is the only entity that can borrow at a low rate and spur growth.

By sticking to the fiscal responsibility and budget management (FRBM) target of 3.5 per cent it has made its approach clear that whatever growth impulses can be provided will be within the contours of the FRBM milestone and a lower borrowing programme.

 The latter, however, is good for overall liquidity and the Reserve Bank of India hence needs to have less concern over the government crowding out the private sector.

The approach to bank restructuring has been quite ambiguous though. While capitalisation amount of Rs 25,000 crore was expected, the government has chosen not to enhance the same or bring in reforms. The reforms that would have been useful are disinvestment of banks to up to 51 per cent as also the merger of weak public sector banks with stronger ones.

The numbers are unconvincing: Busienss Line 1st March 2016

Jaitley banks on a high-growth mantra while leaving little room for error in revenue or expenditure

How would one evaluate the Budget for fiscal 2016-17? The choice was clear for the finance minister — either walk the path of FRBM (fiscal responsibility and budget management) or follow the Keynesian dictum of pump priming.

While most analysts and economists played safe by settling for a number in the range of 3.5 per cent to 3.9 per cent of GDP, the finance minister did surprise everyone by sticking to the number of 3.5 per cent, which is quite bold considering that there has been an increase in several expenditure numbers.

The clue really lies in garnering revenue. However, there are several questions that may come up when attaining this target.

The questions

First, the Budget has assumed a nominal GDP growth rate of 11 per cent for the year to arrive at the fiscal deficit ratio of 3.5 per cent. Now, in FY16, growth is not expected to be more than 9 per cent.

The Economic Survey also expects real GDP growth to remain virtually unchanged at 7 per cent to 7.75 per cent, which is largely the same as in FY16. In fact, it talks about the 8-per cent mark being reached in a couple of years’ time.

This means that inflation could range between 3.25 per cent and 4 per cent, which looks reasonable after a negative number in FY16.

The challenge really is that if this growth number slips by 1 percentage point from 11 to 10 per cent, then at the projected level the fiscal deficit ratio would climb to 3.7 per cent. Anything lower would push up this number further. Hence, we will begin on a rather weak statistical basis.

Second, for the numerator of the fiscal deficit ratio to be where it is at ₹5.33 lakh crore as against ₹5.35 lakh crore in FY16, we are again betting on disinvestment being as high as ₹56,500 crore, as against ₹69,500 crore targeted last financial year.

In FY16 the shortfall was almost ₹44,000 crore. Is there any guarantee that we can reach this target, because any slippage will have to be compensated from other revenue items, which may be very optimistic to begin with?

The government would have to probably follow a systematic disinvestment plan where a fixed set of shares are earmarked every month for sale.

Here, an interesting thought is to combine the sale of PSBs too, so that two objectives can be met — the ₹25,000 crore of capitalisation can come from within, this way.

Revenues, tax and nontax

Third, the Centre is banking on high nontax revenues too — which are to increase by ₹37,000 crore. The contributors are going to be PSUs, through higher dividend payments and spectrum sale of close to ₹99,000 crore.

One can see the PSUs playing a major role both in terms of disinvestment as well as dividends to assist the government in attaining its goals.

Also, PSBs will not be able to contribute significantly as they will be busy cleaning up their books. On spectrum, while the processes are clear and well defined, it will have to be timed such that it does not clash with growth in credit, which is typically in the busy season as it can create liquidity problems.

In FY15, there was an upsurge in credit towards the end of March, which was okay as private demand for credit was low.

Fourth, tax revenue too has been projected in a ultra-sanguine manner. Gross tax receipts are to increase by ₹1.71 lakh crore as against ₹1.05 lakh crore last year.

In FY16, despite negative growth in imports and low growth in industrial production, revenue was buoyant with all segments showing a rapid increase. Can we be two times lucky considering that a lot of these benefits have been availed by the government last year by not passing on the low price benefit of commodities to the consumer by adjusting tax rates?

Most of the targets have been stated at high levels. Income-tax revenue is expected to be more buoyant and we are betting on the new amnesty scheme helping to meet this target.

Fifth, based on all these assumptions, and higher allocations in virtually all areas, the Centre is still working on an unchanged gross borrowing programme of ₹6 lakh crore, which translates to net borrowings of ₹4.25 lakh crore, which will be lower than that in FY16.

Borrowings and revenue

While this will be good news for the RBI as this means there will be little pressure on liquidity going ahead, there would also be a modicum of apprehension.

While the bond market has reacted positively with yields dropping to begin with, it would have to be tracked carefully while adjusting monetary policy measures. The new committee that will be set up would have to keep this in mind besides inflation. The RBI has to be prepared for OMOs (open market operations) in case the target is exceeded.

Last, on the revenue side, we had saved quite significantly in cutting down on defence allocations on both revenue and capital account by almost ₹22,000 crore in FY16.

