on a panel discussion Mirror Now

 https://www.timesnownews.com/videos/mirror-now/urban-debate/gdp-grows-by-20-1-per-cent-is-it-too-soon-to-cheer-for-indias-economy-the-urban-debate/107837

A panel discussion on India's GDP Q1 numbers on Mirror Now.

Q1 GDP more of a statistic rather than a reflection of the state of economy: Business Standard 31st August 2021

 

These growth numbers will moderate going ahead, as the base effect becomes weaker provided there are no further lockdowns

The Q1FY22 GDP growth number at 20.1 per cent looks impressive as against a decline of 24.4 per cent in the previous quarter of the last fiscal. This was expected as the negative base effect was going to distort the picture. Given that the first two months of this quarter were typified by state-driven lockdowns, there was impairment of activity especially in the services sector. Here, too, there has been impressive growth in the trade/transport/hotels etc. sectors, which was pushed back further by the lockdown. Yet the growth was of the order of 34.3 per cent. Therefore, these numbers need to be viewed more of a statistic rather than a reflection of the state of the economy, which is better captured by numbers like the PMI, GST collections, etc.

While this number looks impressive, the gross value added, or GVA, in the economy had moved from Rs 33.05 trillion to Rs 25.65 trillion last year, and now has moved up to Rs 30.47 trillion. Therefore, we have not yet reached the Q1FY20 level, which is understandable. Agriculture is the only sector that has been impressive with 4.5 per cent growth on top of 3.5 per cent. Here, we can credit the good Rabi crop where the residual part enters the Q1 calculations. Agriculture will continue to be the driver in the next few quarters; hence, the Kharif prospects are important.

It should be noted that corporate results that involve earnings before interest, depreciation and taxes (EBIDT) enter as proxies for various calculations in the GVA. A very good quarterly performance, especially in sectors like steel, cement, trade, etc. gets reflected in the GVA numbers here. Manufacturing, in particular, has benefited from both the higher growth in profit (with salaries added to arrive at GVA) and higher IIP growth due to the base effect. For Q2FY22, too, we may expect corporate results to be good and add buoyancy to the GVA numbers. This will taper down in Q3 and Q4, as they had reached more reasonable levels in the same period of last year.

Some concerns

A slight concern here is the growth in the financial/real estate sector, which is just 3.7 per cent over -5 per cent last year. One would have expected higher growth here, as the realty sector was supposed to recover. This is one segment that has the power to drive the economy at a faster pace, especially when growth in banking (deposits and credit) is lacklustre.

The standstill in the economy last year also meant that capital formation had come down sharply. This has gone up to 27.2 per cent now, though when compared with FY21 is at the same level. Consumption as a ratio of GDP has been lower this time, mainly due to increase in capital formation. Last year, the ratio of consumption was higher at 56.9 per cent. This time it is down to 55.8 per cent. In fact, both the years were typified by lockdowns in the country, and it does appear that the lockdown during the second wave shook consumption more than the first one.

So, how would the number look like going forward? These growth numbers will moderate going ahead, as the base effect becomes weaker provided there are no further lockdowns. The services sector will hold key, and so will the government. The recently announced fiscal numbers do show that the government has spent less than last year in the first four months as relief expenditure has been lower. This got reflected in lower growth in the public administration category. There would be a need for a positive push here to ensure that this cylinder fires. Growth for the year could be in the region of 9 per cent–9.1 per cent

Salt to Software Story | Book Review — Tata: The Global Corporation That Built Indian Capitalism by Mircea Raianu: Financial Express 29th Aug 2021

 

A file photo of Ratan Tata (Express photo)

The name Tata is associated with best practices, which includes being ethical and caring. When we talk of professionalism and governance, this name would come to our lips immediately. A book on this group by Mircea Raianu takes one through a historical journey starting from the British days to contemporary times. The 291 pages include references of around 80 pages which indicates the quantum of research that has gone into this rather remarkable book. More importantly, access to the Tata archives was made available to the author, guaranteeing an authoritative volume.

Interestingly, this is not a sponsored book by the company, which often happens when we have corporates get celebrity writers who could be journalists to write on them where it is more eulogy than critique. Here it looks like an independent view given by a historian and the tone is set by quotations that give different views about the group. There is one by TR Doongaji where he talks about how all of us can savour the Tata group in various ways in our daily life, starting from morning tea to dinner at one of their hotels. While this sounds good, the interpretation can be that the group is meant for the elites, as all of us cannot walk into the Taj. There is a quotation of Arundhati Roy, which, as can be expected, smirks of sarcasm when she says we are slaves to the corporate group as we eat even their salt!

