Book Review: Mapping The Mint Street: Business World 31st January 2019

The book is quite topical given the acrimony between the government and the RBI. Bajoria’s narrative provides the consolation that we need not be too scandalized by the developments as this has been happening all the time.
When nationalisation was announced in 1969 all politicians took it upon themselves to have more branches opened in their constituency. L.K. Jha, Governor of RBI wanted licensing to be RBI’s forte and the approach to be gradual. He was asked to leave in 1970.  Governor Jagannathan as head of RBI was not a willing partner to channel funds for Sanjay Gandhi’s Maruti project. He made an early exit from the central bank and moved to the IMF. Meanwhile R K Talwar of SBI was strict on loans to Sanjay Gandhi and Co, and as a punishment there was a CBI enquiry which however found nothing against him. Mr K.R. Puri as Governor of RBI was pliable and had a cosy relation with the Congress government. He was forced to leave by the Janata government in 1977. However, when heading a single person committee on demonetization undertaken by the Janata government in 1978, he responded with a scathing critique. Governor R.N. Malhotra was against giving the government a higher dividend in 1986-87  was not only snubbed but also got on the wrong side of the Finance Ministry during Chandrashekhar‘s brief regime and resigned in 1990. More recently Dr Urjit Patel resigned suddenly and the circumstances under which this took place left little room for speculation.

When you read about these incidents in the history of RBI and juxtapose with what is written about between the Government of India and the RBI in the current context, the idea which strikes us is that conflicts between the two has been historical with the government always having the last word.

It is the narration of these stories during different regimes of Governors of the RBI which make Rahul Bajoria’s, ‘Story of RBI’ very engaging. There are official volumes on the history of RBI which can be found on the web site of the central bank where one can get the historical narrative. But, Bajoria makes a difference by mixing history with several anecdotes that are relevant as they bring us closer to the RBI-government dynamics.

There are different aspects of the central bank that are captured here in these 280 odd pages. The evolution of the institution is vintage reading as one gets to know about how it was formed in 1935. The salient developments of a central bank are covered very eloquently right from the focus on agri finance to the present setting up of new payments banks. In between the genesis of institutions like NABARD, the story of nationalization, tackling forex crisis, introduction of LAF, sale of RBI stake in SBI, doing away with adhoc Tbills, FRBM, Narasimham Committee etc are covered in a rather crisp manner giving the essence without making the drink too voluminous. The creation of the MPC is probably one of the more significant developments in recent times as it is a distinct deviation from the way monetary policy is being decided. This is good for the student of central banking as it chronicles in a succinct way the major milestones.

The political context is mixed well with the functioning of the central bank and this is where one can relate to as the most controversial topic these days is the independence of the RBI. While political interference has been a part of the DNA, there appeared to be a period of mutual respect till about Dr Reddy’s tenure after which the level of acrimony appears to have increased with the governments tending to be more involved in the conduct of monetary policy. The personalities of various RBI Governors can be conjectured here where some like Dr Jalan and Dr Rangarajan come out as being professional and tending to steer clear from controversy. Others like Dr Reddy, Dr Subbarao and Dr Rajan came across as being progressively more assertive. The selection of RBI Governors also appears to be almost always political but the storyline has tended to change for the ruling power once the Governor becomes part of the RBI and turns professional. The Governor is no longer the government’s person on Mint Street.

With Dr Reddy the tone of conversation was more polite. When the Governor requested the then FM, Mr Chidambaram, to be circumspect in his media briefings to ensure that markets were not psyched, his reply was that in a democracy the FM could opine on monetary matters. Dr Subbarao came across as being vocal and had the same FM come up with classic quote of the ‘government walking alone’. There was also an allusion to bringing in fresh thinking in the RBI at this time which was a subtle reminder on who was more powerful. The tussle was always on lowering the interest rates by the RBI which carried on in Dr Rajan’s tenure. The politician Dr S Swamy had openly asked for his dismissal while Nirmala Sitharaman was critical of the choice of his words when he referred to the ‘one eyed king’. His other headlines made on the concept of ‘make in India’ or ‘tolerance’ also has been highlighted in the build-up of his differences with the government.

In more contemporary times the author revisits demonetization and the role of the RBI. In his opinion the RBI did not come out well in terms of its credibility in the short term. Here he quotes various other Governors for taking a different view on the scheme and what the RBI should have done. However, he commends the central bank for managing the entire process despite the hiccups and remonetisation effort.

The author has two interesting bits of advice for the central bank. The first is the need to get in getting lateral recruits as the central bank has its own recruitment process and what normally follows is group think which is one sided. The other refers to the need to strengthen the research capabilities.

The book is quite topical given the acrimony between the government and the RBI. Bajoria’s narrative provides the consolation that we need not be too scandalized by the developments as this has been happening all the time.  The book is very informative and makes good reading especially for one looking for a refresher where the micro details do not matter.

Fusion: How companies should align their purpose of business with the brand: Financial Express 17th Feb 2019

usion could read like another book on how to conceptualise a company’s brand and keep it in consonance with the culture or values of the organisation. This is what fusion is all about as Denise Yohn takes us through how companies should align their purpose of business with that of the brand. And more importantly, which is often missed by companies, the perception should be interpreted from the point of view of the outside world and not their judgment. Companies always like to say that they stand for everything that is right, like being ethical, innovative, dynamic and so on. But this does not get reflected in the way in which the firm operates, which is revealed when the internal culture is studied in detail.

