'Never accept Economic truths merely because somebody said so'-
Just Released books: Corporate Quirks: The darker side of the sun and The Search for Aurangzeb's Stone (fiction)
The credit policy is no longer a policy or
view of the RBI but that of the Monetary Policy Committee. Being based on a
consensus from a combination of internal and independent external experts, the
flavour changes and dispels the common loosely held view that it can be
influenced by external factors. The decision to lower rates was expected even
as the market has made it a habit to always buffer a rate cut every time a
policy is announced. Prima facie, it appeared that with CPI inflation going
below 2% there was strong reason to lower rates as the target which has been
set is 4% with a band of 2% on either side. With the number crashing through
the lower limit, a clamour for rate cuts naturally built up. But if one goes
back to the earlier policy statement from the RBI, there were some issues
highlighted which are still not addressed today. There were three concerns that
were flagged in June which surprisingly still find mention in the policy
statement though the RBI appears to be more positive this time. First, the GST
which was to be brought in from July has an unknown impact on inflation even though the government has assured that
at the aggregate level it would be neutral. Second, the Pay Commission
revisions were to kick in from July on the house rent allowance which would
statistically push up the rent component of the CPI. This is critical because
the non-food components have witnessed increases in the range of 4.5-5.5% in
the past few months and are likely to increase on both these scores. Third, the
states’ fiscal position was under pressure due to loan waivers which came in
the way of RBI action as demand pull inflationary forces could build up with a
lag. It should be kept in mind that the less than 2% inflation rate was partly
due to a high base effect which would get diluted along the way. Add to this
the recent sharp increase in prices of vegetables; there would be upward
triggers though the number of 4% is unlikely to be breached in the next couple
of months. While analyzing rationally one could have argued for status quo, the
growth pressures have been compelling with strong support from low headline CPI
number. The Fed has maintained an unchanged stance this time which combined
with lower domestic rates can impede the flow of FPI and hence weaken the
rupee, which may in turn not be bad for exports. Will there then be further
rate cuts during the rest of the year? Probably yes, once the picture on all
these concerns are known, which could be by October. A good harvest is expected
though any specific crop price hikes cannot be ruled out if there are
shortfalls in some pockets. Therefore, another call on rate cuts can be taken
at this point of time. Further, as this will also coincide with the busy season
when demand for credit picks up, it seems to be fairly reasonable to have the
RBI lower rates at this point of time. The next policy will hence be quite
crucial as a clearer picture emerges on inflation. While growth is low, it has
been so for the last few months and hence would not be the major driving
factor. Another 25 bps cut looks likely on the cards in the second half of the
year.
The author considers Rabindranath Tagore (left) and Mahatma Gandhi the epitome of civilisation and avers that we should all go back to their schools because it’s the right direction
A word we use very often is ‘civilisation’, where the term connotes various things to different people. We talk of western civilisation or Islamic civilisation, where we typecast society into following a certain headline ideology. In the earliest days, anyone who did not speak Greek was called a barbarian and, as time went by, every culture espoused its ‘superior’ civilisation and rebuked others. Hence, every country invariably lays down these contours, and deviations tend to get highlighted as being against these paradigms. Ramin Jahanbegloo starts out from this point of what is civilisation and then takes us through different philosophies of what it stands for, before bringing us to the contemporary era, which has deteriorated to the extent that we have ‘Islamic fundamentalism’ and people like Donald Trump who dominate the global space.
Civilisation is essentially empathy for others and cuts across countries, religions, groups, etc. It’s a case of recognising that we are all human beings and that we should treat everyone the same way. Merely going in for modernism, which covers westernisation and capitalism, does not uplift civilisation. This is where the author brings in two persons who he considers the epitome of civilisation, and who are, coincidentally, Indians: Rabindranath Tagore and Mahatma Gandhi. Not only does he spend time detailing what they stood for, but also avers that we should all go back to their schools because it’s the right direction. Let us look at Gandhi, for example. The three words that explain what civilisation is are swaraj, satyagraha and sarvodaya. Intuitively, we can figure out what the author is hinting at. Freedom to do what one wants without impinging on others is a basic human dictum that sounds logical. Similarly, non-violence makes a lot of sense in a civilised world, where issues can be sorted out through dialogue rather than violence. While reading about acts of violence anywhere in the world, the reader would have certainly felt that there are better ways of sorting out differences. Feeling for others is another basic rule that looks rudimentary, but is rarely followed.