The Tatas started off during the British days and have built an empire across various industries and services. It all started with textiles and opium trading which has evolved over the decades to be a salt-to-software conglomerate. Working with different governments is always a challenge in India as normally politicians expect kickbacks. Interestingly, the Tatas had differentiated between economic and political swadeshi even during the British times to navigate their interests. The difference between how the Tatas have managed and the others is that they have kept political parties in humour without any so-called manipulation. Therefore, while there is evidence to show that Tatas supported Mrs Gandhi during emergency, it was more for business interests. They even managed to ensure that there was no nationalisation of Tata Steel, which was actively on the cards at one point of time. Dealing with politicians in an equitable manner has been the motto for this group, Union minister Piyush Goyal’s recent outburst against the group being an exception.

While we all know of how Jamshedpur developed due to the involvement of the Tatas, the author also takes us through some of the controversies. While there is one story that says that one can drink water anywhere in the township, there is another which reveals how only the more privileged have benefited as slum areas have been ignored. There is a section on paternalism in the group, which actually reveals that it is not overly humane as it has been responsible for downsizing labour force across all streams and relying more on casual labour. From 1991 onward, which was the time India went in for liberalisation, the Tatas, too, turned around and stopped most of the benefits for staff, including welfare spending or jobs for family members. Clearly free markets cannot support such freebies.

Interestingly the author points out that when the Tatas acquired Corus in England, it was believed the group never downsizes and labour is safe. There was a buy-in for sure, but as the losses mounted, the stance changed. This was also a part of the tussle between Ratan Tata and Cyrus Mistry, where it was felt that the group cannot use domestic resources to sustain inefficient labour force overseas. The platform of nation-building that was associated with the group was used to attack this deal. The author takes us through the rather ugly episode of the open dispute between these two scions without really taking sides.

At the same time, the contribution of the Tatas to society is quite overwhelming and institutions like TIFR (research), TISS (social sciences and social work), TMH (cancer care) are some well-known ventures that have made a difference. It started with the Tatas being involved with the Indian Institute of Science.

The Tata model from the point of view of pure capitalism is a powerful story. Building such an empire is never easy in India. Even while the group lost out to the Birlas in setting up ventures abroad during the Sixties and Seventies, their long-term collaboration with foreign capital was leveraged in the IT space, with TCS now being a leader. From using experiences of links with the outside world in the pre-independence days to the control of natural resources, the Tatas have carved a niche in the corporate world.

So how could one summarise their ideas? Trusteeship, democratic socialism and free markets liberalisation were some of the driving forces that blended into the changing times of the market. The group has moved from nationalism and a development state to globalisation, harnessing all the strengths along the way to create this strong superstructure that spans various sectors ranging from food and steel to financial services. A true supermarket, which also never forgets philanthropy and will be remembered for all the institutions in research that have been set up along the way.

How to read the state of the economy: Indian Express 27th August 2021

 How is one to judge the state of the economy? GDP growth estimates range from a high of 11 per cent, as per the government, to 9.5 per cent as per RBI, while private forecasts could go lower. CARE Ratings’ forecast is 8.8-9 per cent. The variation is stark. A ridiculously priced stock market and high corporate profits have been used to vindicate the view that the economy is on the high growth path. Can one take a dispassionate view?

Three things should be kept in mind when evaluating the state of the economy. First, since the economy contracted by 7.3 per cent in 2020-21, all numbers will be exaggerated in the upward direction. Hence beware of any big growth number being interpreted as indicating a recovery.

Second, because of the lockdowns this year for two months, June is bound to be better than May and July better than June and so on. Thus, beware of interpretations based on single-month data. Cumulative numbers are better at times, but can be misleading too.

Third, what is more important is how things will play out during September-December as this is the festival-cum-harvest season which engenders spending normally.

And last, one should sift through the noise in the media, where the optimistic stance that the pandemic is behind us and there is acceleration in the economy can tend to be overstated. Often policies announced are interpreted as having already led to results. A classic example is the Production Linked Incentive scheme, which is a great policy but will work only after three years as those are the terms of engagement. Speeches and presentations made on this subject tend to be biased in a positive direction. Ask the question — are jobs being created and are people spending more?