While a lot of chapters in the book explain how to go about bringing in this alignment or fusion, the most interesting chapter is the one on assessing the brand and culture in any organisation. Here, the author talks of broadly nine kinds of brands which exist: disruptive (Virgin Atlantic), conscious (SoulCycle), service (Ritz Carlton), innovative (Apple, Nike, Amazon), value (Walmart, IKEA), performance (BMW), luxury (Mercedes-Benz), style (Target, JetBlue) and experience (Disney). Almost all companies can be classified under these headings.

Next, the author maps the set of core values, which go with these brands and identifies three main qualities that go with every kind of brand. For example, a disruptive brand would be competitive, stand out and take risks. A service brand will have values such as caring, humility and empathy. Therefore, hotels and airlines would be looking for people with such traits that can help them to mingle with the culture of their business. An innovative brand will emphasise inventiveness, experimentation and continuous improvement. An experience brand will stand for entertainment, enjoyment and originality.

Therefore, one needs to look at both the brand and culture simultaneously and then work towards bringing about the necessary alignment. Interestingly, once the brand culture fusion takes place, the same gets reflected in things like communication within the organisation, employee policies, compensation, etc. In fact, the author also highlights office location as symbolising the brand being projected.

Simple things like rituals pursued or artefacts on display also tell the same story. Awards given internally, which stand as artefacts displayed, is an important part of the culture seen in the company. Even anthems recited or simple gestures like seniors saying good morning to juniors reflects the brand culture. Therefore, this aspect needs to be assessed and implemented to make the fusion work. We definitely can’t have a disruptive brand having a culture of conservativeness where, say, compensation is based on age and tenure. It has to be more dynamic.

The author stresses a lot on not just the customer experience, but also employee experience. Here, the responsibility is with the company to ensure that there is personal engagement with the brand and the strategy is understood by all. It is only when the employee is told, for example, that the customer is first will she work that way. Otherwise, one may tend to use personal logic in interpretation when dealing with customers, which may be against what the brand is supposed to be.

The second part of the book is more on how to go about bringing in this fusion and has some broad textbook-like guidelines. First is that one should operationalise the company based on the image that one wants to portray. The second involves culture-changing employee experience, which is linked to customer experience.

The third is what is called ‘sweat the small stuff’ where we get into details. Rituals, artefacts, procedures, policies reinforce the core values and have to be reinforced all the time. Artefacts are called memory triggers, which constantly remind you of what the company stands for. Fourth is what the author calls ‘igniting the transformation’. When employees are engaged with the brand continuously, the culture gets entwined.

The last step is what is called ‘building the brand from inside out’. To define the brand distinctively, one has to live out the purpose through substantive actions and clearly connect—with customers and other stakeholders—the dots between motivations and actions.

This book is definitely a very useful one for companies that want to identify what they really stand for because, once this is decided, the fusion can take place with the brand and vice-versa. More importantly, what is written in vision and mission statements by companies does not really matter if it’s not implemented well within the organisation. There would then be a disconnection between the two.

RBI rate cut: Analysing the impact of lowering of the repo rate Financial Express 16th Feb 2019

With RBI signalling a change in stance to the lowering of rates and some banks decreasing their lending rates, there is a positive sentiment in the market. Interest rates were hiked twice during 2018 which had put industry on the back foot as procuring funds became expensive. Banks as well as borrowers have always been talking of interest rates to be lowered and hence should be satisfied that there can be more rate cuts to come in the coming months if inflation remains range-bound. How exactly does this translate into higher investment growth?

Theoretically, lower interest costs provide an incentive to companies to invest which in turn helps to foster growth. It also brings down the interest cost for companies which helps in stabilising profits. This will vary across industries as the interest-to-turnover ratio averages around 2-3% for non-financial companies and could stretch to around 10% for capital intensive industries. This looks logical.

The attached graphic juxtaposes the movement in weighted average lending rates of banks (WALR) on new loans given for the last five years along with growth in credit to various sectors to ascertain if there are any connections. Interest rates have actually come down by 210 bps since 2013-14, with the fall being 220 bps by 2017-18 before the repo rate was increased by RBI. Therefore, there has been a tendency for banks to lower rates continuously over this time period. As of March 2014, the repo rate was 8% after which it has come down without any upward revision to 6% by March 2018. In a way, it can be concluded that the transmission has been quite efficient as lending rates on new loans have come down in a commensurate manner. This is significant because, often, it has been argued that banks have not been proactive in terms of lowering their lending rates when RBI takes such an action.

Now, the pattern of growth in bank credit is quite interesting. The rate of growth has actually been declining or unchanged in 3 of the 4 years leading to 2017-18. Secondly, the rate of growth in credit-to-industry, which is what one can relate directly with investment, has been coming down and turned negative in 2016-17, before recovering with an anaemic 0.7% growth in 2017-18. This sector constitutes around a third of total credit and is hence quite dominant. Typically, the lowering of cost of capital should have led to higher credit flow to this sector.

Thirdly, growth in credit-to-agriculture has been buoyant in 4 of the five years which, again, is driven more by statute as it comes under priority sector lending. Fourthly, retail loans have been growing at the highest rates, which is positive for the household sector and has supported both the housing and auto sectors. Also, in the last couple of years, there has been a tendency for even PSBs to concentrate more on retail loans and hence build up a better portfolio given that NPAs tend to be lower in this segment.

Fifthly, the service sector has witnessed a mixed growth pattern and declined to 5.7% in 2014-15 before recovering in the next two years and then slowing down, again, in 2017-18. Here, NBFCs and trade are the two leading sectors which account for around half of credit to the services segment. Lastly, in 2018-19, growth in credit has picked up across all the sectors which is contrary to what conventional wisdom would support as this was a period when interest rates increased.