The capex expenditure, which normally bears the brunt when balancing the Budget, was not compromised last year. But, any slippage in revenue in FY17 may just lead to cuts, which can negate the effort put in fostering growth.

The Budget is quite tightly packed and allows little room for slippage in both revenue and expenditure.

It is banking on high growth, which is extraneous to the system. If things work out, we will emerge stronger, or else there will be expenditure cuts as we have committed to the FRBM path.

Economic reforms: Stop complaining and start working: Financial Express 25th February 2016

The government has unleashed a series of reforms to drive the economy, which have all been hailed by industry as game-changers. Yet variables like investment, corporate profits, growth, inflation, etc, have not really been up to our expectations. Why?

A common statement made by analysts, rating agencies, multilateral institutions and corporates is that we need to have more structural reforms. There is nothing wrong in asking for more reforms, because striving for the ideal is always good as it brings us somewhere closer if pursued. But, do all these reforms matter in the short and medium run, or is it just a case of asking for more when all that is involved is good housekeeping?
If one goes back to FY14 and FY15, it was often argued that the economy slowed down due to policy paralysis which was the result of several irregularities in administration, and which ultimately affected growth. The decline to 4.5% GDP growth, going by the earlier base year, was largely due to the government. However, when most of these points were addressed adequately by the new government in a transparent manner, the growth rates have changed by not more than 1% (by the new methodology). And yet we are still unhappy with reforms. Is there something amiss in our expectations and interpretation?
The argument here is that the government, through policies or reforms, is an enabler of growth, and the basic growth impulses cannot be changed unless there is money put on the table. We have an acute demand problem which has to be addressed for any turnaround. Hence, even if we make it very easy to do business, investment will not come in if there is insufficient demand. The Fiscal Responsibility and Budget Management (FRBM) puts constraints on the amount that can be spent by the government and probably has militated against growth.
The NDA government has unleashed a series of measures through reforms to drive the economy, which have all been hailed by industry with the bromide called ‘game-changers’. Yet variables like investment, corporate profits, growth, inflation, etc, have not really been up to our expectations. So, what have been the leading reform measures taken by the government.
First, the Make-in-India campaign covered 25 sectors and the focus is on investment, both domestic and foreign. We have seen our rank improve on the list of ease of doing business by the World Bank.
Second, the Ujwal Discom Assurance Yojana (UDAY) is a remarkable scheme that will transform the power distribution sector and has been progressively accepted by many states. When implemented by states with corresponding reforms in transmission and distribution (of electricity) and pricing, the health of distribution companies will improve substantially.
Third is Indradhanush, which is a plan to rework the way PSBs function, both in terms of business and governance. This is probably one of the most important banking reforms since the Narasimham Committee.
Fourth, Pradhan Mantri Jan-Dhan Yojana, payments banks, small banks are major reforms in financial inclusion which will reach out to the poor and also help in payment of subsidies.
Fifth, the various insurance programmes for the poor complement the banking inclusion programmes on the security front.
Sixth is the Start-up India initiative, which addresses employment as well as funding, and encourages the spirit of entrepreneurship. Combine this with the Micro Units Development and Refinance Agency Bank (Mudra Bank), and we can see that a distinct thrust on the SME segment has been on the forefront of the policy lens.
Seventh is Skill India, which addresses lacunae for generating such skill-sets that are currently missing and provides an opportunity for the demographic dividend of the country.
Eighth, the new crop insurance scheme of the government. It is a progressive reform which makes it easier for farmers to get cover in case of adverse monsoon rains, and also spares the banks of NPAs and the government of loan-waiver payments.
Ninth, FDI has opened up to defence and railway equipment, and limits for insurance have been enhanced.
Therefore, opening these sectors to foreign investors is a major positive step taken by the government.
Ten, labour issues have been addressed for smaller units to eschew harassment and provide better facilities for labour, especially women.
Last, the National Investment and Infrastructure Fund (NIIF) will provide the springboard for further creation of infrastructure in the country.
The list is fairly long, at almost one major reform a month. Other initiatives have been launching Digital India as well as Swachh Bharat Abhiyan, which are again progressive ones. Coal and telecom auctions were carried out quite smoothly, which takes care of the issue of allocation of natural resources. All this has been done by sticking to the fiscal targets as well as having monetary policy targeting an inflation objective, thus making it more predictable. In addition, there has been rationalisation of subsidies which helps in adhering to FRBM norms.
After all this, what are we complaining of in terms of reforms?
This is important because, ostensibly, there are three issues that are now being citied as action points. These are goods and services tax (GST), land reforms and environment.
* GST is in the final stages of being passed and, given the complexity of the structure of the country and the federal nature, getting all states to agree is a legislative and logistical challenge. We seem to be closer to the end now.
However, practically speaking, GST will ease business and not really add to fresh investment or production. Counter-intuitively speaking, if it would, then this should be the reason for producers holding back their output, which is not the case.
* Resolving land sale through a formula is one thing, but be sure that even if it is passed, it will not open the floodgates of investment, as enterprise will complain of the high land cost. One can’t have it both ways.
* Environment is a very circular factor which all countries are aware of, so having prudential guidelines is a must or else we could also go the China way. There can be no compromise on this one.
The time has come for investors and entrepreneurs to stop complaining and take advantage of all the good work that has been done by the government. We need to show that we react to positive impulses from the government before asking for more. It would also be interesting in case foreign agencies list out what they expect in terms of reforms, with some anecdotal proof of such reforms bringing about big changes in their investment, or opinion of countries which have gone for the same. Otherwise, it appears that analysts are just complaining for the sake of it. There is evidently need for introspection whenever anyone asks for more.

