Tackling China: Emotional rhetoric gaining in decibel: Financial Express 17th July

However, for India substituting goods worth $65 bn with equivalents could mean ending up with a higher import bill, which translates to higher prices.

There is a consensus that India needs to take stern action against China, at least on the economic front. The first action can be to sever diplomatic ties. However, this is more theoretical, and not feasible as this is not yet a war-like situation.

The second option is to have an Iran-like situation, where we, like the US, get the world to impose sanctions. But the India-China skirmish today is localised, and, hence, cannot be taken to that level. Besides, India does not have such sway over the rest of the world.

The third is to directly ban goods from China or impose a prohibitive tariff on imports. We will have to contend with the WTO, but then the organisation does not have the clout to act. China can do the same for our exports, but given that we imported around $65 bn and exported around $16-17 bn on an annual basis in FY20, this may not matter in net terms. Such a decision would have to be taken at the political level and, at present, does not look to be under active consideration. We did have anti-dumping duties some time back on steel imports from China; these, however, were based on an economic and not political rationale.

Fourth is all Indian importers boycotting Chinese goods. Of the $ 65bn or so that we import, around $21bn are electronics, $20bn engineering goods and $12bn chemicals. The reason for importing from China is price and quality. These can be sourced from elsewhere, but the cost factor could militate against such a decision.

The fifth is a modification of the fourth, where every citizen in the country desists from buying any good which has an element of Chinese inputs. This is probably a theoretical response as a product can be made using different supply chains and networks. Besides, for a consumer, cost and quality considerations trump everything else.

The nationalistic tone set by Make in India and the Atmanirbhar campaign is quite appropriate for such action. The question is whether we are willing to do this. There have been relentless moves against the use of plastics, where some sections have moved away. There are campaigns against using environment-unfriendly products, which have not quite picked up. The war against colas has not been heard. In such a situation, class action from the masses is unlikely. It has to be done at the level of business, where one is prepared to import from other countries and probably pay a higher cost. There have been some action on this from dispatch agents who have refused to pick up Chinese goods from the ports. But such responses have to become more macro to be effective. It leads to a classical strategy in the realm of ‘game theory’ where no one knows what the other will do and, hence, boycotting Chinese goods could end up with others going ahead and increasing market share in sales of, say, mobile phones. Therefore, it is hard to have strategies here.

In this age of globalisation, Chinese goods can be routed through any other jurisdiction like Hong Kong, Taiwan, Korea, and so on, which will be hard to track. Chinese manufacturers are everywhere, and the import label could say Europe, with a Chinese company being the manufacturer. Boycotting Chinese goods may not be feasible.

In the medium- to long-term, taking such action against any country may not be prudent as skirmishes on the border do not last forever. Withdrawing economic relations may not be the best practice as it sets precedents. Reviving relations after breaking them is even more difficult. That’s why even globally such actions do not happen too often, and the case of Iran is quite singular. Therefore, letting emotions control policy action is not usually the response of the government and diplomatic channels come into play. It can be assumed that the call for a ban on Chinese goods is more a public outcry than a measure that the government could be considering, as we are nowhere close to the tipping point.

Assuming this extreme, how significant will it be for China? In 2019, out of $2.5 trillion (worldstopexports.com) global trade, India was seventh with around $75 bn. The US topped ($419 bn) followed by Hong Kong ($280bn), Japan ($143 bn) and South Korea ($111bn). India’s share is just 3%.

However, for India substituting goods worth $65 bn with equivalents could mean ending up with a higher import bill, which translates to higher prices. While at the macro level, the impact may not be very sharp, it would impact product segments such as laptops, mobile phones, drugs and pharma, TVs, plastics, dairy machinery etc.

Interestingly, out of the $680 bn of FDI cumulative inflows, China has a share of just 0.5%, and, hence, is not a major player. However, routing through tax havens like Mauritius and Singapore cannot be ruled out which have a share of 50% in total.

To conclude, while emotional rhetoric has gained in decibel level, practically speaking, as long as diplomatic relations are open between India and China, taking stringent action is not feasible. Those in favour of a ban argue that we are already less dependent on China for imports. While it may be tempting to conclude that there is a silent withdrawal taking place, overall imports have fallen. The jury is still out on this. 