What this data indicates is that merely lowering rates does not lead to higher growth in credit across the sectors. It is most effective for the home segment which is also preferred by banks. In case of industry, a lot would depend on the state of capacity utilisation and investment opportunities that are there. Lowering interest rates works in case there is appetite for investment. In FY19, for example, RBI data shows that capacity utilisation rates have been improving and was at 74.8% in September from 73.8% in June. Therefore, some industries were in a position to scale up by borrowing more even though interest rates had increased. In the preceding years, this rate has hovered between 70-72%, which in turn proved to be a deterrent even though the cost of borrowing had come down.

The services sector needs further probing. NBFCs are re-lenders as they borrow money from banks and use the same for onward lending. Here they would tend to switch across different sources like corporate debt and CPs. Lower interest rates, for example, tend to feed into the market-driven instruments at a faster pace thus making such switches attractive. Interestingly, the weighted average 10-years GSec yield had come down from 8.54% in 2013-14 to 6.89% in 2017-18, which is a drop of 165 bps. Corporate bond yields for AAA-rated paper came down from 8.92% to 7.57%, which is a drop of 145 bps while that of AA paper was around 75-80 bps.

Another issue which becomes important is the willingness of banks to lend. Here, the reference is to the NPA issue where the overhang has made banks cautious on the lending side. This has tended to be concentrated in sectors like power, steel, telecom, etc., where the demand for fresh funds has also been subdued as companies try and sort out the resolution issues.

The fallout of the declining interest rates scenario has also meant that it has had an impact on growth in term deposits. The chart below shows how the growth rate has been coming down quite sharply over the years, from a range of 17% to a low single-digit rate in the last 3 years. Now this is a concern for two reasons. Firstly, from the point of view of banks, this is something which can pressurise liquidity, which, in turn, will call for affirmative action from the central bank in the form of support from OMO and term repos. Secondly, at the broader level, this has an impact on financial savings. The overall savings as per CSO is down from 33.1% in FY13 to 30.1% in FY18 which is a concern. Further, within financial savings, migration to the capital market through the mutual funds route or direct equity has also increased the risk taken by households which can be volatile depending on market conditions.

The issue of low interest rates is often looked at from the point of view of borrowers. While lower rates do cause cost of funds to come down, it is not necessary that it will lead to higher investment. This depends on the state of the banking system as well as opportunities for growth. Continuous reduction in rates also flags the possibility of banks finding it harder to garner deposits, which is also the case today where RBI intervention has been almost relentless. Therefore, there are trade-offs to be chosen as savers, too, would have their preferences.

Protect the credibility of macro data: Business Line Feb 8 2019

The latest upward revision of GDP is hard to explain. The Centre’s disavowal of job data too leaves questions unanswered

An institution that has been quite respected in India is the CSO and the statistics it has disseminated have stood the test of time. The data are crucial because they go beyond growth and are used for reckoning economic ratios like fiscal deficit, debt, current account deficit, and so on. Further, these are used for all global comparison; while multilateral institutions like the IMF and World Bank have their calculations, the CSO is the starting point. This is why there is sanctity attached to data.

However, given the fact that there is a large unorganised sector that spans all the three segments — primary, secondary and tertiary — it is always problematic to get accurate data and a large number of proxies are used to arrive at output numbers. To top it all, the numbers have to be revised when fresh information is received, which makes it even more challenging. Hence, while all monetary data that come from the RBI are generally final as the data procurement is from formal sources, the same does not hold for the CSO. Therefore, it is even more important for the sanctity of the data to be preserved, else credibility can be stained.

An important development that has taken place here is that base years have been changed, which was necessary because the existing series had become outdated and non-representative. Unfortunately these revisions were made when the regimes changed and this has tended to create a lot of ‘political noise’.

Theoretically speaking, GDP and employment are macro numbers where governments have a limited contribution directly. They are only enablers and contribute directly only through what they spend through Budgets or persons employed. The policies reap rewards over a period of time and are hard to associate with the regime.

However, it has become part of a larger game of one-upmanship. This means that all governments across the world take credit when GDP growth is higher or unemployment lower. They are not willing to accept that things can be worse-off than in the previous regime. It is taken to be an effrontery to accept such a development.

Now when there were certain leakages from the statistical institutions on employment recently or an earlier paper released on the past series of GDP — which has since been rejected and replaced by an official estimate — which completely reverses the findings, there is even more speculation generated.

Employment numbers are even more amorphous and there are two distinct stances — one based on CMIE, which says things are not good, and the other on EPFO, which is gung ho about jobs being created as enrolments increase.

Employment data

Let us look at the two issues which have caused this upheaval. The NSS study on employment, which got into the media though not officially released, highlights the fact that unemployment was at its highest in the last 45 years in 2017-18. One would relate with this number as the farm sector and SMEs (which have the largest number of self-employed) had been displaced by demonetisation and GST. These are empirical facts. Now that it has been argued by officials that these numbers are not right and have not been approved by the government it poses a conundrum for the analyst. If employment was rising, then it should have gotten reflected in higher consumption or savings, which was not the case in this period. Everyone is talking of boosting consumption because it has not been forthcoming. Further, the migration of youth from rural to urban areas has hit a roadblock as the real estate sector faced stagnation last year on account of RERA.

If the so-called leaked document is incorrect, it is important that the new report clearly states why it was wrong or else it would give rise to speculation just has been the case with the GDP back-series data.