Don’t expect much from the Union Budget: Financial Express 15th February 2016

February is an important month as it leads to the announcement of the Union Budget, which is often hyped as being a ‘make or break’ one. There are several expectations, with various suggestions being made on what the finance minister should and should not do. Invariably, there is a call to cut down on unnecessary expenditure and increase capital expenditure; and various sectors would ask for concessions to enable growth. The Reserve Bank of India (RBI) has also said that it will be watching carefully and, hence, everyone gets involved with these numbers, not to forget the ratings agencies which look at deficits and debt figures. The more demanding ones are looking for reforms too.

However, two things need to be understood. One, we have to separate the policy part from the Budget. Policies are announced through the year and hence all reforms that we keep harping on have been announced and implemented through the course of the year. The Budget is only a projected income and expenditure statement of the central government which provides support to the extent possible, given the fiscal space. Also, the central government Budget is less than the size of the state governments, which are more active at the root level. So, one cannot expect a major transformational Budget.

Two, the Budget should not be viewed as a corporate balance sheet, as the government has certain obligations towards the people and has to balance social development with fiscal prudence. Hence, while the private sector need not worry about spending on the poor, the government has a moral responsibility to do so. Thus, any expectation has to be practical.

The Budget for FY16 had an outlay of R17.77 lakh crore. Of this, R4.56 lakh crore went towards interest payments, R0.88 lakh crore towards pensions and R2.46 lakh crore as defence expenditure. These numbers cannot be lowered, given the fixed nature of these expenses. Hence, 45% of the Budget is committed. Add to this the subsidy bill, which came down to R2.44 lakh crore. It may be difficult to lower this any further, given that the benefits from low crude oil prices cannot push the fuel subsidy amount further down from the budgeted number of R0.30 lakh crore. If the total transfers to states through grants and allocations for centrally-sponsored schemes and state plans are added, another R3.29 lakh crore would have been dispensed with. Putting all these numbers together, there would be a slice of 76% being fixed.

There is also substantial talk of the government spending more on infrastructure. The total capital expenditure of the government in FY16, for instance, was R2.41 lakh crore (both Plan and non-Plan), which is 14% of the total expenditure. Of this, R1.35 lakh crore was for Plan (both central and state), while the balance was non-Plan comprising essentially defence. The curious bit about this capital expenditure is that this item tends to be cut whenever there is a need to lower expenditure to balance the Budget. The accompanying table provides information on the budgeted and actual capex of the government in the last three years.

The table shows that there has been a deviation of around R30,000-35,000 crore from the budgeted numbers in capex, which is around 15-17% lower. It may be justified because this is a discretionary expenditure which can be lowered in case there are problems relating to balancing the Budget. Also, as defence is the largest contributor to the non-Plan segment, where a large part could be imported, the Plan capex would be the important component. The question then really is whether a sum of, say, R1.35 lakh crore of Plan expenditure, which is, say, less than 1% of GDP at current market prices, be able to kick-start the economy? In terms of gross fixed capital formation, this would be around 3.5%. Hence, while any capex is welcome from the government, to consider it to be the engine of growth is quite far-fetched. The push has to come from the private sector.

In addition, when we speak of the R2.41 lakh crore of capex, the bulk of it goes to defence with R0.95 lakh crore, followed by the railways with R40,000 crore, roads with R33,000 crore, bank capitalisation and home ministry each with R19,000 crore, and urban development with another R10,000 crore. Therefore, these six sectors account for the bulk of capex of the government.

Hence, on the expenditure side, there is room to the extent that there are resources being generated. In the past, to justify such budgeted numbers, the disinvestment proceeds have been put at a high level which does not materialise by the end of the year, hence prompting cuts in capex. In the last three years or so, the disinvestment proceeds have fallen short by around R25,000-30,000 crore, which has forced the government to cut back on capex. In FY16, due to higher tax revenue and dividends from PSUs/RBI surplus, there could be some comfort. But, otherwise, compromises have to be made.

