Extension given to the RBI governor is good for the markets: Business Standard 29th October 2021

 The extension given to Mr. Shaktikanta Das, the governor of Reserve Bank of India (RBI) is good news for the market, as the economy is in the preparation mode for a takeoff. The government has quite rightly made the announcement before the term came to an end so that there is certainty on all sides. From a market perspective, this means that the mindset of the Governor is known and there will be no surprises, which could have been the case in case of a change.

While it is true that institutions are more important than the person, ideology and approach of Governors of central banks are important. Mr. Das has followed a very cogent approach of patiently hearing out the market before taking any decision, which has been a strength. There have hence been some major achievements under his first term, which has helped the economy and market.

The first is the ability to deal with conflict and collaborate with the government, which is very important in public policy. Mr. Das has taken along all the stakeholders- government, markets, banks, employees and public opinion. This is in contrast to Dr. Raghuram Rajan who could be more outspoken, which though a prerogative of an academician, could have been more guarded when part of the policy-making team. At the other end was the taciturn Dr. Urjit Patel, whose silence often opened the doors for interpretation, which in turn created perceptions in the market which may not have been right. Having worked with the government in different capacities, Mr. Das has recreated the image of the RBI as an institution, which is in harmony with the stakeholders while taking tough decisions. Maybe his successful tenure supports the view that the right candidate for Governorship is one who has worked with the government as at the end of the day the central bank and Ministry of Finance are part of the same broader set up.

The second has been the way the central bank has worked tirelessly during the pandemic times. This was critical because for the first time the RBI came up with very innovative tools like long-term repo operation (LTROs), TLTROs, operation twist, V3R, GSAPs etc. to ensure that targeted liquidity was available to the market. As banker to the government, the RBI had to ensure that the large government borrowing programme not only went through at a fair cost but also did not crowd out the system. While the economy was in a trough, and demand was limited for funds, the RBI had to ensure nonetheless that there was enough liquidity.

Third, restructuring of loans of SMEs, one-time restructuring (OTR) for larger companies and moratorium were some key measures taken to ensure that there were no adverse consequences of the lockdown on the quality of assets. The possibility of large defaults was always there, and this was guided well through these measures, and it does look like that the worst is over on this count.

The fact that the Governor has reiterated the central bank position when reading out the credit policy statement is comforting as it is known that the easing of liquidity must end sometime, and rates must move up. But providing guidance on the distance to these changes is important and must be calibrated which is what the Governor has been doing by stating the gradualism approach. This means no rude shocks, which is the way to go.

With Air India done, can LIC be far behind?

 

With the stock market on a roll, the time is right for the stake sale in LIC and two PSU banks

The sale of Air India has been an achievement of sorts and provides hope for a successful disinvestment programme going ahead. But if one looks at the Air India sale closely, one can conclude that it has been more of a compromise for the government. There is relief that the government has been able to sell a large loss-making company rather than earning a neat sum of money as part of disinvestment.

A debt of ₹61,000 crore was hard to load on anyone interested in buying the airline. Finally, ₹46,000 crore is still with the government and will be in a SPV that will be forgotten over time. Given that outstanding market loans are to be around ₹80 lakh crore, this debt will be around 0.5 per cent of the amount which is not much.

Tatas have actually paid only ₹2,700 crore to the government while taking on ₹15,300 crore of debt. The government will be happy to have the company off its hands as it was making a loss of ₹20 crore a day. Tatas will have to figure out how to handle this part of the deal, which otherwise appears to be a good one. The gains from aircraft, landing slots, number of flights, experienced staff etc. have been very tempting and proved to be the clinching factor.

The workers get protected for a year, after which there can be some serious reconfiguration of staff. That will be another worry for the employees as a one-year time span does not afford much space to look for alternatives. Practically speaking based on what happens in all such consolidation activity, the staff end up getting a raw deal. There is no reason why it should be different for a loss-making company that has found a buyer.

While the government will be relieved, the amount received is too small for the target of ₹1.75 lakh crore. There is the big LIC sale that has to be reckoned with and while the company will find many takers being an excellent pick, working out the deal before March 31 will be a challenge.