Further, an argument has been made that a survey cannot be compared over time. But all surveys are supposed to be representative of the macro situation, else they will not have relevance. In fact, the use of proxies in calculating GDP is also based on such assumptions.

Though standards change for what constitutes employment, the numbers over the years are definitely comparable; and just as they can be done for GDP, the same holds for employment.

The second release is even more interesting, where the revised GDP growth numbers for FY17 and FY18 have been increased from 7.1 per cent and 6.7 per cent to 8.2 per cent and 7.2 per cent, respectively. This changes the narrative fully because it indicates that demonetisation was a period when GDP grew at the fastest rate in the preceding six years which is hard to believe considering that all activity came to a standstill for five months as money was not available.

Farmers were unable to sell their produce, SMEs had to close down due to non-payments, corporate results were down in Q3 and Q4 of the year (especially the consumer-oriented ones) and bank credit growth slowed down sharply to 8.2 per cent which is the lowest since 1991-92 when it was 8 per cent.

Clearly such acceleration in the economy is hard to explain. In fact, if the economy was booming at over 8 per cent in 2016-17 and 7.2 per cent in 2017-18, there should be less concern about growth. But this has not been the case; there is palpable concern over both growth and employment.

While it has been pointed out that the data received is more contemporary, which cannot be disputed, then the wisdom of having such advance releases needs to be revisited. There are fairly big divergences between the advance estimates in January 2018 and January 2019. Further, if correct information comes in only after a year due to corporate or crop data, then there should be sharp qualifications made. Else, the results can be construed as being fairly misleading.

We certainly need to be careful with revisions as sharp changes in magnitude and direction raise doubt. When this happens often, it can lead to confusion for the user who has to change the narrative behind the numbers.

RBI's new market-friendly policy indicates there could be more cuts ahead..Business Standard 7th February 2019

The decision to lower rates by 25 basis points (bps) does come as a surprise though the change in stance was on expected lines. Quite clearly, the Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) have decided to provide the final push to demand at the end of the fiscal by lowering rates. As four members have voted in favour, this is quite significant as it does indicate that this stance will continue in the new fiscal as well.

The decision to lower rates is surprising because the main factor which determines policy decision, i.e. CPI inflation potential remains unchanged. The risks of monsoon, higher food prices, oil prices, demand led inflation pressures etc are factors that had led to a status quo decision by the RBI earlier. However, this time the stance has changed and the expectation is that inflation will be 2.8 per cent in the fourth quarter (Q4), which justifies this move.

For the next year, too, the MPC has projected inflation to reach not more than 3.9 per cent in H2FY20 (second half of financial year 2019 – 20), which will be lower than the target of 4 per cent. As long as this target holds, one can expect further cuts during the year; and depending on how the inflation rate moves, one may expect 25-50 bps cut going ahead.

The decision is positive for the market, as it will bring down rates for sure especially for G-Secs. This will help in mark to market (MTM) for banks at the end of the year, given that the holdings are high.

Borrowers will benefit from lower rates for sure. That said, at this point of time, there may not be too many new projects being undertaken till probably the general election results are known in May. However, this will be positive for the retail segment, especially mortgages, where the interim budget has first made real estate more attractive for households. If banks follow suit and lower rates, it would help in generating demand. Most banks, including the public sector banks (PSBs), have been favouring retail lending given that the portfolio remains more robust compared with other loans. Banks may continue to be cautious in terms of lending to companies, as the NPA (non-performing asset) issue still needs of be addressed, even though the incremental quality of assets has stabilised. Also, they may be sticky in lowering deposit rates given that the growth in deposits so far this year has been lower than growth in credit.

The RBI also has taken a view that inflation will be less than 4 per cent for the next year as well. This would be interesting to track because the potential to inflation is quite high, especially with oil and food prices coming under pressure.

On growth, surprisingly the view taken is that it would be just 7.4 per cent. This means the economy may not see any significant changes in dynamics involving investment or consumption, and it would be just marginally above 7.2 per cent achieved this year. The central bank has quite rightly pointed out that investment has not been buoyant and has been driven by the government and not private sector. With growth assumed to be virtually unchanged, it does appear that there may be no significant change here. In fact, the government, too, would have to review their capex plan for the next year when the main budget comes out.

Budget 2019 is not just about spending,...Financial Express 6th February 2019

The Interim Budget for FY20 will go down as the ‘sweetest fiscal document’ because it is truly what, in economics, is called a Pareto optimal state, where several people are better off and no one is worse off. Rarely do we have a Budget that gives and never takes. As this Budget typifies this phenomenon, it is quite remarkable. In fact, if the assumptions made here are workable in all future years, it is great times for taxpayers as well as beneficiaries because we will continue to pay the same if not less tax and still get more from the government. Just how has this alchemy been made possible?

The Budget speech has made it clear that tax collections, be it direct or GST, have been very buoyant mainly because the tax base has increased. Therefore, lower GST rates have worked wonders and brought in the goodies as we pay lower prices and the government still collects its revenue. The direct tax base has widened sharply due to two measures which the government has taken in the last two years in the form of demonetisation and GST. The revised GDP numbers show that demonetisation did not stifle growth but actually fostered higher income which is seen also in the budgetary tax collection numbers.

Therefore, the FM thought it fair to start rewarding taxpayers and the best way to do so is to start from the bottom and, while Rs 18,500 crore would be lost as tax revenue, it will be more than made up by higher consumption which would automatically increase collections thus making the fiscal arithmetic strong. Will inflation increase on this score? To a certain extent, if people spend more on consumer goods, the industry will benefit. But given excess capacity, this should not translate into inflation.