On the revenue side, given the GST and DTC being in abeyance with the corporate tax roadmap already laid down, not much can be expected. Sops to start-off some of the initiatives on start-ups or smart cities could get some momentum, though funding options would be limited here.

While one may argue for higher expenditure or higher fiscal deficit, the issue really is that, with GDP in a deflationary mode, which will prevail in FY17 too due to global conditions, the elbow room will be limited. The fiscal deficit ratio for FY16 could go up by 0.1% to 4% in case GDP grows at nominal terms with a slippage in nominal GDP growth from 11.5% to, say, 10%. This can be replicated in FY17 too.

To conclude, it could be said that while the Budget game is played every February with the government pepping up the sentiment as all sectors demand sops, a realistic view is there is not much that is available in the Budget. Also, asking for more reforms is quite ridiculous, given that the government has already invoked almost one major policy every month in this year. Asking the government to do everything could mean shirking the challenge. We have to revive the Keynesian animal spirits to brighten our own prospects—the Budget will be an enabler.

A world of good: Book Review Financiqal express February 14 2016

SOCIAL SERVICE is something all of us are familiar with, with names like Mother Teresa reverberating in our ears. But when we talk of social entrepreneurship, it is different. Social entrepreneurship goes beyond pure social service, with new dimensions being added in terms of transformation. It is the creation of an entirely new ecosystem around a problem, which has some identifiable fault lines. This is done by filling the gaps and transforming the equilibrium, making it sustainable. This is what Roger L Martin and Sally R Osberg explore in detail in their book, Getting Beyond Better: How Social Entrepreneurship Works, giving various examples.
When we look at what social entrepreneur Mohamed Yunus did for Grameen Bank in Bangladesh or, for that matter, even Johannes Gutenberg did with the printing press, we can see that they were revolutionaries, as they brought about a ‘general good for all people’ through innovative systems. Grameen Bank started and popularised the system of microfinance to provide funds to the un-bankable, while the printing press made the spread of the written word ubiquitous.
The authors identify four stages that are traversed for successful social entrepreneurship to take place. The first is an understanding of the real world—not just through a status-quo situation, but also by identifying the cracks that need to be addressed. Next is envisioning a future where we should know in which direction we should be headed, which, in short, is a possible solution to the problem. We hence have to necessarily set high bars, envisioning fundamental equilibrium change. Third, we need to build a model for change that is sustainable and which lowers the cost of accomplishment, which can be captured and quantified. Last, they talk of a solution that is scalable without additional doses of investment, as it will otherwise become too expensive.
The authors make the book interesting by giving several examples to show how social entrepreneurship works. Besides the story of Yunus and Grameen Bank, which the reader will identify with, our own unique identification (UID) programme also falls within the definition of social entrepreneurship. The Aadhaar concept can be used for delivery of various government schemes in an efficient manner, which makes it unique. Such initiatives can come from both the government and private business, and the authors separate the models of entrepreneurship from both these sources. In case of the government, it includes all citizens, is ubiquitous and is also in the nature of being mandatory, with wide-scale social benefits. Business-driven models, on the other hand, deal with their own sets of customers and hence are limited in scope and include only those who are part of that universe. More importantly, they are driven by profit, as they involve private cost and hence have a different motivation from that of the government’s.
Interestingly, one of the examples given for government transformation is the historic Magna Carta signed in 1215 by the king of England, when the rule of law came in. Till then, it was the king who decided everything and who could not be questioned. The civil rights movement in the US is another example of how government-led transformation took place. This holds for the UID scheme as well, which enables better targeting of government subsidies and payments. Therefore, all such entrepreneurship need not just be viewed from the point of view of a social issue being addressed, but from a social good being achieved point of view as well.
For business-level transformation, the examples given are those of Thomas Edison and the light bulb, which was revolutionary. This was also the case with what Steve Jobs and Steve Wozinak did with Apple. These innovations were literal game-changers in the way they affected normal lives. Devised with pure profit motivation, a social transformation was brought about nonetheless by the innovation.
The authors argue that such transformation is not very common and is inherently challenging to pull off, needing an external prod to motivate such action. This can come from social activists or some extraneous development. This sounds reasonable, considering that government and business alike are typically invested in status quo of a situation. In fact, there is a tendency not to disrupt this status quo, as it requires a lot of courage to think differently.
Let us sample some examples, which describe this phenomenon. Sir Ronald Cohen of Big Society Capital, a UK-based social investment institution, started the enterprise to provide capital to social entrepreneurs by arranging debt, collateralised debt, social impact bonds, etc. Molly Melching, founder and executive director of Tostan, a non-governmental organisation, went to Senegal and lived with the natives. She influenced them to change their attitude towards girls and managed to change their lives, reversing the subjugation of women in these communities. Back home, Kailash Satyarthi worked towards helping children, who were involved in dangerous occupations, and rehabilitated them through education. Madhav Chavan, who started the Read India Campaign, has worked towards educating slum children as well.
In all these cases, one can see a commonality: there has not been any charity or direct help involved. These entrepreneurs created new systems to better lives after studying the specific problems and addressing them. These stories are inspiring and anyone wanting to make a difference to society can learn different ways of contributing to this common good by reading this book.