Unlocking economy in phases poses a major conundrum for government: Indian Express 15th July

Today, it is hard for one to say whether it is more challenging to opt for “unlocking” the economy as compared to “locking” the country. In a way, the former option looks more difficult because when the country opted for the lockdown, there seemed to be little choice. It was based on the assumption that lives were more important than livelihoods. But as the decision sank in, and its impact played out, it was realised that the lockdown led to the impoverishment of enterprise and that the epidemic was spreading. The decision to unlock the economy in phases poses a major conundrum for the government. Unlocking also means getting back to a state of normalcy at some time, which will be problematic.

First, the steps involved in unlocking the economy. Opening up of non-essential production has been allowed, though it’s fraught with ambivalence at the state level. But, this will be ironed out in the typical “jugaad” manner over time. But what about services? This is probably the most crucial element of unlocking the economy at a time when the number of infected has crossed 25,000 a day and is moving north. How does the government agree to allow public transport to function? And when will the railways and airlines’ operations be restored to normalcy? The truncated services have complex “standard operating procedures”, which deter travel. But once opened up, the SOPs will lead to chaos as there would be millions of people on the move every day. Therefore, the door has to remain closed for a longer period.

Second, after three months of the first economic package that offered free foodgrains to the poor elapsed, the Prime Minister announced its extension for another three months, which would cost the exchequer Rs 90,000 crore. But what happens after three months? Can one really withdraw the scheme, given that most sectors in the economy would, at best, be getting back on their feet rather than walking? Withdrawing any scheme for the poor is tough, though retaining the same will add another Rs 90,000 crore or 0.45 per cent of GDP every three months, adding pressure on the fiscal deficit.

Third is the moratorium provided by the RBI to borrowers for six months beginning in March. The lingering question is: What happens after the six-month period ends? The first-quarter corporate results are abysmal, with negative growth in sales and a sharp drop in profits. This will get reflected in their ability to service their debt commitments. The Purchasing Managers Index for June also indicates that activity is sluggish and it looks unlikely that there will be a turnaround in July. With output growth being stifled in this period, it is improbable that those who took the moratorium can actually start servicing their debt. Additionally, the retail portfolio is filled with mortgages of borrowers with “no jobs or lesser salary” (NJLS). These individuals have been affected for at least a year. The question is: How long will one extend this facility and, more importantly, what happens when it ends?

Opinion | In locking down and opening up, state needs to choose its words carefully

Fourth, the RBI has tweaked the NPA classification norms in conjunction with the moratorium, which is logical. But, at some time, money has to be repaid to the banks, and if not, the loans have to be classified as NPAs. There is already talk of restructuring loans but which part of the asset portfolio would qualify for the same? Should it be only the SMEs, which are on the radar all the time, and also sectors that have been deeply impacted, especially in the services sector such as tourism, hospitality, airlines, and entertainment? While restructuring is a short-term measure, banks will be keen on knowing how the RBI will be looking at these assets because when forbearance becomes a bad word there can be a ballooning of NPAs. This is problematic for the system and the government because it would mean the provision of more capital to support public sector banks.

Fifth, and related to the previous point, is the outcome of lending based on guarantees given by the government for SMEs and NBFCs. This was a useful step announced by the Finance Minister — in line with what several governments in the West have announced to support their economies. While it would be too pessimistic to say that a large part of the debt could go bad, defaults in the region of 10-20 per cent cannot be ruled out. Hence, an SME package of Rs 3 lakh crore of guarantees may have to be forgiven (waived off) and paid through the budget.

Sixth, the curse on all central banks this year has been the provision of liquidity to the system. Central banks in the West have opted for quantitative easing in different forms while the RBI has used long-term repo operations and measures like facilities for NABARD, SIDBI, targeted long-term repo operations and open market operations to ensure that there is a lot of money in the system. But with subdued production (supply) even in 2021-22, the generation of excess demand across the world leading to higher inflation cannot be ruled out. The puzzle is what will happen to the loans that have been taken today at a variable rate, which will become more expensive in future. This can affect the economic viability of units in the second round.

Clichéd arguments of there being no free lunches are a fact in the present context. Someone has to pay for this package and while the government will find itself fiscally strained, it could collect revenue through more taxes — the dividend distribution tax, surcharges on higher incomes or a COVID cess — but this will be intrusive. The RBI will have to move away from the accommodative stance and rein in inflation.

The scenario painted here is not without a sense of déjà vu as the post-Lehman drama played out, which though was of a smaller scale than the current pandemic, was not without repercussions. We need to be ready with answers now.