This is where the author leads us to where the problem lies. Capitalism, survival of the fittest, growth, greed, etc, are all reasons why we deviate from these basic principles, and which lead to the transformation of society. So ironically, de-civilisation is not the absence of civilisation, but the idea of ‘thoughtless civilisation’. The moment we lose empathy for other human beings, we can say de-civilisation has set in. This is why we have discrimination in different forms, which can lead to violent responses too. The usual pockets of this phenomenon are manifested in assault on minorities, women, children, marginalised societies, etc. Therefore, when emotion and empathy take a backseat, we can be sure that we are headed towards de-civilisation. The author takes us through the views of various philosophers on this issue, which have pervaded over centuries, such as Freud, Rousseau, Kant, etc. The view and direction are always the same on the issue, but it’s just that societies have deviated significantly from the ideal due to the so-called development processes, including ‘machinery and technology’, which have been pointed out by the author as being among the driving factors for the deviation because they are done unconsciously. Western capitalism, for example, espouses survival of the fittest, which, clearly, makes a distinction among people and severs any link with empathy and humaneness, which is what profit is all about.
Interestingly, he points out that once we say ‘might is right’ in the realm of politics—and one can draw parallels easily in today’s world—we cease to talk about a hopeful, interconnected and dialogical mode of living together, but veer towards de-civilisation and dehumanisation. The author recommends that we should actually go back to the principles of Tagore and Gandhi, whom he holds in high esteem, to regain civilisation in the right spirit. In fact, if we don’t redefine this connection, we will never be able to reconcile poverty, tyranny and fanaticism with civilised facades of religion, technology and capitalism. Tagore was opposed to modern civilisation that lacked wholeness due to the predilection for materialism, which impeded moral progress of humankind. The caption ‘unity in diversity’, which was from Tagore, encapsulates it all. When talking of de-civilisation, he talks a bit about the Islamic forces, which are a product of fanaticism. Here, he also highlights the destruction of culture, drawing parallels between the destruction of Buddhist statues in Afghanistan, what Alexander the Great did when he burnt down the palace of Persepolis and Babur’s destruction of Jain temples. But Jahanbegloo is equally critical of Trump who, he feels, is against the existence of ‘others’. Both these examples intertwine the problem of civilisation with evil, as per the author.
The curious part of the global saga, which is disturbing, is that the ISIS has progressively more sympathisers and Trump more voters. There is, really speaking, not much thought on humanism or empathy these days except in the form of aid given by countries to poorer ones, which also is no longer on the radar of most developed countries, which have their own problems. This is quite a good book, which talks about the degeneration of civilisation. Whatever has been stated is right and can’t be contested. However, the author does not quite show how to reconcile the idea of civilisation with the truth of capitalism, which has come to stay and, hence, is very idealistic. Countries are on the road to progress, where movement is always uneven. At the economic level, there is no solution provided nor does the author offer a way to reconcile the rise of, say, fanaticism with reality. Propagating going back to simplicity is theoretically fine, but not practical. Hence, one should read this book more as a commentary on what the title calls the ‘decline’ of civilisation, and not really as a roadmap for the future.
However, there are some interesting aspects to the impact demonetisation has had, and that cannot be ignored
Six months since the end of the demonetisation effort, there is no clarity on its impact or consequences. For a cashdriven
economy, such a transformation is significant as it has tried to change the way in which business is conducted.
It is still not certain whether or not equilibrium has been reached in terms of the repercussions of this scheme having
played themselves out. Answers are not easily forthcoming; however, we can make some interesting observations.
Some observations
First, the major objective was to attack if not impound black money. Unfortunately, the Government has not yet come
up with a number regarding how much illegal money flowed from the second income disclosure scheme and the
accompanying tax. The RBI too has not yet announced the quantum of money that came back into the system out of the
₹14.5 lakh crore of demonetised currency, though the market believes that almost everything returned. Hence, it is
status quo on black money.
The second objective was to target terror funding which, prima facie, made sense: it was revealed that during the
demonetisation drive, the incidence of terrorist activity in Kashmir had reduced. But with skirmishes against the
establishment increasing of late, the comfort experienced during November-December could be interpreted as being
only temporary. We cannot be sure whether or not terror financing has ebbed.
Third, the Government had sought to attack counterfeit currency, but the actual picture is not known as yet. There have
been reports of such money being discovered, though these are isolated incidents. In fact, counterfeit currency is very
difficult to trace; this is an issue facing almost all countries as the currency tends to blend into the system through
different means.