Troubling signs in a stable economy : Buisness Line 9th February 2016

Macros may be sound, but chinks — corporate bottomlines, NPAs and falling exports — cannot be ignored

Fiscal 2016 has been a fairly confusing year for us. We are the fastest growing economy in the world, a view reiterated by all global agencies. There has been a lot of praise for the policies invoked by the government.

A number of indicators show that things are moving forward. Yet there are disturbing features that engender scepticism. Hence, there is need to build a balance sheet for the economy to clearly separate the winning and pain points.

Plus points

On the assets side, the first thing is that growth in GDP has held up and will be marginally higher than that in FY15. While this is a distance from the 8 per cent plus rate we had hoped for when we started the year, a stable rate of 7.5 per cent is assuring.

Second, industrial growth has been higher than last year and growth between 4 and 5 per cent seems possible, aided by a combination of revival in household demand and infra investment in roads and railways, topped with a statistical low base effect.

Third, the Reserve Bank of India has lowered interest rates by 75 bps this year which is indicative of the fact that it is happy with the inflationary situation: the way ahead is clearly downward.

Fourth, the current account deficit is quite well placed at 1.5 per cent of GDP, which is one reason the current global disturbances have not created the panic reminiscent of 2013 when the Fed was supposed to announce its QE tapering programme. Related to this development is the fact that the import bill is under control, with both oil and gold being lower. A bit of luck on the global economic scene front has kept the oil bill under control while several attempts at dissuasion have controlled to an extent the import of gold.

Fifth, the government’s subsidy bill has been controlled with a combination of luck as well as better administration through rationalisation. And lastly, we continue to draw healthy FDI flows despite the global disturbances.

Troubling liabilities

The liabilities side does raise concern. The first concern is that agriculture remains a non-performer. We work on the assumption that we have never had two successive subnormal monsoons, and are caught offguard when it happens. While we have reacted to a specific crop crisis, little has gone in to prevent one from happening. Such myopia has been witnessed over the years.

Second, credit growth is low as companies are not borrowing. While there has been some substitution from the commercial paper market for working capital requirements and the bond market for long-term finance, such borrowing is concentrated in the financial sector. Most of the growth has been in the retail area. Investment has lagged in manufacturing with the average capacity utilisation rate being around 70 to 72 per cent. This also indicates that infra investment in the private sector is yet to take off.

Third, the same is reflected in the gross capital formation rate which has been coming down over time with Q2 witnessing a decline from 28.9 per cent in FY15 to 28.3 per cent in FY16.

Fourth, our exports have been declining — this is cause for worry. It indicates that our goods are not competitive as the real test is what happens when the global economy slows down.

While our focus through policy has been on providing sops on imports, tax holidays and better administration, the medium-term goal should be on changing the composition so that we can increase exports. The decline in the rupee, to the extent that it helps, has been comparatively too weak to make an impact as the rupee has performed better than other competing currencies.

Fifth, the corporate sector’s performance has been disappointing, with three successive quarters of decline in profits. While sales growths have been positive and margins have been retained, stress has developed in terms of debt service and profitability.

Sixth, the banking system which is being addressed through appropriate policy measures by the government and the RBI is bogged down by high nonperforming assets and low capital. There has not been much progress here and while the third quarter results are coming in, it is unlikely that either the fifth or sixth concerns are going to be reversed.

Finally, FPI flows into both equity and debt so far have been very low so far till December, at minus $4.2 billion and plus $0.9 billion, respectively.

Some discomfort

On the borderline there are issues that look good but still cause discomfort. First, CPI price inflation has come down to the 5 to 6 per cent range but looks unlikely to ever go to the 4 per cent mark on a sustained basis.

Second, WPI inflation, though in the negative, has squeezed the pricing power of corporates. If input costs have fallen, so have the prices of final products.

Third, while the fiscal deficit has been targeted at 3.9 per cent and will likely be achieved, there is some apprehension on the quality given that the disinvestment programme will not work and expenditure cuts may be invoked.

Putting all these entries together, a dispassionate view would be that there is still a lot of work to be done. What we have attained this year is just about a stable performance with probably an upward bias for some variables. However, areas that require fundamental changes need to be addressed more resolutely in FY17.

Drawing lessons from the China trouble: Financial Express 25th January 2016

A lot has to be done to lower inequalities so that the relatively-less-rich people enter the spending stream in a big way. Creation of jobs and direct support from the central and state governments is needed, as we have reached a state where tackling inequality is not a moral compulsion but an economic necessity.