Why the Sensex still has room to rise: Business Line 15th July

The PMI readings have lent support to market optimism. Attributing the rise to unbridled speculation wouldn’t be right

The shutdown has one anomaly in the economic space and that is the stock market. The tendency to move up since March has been remarkable, which has often raised the question of why it is so? Is it pure irrational expectations and greed, the push being given by stock experts in the media, which is driving investment? Or, is there reason in this madness?

There are two things about the stock market that have to be understood. The first is that over the longer time frame it is supposed to reflect expectations of earnings. Hence, if companies are expected to do well based on future earnings, then prices reflect this sentiment. This is distinct from the first quarter earnings of almost all companies, which generally are quite bad.

The second is that markets react to events on a daily basis but then move on. Hence, a disappointment in the outcome of the government package will shake the market for a day or two, but subsequently stocks will be driven by other factors. If this is accepted, then it becomes easier to see some method in the stock movements.Chart traces the movement of the Sensex starting January 1 and, quite interestingly, the trough was reached on March 23 with a fall of almost 4,000 points even before the shutdown was announced. The descent had started from the second week of March as fears of Covid, the episodes of which were more in China and Italy, seemed to be coming gradually onshore. The movement subsequently is quite distinct as there has been a general upward move with regular waves of stable amplitudes.

Quite clearly, the announcements made by the government on the lockdown periodically helped in changing the mood in the market. The shape taken by the Sensex is in the nature of an extended ‘V” shape recovery, where a sharp decline was followed by an extended and stretched recovery.

 

The Table lists some important elements associated with stock movements, and represented by the Sensex. The index has been averaged for the month to avoid the end-points extremes, which can distort the picture given that the environment was volatile with every announcement relating to the shutdown having a single session impact on the stocks.

FPIs, MF investments

The immediate factors which come to mind are the FPI (foreign portfolio investment) inflows and mutual funds’ net investments in equities. A contemporary measure of fundamentals, the PMIs, have been drawn in as these are leading indicators that are compared over the previous month and can be related to changes in stock indices.

 

One factor that has affected the Sensex is the introduction of the lockdown, which started off being ‘complete’ in April but then got diluted in stages at different levels, raising the hope that things could become all right on the economy front. However, there has been dithering at the state level, which has meant there are no signs of normalcy anywhere in the country.

The Table reveals that there seems to be some economic rationale for the Sensex movements once it is accepted that it is influenced by contemporary developments in the short run. January had strong FPI supported by good confidence levels going by the PMI. February was an aberration when there was a decline even while mutual funds invested heavily, and the PMIs were satisfactory if not good.

The threat of a world recession and the slow spread of Covid at that time did raise serious concerns. March was a washout as FPIs moved out in large numbers as confidence levels declined, with services slipping into the negative territory. Mutual funds were strong as year-end investments from households in equity schemes increased. But this could not reverse the tide.

April was the first month of the lockdown and the disastrous effects could be felt in all the four variables, with the PMIs going to their lowest levels. This was probably why the confidence level came down sharply. May witnessed a slight recovery as the government opened the doors, albeit gradually.

Though in the negative zone, both the PMIs showed improvement and inflows into equities were positive. June saw a continuation of the mood, while mutual funds were marginally negative, FPIs were bullish and the negative sentiment in the manufacturing and services sectors improved.

In line with trend

Hence, seen in this way, the Sensex movements are explainable even in the short term. The present level of 36,000 is broadly in line with what it was just before the sharp decline took place at the beginning of March. If this is so, one may expect further upward movements in case the government hastens the ‘unlock’ programme; currently, the government is vacillating given the high incidence of the epidemic.

The clinching factor would be the flow of funds as the PMI indices would tend to move upwards though that of services will remain downbeat for an extended period given that it would take more conviction to really open up this sector.

The stock market has, in fact, followed fundamentals during this period of a little over six months. The relation with negative growth in GDP or negative growth in corporate sales and profits does not hold. Yet, this cannot be used as an explanation to relegate the stock movements to unbridled speculation as there is reason in this apparent madness.

India Still a Shackled Giant:..Book review Financial Express 5th July 2020

It is always interesting to read a book on how the Indian economy is perceived from outside as Indians tend to have definite slants when writing, as there are unconscious biases depending on the tilt to ideology of various political parties. However, Dev Kar, in his book, India Still A Shackled Giant, gives a rather unbiased view on the evolution of our economy and the road ahead.