The same holds for food where prices have come down due to excess supply. If consumers spend more, then the surpluses should be consumed without any inflationary implications. To buttress this point, the government has projected growth of 11.5% in GDP which looks fair enough and reasonable as it is a combination of 7.5-8% growth in real GDP and inflation of 3.5-4%, which few can contest.

The size of the Budget has increased by 13.5% in FY20 which is lower than the 14.7% growth in last year’s. This still gives space to distribute the goodies. While earlier Budgets spoke of rechristened health, cleanliness, education, and insurance schemes, this one does plain speaking with cash transfers. If NREGA has been a success over the years, giving Rs 6,000/annum under an income support scheme to the smallest farmers is similar in scope and wider in coverage.

NREGA gives wages of Rs 170-200 a day for 100 days which is up to Rs 20,000 per annum as against the Rs 6,000 announced under the income transfer scheme. But these rates can improve over time and, hence, rather than not having a scheme, it is a good start. While critics have argued that even non-farmers should be covered, this can be considered to be a beginning which can be more inclusive in the course of time. There are higher allocations for NREGA and, if one adds the pension schemes and other central programmes like interest subvention, etc, the poor are definitely better off and these allocations cannot be grudged.

Economists always tend to play spoilsport and ask as to from where does the money come from. Here, the final deficit number remains unchanged and the net borrowing programme is higher by just Rs 50,000 crore which can be absorbed well by the system. Therefore, from the point of view of prudence, there can be no quarrel. RBI is to pay an interim dividend this year to support the FY19 Budget which will probably also increase next year. This is critical. Also the decision on how to monetise the reserves of RBI will offer a lot of comfort to the government as this can actually fund several programmes, including the farmer payouts as well as bank recapitalisation.

Interestingly, the latter has not found mention in the Budget which means it will come from outside. This will be a major source of funding for the Budget as the spectrum sale component has ceased to be of interest to players given their financial situation today. The final weapon which has been fired to ensure fiscal prudence is disinvestment. Even for FY19, the amount has not been changed and is at Rs 80,000 crore which will go up to Rs 90,000 crore next year. But disinvestment now has become a routine exercise and while economists and analysts keep analysing how it will take place, the process has been really straight forward and assuring.

Either one PSU buys another or the LIC steps in and buys shares or the existing company buys back its shares. In all these processes, surpluses with PSUs get transferred to the government. A small part goes to the government as dividend and the larger one as disinvestment. Therefore, one should actually stop debating on whether this target will or will not be met because axiomatically targets are always met as the route is well defined and institutionalised. The stock market should get used to the fact that disinvestment does not mean more stocks in the market and hence should stop guessing the quantum that will enter the fray.

The Budget is hence an ideal one which can be scaled up over time assuming the growth numbers work out right. In fact, curiously, the GDP number used for FY18 and FY19 are the first advance estimates for FY19. With the revised estimate for FY18 being upped significantly one day before the Budget was announced, if the nominal GDP growth rates for FY19 and FY20 are recalculated then the fiscal deficit ratio for FY19 would be 3.3% (as GDP would be Rs 191.98 lakh crore as against the assumed Rs 188.40 lakh crore) while that for FY20 would be 3.3% (as GDP would go up to Rs 214.05 lakh crore instead of Rs 210.07 lakh crore)!

Also, the moment it is accepted that a lot of public sector money, which includes RBI, can be used for financing the Budget, then nothing is impossible. This can be combined dexterously with deferred payments which are rollovers and off budgetary borrowings to reach the target. Meanwhile, when revised GDP growth numbers point upwards, automatically the denominator increases and the fiscal target is maintained. But as all this has been done without causing pain and there should be no complaints as such, even from the economist.

Interim Budget 2019: A fairly balanced budget where no one can be unhappy: Business Standard 1st February 2019

From an economic standpoint, the broader question is as to how would the budget numbers add up in terms of ensuring that the deficit is contained at 3.4% in FY20?

The Finance Minister has taken a fairly pro-people stance in the Interim Budget announced today. Two things stand out. The first is the tax benefits for the middle class, which has been quite phenomenal as rarely does an Interim Budget give benefits in terms of increasing the exemption limit substantially as well as other add-ons in terms of standard deduction and tax emption on interest. Second, the thrust on the poorer sections through health insurance, pension, assured income (Rs 6000 per annum for 12 crore families) etc. is a big positive which if implemented well will help society.

If this is combined with the interest subventions schemes announced for both – farmers who pay on time as well as SMEs – the progress made is quite substantial. In a way, these announcements are more universal and obviate the need to have provisions for loan waivers or any other form of transfer of income, as the present benefits are tied to a purpose. In a way, this is more practical and makes sense. 

From an economic standpoint, the broader question is as to how would these numbers add up in terms of ensuring that the deficit is contained at 3.4% in FY20? Quite clearly, there is an assumption that underlying growth will be robust as this is the only way in which there will be an increase in revenue collections, especially on the GST (goods and services tax) front. In a way, this may be a reasonable assumption given that the concessions provided to a large section of people either through direct transfers of tax relief will increase purchasing power that should ideally be directed at consumption to a large extent. Industries like auto, FMCG, durable goods, garments can expect to see some benefits percolating to an extent on this score. The Finance Minister has been positive about the GST collections even for this year, considering that there has been skepticism on whether or not the target will be attained. 