The current global economic situation hinges around what happens in China. While, according to the IMF, in 2016 the main growth impetus is to emerge from the developed nations, the China factor will continue to dominate the financial landscape for some time. Discussions do surround the issue of whether or not India can fill in the gap left by China, which may border around hubris, as there are similar underlying factors that lie in the economic stratosphere which we should guard against.
The Chinese model of growth, which took the world by storm by promising more, was based on the premise that heavy investment, especially in infrastructure, can be the road to sustained prosperity. As long as it happened, it was good for everybody. The Chinese economy grew very well and the double-digit growth rate became the norm. Chinese goods based on cheap labour flooded the market, which was good for importing countries. China became the largest consumer of materials, especially natural resources, which meant that the exporters of minerals and crude were happy.
As China consumed larger quantities, a chain had been built that dragged along all other nations. At the same time, China’s tryst with growth became an obsession as the yuan became an increasingly important currency—to the extent of entering the Special Drawing Rights (SDR) basket last year. Across the world, investors in both stocks and commodities gained from this meteoric rise of China. The so-called decoupling theory held after 2008, where the growth waves emanated from the Forbidden Kingdom.
The flaw in this model was known but not accepted, as it was assumed that gravity would keep this chain never-ending. The chink in the armour was that growth cannot be sustained without consumption. An investment-based model works only up to an extent, and China revelled in the infrastructure boom with roads, super highways, trains, ports, airports, etc, which added substantial delta to the GDP. But there are limits to this kind of growth, and unless there are more people to use the same structures that have been created, the momentum cannot be sustained.
A second fallout of this route was that growth was financed by the institutions at state-controlled interest rates, with dictates from above. This resulted in a weak banking system, and while the NPL levels are low, there could be a lot hidden in the books.
Third, growth has not been inclusive and it is only the higher echelons which have gained in this model. The percolation has not taken place, and with the one-child norm being pursued as policy and substantial migration to the US and Europe of the skilled youth, the country is to run against the wall of shortage in skilled labour, which will only get exacerbated as more people join the retired gentry.
Fourth, in a move to prop up the economy, the government is pursuing a dual path of pushing up investment by lowering interest rates as well as letting the currency fall to edge up exports. Both these moves could be counterproductive, since higher investment may not be the need of the hour and, by doing so, one may just be creating another set of bad assets in the absence of consumer demand. The decline in the currency has not been taken too positively by other emerging markets and a series of competitive depreciations can be witnessed where, at the end of the day, there could be no winners.
The China syndrome will continue to play out and go on distorting the global markets; what was seen in the currency market to begin with has percolated to the stock markets where tremors on the Shanghai exchange are felt in New York and Mumbai.
Are there any lessons for us in India?
We have not yet fully optimised the investment-route model and, hence, with the existence of spare capacity there is room to leverage the same while filling in the lacunae. But the problem of consumption remains for us too. Over the last three years, it has been observed that household consumption has also come down on two scores.
One, incomes at the lower levels have not increased, where the population is large in number. Therefore, purchasing power has been limited to a fixed class which is not expanding at the desired rate. This section typically is satiated and, with the exception of replacement demand, would only find use for new goods in the market. Two, high food inflation has dented the consumption power of households, leading to less demand for non-food items.
Clearly, we have to improve the income distribution of the country to ensure that consumption keeps increasing, or else we would encounter the same issues and challenges as China.
India too has been trying to follow the investment route to growth, but has been constrained by the availability of funds; this is not so in China, which has also managed to attract large doses of FDI with an enabling environment. However, it has been observed that, in a democratic set-up, an investment growth model will never be smooth due to a plethora of issues relating to land and environment; this was not a limiting factor for China where the state controlled all decisions.
In addition, forced low interest rates can result in higher NPAs when there is a downturn, which was the case between FY12-15 when projects came to a halt for a variety of reasons. It is only appropriate that RBI while lowering interest rates is continuously cautioning banks on the quality of assets.
Last, on labour force, while the challenge is not that acute given our young population, the challenge is really with skill development, which is what the government has been focusing on. Having a large labour force can be counterproductive unless it is trained in relevant skills, or else the demographic dividend can turn into a nightmare.
Therefore, there are lessons to be learnt from the China model and not focus just on investment but also consumption. For the latter to happen, a lot has to be done to lower inequalities so that the relatively-less-rich people enter the spending stream in a big way. Creation of jobs and direct support from the central and state governments is pragmatic as we have reached a state where tackling inequality is not a moral compulsion but an economic necessity.
It is, hence, quite appropriate that both the government and RBI keep talking of inclusive growth in terms of income as well as access to credit.