His pitch is that governance has failed in India notwithstanding the various reforms brought in by the government post-2014. Here he quotes extensively from the World Bank Governance Index to show that things have not changed much, which is why there is little progress at the ground level. What one can make out from this overall exposition is that good governance is a necessary condition to bring about rapid growth, which addresses the issues of any emerging economy, especially with a population the size of ours, which also goes with the rather low quality of living indices.

He puts on the table quite frankly what we all know. There is widespread corruption in the political economy and the various scams that have tarnished the nation’s image have not changed the basic character of going about doing our business. There seems to be no retribution for financial scams and the entire series of telecom, coal, iron ore scams have finally not brought to book any of the perpetrators. The VIP culture even today is rampant, and getting to be a part of the government is interpreted as having inherited the right to a superior living. Even though there is a lot of talk about curbing the use of black money when it comes to elections, there is still a case for money power being the driving force. In fact, the relationship between muscle and money power ensures that parties that come to power have to include these power brokers in the elite as a kind of reward.

While this is something that is hard to crack, Kar also talks about how the institutional segment has lost its independence while trying to or forced to cozy up with the ruling elites. The CBI has been chastised by the Supreme Court and the perpetrators of riots never get punished as the processes are long and convoluted to the extent that human memory has its limitations for charges to stay. That’s how the nexus between the criminals and politicians gets symbiotic. The Panama Papers exposed quite a number of these instances, but the scamsters got away all the time, almost as part of routine.

Interestingly, the author also talks of how the independence of the RBI has come under a cloud of late and the controversy over the transfer of reserves does get mention. He argues for more like what happens at the level of the Federal Reserve, where there is less intervention from the government, and the appointments and tenures are immune to any such possible threats of dismissal. The reader here would definitely side with the author on this point.

Besides the political economy, Kar also takes the reader through the other economic and social issues that have shackled the country. Here we would be familiar with the data, as well as arguments, when the author talks about the low level of healthcare in the country, as the focus is rarely on the bottom of the pyramid where the political noises end with occasional monetary transfers especially at the time of elections.

The same holds for education levels, and quality of the majority which can become a threat given the demographic structure that we carry. Similarly, the issue of poverty and inequality can be debated with various numbers and studies.

But, at the end of the day, it is true that both of them have become eyesores which come in the way of the development of the country.

Therefore, the Indian economy will never quite reach the stature of what were called the east Asian tigers, as there is a lot of distance to be covered both in terms of enhancing the level of governance and quality of life. This has to be at the top of the agenda that has to translate into action. The author is appreciative of the steps taken by the BJP government on Aadhaar, UDAY, Make in India, Swachh Bharat, etc. Clearly, they have to be persevered with and taken to another level so that the quality of life improves for those at the bottom. This requires even stronger governance, which has to come from the top.

The book is quite balanced and cannot be faulted as being overtly critical, as there is a lot of data and research to back up the statements made. By bringing to the fore governance standards, it rings the warning bell to the government and exhorts it to bring about change. The deep-rooted malaise of low level of social and economic indicators should not be ignored, as we normally tend to gloss over macro numbers like GDP growth and get carried away by the now cliched ‘fastest growing economy’. It is evidently time to deliver and hopefully the policymakers should take lessons from this book.

More fiscal disturbance to be expected as the lockdowns are extended: Business Standard 30th June

The PM has announced an extension for the PM Garib Kalyan Anna Yojana till November, which was quite expected. The scheme was originally announced in March for three months and would have lapsed in June. Given that the pandemic is still spreading and the lockdown is more or less existent in all states, it was necessary to provide relief to the targeted population. Therefore, the extension of the scheme was expected though the time frame was unknown. The PM will be covering the entire festival season till November so that 800 million will get 5 kg of cereals and one kg of pulses every month for this period. Further extensions cannot be ruled out, though the government will be carefully observing trends in the pick-up in economic activity and agriculture.

ALSO READ: Covid-19 impact: India's eight core sectors output contracts 23.4% in May

The cost of this programme has been put at Rs 90,000 crore, which is outside what was in the Budget. Therefore, there will definitely be pressure on the fiscal balances. Today it is almost clear that there will be a fall in the real GDP growth and the best-case scenario is one in which nominal GDP stagnates at around Rs 200 trillion (with real GDP growth declining by 5 per cent and inflation being 5 per cent, thus resulting in zero growth). Intuitively it can be measured that the extension of this scheme will be at 0.45 per cent of GDP and hence add to the fiscal deficit by this amount. In fact, the earlier measures were of the order of Rs 1.75 trillion and with this new addition will be Rs 2.65 trillion or 1.3 per cent of GDP.