Economic impact
How about the economic impact? Here too there is not much clarity. The impressionistic view is that GDP growth got
impacted by at least one percentage point. The economy appeared to be moving along very well till October when a
good monsoon and high consumer spending augured well. Hence, there did not appear to be anything amiss in the
economy which should have registered higher growth than 7.1 per cent relative to 8 per cent in FY16. Assuming that the
lower growth could be attributed to this process, it could be construed as being the cost of demonetisation on output.
Second, the corporate performance for Q3 and Q4 was downbeat. Demonetisation affected all the consumer-related
sectors which are driven by cash such as consumer durable goods, automobiles and real estate, and those linked with
them. There was some recovery in the auto segment in March when companies tried to offer discounts to sell vehicles
that were not compliant with the Bharat IV norm. This performance could have been treated as an anomaly but for the
fact that India Inc will continue to face challenging times in Q1 and Q2 of FY18 due to GST which has led to major
destocking exercises that will further disrupt normal activity.
Third, the combination of the first two factors has also meant that job creation continues to be slow as there were
substantial job losses to begin with especially in the SME segment where an embargo on production due to absence of
availability of cash led to large-scale retrenchment. The impressionistic view is that employment also was impacted in
Still in shadow The other end of the tunnel Hung Chung Chih/shutterstock.com
8/3/2017 The picture’s hazy, even six months on | Business Line
http://www.thehindubusinessline.com/opinion/the-pictures-hazy-even-six-months-on/article9778927.ece 2/2
the plantations segment in agriculture. This has turned around gradually of late but will reach normalcy only after the
impact of GST gets absorbed.
Fourth, there is no clarity on the digitisation process, which became the objective of this move somewhere along the
way. There are two ways of looking at this. There is evidence to show that there has been an increase in the use of
digital modes of transaction such as mobile phones and electronic wallets. This cannot be disputed even though the
numbers have declined somewhat after March-April.
An interesting aspect
But the data on money supply is interesting. As the supply of currency kept increasing there has been a tendency for
larger quantities of currency to be held by the households. At the time of demonetisation the currency to money supply
ratio (a currency multiplier) was 7.02. It peaked in January at 13.91 and came down to 8.56 by June. Hence, the
penchant for holding cash has not ebbed and will be absorbed as supply increases.
Fifth, the banking system has certainly gone through turbulent times. The surplus cash has found its way into deposits,
leading to the build up of extra cash with the system. The amount is quite large at around ₹2.7-3.7 lakh crore as the
outstanding amount under term and overnight reverse repo. This automatically means that there is a carrying cost for
banks, which may have to pay at least 4-7 per cent on these deposits depending on the tenure, while the return is
around 6.25 per cent. The cost borne by the RBI/Government on an annualised basis would be around ₹18,000-20,000
crore.
These developments have been positive for the electronic mode of transactions as cards/e-wallets/transfers carry a cost
which is paid finally by the customer/trader, etc. The widespread use of such facilities has positive implications for the
telecom industry too with greater usage of the media as well as the manufacturers of phones as the habit catches on.
This is a big positive for the system on this score.
Bold move
But on the whole the demonetisation exercise as it stands today looks to have been a bold experiment which went
through peacefully though the results are still unclear. The digitisation objective which came in later has certainly made
progress. But the abhorrence for currency as posited by votaries of this scheme is definitely not supported by the
households which continue to prefer holding cash for various reasons. Hopefully the generation of future black money
will be slower with GST and other reforms such as RERA in place which will help make transacting easier as well put a
check on the generation of such income in future
Banks have to rework their strategies to make arrangements for capital. This will also mean putting their books in order and working hard to use the IBC-NCLT combination.
he industrial growth number for May is quite disappointing as it does indicate that there are still few signs of the expected economic turnaround. Add to this the fact that the Goods and services tax GST has been introduced and there is some uncertainty on how the economy will fare. While an upward movement will definitely take place, the timing and pace are uncertain given the potential disruption that could be caused by the GST in the production cycles.
As usual with low industrial growth and low consumer inflation (Consumer price index) prevailing, it is but natural for the government to ask Reserve Bank of India to lower interest rates in August policy. But, will it work? The problem in India is an acute shortage of demand which had led to the build-up of excess capacity where making more investment does not make sense. Further, with the NPA resolution still in the initial stages, banks would not be willing to be aggressive in lending. Therefore, forcing the central bank to lower rates may not really work, but only provide an inadequate cover for a more deeply ingrained problem that exists today.