To garner around ₹1 lakh crore (which is what the Budget talks of from LIC and the two banks’ sale), the company has to get a valuation of at least ₹10 lakh crore as the government is talking of 10 per cent stake sale. There is talk of reservations for foreign investors, institutions and retail and the entire process has to be worked out with the finer details given the amount involved.

Any sale which hopes to get in such a big amount is betting on the market having appetite for this quantum of disinvestment. As this will be towards the end of the year, availability of funds plus the state of the market are important factors.

Sizzling stock market

There has been over ₹80,000 crore of IPOs already offered in the market. The Sensex is ruling at a level of around 60,000 and the doubters are questioning the size of the upside to any sale/purchase done at this time. Around half of the IPOs this year have done well — especially those that were out in the first part of the year.

The good part of the LIC disinvestment is that it has been accepted as a viable proposition. Probably this is because currently the talk is of only 10 per cent sale with the assurance that the government stake will always be 51 per cent or higher. Clearly all investors in the insurance behemoth would be putting in their money for improving their return and net worth rather than take control of the institution. Here it will be useful if the government provides a calendar for future disinvestment too till the 49 per cent mark is achieved as this will affect the free float of shares in the market and have an impact on valuations.

From the market perspective just like how the debt of Air India was a consideration, in case of LIC its perceived role as the ‘investor of last resort’ will be something that will come up for discussion. In the past it was widely believed that UTI and public insurance companies were used for major interventions by the government to steady the market. When disinvestment came in, public institutions (insurance companies in particular) and other PSUs (especially cash rich OMCs in the public sector) have played a significant role in making these plans successful even if it meant picking up shares at a high cost.

This will not be possible in the new setting once the company gets listed. However, on the positive side none of the OMC valuations have been affected by their cross holdings in other PSUs and therefore this may not matter. This may give hope to the government that it can still be business as usual for the LIC, post IPO. But at this stage it should be thought through closely.

The two PSBs’ sale will also be watched not so much on valuation but the approach to its fulfilment. The government has hinted at letting go of these banks which means that the stake can come down to less than 51 per cent. The market is already buzzing with talk of a complete sale which must necessarily involve a big purchaser which can be a private bank.

The internal working group of the RBI had been open to corporates getting a licence subject to caveats. This could be an opportunity for an entry given that whichever bank is going to be sold will be adequately capitalised (as per latest news on infusion of funds by the government) with an experienced staff to handle the physical infrastructure. Existing private banks or NBFCs wishing to gain size or make inroads into banking will find these offers tempting and this can make the valuation attractive for the government in achieving the ₹1 lakh crore target set for the financial sector.

Hence with the pandemic behind us and a successful progress of vaccination it does look like business as usual for the economy and the market will have exciting times that goes beyond the 60,000 level. Disinvestment has to carve its niche in this setting.

The fuel debate on NDTV 24th October 2021.

 https://www.ndtv.com/video/news/we-the-people/fuel-prices-taxing-aam-aadmi-606948?rdr=1#video-featured

The madness of Musk | Book Review — Power Play: Elon Musk, Tesla and the Bet of the Century by Tim Higgins: Financial Express 24th October 2021

 

An interesting attempt to uncover the story behind Elon Musk the man and his business ventures

Under Elon Musk’s command, Tesla has become the highest-valued car manufacturer in the world (AP Photo)

Elon Musk’s name tosses up extreme emotions among people, ranging from deep admiration to disdain associated with arrogance. This is the issue with most over-successful young entrepreneurs who have brought about a sea change in the way in which they write their stories. Musk, known for SpaceX and Tesla, has been what can be termed as a go-getter who has been aggressive in his quest for fame and achievement.

The curious part of his story is that he made his wealth by co-founding what is now known as PayPal and was actually more passionate in starting SpaceX and trying to get to Mars. The entire story is narrated by Tim Higgins in his book, Power Play, which goes into finer details of the Tesla exercise. Under Musk’s command, Tesla has become the highest-valued car manufacturer in the world. The company has brought to reality the imagination of the tech industry of Silicon Valley by putting vehicles running on batteries in various cities across the globe.