As the FM has juxtaposed the same with lower rates, the message sent out is that contrary to what conventional wisdom dictates; lower rates can actually increase revenue by widening the consumption levels, which is how theory says it should work. This will hold the clue going forward as the benefits given in tax relief is a known quantity which will definitely not be missed while collections depend on how the economy performs. The Budget has assumed that the increase in income tax collections would be by Rs 91,000 crore, which is almost the same as that last year even though concessions have been given. It is assumed that more people paying lower taxes will achieve this target. 

An interesting number here is the revision in the non-tax revenue component of dividend from the Reserve Bank of India (RBI), which is higher than budgeted in FY19 and still higher in FY20. Quite clearly, the RBI may be paying an interim dividend and there could be some movement from the reserves next year.

Maintenance of the fiscal deficit in this range is a positive signal for the market in terms of how liquidity will be affected on account of government borrowing. But gross borrowings are higher at Rs 7.10 lakh crore, while net borrowings are lower through switching and buybacks. This is something that needs to be watched as it can lead to pressure in the market.

The interesting part, however, is disinvestment that continues to be budgeted at higher levels and look less realistic considering that it has always been a struggle to meet the target through inter-PSU sale or insurance companies buying the stake. Therefore, while the amount of Rs 90,000 crore looks very high, it does seem that it will be managed at the end of the day, just like was down this year.

It is, hence, a fairly balanced budget where no one can be unhappy. The important question will be asked during the course of the year, on whether or not these numbers will be achieved.

Budget 2019: A painless Budget for all..Free Press Journal 2nd February 2019

ouseholds should be happy over the Budget, as for the first time, a large number of benefits have been given in an Interim one. The government has so far been quite austere in giving income tax benefits but on the back of a good record of collections, it has decided to reward tax payers with some substantial benefits.

An increase in the exemption limit combined with higher standard deduction and higher limit on TDS on interest from banks, will help in increasing the spending power of individuals. This has wider implications in terms of higher savings and consumption, which will augur well for the economy. The money released into the system will be used for spending on fast moving consumer goods (FMCG), durable goods, auto and textiles. This has positive impetus value for these industries.

The Budget has been cheerful also on the housing front, especially on the rent side for people having two houses as well as the TDS on rent. The first was an anomaly and had to be corrected while the second was quite outdated in these times where TDS had to be applied when rent exceeded Rs 1.8 lakh per annum. Individuals planning to buy a second home can do so without the use of subterfuge as the existing rules were daunting.

The second part of the focus has been on the farm sector and the approach has been different. Instead of going in for loan waivers, the government has pitched for interest rate subvention whereby farmers get to pay 3% less over and above the existing 2% on rescheduled loans provided they service them on time. This is good for banks which have been unsure of such lending, as there was a high chance of building up NPAs in case of an adverse monsoon.

A more novel scheme which has come in relates to the cash transfers for the marginal farmers of Rs 6000 per annum to over 12 crore households. This is in a way is a modified version of the Universal Basic Income where a transfer is invoked into the account of the targeted individuals. As this is an interim budget there have not been any pain points as such as the government has not raised taxes in any area and has concentrated more on giving concessions or invoking expenditures to ensure that the targeted people are better off. This has been done without altering the fiscal math as the fiscal deficit remains at 3.4%. The disinvestment target has been upped to Rs 90,000 cr which is even higher than the Rs 80,000 cr for FY19, which the Budget is confident of achieving. This could be a balancing item once the revenue and expenditure has been worked out which can be achieved by the standard methods used in meeting fiscal targets which involves buybacks, getting LIC to buy shares or PSUs buy into one another. This has become a standard operating procedure which will probably be used again in FY20 to meet the targets.

How has this been achieved? Two things have been assumed here. The first is that the GDP growth will be higher at 11.5% in nominal terms which is reasonable and second, the overall size of the budget has been increased by 13.5%. This will help in increasing tax revenue to maintain high collections which are then used for higher allocations that have been announced. While these numbers can change when the main budget is announced, they are unlikely to be very different.

Budget 2019: Read between the lines...Financial Express 31st Jan 2019

Irrespective of whether or not the budget is regular or an interim document, it would always be interesting to read the wording and the content of the proposals. That’s so because all budgets are clothed in eloquent language and take one through the achievements of the year with some prophesies for the future. It is not surprising that the main pain points are never revealed and one has to skim through the documents to get a hold of them. Selective numbers are presented, which become highlights to be commented on until the fine print comes to the surface. Let us see what all one should read more carefully.

The first is the fiscal deficit and whether the target has been met at 3.3%. But this is a statistical number and the numerator can change as there is legitimate scope to roll over expenditures, overstate revenue (there are still two months left to garner revenue), defer some expenses or just cut back on some expenditure. All these are possible and hence the discussion is more academic.

Second, the disinvestment estimate will be of interest as the present data suggests that we are well short of the target of Rs 80,000 crore. If the revised number remains unchanged, then the stock market can breathe easily as this would mean there would be more of PSUs cross-selling and buying as it is not possible to raise Rs 40,000 crore in two months following the due processes. To that extent, this will be neutral in effect.

Third, the gross borrowing programme for the coming year will be important. Even though it would be an interim budget and numbers can change, it is normally assumed that the gross borrowing programme will normally not be altered in June or July as there would be too much of disturbance in case it does happen. The number can be anywhere between Rs 6-6.5 lakh crore for FY20 and here too there is flexibility. The government can use more of NSS (small savings), use buybacks selectively or draw down on cash reserves to ensure that the market is not spooked. This has been done in the past and will be done again. This is why the fiscal deficit number finally matters when evaluating shortfalls in revenue and not the gross borrowings.