RBI has lowered the interest rate last year and also gotten banks to improve the transmission process. Yet, credit growth has been tardy as demand has been limited (or migrated to the debt market). It is not surprising that banks are sitting on around `3 lakh crore of surplus funds which came in during the time of demonetisation being unable to deploy these resources. Hence, there is an anomaly in the market where banks are being compensated through the reverse-repo auctions (daily and term) and paid around 6.25% by RBI, or else they would end up making a loss on these funds.
The stalemate in the country has been caused by the government prodding RBI to lower rates, which is not happening as RBI has to take a forward looking stance on inflation, where the signs do indicate an upward trajectory. This is so because of higher vegetable prices, increase in the rental component in the CPI due to the implementation of the Seventh Pay Commission recommendations on ‘allowances’, GST impact on service prices and some manufactured products like clothing in the CPI and the good chance of higher fiscal deficits of states on account of the loan-waiver schemes the headline inflation trajectory would be upwards once the base effect wears off.
On the other hand, the government has virtually refused to compromise on the fiscal target. It has been stated clearly that the centre would not support the states on waivers and that the latter will have to adjust from their budgets. In this situation, it is unlikely that the deficit target of 3.2% will be breached, and hence there will not be any impetus coming in from the centre. Where does that leave the economy? A strong demand-side problem cannot be addressed by lowering rates and this is something which must be appreciated. Making such a demand sounds logical considering that the CPI numbers are less than 2%, which is the lower band level set by the monetary policy committee (MPC). Government spending, today, is limited to around `3 lakh crore on capex this year as per the budget which on its own will not be able to provide the impetus. States cannot support this push as they would be forced to lower their capex in order to meet the deficit targets after adjusting for loan waivers. There is, hence, an impasse here.
The government so far has done well on administrative reforms, which, as has been seen, are unable to push the economy forward. This also means that any clean-up in the system makes the ‘business of business’ easier, but can do little to increase production. A direct push is required through aggressive spending. The private sector has to play a large dominant role but is constrained to a significant extent by the non-performing assets (NPA) problem. Infrastructure travails remain, and while the government has done well with national highways and railways, the other segments still require large doses of investment. This implies that the growth process will only be gradual this year and a sudden revival looks unlikely.
The GST is a disruption as one is not sure how it will work out. As it is supposed to be a revenue neutral and non-inflationary system, it needs to be seen how the two will be matched. It has led to a large quantum of de-stocking in the months of April and May, which will affect growth numbers in June-July. However, as companies do maintain certain levels of inventories during the year which can range between 15-25% depending on the industry, it can be hoped that re-stocking would start in the months of August-September onwards, which will help to push up growth and start the virtuous backwards link with the rest of the economy.
The other factor is the Kharif prospects, which appear to be good today. A good crop like in the last year will help to revive rural spending, in turn, providing a push for consumer demand. As both the process of re-stocking and consumer spending would begin roughly at the same time from September onwards, this would be a critical period for the economy if it is to recover from the low-growth trap that it got into ever since demonetisation. Hence, the second half of the year will be critical as it will guide future prospects. The psychological mark of 8% growth has been elusive for long (the 8% number for FY16 has come in only as a revision which makes it less satisfactory) ever since the new base year was used for calculating gross domestic product (GDP) from 2011-12 onwards.
While this process is on, the financial sector has to be geared to meet this demand, and banks, in particular, will have to rework their strategies to make the arrangements especially in terms of arranging for capital. This will also mean putting their books in order and working hard to use the Insolvency and Bankruptcy Code (IBC)-National Company Law Tribunal (NCLT) combination to resolve the NPA issue. It may be hoped that this would be completed in this fiscal so that FY19 could start off on a better plank with both higher growth and a robust financial system.
Stock markets are always an enigma as very often it is hard to rationally explain price movements. Market transactions which determine the final price on a real time basis could be driven by several factors and often it is difficult to distinguish between a forward looking view and a contemporary one. A press conference on GST can buoy the markets either way, but it would be back to normal the next day. This is what makes it challenging to take a view on prices.
Add to this the plethora of advice that the reader or viewer gets on individual stocks every day, and one can be confused about investing for a long term horizon, as one can never be sure whether it is the right time to buy or sell. And, much like the economic forecasts where economists have an array of numbers for the same variable, two experts could be advising differently—one to buy and the other to sell the same stock.