Several indicators are used as leading signals of the economy. But here, too, we need to be careful. PMIs for manufacturing and services tell us if we are better off than the previous month. But that is not how data is normally presented as we usually talk of year-on-year growth. But it is an early signal for sure. The IIP and core sector numbers will be influenced by base numbers and come with a lag. Exports have been touted as being a driver of the economy. But remember exports fell by around 17 per cent last year. GST collections are a good indicator of consumption but tend to be volatile. Besides, the Centre has estimated already that it will have to borrow Rs 1.5 lakh crore to compensate states this year, which means that there will be shortfalls again. We need to look at the bigger picture and not get swayed by headlines stating that we have clocked over Rs 1 lakh crore collections for the “nth” month.

The best indicators on the state of the economy come from the financial sector. Bank credit is a good indicator of whether companies are producing more as all activity requires working capital. Here, the picture is not good as growth is (-) 0.4 per cent as of July end, indicating that activity has not picked up yet. The SMEs, in particular, have been affected in the second round and will take time to recover. Several services like entertainment and retail malls have not yet commenced operations on a reasonable scale. Hotels and restaurants have just started commencing operations in some states. Therefore, credit growth is in the negative territory.

The debt market tells us if investment is on the cards. There has been a lot of talk on various schemes being implemented for reviving investment. If this were happening, money must be raised. Debt issuances are lower in the first four months at around Rs 1.25 lakh crore, which is half of the Rs 2.57 lakh crore mobilised last year. Therefore, the investment scenario is still one where companies are watchful. There is surplus capacity in industry with utilisation rate being at 69.4 per cent in March 2021.

A pragmatic way to look at things is to observe the patterns in the coming months. Rural demand is an integral part of the story and presently progress on the kharif crop is satisfactory. There are concerns on cotton and oilseeds and September will be critical here to judge if the area under cultivation reaches normal levels. A good crop is also necessary to generate spending power besides augmenting supplies in the market as well as food processing industry. The second wave has pushed back rural households with more expenditure on health care. This can be reflected in lower spending post October.

Employment generation is a trigger for higher income and spending and while the battle between CMIE and EPFO data remains unresolved, the market will finally reveal if people have more money. Inflation is high and though there is a view that it is transient, this may not be the case as several households, who are living on a fixed income have witnessed a double whammy in the form of lower returns on deposits (that’s why everyone is flocking to the stock market), and cumulative inflation of 6 per cent last year, and a similar number this year. The pent-up demand story played out to an extent last year and expecting it to be replicated may be bordering on reckless optimism.

Investment will trail consumption and while the Centre has a good capex plan, it is only one piece in the overall puzzle. The private sector must get involved and with the banks being hesitant, the road can get longer.

What if the NCDEX merges with the NSE? Financial Express 24th August 2021

https://www.financialexpress.com/opinion/what-if-the-ncdex-merges-with-the-nse/2316230/

Need to hasten the rollout of Rs 6 trn asset monetisation plan: Business Standard 23rd August 2021

After a hiatus in policy announcements, the government has come up with a rather cogent National Monetisation Pipeline where several assets coming under different ministries are to be sold to the private sector. Not really sold, but leased as the asset would go back to the government after a period of time. Hence, roads, power, telecom, oil and pipelines, railways etc. would see several such monetisation plans for a sum of Rs 6 trillion over 4 years with Rs 88,000 cr this year.

In such a situation, there would be two main approaches. One where there is a PPP-like approach where the private party leases the asset, be it a road or a railways station or route and earns money from the same while paying the government the rental. The asset remains with the government. The other is through the capital market where a mutual fund-like InvIT is issued like was done by Power Grid Corporations through a SPV and the units are held by the public. There could be other options, but the focus will be these two route.

On the face of it, this is a great idea. The government spoke of it in the Budget and getting in Rs 88,000 cr this year will be a bounty given the state of finances. The question is how soon this will begin and are there plans in place. The problem with any asset sale or lease as is the case today is that the timing has to be right. The stock market is on a roll and ideally the ambitious disinvestment programme should have been on the way. But the bureaucratic processes come in the way and we have not seen much action on this front with 5 months passing. Here we are talking of 2 PSBs and an insurance company being divested. Do we have plans in place where these assets have been identified and the route and pricing decided so that the NMP can be set in motion?