Fourth, there will be a lot of talk of how the tax base has increased. A curious fact is that during 2012-13 and 2015-16 the number of individual income tax assesses increased from 28.92 million to 40.74 million and then spiked to 46.38 million in 2016-17 post demonetisation. But in 2017-18, the total was just 46.67 million. Thus, there does seem to some tapering of the increase. In fact, 2015-16 and 2016-17 witnessed an increase of 4.64 million and 5.64 million assesses at the individual level. Interestingly, in 2017-18, of the 46.67 million assesses, almost 20 million did not pay tax. Thus, these numbers may not mean much in terms of collections.

Fifth, with a lot of wooing of the poor in the last few months, there is always interest on what the budget can do especially for loan waivers. Speaking on the pulpit is one thing for any party, but actually doing something through allocation of funds is more important and challenging. One has observed that while several states make bold announcements of farm loan waivers, these provisions are never made in the budget and can be phased over a period of time. This is so because there is limited fiscal space. Also, often the budgeted numbers are high but the revised ones are much lower, as was witnessed for the smart cities too in the earlier budgets. Therefore, before one takes umbrage at the fiscal disruption caused by such announcements, it is necessary to check if such provisions have really been made.

Sixth, the narration of the achievements of the government during the year is probably the less controversial as it is based on facts and may not be related to the budget. This is a standard or classic Potemkin effect where every government presents the better part of the story, which is usually very convincing. But this will not have a bearing on the budgetary numbers.

Seventh, the capex statement is rarely spelt out in the budget. The government outlays on various infra projects is a standard part of the speech where large numbers are spoken of. Here again, like pro-poor programmes, there would never be time-lines or would be futuristic like 2025 target, if not the next five years. It is hence necessary to go through the individual department layouts to figure out where the money is being allocated.

(Two things need to be highlighted here. The first is that the size of the capex of the government last year was Rs 3 lakh crore, which is much lower than the numbers spoken of in the budget. A substantial part of fund-raising is done by PSUs, which fall outside the ambit of the budget and hence do not get counted in the fiscal deficit or debt, though are covered widely in the speech without being qualified. Second, the budgeted capex number is the discretionary part of the budget that can be compromised any time with cuts, as it is not committed. Now, since 2009-10, on five occasions there have been slippages that range between 12-18% of what was targeted. The current government slipped by Rs 30,000 crore in FY15, but exceeded the target well in the subsequent two years (Rs 12,000 crore and Rs 37,000 crore, respectively), but faltered in FY18 by Rs 37,000 crore. Quite clearly, not doing such a cut would have increased the fiscal deficit by 0.2% to 3.7%. Once again, fiscal prudence scores over rhetoric at the end of the day.)

Eight, with all the controversy over the transfer of reserves of RBI, it would be expected that there would be some mention of the way forward. While the appointed committee would present its recommendations in March, there should be some indication on how the money will be used, which can be for financing the budget or recapitalising PSBs.

Nine, with competitive talk now by all parties on providing a basic income to every poor individual, the necessity of this will be spoken of in the budget. However, as the funds have to come from the budget, and if at all taken up would be by merging existing schemes. Therefore, one should sift between the rhetoric and the practical application of such a principle.

Last, there is a ubiquitous appeal to the farmer community in terms of target set for bank lending to agriculture and the levels will be spelt out. Isn’t there something called priority sector lending where banks perforce have to lend 18% of their resources to farmers? But that is how the narrative always goes.

The Union Budget is probably the biggest national economic event that is heard by almost everybody in the business community and receives more headlines than any other presentation. Unlike corporate discourses where the basic numbers and announcements are placed in a power point presentation, the speech is long and filled with aspirations and achievements. One needs to read between these lines to separate the facts from the harmony or noise.

Govt’s pet projects have been a mixed bag: CARE Ratings’ Sabnavis: Business Line 28th Jan 2019

Madan Sabnavis, Chief Economist, CARE Ratings, spoke to BusinessLine on the progress made in the Central Government’s pet projects. Excerpts:

What are your views on this Government’s ‘pet projects’?

We can broadly put the Government projects in three buckets. There are those involving direct expenditure through Budgets; policies which are oriented towards the lesser privileged and policies which are administrative in nature and ease the conditions on doing business. Under the first, we can see roads, railways and urban development being the focus areas taking large investments. Under the second, affordable housing, farm insurance and healthcare would be the top ones.

Swachh Bharat has not been so much a growth driver. It has been more about attitudinal change and has had only reasonable success. In terms of doing business the relentless focus has been on unshackling procedures which is an ongoing task.

How have these projects fared in the last year?

Roads and Railways continue to be main areas of expenses and have been success stories. On urban development, allocations have come down and it looks like the Government has had to revisit allocations given the budgetary pressures. Affordable housing policies have worked and can be seen in the growth in home loans and the construction sector.

Health is a new scheme and it has to be tested with time. Insurance has not quite worked out as can be seen from farmer distress this season. The performance of ‘ease of doing business’ has been good as witnessed by the improvement in rank this year.

How would you compare the performance of the BJP Govt vis-a-vis UPA?

The performance of the current Government has been very good so far in terms of various schemes as the results show. There have been some slippages in urban development where States too have to be taken along.

Also, some schemes like the farm insurance has not quelled the travails of the farmers this year. Here too States have a bigger role to play. The Central Government has to work with States to get things done which is always a challenge. The biggest achievement has been improvement in rank in ease of doing business. In fact, streamlining of polices relating to natural resources has been a big achievement of this Government.

How would you rate these pet projects on efficiency of spend?

This has always been a problem where we have been good at starting projects but wavered in implementation.

While direct expenditure on roads and railways has been good, the same has not been seen in urban development.