The government has already increased its gross borrowing programme to Rs 12 trillion from Rs 7.8 trillion and it would be interesting to see if these numbers were included in the calculation. The government accounts for the first two months of the year are not encouraging and tax revenue aggregated to Rs 1.26 trillion compared with Rs 2.14 trillion last year. The shutdown has resulted in sharp decline of GST collections of around Rs 57,000 crore and income tax by Rs 25,000 crore. These shortfalls will persist as long as the lockdowns are extended. This has to be kept in mind throughout the year as revenue shortfalls will be linked with level of economic activity. It is probably keeping this in mind that the government has been increasing the excise duty on petrol and fuel to shore up its resources. Excise collections in the first two months were lower than last year by around Rs 17,000 crore.

The overall fiscal deficit will most likely move towards the 7-8 per cent range for sure for the central government this year and a lot will be dependent on the disinvestment programme which is betting on three big-ticket sales – LIC, BPCL, Air India. However, the positive aspect of this enlarged fiscal deficit which is combined with the state deficits and can come closer to 12 per cent, is that the surplus liquidity in the system will buffer to a large extent this demand and ensure smooth passage. Also, the RBI can be relied on to provide liquidity through its OMOs and LTROs to ensure there is minimal market distortions.

The challenge for the government evidently will be next year as it has to work hard to revert to the FRBM path.

Will expanded RBI oversight change cooperative banking? Financial Express July 1 2020

From the point of view of RBI, the challenge would be to regulate and supervise these 1,500-odd banks with the same rigour as is accorded to the commercial banks.

The recent ordinance relating to cooperative banks, barring those which lend to farmers, has brought in a certain amount of euphoria. The ordinance gives regulatory oversight of these banks, essentially urban cooperative banks and multi-state cooperative banks, a push by putting in place a stronger RBI supervisory structure for them. The objective, as stated by the government, was to provide protection to the deposit-holders.

Two things must be remembered. The first is that the Registrar of Cooperatives and RBI were both the regulators of these cooperative banks, and hence, the former does not lose its power which remains unchanged. Therefore, the two regulator model still holds. Second, even earlier, there was RBI oversight though not to the extent that is being spoken of today. Hence, it is not a case of saying that there was no oversight earlier that has been brought in today.

The PMC fiasco laid bare the problems with the cooperative structure. These banks had a different kind of regulation from that of the commercial banks. Hence, while the PMC problem became an RBI problem, which had to be addressed, the fact remains that co-op banks have very opaque structures. Given the large number of such banks (urban and multi-state)— around 1,500—the regulatory pressure on RBI would be immense.

If one were to look at the structure of UCBs, in 2019, 1,544 of them, according to RBI, accounted for a balance sheet size of Rs 6 lakh crore compared to the Rs 166 lakh crore of commercial banks. Of this Rs 4.8 lakh crore were deposits (Rs 129 lakh crore for commercial banks) and net worth of around Rs 0.5 lakh crore (Rs 13.3 lakh crore). On the assets side, loans were at Rs 3 lakh crore (Rs 97 lakh crore) and investments Rs 1.57 lakh crore (Rs 43 lakh crore for commercial banks).

Since 2015, the SLR requirements of UCBs have been reduced progressively in line with the prescription applicable to SCBs. Furthermore, since UCBs are governed by Basel 1 regulatory norms, the liquidity coverage ratio (LCR) requirement is not applicable to them. In terms of soundness based on CAMELS, RBI has classified 78% of them in the A and B categories. The capital adequacy ratio for them was 9% as they are not supposed to be included under Basel 3 with any capital conservation buffers or higher tier-1 capital; 96% of them had a CAR of over 9%. Gross NPA ratio was 7.1% in 2019, but was up to 10.5% in H1FY20 due to the large failures. As of 2019, return on assets was 0.74%, and the return on net worth was 8.66%. Hence, the overall picture is not bad, but for the fact that there have been failures. There have also been 132 mergers of UCBs in the last decade and a half.