The second issue with the PPP is that this has been tried in roads with different kinds of results. Now we are actually talking of such arrangements in new areas like pipelines, power, mining etc. Both sides of the deal- the government and the private party have to be in agreement with the terms of engagement. It will be interesting to see as to how much of this will be lapped up by the private sector. There has to be interest shown by the private sector as the asset will never be owned by them as the government has made this clear.

The third challenge will be the appetite of the market. There is already a large part of PSU shares, which should be coming into the market. This goes with the large volume of IPOs that have been raised by the private sector. Will there be enough money to support these monetisation plans? While there is a mad rush to the capital market given the abysmal returns in the fixed income space, the prospects for REITs for example have become a bit dull given the state of the real estate market. The same could be the challenges for some of the InvITs being raised for other sectors.

The approach taken by the government is quite unique where the NMP becomes a part of the financing plan for the National Infrastructure Pipeline. As resources are scarce it is essential for the government to explore all options, and the NMP fits the bill. The main challenge is getting this in motion and maintaining the momentum over the next 3 years or so. With the resolve shown by the government this should be possible, the challenges notwithstanding. 

Indian bond trading is in need of better market making: MInt 20th August 2021

 https://www.livemint.com/opinion/online-views/indian-bond-trading-is-in-need-of-better-market-making-11629389415171.html

RBI's Index on financial inclusion: A very timely initiative: Business Standard 17th August 2021

 The Financial inclusion index brought out by the RBI is very timely and important as it attributes a number to everything we talk of on the subject. Financial inclusion has been on the agenda of all governments and regulators and goes beyond the concept of providing a deposit account or loan. The index includes 97 attributes that are extensive and one assumes that they cover capital markets insurance and other banking services. The index is to be announced every July and as of now the RBI tells us that the index is at 53.9 as on March 2021, compared with 43.4 in March 2017. It includes three main attributes: access, usage and quality.

The dates chosen are interesting, as 2017 comes just as we came out of demonetisation, where people perforce had to go digital, which provided an impetus to digital banking. This was also the time when there was widespread use of the Jan Dhan account, which has now become the conduit for channeling any cash transfers to beneficiaries. Therefore, there has been a big push given by the government to inclusion through this account. Hence it is expected that access and usage would tend to increase automatically as funds keep passing through these accounts. Also, with digital banking picking up fast, it would add weight to this index.

It may be recollected that the government launched some rather aggressive insurance schemes for farmers and individuals, which means that there has been a tendency for greater coverage of the population under insurance. The PM health insurance scheme has been popular and actually enhances insurance coverage to all the needy people. This gets reflected in the score going up by around 10 points.

The index has to be read as a number and is not linked to a base year. Hence a number of 100 would mean that based on the criteria used the entire population is included in the financial system. One can hope that this number only increases with time. The pace of increase will be important here.

Some thoughts that come based on the limited information provided by the RBI on the index are the following. First, in terms of banking we may have reached the optimal situation as incremental Jan Dhan accounts have been slow. Also with the currency situation normalising, the push to digitisation is less intensive. Second, for this number to increase, non-banking services have to increase. Here the population has to use more of mutual funds and insurance products. Will this really accelerate? Insurance companies and mutual funds have a challenge here as typically low income people are small-ticket customers and the cost of inclusion is high and may not be worth their while. Third, even for banking it would be interesting to see if the transactions being witnessed go beyond the forced Jan Dhan accounts which receive wages, pensions and transfers. People actually need to use these accounts for regular transactions and hopefully the detailed index should reflect this aspect of quality.

Ideally it would be useful if the RBI would break this index up across various segments so that there can be concentration on the specific sector. The progress so far is impressive for sure, but there could be a bias towards banking and further to areas where the government has pushed financial products as part of its social development programmes. This is a very good start made by the RBI which should be monitored regularly to gauge the pace of progress as it will help future policy formulation in the right direction.

The Libor’s last tango: Important to get a sense of the costs of Libor regime ending & consequent shift to new benchmarks: Financial Express 12th August 2021

 RBI had estimated in November 2020 that around $50 billion of debt and $281 billion in derivatives would expire after 2021.

RBI’s recent Guidance to banks as well as companies calls for being cognizant of the fact that LIBOR will be going off the market from next year; it warns entities against getting into such contracts. More important, they need to handle contracts that are expiring post-2021. LIBOR is a sort of financial truth used globally for plethora of transactions. Once the LIBOR loses its sanctity, there is the question of how to handle the same.