The detailing by Higgins is quite rigorous, though this is not an official biography. The author is quite unpretentious in his narrative and does not hold back from criticising Musk where required, especially when his behaviour was obnoxious with his colleagues. Higgins, a reporter from Wall Street Journal with specialisation in the automotive industry, also says at the end that this draft did go through Musk, who reacted by saying that most of what was written was ‘nonsense’. He also found it boring and dull. The reader can, of course, take a call on this by perusing this rather interesting and page-turning book.

The author, however, has averred that he has based his book on various conversations with hundreds of people involved in Musk’s life and has been through bundles of documents to present a straightforward story based more on facts than interpretations. Clearly, Musk does not agree with everything or rather accepts less of what has been written.

The two pet projects of Musk have been the electric car and the quest to ride to space. Like Bezos and Branson, his passion for achieving his goal has been immense. Reverses have never come in the way of pushing forward and this has been the hallmark of the man. He genuinely believes that he is saving the planet by getting rid of pollution through his EV mode. The principle is simple: get to run a sports car that will generate cash, which will finally be used to go to the mass market.

The car, Model 3, was to be priced at $35,000 which, though very high, was also not feasible as it was to be a people’s car, which it cannot be with this level of entry price. But there were buyers for the story and the commitment of purchase did spur Musk even though it progressively became hard to meet the commitment as costs soared. The concept of having a battery-driven car was always going to be a challenge and the tribulations that Tesla went through are quite fascinating. One problem that still plagues Tesla is getting a grasp on the vulnerability of the battery used: lithium-ion. This was a reason why conceptually cars running on chargeable lithium-ion batteries had long been a nonstarter for car companies considering this option.

An interesting part of the story is that the EV has become a niche product for the affluent than a common man’s utility vehicle. This book must certainly be read by all EV makers in India as there are several lessons to be learnt from the Tesla story. Of course, the advantage of followers is that they can eschew the cost of innovation, which is usually the cross carried by the first mover. Tesla had also tied up with China to set up its manufacturing facility to basically cut down on cost.

While the story is about Tesla, it is also about the man, and given his egotistic level, which is very high for all such ambitious entrepreneurs, there was a run-in with the Securities and Exchange Commission (SEC). Musk enraged the SEC by tweeting about pricing Tesla shares at $420, which was a joke intended to amuse his girlfriend. But Musk is not the person to bend to any authority and the arrogance displayed when pulled up has been elaborated quite extensively by Higgins. This involved all charges of violation of corporate governance which, according to the author, were serious.

Elon Musk has clearly gotten some things wrong, including missing deadlines, going on the wrong side of regulators, being brusque and unfair with talented employees, and making several unfulfilled promises. But he has set in motion some great things that will change the world for sure, which is getting the electric vehicle on the road. He has shown how a start-up can grow to become a global force. Higgins does pose the question on whether Musk is an underdog or an antihero or a con man. Or is he a combination of the three? The reader can vote on this after reading the book.

Madan Sabnavis is an independent economist

Book details

Power Play: Elon Musk, Tesla and the Bet of the Century
Tim Higgins
Penguin Random House
Pp 377, Rs 799

Why scarcities keep recurring, and how we can fix it: MInt 20th October 2021

 https://www.livemint.com/opinion/online-views/the-need-of-systems-that-ll-help-tackle-a-crisis-rather-than-deny-it-11634747621976.html

on ETNow debate: India Development Debate on labour shortages on 19th October 2021

 https://www.timesnownews.com/videos/et-now/shows/deep-dive-key-sectors-facing-labour-shortage-india-development-debate/112239

Coal crisis can drag down recovery. All stakeholders must act: Indian Express 19th October 2021

 The coal crisis brings a sense of déjà vu as the storyline seems similar to what happens when there is a shortage of sugar or onions. The difference is that the shortage of farm products is normally due to crop failure while the reasons for coal shortage are more human-made.