How will things be different now? The deposits of UCBs have always been covered under the deposit guarantee scheme, and hence, nothing much will change as deposits upto Rs 5 lakh would be covered under the same. These banks can, however, now have access to capital in the form of both debt and equity after taking permission from RBI. Hence, the due diligence process that has to be followed for raising either equity capital or bond will automatically ensure that they work towards maintaining a very good track record of performance, and, more importantly, governance. The ordinance also gives RBI the power to allow for mergers or amalgamations, and hence, if it is observed that some of them are too weak to survive on their own, action can be taken.

The cooperative banks have a wide scope to expand their business, which is good for the financial system because this large pie of players has remained at the periphery for too long. They have a strong focus on the SME sector, which can benefit a lot. In 2019, 44% of their lending was for priority sector, and the two leading segments were MSMEs, with a share of 26.9%, and housing, with 7.5%.

From the point of view of RBI, the challenge would be to regulate and supervise these 1,500-odd banks with the same rigour as is accorded to the commercial banks. It will also have a say in the appointment of key management positions just as it has for commercial banks, and it can seek changes in case the performance is not up to the mark. RBI can, in the public interest, supersede the management of a multi-state cooperative bank for up to five years and appoint an administrator. If the bank is registered with the Registrar of Cooperative Societies of a state, the regulator will have to consult the state government concerned before issuing an order to supersede the board.

This will require expansion in staff to meet the requirement of maintaining high standards of governance, that are adhered to in the larger banking space. Less than 30% of the banks have total advances of above Rs 500 crore. Over half have a credit size of less than Rs 50 crore, which will make the job of supervision even more challenging. It can be expected that a certain degree of segregation would be called for initially where the bigger ones would be taken up on priority.

Also, looking at the future of the cooperative banking system, one can visualise a change coming in over a period of time. This large number of banks may not be sustainable, especially as the larger ones do take on the expansion path and are able to further diversify their asset portfolio and get into new spaces. This possibility cannot be ruled out and can lead to a wave of M&A activity as these banks seek to leverage synergies and grow their books. Presently, the approach has been to remain niche players, and there has been limited incentive to grow as the perimeter of activity has been defined, and the players work within these lines drawn.

It has often also been alleged that some of these cooperative banks have political clout, and it would be interesting to see how this new regulatory and supervisory structures change the way in which these banks conduct business. Logically, given the way some of the expansion and M&A activity takes place, it can only be expected that better governance practices would percolate into their functioning. But, getting this done could be one of the tougher challenges for the new regulatory architecture.

Here's why this is the right time to support agriculture: Free Press Journal 29th June 2020

Agriculture is the sector we are all banking on this year to drive growth. This is logical considering that this is the only sector which has so far been insulated from the pandemic and also been outside the purview of the lockdown. With few impediments on account of the shutdown, which were only transient in April for rabi crop of 2019-20, the focus on this sector this year is sharper.

The IMD has forecast a good monsoon which is a good sign as good rains are a necessary condition for a good kharif harvest as well as rabi crop as the water retention during these months helps the second crop, too. The fact that the monsoon arrival is on time augurs well for the farmers and country as a precondition is satisfied even though the progress and spread across geographies will also determine the efficacy of this forecast.

Also the area under cultivation so far has been more than good though it is still early days. This can be ascribed to the fact that the large volume of migrant labour that has returned to the villages have been employed on land which they had earlier left in search of better opportunities in the cities. Therefore, the problem of labour shortage faced by farming in the last few years especially at the time of harvest would not arise as there are more hands at work. In fact, there could be a tendency for too many hands which can push down labour productivity and lead to disguised unemployment – which was the case earlier.

Hence, on the whole the prospects for agriculture look positive for this year and looking at growth of 3-4% being sustained cannot be ruled out and could be real. This would probably be the only other sector besides the government which will be in the positive territory.

The challenges for agriculture however still remain. A good crop does not necessarily mean that incomes will increase. It has been observed in the past that excess supplies which are an outcome of a very good monsoon and crop leads to a decline in prices which affects incomes. Where there is public procurement, like rice, the farmers are protected. However, when it comes to pulses or oilseeds, it is imperative that the state government plan in advance and make arrangements for procurement to protect the interest of farmers.

The government has spoken of repealing of APMC laws and enabling farmers to sell directly to the consumer. This has to be done as fast as possible. Today the situation is one where the farmer is getting a low price but the consumer paying a higher price due to the high cost of intermediation. In Mumbai for example, several farmers are driving from Nashik and selling vegetables to the consumer directly and hence increasing their incomes as well as lowering the price for the household. The same is required for pulses so as to ensure that the income increases especially where there is no procurement.