There are two aspects. First, globally, there is already a large volume of outstanding transactions linked to LIBOR (around $223 trillion, of which $74 trillion could be maturing post-2023). The bulk is in derivative contracts—around $213 trillion. Second, even though the ICE Benchmark Administration (IBA) had announced that it would no longer be providing these benchmarks, several transactions were still reckoned.

Now, with the advice that all the transactions and contracts must be recalibrated to a new benchmark, the latter should ideally be an inter-bank rate. LIBOR gets into almost all risk models, valuation tools, and product design (even MIFOR of India is linked to LIBOR and will now fall out of use). Mortgage rates are set against the LIBOR. Market-players are looking at SOFR (secured overnight finance rate) as an alternative, as this was recommended by the Alternative Reference Rates Committee (ARRC). The fixing of spread adjustments by the International Swaps and Derivatives Association (ISDA) provides an economic link between LIBOR and selected risk-free rates (RFRs) for referencing contracts that expire after end-2021. But, any new benchmarking will mean that there will be losers and gainers, and the amounts involved may be large.

Once the reference is decided, there must be agreement on the basis (yield difference) between the old and the new benchmark. This can lead to considerable subjectivity, since, even though historical data can be used for creating these links, the robustness of this is questionable. SOFR is an overnight rate based on actual data and is not forward-looking, while LIBOR was for different tenures (of one day to one year) but based on market-experts’ opinion.

RBI had estimated in November 2020 that around $50 billion of debt and $281 billion in derivatives would expire after 2021. There are also government contracts that are linked with LIBOR. There is clearly a risk being carried by companies and banks on these contracts, as borrowings or deposits would directly get affected by the differences in cost that may arise when the benchmark is changed. Interest rate swaps (IRS) are benchmarked with MIFOR, which includes LIBOR.

Companies and banks would need to seek a hedge to counter potential losses. For new contracts, the players will know in advance the benchmark, say, the SOFR, and accordingly decide on pricing. The running contracts will be a concern. The $50 billion of debt would be equivalent of Rs 3.75 lakh crore and even a 0.1% variation can mean a potential loss of Rs 375 crore.

It will be interesting to see how RBI adapts to the absence of LIBOR. At present, all ECBs are benchmarked against the LIBOR, and companies are allowed to raise money at LIBOR-plus-a-certain-interest-rate. RBI’s decision will set the tone for others. RBI, of course, is not dealing with the LIBOR here, but merely using it as a reference point for commercial borrowings.

Taking this forward, the threat of risk posed to the financial system needs to be evaluated and it would be useful if banks are asked to make such disclosures as part of market risk carried and the mitigating measures. The same holds for companies which need to evaluate and state in their quarterly investor meeting the possible cost that would have to be borne on account of this transition. It is important to get a sense of the cost of this change for Indian entities as well as RBI’s thought process on the benchmark to be used.

Growth still not durable and inflation transitory, markets not convinced: Mint 7th August 2021

 After much waiting for the Reserve Bank of India’s (RBI’s) stand on interest rates and policy stance, it is now understood that there will be no change. The reason is simple. RBI, like other monetary authorities, have reiterated time and again that it will do everything to stabilize growth. And growth does not happen fast; and also, the path is not even. Improvement in purchasing manager’s index or goods and service taxes collections in one month may reverse the next month. Moreover, there are statistical base effects which may cloud one’s judgement.

Under these conditions, the policy must be read carefully for three reasons. These perspectives relate to growth, inflation and liquidity. Here too, the path is predictable as the direction is clear once growth is given precedence over inflation. Therefore, when the monetary policy committee treats inflation as being transitory, the question to be asked is how one can define inflation as being temporary or transient. In the last 15 months since the pandemic struck, consumer price index-based inflation has been above 6% in 10 months, 5-6% in two months and 4-5% in three months. Quite clearly, the view of inflation being transitory can be debated. RBI’s opinion is that inflation will still be 5.9%, 5.3% and 5.8% in the remaining three quarters, which shows that it is more permanently in the 5-6% range. Hence, interpretation of inflation is one of perception.