India has the world’s fifth-largest coal reserves. Theoretically, therefore, there is no physical shortage as we can mine as much as we want to. For this to happen, miners, which includes Coal India, must invest more money in coal production. During the monsoon season, rains do not just stop the mining process but can also affect coal stocks – this is somewhat like the excess grains problem.

Today, while the government has been saying that the supplies are at their highest, the power-generating companies are complaining that their stocks are low. Normally, they maintain around 30 days of inventory, but, currently, this has come down to three days. Such shortages invariably lead to outages, some of which are already being witnessed in some pockets of the country. Several states say that they are running out of coal. Will this situation get reversed? Probably conditions will improve with time, but one does not know when. Demand surges and disruption in supplies can exacerbate the issue.

On the supply side, because of low investment, coal cannot be mined more than the capacity which exists today. Hence, the increase in supplies will be gradual. Ideally, just like we import sugar or onion when there is a shortage, we should import more coal. But that has its challenges.

In terms of demand, producers should have sprung into action when stocks were getting depleted and not waited till the crisis to flag the issue. Ideally, if supplies were not available, provision for imports should have been made. Now, the government is asking companies to meet 10 per cent of their requirement through imports.

The global coal crisis has led to higher prices. Here, too, a sudden resurgence in demand after the pandemic has exposed the supply limitations. During the first lockdown, mines closed or operated with limited capacity as the offtake was limited. Now with a resurgence in demand, time lags are involved, which, in turn, have pushed up prices. The international price has gone up by almost 40 per cent in the last month. China – a major producer and consumer – has also faced this problem as it has tried to save coal for the future and imposed restrictions on mining to go green. At the global level, as power companies are not getting coal easily, they have switched over to oil, pushing up the price of Brent.

Ideology has a big role to play in this crisis. In India, coal imports have been traditionally high. Under its atmanirbharta drive, the government has voiced concerns on this issue and asked generators to be more self-reliant. Coal dependency came down over time, which also coincided with a lower phase of economic growth. The same has happened in China where the government has taken the greening concept seriously and asked coal producers to control production and power generators and move over to other greener fuels. This has made coal producers less willing to increase investment.

Ideally, power companies should import coal. But that increases the cost of power production and power tariffs cannot be revised easily, like in the case of crops. It is often asked that if the government can keep raising the price of petrol and diesel when crude oil prices go up, why isn’t a similar policy followed for power. The power sector, however, already has its woes. Distribution companies have been running losses due to their inability to cut down on transmission losses or increase tariffs. As their losses mount, the amount overdue to the generators increases. Therefore, the producers are not willing to increase their costs.

What could be the impact on the economy if this crisis gets prolonged? The economy has been showing signs of recovering and the October-December period is crucial because there are expectations of pent-up demand helping to accelerate growth. Any disruption in the power supply can push back this process.

The challenge is that today all the three sectors, agriculture, industry and households, are equally important. The rabi sowing is about to start and power is required to drive the sowing efforts. For industry, production requires uninterrupted supplies. A lot of business is being conducted from home after the pandemic, and power disruptions will come in the way of work.

Inflation too is delicately placed, though the situation currently looks comfortable due to the high base effect – this could help in the next two months. The prices of vegetables have started increasing and edible oils continue to be a pain point in the inflation schedule. If power companies start revising their tariffs, inflation will shoot up.

The coal shortage problem is very serious as it affects power supply, which is the backbone of all economic activity. It could surface again especially because the country is in a transition phase. There is much talk of reducing the carbon imprint – using less coal and shifting to renewables. Mismatches can surface, especially after the monsoon, and have chaotic effects. All stakeholders – the Centre, states, miners and power generators – must work together and plan the strategy going ahead. The nation is expected to grow by more than 8 per cent in the next few years, and we need to have a strong power generation edifice for the same.

on ETNOw the coal debate 12th october 2021

 https://www.timesnownews.com/videos/et-now/shows/can-the-coal-shortage-hit-indias-recovery-india-development-debate/111803

Natural experiments in economics: Business Line 16th October 2021

 

The work of this year’s Economics Nobel winners is particularly relevant in public policy

David Card, Joshua Angrist and Guido Imbens, the Nobel Prize winners in Economics this year, have made a unique contribution in the field of labour economics, which is based on cause-and-effect related issues. This in turn has relevance in public policy. Their approach can be carried forward to our everyday life too.