It has to be mentioned here that on account of the lockdown and the rise in unemployment and fall in salary income, overall demand too could be impacted and hence the millers may be taking lower stocks of grains from farmers. This factor will surface in the coming months when the harvest takes place post September.

Therefore it is necessary to distinguish between production and income of farmers as the link between them has been severed in the last couple of years. A good harvest is a necessary though not sufficient condition for higher income. This also means that per capita income in this segment will decline if prices do not rise as the population working in agriculture will be higher this year. It is hence essential that the government should aggressively support income through the NREGA programme and ensure that 100 days of work is available. Interestingly the historical average of number of per capita days worked is less than 50 days.

Hence while it is tempting to think of post-harvest and festival season starting September to be probably the turning point in the economy where rural demand picks up, caveats need to be in place. There has to be affirmative action taken by the government to ensure there is procurement where possible and freedom and access to the retail customer so as to cut out the middleman. Here one can already see the big gap between wholesale and retail inflation for food products. The deviation is high mainly due to the intermediation costs and the inability of farmers to sell directly to the customer. It is an old problem, but this could be the time when the government could make this transformation possible and can be the tipping point.

Covid-19: If data collection is incomplete,...Financial Express 29th July 2020

The shutdown announced by the government in March and the subsequent extensions over the last three months have made gathering statistics very difficult. The government organisations that collect such data find it hard to do so as the sources have been partially functioning and getting quotation on prices or production is not complete. Therefore, when the data is released on inflation or industrial output, there is a caveat put that the data would be subject to revision.

Various organisations have their forecasts on how India’s GDP growth would look like for FY21. The first one from the IMF put it at 1.9% in FY21, which would be higher than even China. This was in early April. The UN had earlier mentioned that India would be a shining star this year along with China. This was the period when India had very low infected cases and, prima facie, it looked like that the 21-day lockdown would have achieved the goal of containment and that there would be no extensions. However, there have been several extensions with modifications on what can be permitted with different laws across states, which, in a way, has not made business operations easy.

This has changed the way one has looked at growth prospects for India, and forecasts brought out by various investment banks, commercial banks, research agencies and scholars came out with numbers ranging from (-)1% to (-)25%. Such variation can baffle the reader because one is left wondering how these numbers are arrived at. Normally, forecasters vary by 0.5-1% point on either side of an average. But such variation is quite remarkable and deserves explanation.

Any econometric model used is based on certain explanatory variables that are defined numerically. But today the main factor guiding the equation/s is a black swan event of a shutdown with an undefined tenure which cannot be numerically expressed and has no precedent. Therefore, no model can throw up a GDP number as all the so-called independent variables that are being used have been assumed to take a certain shape. Hence, depending on what the estimator or forecaster assumes to hold for the year, a different GDP growth number is deduced. Even if a sectoral approach is taken, can one be confident of construction getting back to normal in September or could it be December. For hotels and travel, would it be Q3 or Q4 or maybe not even this year? Hence, the crux is the set of assumptions being made on how soon various components of GDP start moving during the year.

Roughly speaking, one knows that the GDP number for the year is split almost evenly across the four quarters ranging from 22-23% to 25-26%. The first quarter is a virtual washout with few exceptions in the non-services sector. But from Q2 onwards, the assumption made would be critical. The IMF had spoken of the second half being the inflection point and RBI also hinted at this period being different. However, observing how things have worked so far, the virus affliction numbers are rising and while the government is opening the economy, one is never sure if it will be shut again after three months if the situation escalates—where there is a fair possibility. Therefore, this entire exercise is akin to the analogy of monkeys throwing darts as any number can turn out to be true. A forecast based on a model that says 20% fall or gut feeling of 10% or a plain shoulder shrug of, say, 5% decline is at the same level!

The other problem is with the numbers being brought out by the CSO or the Office of the Economic Adviser. If data collection is incomplete, there may actually be no point in disseminating the same as it can only mislead given that there can be substantial revisions in the future. Even under normal conditions, the provisional figures change when the actual numbers flow with a gap of 2-3 months. The race to bring out provisional numbers by a fixed date runs this risk of interpretation and can also affect monetary policy decisions if it pertains to prices, which will be the case this year as CPI data is only partial.