How about growth? Here, there is a bit of irony. Growth will be 9.5% (CARE Ratings believes it will be lower by 0.5-0.7%), and for the quarters, it would be on a declining slope of 21.4%, 7.3%, 6.3% and 6.1%. The irony comes from the fact that while growth actually picks up in the economy as the unlock becomes more wholesome with services also being allowed to function, numerically, the growth numbers will come down due to the base effect. Therefore, logically, these numbers may not matter much as they will not reflect the reality on the ground, which holds for most “real" variables this year where sharp dips last year will provide the buoyancy this time.

It would be interesting to try and interpret the permanency of the growth path based on the MPC discourse. The term used is “growth on durable basis" which is open to interpretation. The three engines are firing at different paces—consumption, investment and trade. That is the good part. If this is so, then growth is clearly on the right path and there should be less concern. In fact, if we add what the chief economic advisor had to say about growth being 11% this year, it looks like that growth is back for sure. The governor also said that until one is convinced on growth, inflation will not be looked at too seriously. But if the growth path is certain, there is reason for the MPC to look at inflation because we are living in a world of negative returns for savers. At some stage, this reality has to be accepted and the growth argument will no longer hold. Quite clearly, this question will pop up in the next policy when growth will be up and so will inflation. It would be useful for the market if the MPC could define the criteria for feeling assured that growth is back. We may have to start increasing rates just as the Fed has also been talking on these lines.

RBI has taken a neutral view on liquidity, with the caveat that any opening given to banks to park their funds does not tantamount to withdrawal of the stimulus. This is important because the V3R (variable rate reverse repo) scheme which offers banks a chance to deploy their surplus funds for a longer tenure is not mandatory but an option being provided. There is a chance for rollover of the surpluses which is useful for banks. To balance the same, RBI has also kept open the on-tap targeted long-term repo operations (TLTROs) and marginal standing facility (MSF) open till December. This may not really matter as there has not been any interest shown in the on-tap TLTRO scheme so far.

A broader question to be posed is that when there is surplus liquidity in the system, what exactly is the gameplan for banks when they sell their holdings of government paper under the G-sec acquisition programme (GSAP). This is pertinent because the funds that they get are not being lent but being put in the reverse repo window which offers 3.35%. Therefore, giving up on a coupon rate of around 5.5-6.5% through the GSAP for investment in reverse repo does not sound an optimal action unless they are in a state to start lending in a big way. For example, RBI announced the purchase of the 5.63% 2026 paper which has a yield of 5.76%. Giving this up for reinvesting in 3.35% is puzzling. But as said by the governor, the average amount deployed in the reverse repo has only been increasing to a high daily average of ₹8.5 trillion in August from an average of ₹5.7 trillion in June. Banks have clearly been losing out on at least 200 basis points on these excess deployment in the reverse repo auctions, which finally affects their profit and loss (P&L).

How have the markets reacted? The 10-year bond has seen an increase in yield from 6.20 to 6.24% which shows the continuation in scepticism which has been witnessed also in successive auctions on Friday when paper goes unsubscribed or devolves on the PDs. Interestingly, the auction of 6.10% 2031 paper was not subscribed. The market is still not convinced.

MPC reassures status quo on rates, but changes view on inflation: Business Standard 6th August 2021

 

The temporary supply shocks that have led to higher inflation has been kept aside by the MPC while focusing on growth

The credit policy announced on Friday was not expected to come out with anything very different from the earlier announcements. There are no changes in policy rates as expected with the Reserve Bank of India (RBI) reiterating commitment to growth, which is still in early stages. But yet there are some things that the market always looks forward to in terms of numbers and language. Both are important. Any change in forecasts would make economists rework their models to see if they need to change their assumptions. The language is important, as it could talk more about what to expect from Mint Street in the future.

The RBI has left the GDP forecast unchanged at 9.5 per cent and the quarterly progression would follow the earlier path. There have been minor changes here at 21.4 per cent for Q1, 7.3 per cent in Q2, 6.3 per cent in Q3 and 6.1 per cent in Q4. Therefore, we can expect a diminishing growth rate during the four quarters, which is more based on the base effects weaning rather than absolute growth slowing down. In fact, absolute growth will be picking up. The RBI is confident that there has been revival in all the three engines: consumption, investment and external demand. Here it can be argued that it still needs to be seen if this has worked out, because base effects have tended to make several initial indicators look good.