Flash Winners book review: The e-way ahead: Financial Express 24th January 2016

Flash Winners: A New e-Commerce Model for Success
David Abikzir
Westland
Pp 239
Rs 599
E-COMMERCE APPEARS to be the most happening arena right now, with Amazon, Snapdeal, Flipkart, etc, being the most prominent names. The concept sounds exciting because it appears easy. This is because it is based on transacting on the Internet, which looks seamless. Given the fact that most of us look upon technology as the be-all-and-end-all of life today, it is not surprising to be in awe of this mode of transaction. However, we often forget that even though technology enables processes, it cannot be the core of such business. The business, as a standalone, has to be tenable, with a number of ends that have to be woven together cogently. Invariably, we do not look at the yarn. And that is why a lot of e-commerce ventures fail.
David Abikzir in his book, Flash Winners, takes us through these phenomenon and starts off by telling us that around 50% of e-commerce ventures have closed down in a years’ time in India. What is more disheartening is that within three years that number will swell to 80%. This means that there will just be one-fifth possibility of success for a e-commerce venture in three years’ time. Unsurprisingly, the prospect of getting into such ventures does not sound that attractive any more.
Abikzir takes us through the trials and tribulations of these ventures in a conversational mode by creating a character called Teju whose parents ran a very successful mom-and-pop store. But when Teju’s mother tried to run the business through an e-portal, it turned out to be a disaster. The conclusion drawn is that what works at the physical level does not necessarily work in the e-mode.
Gauging the market is tough. And though India looks attractive, given the size and classification of the population based on income as per the National Council of Applied Economic Research (NCAER), entrepreneurs have faced challenges all through. The enticing numbers by the NCAER have tended to sway several companies that have tried operating in India. However, not getting a grip of the environment in which the companies want to operate in can be defeating. To drive home the point, the author gives the example of how a foreign wine producer wanting to set shop in India got all its calculations amiss. People may appreciate imported wine in an exhibition, but once such a producer tries to do business in India, he has problems with processes like permissions, importing channels, distributors and retailers, and ends up with a high price, which is not acceptable. The realisation that India is a beer-drinking, not wine-consuming nation should be appreciated. Going by general market research, which shows that a large part of the population is mobile up the income scale, could have led to erroneous inferences.
Now, coming to e-commerce, one has to choose between an inventory-led model and a market-driven one. The former has a challenge of how to procure, store, finance and handle distribution. Any fall in quality of service can drive away the consumer. When dealing with fresh produce, one has to be doubly careful of packing and dispatching it. Again, distribution channels are important and depending on whether one uses their own transport or hires from a third party, costs vary and the models end up being not so profitable.
The other model is the ‘market model’, which sounds better, as it aggregates over various producers and distributors with fewer issues of inventory handling. Hence to an extent, the costs are defrayed over a wider group. The author provides various calculations to show which model works best given the costs—transport, packing, margins at all levels, warehousing and marketing. In fact, marketing becomes very important and he backs the showroom concept, which is the Web page that actually brings producers and consumers together, just like how a physical store attracts consumers. The strategic positioning of products on the Web page can change the consumer’s preferences.
The author’s model of profitability is to shift marketing and shipping expenses to suppliers, as these are two big expenses in such a model. This would mean having two sets of products—one which customers want and the other that gets high margins. Further, discounts need to be procured from suppliers based on the basis of high volumes, so that profits can be stepped up.
The author classifies all such ventures into three categories. The ‘stagnant’ ones play safe and do not scale up being risk-averse. Their progression is based on a fixed path that is followed and may not be visible to others, as they are not in the race. The ‘losers’ are the largest category, who want to break free, not follow the rules of the game and like to set their own. They are creative and innovative, but aggression also means that they do not understand the cons of their models and falter. The ‘winners’ respect the standards and are able to make them evolve as per the progression of the game.
Hence, while the entire concept of e-tailing sounds very inviting, what goes on in the background is probably what holds the clue to the survival of the enterprise and finally impacts profitability and sustenance. Issues like after-sales service are very important and while a customer feels confident when dealing with a ‘brick-and-mortar’ store, it might not hold when it comes to an e-venture. Payment convenience is important and tying with various payment gateways is essential. Other issues are availability, delivery time, discounts, freight cost, etc.
In brief, Abikzir is able to explain not just the ethos of the Indian consumer, but also the loose ends that have to be tied when starting and running an e-commerce venture. Conventional tools like strategy, market, product format, system and profitability remain the same. But when we move over from a model where there is physical interface to one which is through the Internet, one has to be doubly watchful about the implications of all these tenets.
This is surely an interesting book and would appeal more to those looking to start such a venture. It could also provide answers to existing failures, which can lead to introspection. This is so because while elucidating why ventures fail, the book also explains how one can avoid these pitfalls—and, more importantly, tells entrepreneurs that they have to be open to ‘adapt’ to the situation and work their way through.

Less than 5% CPI, unsustainable: Financial Express 14th January 2016

During the last 10 years, CPI inflation was above 5% in nine, with FY06 being an exception, at 4.4%. On three occasions it crossed the double-digit mark and two others ranged between 9-10%. To expect CPI inflation to fall to less than 5% on a continuous basis would be extending optimism.