Coincidentally, RBI has taken the tone of doing everything for growth and hence the inflation number may not matter in the broader scheme of things for the MPC. But the CPI indices for this year will influence those of FY22, which may then be the signpost for the MPC.

The challenge is to make sure that the data that is brought out when things get to normalise is correct as both the output numbers and prices get into all economic ratios whether it is fiscal deficit or outstanding debt or CAD etc. There is a likelihood of these numbers changing significantly as data comes in. While output data is based on what is reported by individual units which if missed in April or May can finally be reckoned by March when the accounts are closed, the same does not hold for price data which will be lost. Averaging of prices will address partly the issue but cannot correct the same. Currently, too, there has been a tendency to understate food inflation as the lockdown has increased prices paid by households which is not captured adequately due to the system of obtaining quotes from specific touchpoints. Extreme shortages have made consumers pay more than has been reported.

The problem with data interpretation would carry forward for the next year too, where most estimates are in the higher range of GDP growth being above 8%. While this would be a statistical possibility, it would not reflect real growth as for the first time the country would be coming out from a negative GDP growth number in FY21. Therefore, data disseminated in FY22 would also carry the risk of overstating the true position.

The way out is to eschew relatively high frequency data this year until there are signs of normalisation to ensure that the right signals are given. Price deflators would be probably more relevant in stating the true inflation situation. The proxies used for the unorganised sector would be probably even more chaotic as the MSME business has been completed distorted. From the point of view of analysts, monetary data could be indicative proxies—though even here with the plethora of relaxation made by RBI, growth in credit may have its limits when used for interpreting real economic activity.

Fitch revises India's rating: Business Standard 18th June 2020

Credit rating agencies across the world have tended to converge in views, though they may not actually give the same rating. In India’s case, Fitch had retained the rating at BBB- but changed the outlook to negative from stable, while Moody’s had downgraded India and Standard & Poor’s (S&P) retained the rating. However, the commentary of all the rating agencies are similar and this is where one can look at what Fitch has got to say.

Fitch has used the pandemic impact to comment on lower growth for India, which can be -5 per cent this year due to the lockdown and its effects. This is different from Moody’s that had taken the view that growth has not been impressive even before the pandemic came.

Second, Fitch has actually blown hot and cold over the fiscal. It acknowledges that the government has been prudent when it comes to spending during these times and has limited its expenditure relief. Most of it is in the form of using the financial sector and the stimulus of 10 per cent is outside the system. This said, it goes on to say that debt will be elevated to 84.5 per cent of gross domestic product (GDP) due to the fiscal slippages. Quite clearly, the link from lower GDP growth has been extrapolated, where it is assumed that revenue will fall leading to higher borrowings (which has already been announced by the government). However, the commentary again does give a pat by saying that the debt is in rupees and even the FPI holdings are quite low to really cause a disruption.

The third concern is on the financial sector, which is of course well known today. With all the moratorium being given to the borrowers and the extensions being the corollary, the future of the quality of the assets of the banks and non-bank finance companies (NBFCs) is uncertain. Fitch acknowledges that the non-performing asset (NPA) situation has improved in financial year 2019-20 (FY20) over the last two years, but there is a good chance of stress building up again with likely defaults.

All three concerns are legitimate and the rating agency has used the benchmarks with other countries in the same bracket of BBB to take a view on the rating and outlook. While it is the prerogative of a rating agency to give its view as it based on an objective criterion, the broader issue which is raised is whether such a change would be invoked for all countries as almost all major economies affected by the pandemic have been afflicted by low growth, distorted government balances and weaker financial systems.

Fitch has also included in the commentary a little bit on the political issues at the order with China, which is a kind of red flag raised. It has been appreciative of the Reserve Bank of India’s (RBI) policy of inflation targeting and proactive reaction to the pandemic. It is also positive about the structural reforms of the government announced over the last month or so. Clearly, India seems to be in the right direction, though further slippage can question the existing rating which is what the outlook signifies.

India has had this constant ideological battle with the rating agencies which have kept the country at just about the investment grade level. While the government is not affected by the rating, Indian companies are as is the reputation in general. Given the outline provided by the rating agency, it can be seen that almost all the factors are external to the government and hence take time to address. The government, on its part, is committed to reforms as seen in the last year or so, and would continue along the path.  It is unlikely to change stance under these circumstances.