On inflation, the RBI has become slightly more hawkish as the overall forecast has changed from 5.1 per cent to 5.7 per cent with the predictions being 5.9 per cent, 5.3 per cent and 5.8 per cent respectively in the last three quarters. This is interesting because there is acceptance that inflation will be elevated throughout the year, notwithstanding the fact that there will be a good kharif harvest. We are definitely talking of numbers in the region of 4 per cent and the range is between 5-6 per cent. The problem evidently will be on non-food products, including oil-related goods.

Here one can say that the RBI has taken a dualistic view. The first is that while growth is picking up, it remains fluid given the possibility of the third wave. Therefore, the RBI will continue to focus on growth. The second is that inflation is seen as being transient even today, and this is the important part of the commentary. The temporary supply shocks that have led to higher inflation have been kept aside by the MPC while focusing on growth.

The RBI is happy with the status of liquidity and the transmission of interest rates by banks, which has helped lower the cost for most borrowers. So far, it has been seen that while interest rates have come down, the willingness to lend has been a problem as banks have been careful on this score. In fact, of late even retail loans are facing challenges given that the non-performing asset (NPA) levels have gone up of late.

The language this time has been more predictable. It may be recollected that in the earlier policy, the Governor did talk quite definitely on the objective of managing the yield curve. This was significant because it gave a clear indication that the RBI would ensure that bond yields remained stable. But the market had other views and we have seen the yields rise very gradually with the ten-year bond now touching 6.20 per cent.

Therefore, overall the RBI has not quite changed any view on ideology. The 10-years bond went up from 6.20 per cent to 6.23 per cent as the Governor concluded his speech. Maybe the market still is not too convinced given the high inflation and government borrowing programme.

Removal of retro tax will send positive signal to foreign investors: Business Standard 5th August 2021

 

This change in retro tax law will reflect well on the govt's efforts to improve the ease of doing business environment

The removal of retrospective taxation for deals reckoned prior to 2012 is a very progressive step taken by the government. This, ostensibly, comes on the back of the litigation that is on in the International Arbitration Tribunal relating to Cairn Energy. But this has been a legacy issue with successive Indian governments where retrospective taxation was an effective way of garnering revenue. The indication given by the government alongside is that there could be refunds given to the companies without interest.

Retrospective actions are always retrogressive, and this is a correction required in the Indian tax system. While Cairn and Vodafone are lingering issues involving large amounts of money of around Rs 20,000 crore-Rs 30,000 crore put together. The fact that the Cairn deal was in 2006 just reveals how anachronistic are these laws. In case of Vodafone, the Supreme Court had also ruled in favour of the company, but the retro rule, pushed it back. Withdrawing such a measure is a good signal for companies looking to invest in India. Around a dozen companies have been impacted by such measures. This is a big regulatory risk that the players face when investing in any country where laws change. This cannot be avoided but making them effective retrospectively is never a good idea even though it does look tempting for governments.

India has been trying to reach out to foreign investors by providing a better enabling environment to do business. The recent discussion on IBC is also timely as that has also been a sticky issue with investors. Tax laws are probably even more important as they affect companies directly. Companies always run the risk of tax laws changing in any domain, and that is acceptable. However, making any new tax law effective from an earlier date is not acceptable as the regulatory cost increases and sends a wrong signal.

From the point of view of the government it can be argued that there is a potential loss of income. However, often such cases can go into litigation as has been the Cairn case, where the cost in terms of time and money also increases besides sending conflicting signals. Such amounts are not normally buffered in the Budgets on account of the time taken to recover the amount even when imposed. Therefore, such a law will be fiscally neutral and would have a positive impact only when it is received.

This should also give the government an idea to also follow the same path whenever tax exemptions are withdrawn, or rules changed for any savings instruments in the domestic economy. It may be recollected that when equity capital gains were introduced there was grandfathering introduced. However, when the debt mutual funds were to be taxed on capital gains for a period of 3 years rather than 1 year, it was done retrospectively. Therefore, it is essential to ensure this also holds in the domestic context so that domestic investment is also sure.

One of the guiding principles of investment is certainty in environment. This is provided by a regulatory structure at the time of investing. Changing laws during the course of time may be inescapable. However, when it comes to taxation doing so with retro effect sends wrong signals and it is good that the government has withdrawn this rule. This change in retro tax law will reflect well on the government’s efforts to improve the ease of doing business environment for sure.

Where reforms didn’t deliver: Businessline 2nd August 2021

 

The scorecard on health, education and employment is poor

The three decades of economic reforms since 1991 have certainly ushered in major changes in India’s economic architecture, leading to a better standard of living and access to more goods and services through global integration. But there are some issues that have not been tackled appropriately.