Normally when we want to find out the cause and effect of any economic phenomenon, we carry out randomised experiments. Samples are chosen, and the question is posed to the participants without telling them the purpose. But this runs the problem of selection bias and tends to be narrow. To overcome this shortcoming, Card, Angrist and Imbens use what is called the observational data approach for answering questions of causation.

This is within the realm of natural experiments, which involves studying results of any action taken by, say, the government on the stakeholders concerned over a period. Interestingly, the 2019 prize had gone to Abhijit Banerjee, Esther Duflo and Michael Kremer for their work based on the ‘experimental approach’. Evidently, both sets of theories have their place in economics and add value. This is important in economics as distinct from medicine, where clinical trials are based on random trials that are carried out to see if medicines work. Hence a controlled experiment has yielded a preventive vaccine for Covid, but the impact of the pandemic on schooling and children is hard to analyse this way. The canvas is larger, and the experiment involves observing the patterns across countries to study the causative effects which will be within the purview of the work of this year’s winners.

Education versus income

Let us see some of the questions in labour economics which are answered by their work. The first is whether more years of education leads to higher future income? This cannot be done with a fixed set of respondents as it would be a biased one. One must observe over time in specific geographies, after understanding the socio-economic conditions. Their experiments did show that students who studied more earned higher income.

This makes sense as those with better qualifications tend to do better in life. But their focus was mostly on schooling in lesser developed countries. At times this could get distorted if people studied more just because they did not get jobs. But the take here is that this would not normally happen for long as people not interested in studying more would like to join the labour force and earn money as soon as they can.

Another issue which was studied by David Card was whether an increase in minimum wage leads to lower employment. This is a critical question for the labour market which always seeks to find a balance where labour wants a higher wage and companies which would like to be selective in paying higher wage to the more efficient. His analysis shows that employment does not suffer as the minimum wage sets the threshold for producers who must pay the higher amount as per law and there is little choice.

But Card showed that when minimum wage increases labour tends to become more efficient which helps the organisation to increase output. Therefore, labour costs do not get onerous. Also, at this level there would be unskilled labour involved which cannot be substituted by technology unlike other desk jobs or even factory skills that can be replaced. Such a conclusion is drawn by studying trends and patterns over time.

An area which Card has analysed in some depth has been the issue of immigration. Do immigrants create problems to the local labour force? This is one issue which has come up often in the US, especially under the Trump regime that alleged that they tend to take over the jobs of the local population. His analysis shows this does not necessarily happen and it depends on the level of work.

The approach of the trio also involved natural experiments which cannot be influenced by the analyst. It also answers simple questions on, say, a course which must be offered to students in an university. Or it could be a new product that is sold with special offers, including discounts and free samples. By making such announcements, can the students who take the course or consumers who buy the product be influenced? Universities as well as companies must take this chance because there would be students who would take a course even without being specifically made the offer while there could be another set who came in due to the offer while the third set would not be interested anyway. These are the kind of questions that are posed when we deal with cause and effect in such experiments.

Companies are always doing such an exercise and fine tune their marketing plans. Often, they follow the faster path of randomised controlled trials which is a market survey-based approach when new products are launched. When they do not do well it would mean going back to the approach of natural experiments to find reasons for things not working out.

The larger question is whether corporates can wait for long to get these results before launching a product? Often the product is differentiated and cannot be compared with stories of other companies. Such natural experiments tend to work better for government-driven programmes where experiences from the past provide signals for the future. Therefore, from the point of view of public policy these theories are very relevant and more likely to be pursued.

Gold and social stock exchanges bound to click: Financial Express 15th October 2021

 

While the space will be open to new players, existing exchanges can also have separate desks for these products.