Is there any sense in these numbers? For example, if one looks at the banking stocks today, the NSE sectoral index shows that since April there has been an upward movement at a time when the banking problem has been very much deep rooted. The talk is on merging PSBs and infusing capital, and there was gloom when uttering the word ‘banks’. But the announcement that there could be a solution in the offing on NPAs through the IBC has spurred a revival in confidence in these stocks and the sentiment is positive. Otherwise, for a sector which is still looking for the proverbial light at the end of the tunnel, there should be despondency everywhere.
A way out is to see if stock indices reflect the core strength of the economy and the best way out is to look at the GDP. This can be done over a longer period of time logically, and annual numbers make sense. In fact, even monthly data on variables like industrial growth, inflation, interest rates, primary issuances, etc, do not link well with stock movements, though FPIs have a better fit. Very short-run influences would be nebulous as with stagnation in the industry, growing NPAs, limited private investment and a decline in credit growth, stock market sentiment cannot logically be positive or change that soon. Of course, experts aver that stock prices are forward looking and if the expected earnings justify a forward looking number then they should also be ahead of the curve. At times it is argued that as future earnings matter more than the past; hence rising stock market heralds only better times.
At the other end, mutual funds are singing a lilting tune with almost every scheme showing fabulous returns over five years, which gives the impression that any such investment would have beaten the market. This is intuitively not surprising because if the Nifty is reigning at an all-time high, any comparison with earlier years would necessarily denote such high returns and would increase if one moved back in time
Therefore, ideally, an average index for the year is more appropriate as it isolates these end point swings which can kill the good mood. This average movement in the Nifty can be compared over time to gauge whether or not it has kept pace with GDP growth. This would be a pragmatic way of looking at such relationships.
The table alongside provides information on GDP growth since 2006-07 and average Nifty for each of the years up to 2016-17.
The table shows that up to 2015-16, in general, the stock market movements were in line with the GDP growth rate of higher growth in the latter being associated with higher Nifty movements. 2012-13 was the only exception where the Nifty went up by 5.3%, even as GDP growth slowed down from 6.7% to 5.5% (this would hold even with the earlier the base year of 2004-05). The year 2015-16, witnessed virtual stagnancy in the Nifty on an average basis, but GDP growth increased at a higher rate. Very significantly in 2008-09, following the global financial crisis, the Nifty had almost crashed by around 24% as GDP growth also slowed down by a little over 250 bps.
The major anomaly was 2016-17 when GDP growth slowed down quite distinctly from 8% to 7.1%. Yet, the Nifty has increased by 5.6% and this enthusiasm carries on even today with the market moving by an average of 12% in the three-months period over 2016-17, which is remarkable. Growth indicators have not quite started looking up as yet though there is the ubiquitous hope that it should happen in the second half of the year.
The movement in 2016-17 was surprising because it came at a time when the government went in for demonetisation, which did push back growth to a significant extent. However, if a reason has to be ascribed, the credit for higher FPI funds coming in, which is the main driver, can be attributed to the reforms agenda of the government especially with the expected determined implementation of the GST. Also, the demonetisation move could have been interpreted positively as a frontal attack on black money which is expected to yield long term gains when combined with GST. Therefore, the rise can be attributed more due to positive sentiment than any parallels being witnessed in the growth canvas.
These numbers, hence, do indicate that if stocks have to be correlated with GDP growth over a longer period of time of say a year, on an average they would reflect well the state of the economy. Can the Nifty then be taken to be a leading indicator of the economy? Probably, yes, because in seven of the 10 years, the relation did hold and in another one, 2015-16, one would not have lost. The current situation, however, still warrants raised eyebrows, but as all expectations are that the economy will do only better than 7.1% this year, then rising stock prices must signal the same, though the extent may be interpreted as being a trifle exaggerated. But for long term investors, getting in may not be a bad idea still if one is looking at a longer term horizon when GDP growth should be ascending the scale and move towards the 8-9% mark. To put it conversely, if we expect higher growth in future, then the returns on the bourses must also get better.
Short-term investors, however, can never be sure, but probably that is the thrill about such investing.
Author of:
1."Macroeconomics Demystified" (Published by Tata Mcgraw Hill, 2008)
2. Eco Quirks: An Eco-cynic's journey into your world: Tata Mcgraw HIll, (2010-11)
3. Economics of India: How to fool all people for all times, Atlantic
4. Hits & Misses: The Indian Banking Story (SAGE, 2020)
5. Lockdown or economic destruction (2022, Atlantic), 6. Banking Trends and Controversies (2023, KBI Publishers) 7. Corporate Quirks - The darker side of the sun (2023, KBI Publishers) 8. The Search for Aurangzeb's Stone (Vishwakarma) 2023