The average GDP growth in the three decades was 5.8 per cent per annum compared with 5.6 per cent in the 1980s, which was the period where there was a cosy coexistence between socialistic mindset and liberalisation. Therefore, while there were qualitative changes, the GDP growth moved up only marginally. However, compared with the three decades preceding 1991, it would seem impressive as the growth then was a meagre 4.2 per cent. But such a comparison would be improper as the country was beset by wars, droughts, famines, and the first oil price shock.

At the socio-economic level, the country has failed quite badly in the area of health, which got exposed during the pandemic. Leaving healthcare to the private sector was a wrong move, as it has exacerbated inequality and has healthcare has become unaffordable for a majority of the population. Poorly maintained health centres, absence of doctors and nurses and widespread corruption in handling resources reflect a rather sorry state of affairs.

Poor infrastructure

Second, education has taken a back seat. Here again, the poor infrastructure provided by the state has made those who can afford private education to move away to those facilities. The tendency to propagate education in local medium means that students without an English education are left with the chaff when it comes to procuring jobs. The inequality starts at this stage in life and builds up along the way. Having multiple boards with different standards ensure the rich are able to do better in life.

Third, poverty. There has definitely been an improvement in the poverty ratio. Going by the World Bank’s poverty line measure of $1.90 per day, India had 109-152 million poor people in 2017. The $3.20/day standard of low middle-income class was large at 543-630 million. Though there can be different interpretation of these numbers, the protagonists of reforms would argue that this is an improvement compared with 1991.

Fourth, the World Inequality Database for 1991-92 and 2018-19 shows that the top 10 per cent had 36 per cent of the national income at the time of reforms, which rose to 57.1 per cent by the terminal period. The top 1 per cent increased their share from 10.4 per cent to 21.7 per cent during this period. Clearly, reforms have made the rich richer, and while the poor may have seen some improvement, it is clearly not what would be acceptable by the Piketty School.

Fifth, employment. With there being no standard measure of the unemployment rate unlike in the West, the fact that the unorganised sector still dominates the scene tells how this picture has evolved. The government sector has lowered the pace of job creation while the private sector has resorted to greater use of technology making existing skill sets redundant. While the youth who are trained do get employment, it is more of an urban phenomenon. Rural jobs remain simplistic and unsustainable.

The approach so far has been to provide cash transfers rather than sustainable jobs. The MGNREGS is good, but it is more of a dole as the projects involved create little value. The PM Kisan scheme is good in that it provides supplementary income, but does not give assurance of value-added jobs. Hence commercialising rural India has to be the theme going forward.

On the markets front, successive governments have blown hot and cold. While maintaining a commitment to reforms and less intervention, the markets are not quite free. Banks, for example, are allowed to set their interest rates unlike in the pre-reform period where the minimum lending rate was fixed. But today there is a lot of regulatory intervention. The formula for fixing the lending rate is decided by the regulator and interest rates for some loans are to be fixed to a benchmark. This is unique to India where the central bank decides on commercial rates. Similarly, while the interest rates on government securities are to be market determined, monetary policy actions are taken to ensure that the rates remain low.

On the agricultural front, politics dominates economics. Price fixation through MSP (minimum support price) is based on the interests of farmers and markets are not allowed to work. One sides taken are taken of either the consumer or the farmer, the the market mechanism gets distorted. The same holds for industrial goods, where government intervention through higher tariffs on imports is antithetical to liberalisation. India Inc cannot have it both ways.

The issue of regulatory capture has been observed in several cases. The capitalist-political nexus exploded with the NPA issue, which has pushed back the economy by at least 5-7 years. Natural resource allocation was more than controversial. Corporates siphoning off bank funds has impacted the financial system.

The symbiotic relations between capitalists and bureaucrats have come to the fore often. While the present NDA government has taken a lot of effort to streamline operations, it has been challenging. Transparency International’s Corruption Perception Index put India at 88 out of 180 nations in 2020. In 2010 we were 91 out of 178 countries. In 2005 we were ranked 88 in 159 countries.

A big change in mindset is required to address all these issues. Unfortunately, the electorate never votes out parties for non-performance on these parameters, which has helped to cement the status quo. People need to demand permanent jobs rather than handouts and a clean bureaucracy.