With inflation once again remaining fairly sticky in the 5.5% range, a question that can be asked is, whether targeting a CPI inflation rate of 4% looks reasonable given our past experiences? Inflation in India has always been unpredictable, with both internal and external factors influencing this number. While oil prices are a known variable when it comes to driving inflation, other commodity prices driven by global factors have surfaced in the last two years, sending conflicting signals through the inflation indices. At the same time, domestic shocks have emanated from products such as onions, often leaving us helpless in terms of policy response.
Conventionally, one could always say that the WPI and the CPI moved together, with the thumb rule being that the difference would be 2% points. Normally, the CPI would rein higher than the WPI. The former is a retail price index and the latter closer to a producer price index. The two indices differ in terms of weights given to various components, besides these constituents being different. The WPI includes machinery, metals, etc, which do not feature in the CPI. The latter, in fact, is dominated by food products, clothing, travel, rent, recreation, etc. Given the long value chain in the system, retail prices are always higher than wholesale prices and tend to increase more than proportionately as margins get enhanced during an upswing in prices.
In the last three years, things have changed, with the differential between the two indices increasing at the rate of 3% in FY13, 3.7% in FY14 and 4.3% in FY15. For FY16, the differential is above 5%, with the WPI indicating a negative number. This has caused different emotions, with no one being happy. Consumers still complain that prices are high, and inflation of food items has denuded the purchasing power and demand for non-food products, which is reflected by the low growth in industry. Producers have been affected by declining prices, which has impacted their profitability. While both raw material cost and final prices have declined, they have witnessed a sharper drop in prices of their products. How exactly can we interpret inflation?
In India, inflation is necessary and inevitable to keep business ticking. It has been observed that prices should increase by at least 2-3% on an annual basis for manufacturing to provide incentive to produce and make profit. Therefore, deflation is definitely not a good sign for industry even though it provides comfort for policy-makers. Consumer prices, on the other hand, are bound to increase by at least 5% on an average basis and anything lower would be by chance only.
Data for the last 10 years indicate that CPI inflation, going by a combination of the index for industrial workers and the new CPI with base of 2012, was above 5% in nine of the 10 years, with FY06 being an exception, at 4.4%. On three occasions it crossed the double-digit mark and two others ranged between 9-10%. Hence, to expect CPI inflation to fall to less than 5% on a continuous basis would be extending optimism. More so because the factors that have led to this relatively high range of inflation are driven by circumstances over which the government and RBI have little control. There are reasons for this.
First, CPI inflation is affected mainly by what happens in the farm sector. The behaviour of the monsoon and the outcome of the two crops, rabi and kharif, will have a major bearing on how these prices move. Further, prices tend to react to news on crop prospects, and given that the monsoon rains have now become erratic across various regions (even if the overall number is normal), prices have become volatile.
Second, it has been observed that specific price shocks have caused considerable increases in consumer prices. It could be pulses this year, or onions, tomatoes or potatoes on others. Excessive monsoon rains or damage to crops could cause considerable increase in prices, even with an otherwise normal harvest and low inflation for other crops.
Third, the MSP issue has been contentious as it rakes up the debate between interests of farmers and consumers. While the government has tried to moderate the increases in these prices, at times it may not be possible to control these hikes as farm productivity and interest in agriculture has been dwindling over time. This factor would continue to exert pressure on the CPI food inflation index.
Fourth, we have now moved over from a controlled regime for prices of petrol and diesel to the one that is market-determined. Here again, these prices have become volatile for two reasons. One, while the global crude oil prices are low today, any increase in price would automatically get reflected in the CPI both through fuel inflation as well as indirectly through the transport and travel components. Public transport and taxi fares once increased never return to the earlier levels. Two, given the state of markets, the rupee has also been susceptible to depreciation, which, in turn, increases the prices of fuel products that are not controlled. As the government works towards moving away from the system of providing subsidy on fuel products or minimising the same, the prices would tend to go only in the upward direction.
On the other side, global commodity prices, which have played a critical role in lowering producer prices in the last two years—especially of metals, fertilisers, metal products, machinery, etc—can be reversed once the world economy turns around. This would tend to push up prices of manufactured goods within the WPI and indirectly to a lesser extent on the CPI.
To conclude, it may be stated that there is a bit of uncertainty in the global markets right now, and with a strong likelihood of volatility in the domestic market for food products, inflation is bound to be relatively high compared with those of developed countries. Hence, while 2% is the norm which is used by the US Federal Reserve or the European Central Bank to target inflation and hence monetary policy, in our context the threshold has to be higher.
The current level of 5-6% looks realistic as anything higher could cause pain. However, to target anything lower, while a theoretical possibility, may not provide proper guidance for monetary policy formulation as the number would be hard to achieve and sustain. And more importantly, almost 80-85% of the index is not affected significantly by interest rates.