SEBI has made two interesting propositions for stock exchanges to consider. The first is a gold exchange and the other a social stock exchange. While it will be open to new players, existing exchanges can also have separate desks for these products, just like there are for SMEs or currency derivatives. Post the merger of SEBI and FMC, existing stock exchanges can also deal with commodities.A spot gold exchange is a novel idea, where one can buy and sell gold on the exchange after having the gold deposited in vaults and getting an electronic gold receipt (EGR). Prima facie, this concept looks promising but has to compete with other gold investment options.

First, there are gold futures that are very liquid on MCX, with the option of delivery. Having a spot market is a blessing for the exchange as members can directly have a reference price and can seamlessly deal in both the segments. There can be an advantage here for the exchange that has a virtual monopoly in gold derivatives. Futures are more efficient than spot trade for investors as the margin to be placed is just around 5%.

Second, there are gold bonds issued by RBI which give one an interest of 2.5%. This gives one the benefits in price movement without having to hold on to the metal. This was the idea behind the Sovereign Gold Bond where the aim was to reduce physical demand through imports but provide the investment opportunity. The handicap is that it has a fixed tenure of eight years (can be redeemed early only after five years) with 4 kg being the limit on investment every year. This is a good product because when dealing with EGR one has to bear the vault costs, which does not hold, for the gold bonds.

Third, there are ETFs in gold where the fund manager looks after the NAV and regularly trades in gold while maintaining the reserves so that the holder can exchange the ETF units for gold, if needed.

The broader question is why should anyone come on to the gold exchange when there are other options? Gold futures deal in future price but follow the rules of spot trading where delivery is possible, though not efficient. And all this is happening in an environment where the traditional or conservative holder of gold does not want to lose sight of the metal and buys and holds jewellery in the locker. But exchanges cannot be left out and will surely rush to open these desks.

The social stock exchange is a novel concept in a way as this will be a platform for both debt and equity to be raised by a different set of companies (defined as for-profit or non-profit, but excludes regular corporates) where the money is used for social purposes as defined by SEBI and covers 15 areas. One may recollect the issuance of green bonds by banks where the funds were used for funding environment-friendly projects.

Here the concept has been broadened, more on lines with the ESG dictum, and hence there is a social good being accomplished. There is, of course, the question of how the use of these funds is monitored. There is a check being put by SEBI through audit processes which presumably will also lead to penalties being imposed in case of deviations.

The problem is that money is fungible and hence it becomes difficult to segregate the funding source to its use. When banks lend for a ‘green purpose’, they monitor end-use, just like they do for any loan; hence, in general, there is compliance. But when it comes to the market, such audits become more challenging especially if the entities are not corporates which have a predefined presentation of their accounts.

Here we are talking of bonds issued by hitherto unregulated entities. There could be considerable apprehension and it would be necessary to provide signals to the investing public through mandatory ratings for both equity and debt.

With a distinct thrust on ESG, the government can give a green push by providing tax breaks to investors of such bonds. This can help the public take part actively in a different kind of Green Revolution.

RBI has just about started a gradual liquidity reversal process: Business Standard 8th October 2021

 The Reserve Bank of India (RBI) has not really gotten in any surprise on the rates front, which is good for the market. The unchanged stance on repo and reverse repo rate does assuage the market. Given that other macroeconomic expectations are largely balanced with inflation to move downwards, it can be expected that there will be no change in the repo rate for the rest of the financial year.

The GDP outlook was expected to change upwards, but the RBI has retained 9.5 per cent forecast. It is sanguine on investment recovery, as well as the services sector. This is significant as the CMIE data on investment was not too positive for the first half of the year. The opening of the economy post the nationwide lockdown to slow down the coronavirus has finally covered the services sector. Interestingly, due to the base effect of last year, the quarterly growth rates for the year would be declining from 7.9 per cent in Q2 to 6.8 per cent in Q3 to 6.1 per cent in Q4. This should not be interpreted as slowing down growth due to these statistical effects.