Both insurance and health is a challenge as it has to be tested with the beneficiaries both covered and reimbursed. This has been our Achilles heel even in the past.

Do you feel that these pet projects could boost GDP growth in the coming years?

The direct expenditures do give direct thrust to GDP. But overall the Central government expenditure is just ₹3 lakh crore of which 75-80 per cent is on non-defence. Given the size of our GDP the amount is too small to drive a base of ₹180 lakh crore of GDP.

Modi govt’s push for SME loans, ...nationalisation mindset: Financial Express 24th Jan 2019

Nationalisation and financial sector reforms have been two major milestones in Indian banking, making 1969 and 1992 landmark years in India’s history. While financial sector reforms brought about a sea-change in the way in which India does banking, there is a sense now that we may just be going back to the ‘command economy’ days.

Nationalisation was about driving the socialist dictat where mass-banking was the guiding principle, and banks were to be used as instruments for delivering social good. Banks were taken over by the government, and only the small, niche players remained, the ones that are called the old private banks today. The rest became public sector banks. Once owned by the government, they were used for furthering political agenda and initiatives like loan melas caught on where favours were forcibly dispensed. There was scant attention paid to loans being serviced or repaid, and, therefore, banks looked very profitable as their asset size increased. Appointments were made by the government and, in return, compliance was the norm. More importantly, there was little accountability and rarely were the banks questioned. Default in debt service by borrowers was addressed by giving additional loans so that the earlier ones could be repaid. The system was in a comfortable equilibrium.

Once we entered the world of reforms, the Narasimham Committee was instituted where the best global norms were studied and implemented very well. This brought in income recognition standards and the quality of assets was important. Once an asset turned non-performing, provisions had to be made, which brought down the profits. Also, lending was benchmarked against the ‘own capital’ of the bank, and, hence, capital adequacy standards came in. It took around a decade for the system to adjust fully. Competition was ushered in through new private banks that provoked comparisons regularly.

Both sets of banks have progressed well on a comparable scale, and technology, which has been a driver for the private banks, has been adopted by the PSBs, too. The quality of service in PSBs is comparable today to that in private banks, and the product offering is on a par though there could be some laggards in the PSB ecosystem where legacy issues have to be fully tackled. The case of overstaffing in PSBs is also a thing of the past, and the difference in culture has come down.

However, PSBs still have some major challenges that are remnants of the nationalisation days. First, they continue to be owned by the government, which means appointments are driven by a different ethic. Second, they continue to be the tool to drive the agenda of the government; a very good example is the Jan Dhan scheme that had been pushed on these banks irrespective of the viability. Third, the focus on SME loans, through the MUDRA window, is also a PSB task. Fourth, when infrastructure had to be funded after the DFIs got converted to banks; the onus fell on these banks that had to perforce channel funds to sectors like power, telecom, steel, textiles, etc. A large part of these loans have turned NPAs, an issue that is at the core of the larger problems facing the banking sector today. Fifth, when farm loan waivers are announced by the government, they cover the loans disbursed by PSBs, and anecdotal experience shows that often banks find it hard to get the money from the government when the latter has fiscal strains; this, in turn, leads to write-offs at a later point of time. Sixth, while interest rates are supposed to be freely determined by banks based on commercial considerations, often PSB heads are summoned to North Block and given instructions to lower interest rates. Seventh, political calls on loans have been a part of tradition where bankers may have to disburse loans on ‘instructions from above’, though this has reduced considerably of late. Eighth, targets are actually set on farm loans in the Budget, and passed on to the PSBs that have to ensure that the growth rate is maintained—this could be beyond the 18% priority sector stipulation already there.

It is not surprising that contradictions have surfaced in the form of PSBs saddled with several challenges. The important question is that a call has to be taken on whether or not we are serious about banking reforms and maintaining the sanctity of the system. The problem is not with the concept of a PSB, but with the processes involved and the lack of independence in operations. This kind of ambivalence has made the situation puzzling.

Hence, while we have taken several good points from the Narasimham Committee Report and implemented them to make the system world-class, at the operational level, there has been a flip-flop attitude. The approach towards prudent regulation has also been hazy. While moving to the 90-day norm was well implemented when the infra-NPA pile came up, soon enough , it was back to the days of nationalisation where we followed the policy of evergreening assets to book lower NPA levels. This escalated the problem to such proportions today that it has become hard to overcome.

The same mindset is in play when it comes to SME loans. While there is a genuine concern here, the can has been kicked once more by allowing for restructuring. It was done post-demonetisation and once again this year. It may be hoped that this is a one-off case and is not replicated in the years to come.

We have actually done very well on capital adequacy norms by pursuing an aggressive policy. While relaxing the norm on capital conservation buffer (0.625% to March 2020) to release capital for lending will not impinge on the strength of the system, it is the compromising mindset that is a concern as it sets precedents that can be used for further relaxation of norms in future. Also, the call on relaxing the standards for NPA recognition in certain sectors in the context of the IBC has meant moving a few steps back.

The time has come for us to take a concerted view on the banking system. While going strictly by the book can have pitfalls in terms of bringing in considerable rigidity, flexibility should be the last resort and not the first option. Otherwise, as can be seen, the general mindset has tended to move back towards the days of nationalisation where the ‘social cause’ became a justification for all actions. While there is nothing wrong in both the models, moving continuously from one to the other not only smells of uncertainty but also fails to anchor the main objectives of the system. If we opt for the old school, then there should be less discussion on prudential regulation and more on over-riding social benefit. We cannot have both for certain.