Inflation forecast has been, on expected lines, moderated to 5.3 per cent from 5.7 per cent. Here the interesting thing is that the quarterly inflation rates would move down from 5.1 per cent in Q2 to 4.5 per cent in Q3 but rise to 5.8 per cent in Q4. Hence, this means that the base effects will finally erode with prices moving up. The RBI here has rightly pointed out that the two oils--edible and crude--would be the main risk this year going ahead. This is probably the biggest risk for the economy as it does affect input prices and finally growth.

The important message awaited was the RBI take on liquidity. Here the reiteration that the RBI believes in gradualism is important. To regulate liquidity, the RBI will not be holding any more GSAP auctions but would continue with OMOs and Operation Twist to regulate the market yields in particular. This is a positive step as it ensures liquidity does not shoot up but yields remain regulated.

The RBI will now be quite aggressive in the V3R-variable reverse repo rate auctions for 14 days that will help absorb excess liquidity in the system. The RBI has rightly emphasized that the V3R can also be called the voluntary reverse repo rate auctions as the purpose is to allow banks to put their surplus funds which today is nearing Rs 10 lakh crore in these auctions and earn something higher than 3.35 per cent. There is hence a calendar drawn out till December, which progressively absorbs more liquidity from the system starting with Rs 4 trillion and going up to Rs 6 trillion. This again is the ideal way of going about the absorption process.

The final message-- which is important--to be taken is that the RBI has just about started the reversal process, but it is going to be a very gradual one. There will not be any shock to the market, with the calendar being drawn out. By assuring the market that the RBI will use OMOs and Operation twist at any point of time it has assured the market on the yield curve. There should ideally be no kneejerk reaction in the market. The 10-year bond has moved up from 6.27 to 6.28 per cent, but maybe we should not read too much into this.

Just how much skin should a player have in the game?: Mint 5th October 2021

 https://www.livemint.com/opinion/online-views/just-how-much-skin-should-a-player-have-in-the-game-11633366685918.html

Linking cess with govt borrowing is unfair: Business LIne 4th October 2021

 

The GST Council’s inaction on petro products and cess continuing till 2026 are likely to make life difficult for consumers

The outcome of the GST Council meeting on September 17 is likely to divide opinion. The lowering of rates on several products and services especially in the pharma area is welcome at a time when health inflation is high and has affected almost every household as expenses on healthcare has increased during these pandemic times. However, two areas would come as a disappointment for sure.

There were expectations that the energy products would be brought under GST or at least a roadmap announced to ensure that at some point of time this would be a reality. Petro products are widely used by everyone either directly by operating vehicles or indirectly through the price impact on all products. Currently all taxes levied by both the Centre and States form two-thirds of the final price paid by the consumer. Even if a GST rate has to be considered, it would be abnormally high at 200 per cent presently which does not hold for any product. It is hence hard to choose a rate for these products as it is extremely high for something which is an essential good for the public.

Fiscal compulsions

The conundrum for the government is that these taxes have a direct impact on the fiscal balances. A sum of ₹6.35 lakh crore was earned by the Centre and States on these products in FY21 as revenue compared with ₹5.07 lakh crore in FY20. Quite clearly as consumption had fallen due to the lockdown, and global price of crude had also come down due to the recession, the government had fully exploited this situation by raising taxes in the form of excise duty (Centre) and VAT (States).

Excise and VAT accounted for ₹3.71 lakh crore and ₹2.03 lakh crore respectively in FY21, while customs, cess, royalty, IGST and minor amounts for CGST and SGST accounted for the rest of the collections. Unless the governments (Centre and States) are willing to reduce their levies, it will not be possible to bring petro products under the fold.

There is ideology at play here as well the government would like to retain the prerogative to increase taxes when it wants to. This holds especially when the base price of crude oil comes down. Crude oil has tended to vary between $40-70 in the last decade with wide aberrations on both sides, though generally in the upward direction. When this base price comes down, if the products are bound by GST rates, then the government would lose a lot of revenue which is likely to hit it hard. The Centre levies a fixed excise duty while States impose a VAT.

Last year, for example prices crashed to an all-time low in April with futures prices going negative and consumption plummeted thanks to the Covid lockdown. In such a situation increasing rates made sense to protect revenue. The Centre increased the specific duty while States automatically benefited as VAT is ad valorem. Some of them increased their VAT rates.

However, this year with crude oil price going back to the range of $70 plus, and taxes unchanged, prices of petrol and diesel soared above ₹100/litre and inflation becoming intransigent. The price of LPG too has been pushed up independently by the government by as much as ₹190 a cylinder since January 2021.

There are two solutions. First is that the GST can be made conditional on the crude oil price range and hence can be graded. There can be a series of rates to begin with depending on the range of crude oil price. The other option is for the government to voluntarily create a buffer above a threshold after which the revenue generated will be used for the rainy day when rates will not be increased. It cannot be ‘heads I win and tails you lose’ — where ‘you’ is the consumer.

The cess factor

The GST Council’s decision to retain compensation cess up to 2026 is also likely to disappoint consumers.

In FY22 it is estimated at ₹1 lakh crore which was also broadly the expected collections in FY21. When GST was launched in 2017, the cess, was to have been for five years, to be used to compensate States for any shortfall in revenue for this period if revenue did not grow by 14 per cent per annum.

This five-year period was to end in March 2022 after which the cess should be withdrawn. However, the Finance Minister has stated that the cess collections had fallen short as did overall GST revenue last year as well as probably in FY22 due to the lockdowns. The Centre had to borrow money to pay the States their dues. Now to repay this additional borrowing along with interest, the government plans to keep the cess running, which will over the next four years, help to make this payment.

Is this the right thing to do? This is a very ingenious way that the government has chosen because it sets a precedent that a cess can be levied or carried on to finance additional borrowing. In effect, the higher government borrowing programme is being financed through a cess, which may seem unfair to the public. The two should be separated, as taxes can be levied in future to service debt. Indian fiscal history shows that whenever a cess is levied (which need not be shared with States), they tend to become permanent.

This cess is imposed on vehicles, tobacco, alcohol, energy products including diesel and petrol, aerated water and coal. The implication is that these products will face a price disadvantage for four more years.

This is not good news for the auto industry in particular which has been buffeted twice by the lockdowns.

Therefore the GST Council’s inaction on these two issues is not good news for the consumer as inflation will continue to be high as the government is not willing to relent. The continuation of the cess can be a dangerous precedent used in future if it gets linked with government borrowing.

Book Review — Noise: A Flaw in Human Judgment by Daniel Kahneman, Oliver Sibony and Cass R Sunstein: Financial Express 3rd October 2021

 

 A case to cancel out human as well as AI biases while taking decisions

The point that the authors make is that while laws or rules are objective, human interpretation makes them subjective.

Noise by Nobel laureate Daniel Kahneman, Sibony and Sunstein is an amazing book that takes us into the labyrinths of how we respond variably under different conditions that results in inconsistencies while making any judgments. This being the case, various people judging the same issue will naturally have differential verdicts. And when the verdict involves judging a crime, it goes without saying the result can mean life or death.

Starting with the subject of how different judges look at crimes and give different sentences—some lenient while others are unforgiving—several lives may be pushed to the corner on account of being in the wrong court. It is hence not surprising that various judges are known to be very intransigent when it comes to specific kinds of crimes and would tend to be ‘harsher’ in relative terms than others. But it is not just the case of crime where such ‘noise’ comes in. Even in normal businesses, like insurance, the official who surveys the damages may look at things differently and accordingly recommend compensation. This can affect the outcome of the claim.

The point that the authors make is that while laws or rules are objective, human interpretation makes them subjective. This happens everywhere and often we don’t stop to think. Even in innocuous events like beauty contests, the judges’ views could be clouded. In fact, Keynes had said that judges normally don’t select who they think are the most beautiful, but those who they think others believe are the top rated. Therefore, the issue of subjectivity plays in a big way.

Another area where the authors discuss a lot is the field of medicine. Here, the reader will be able to connect quite easily because rarely do two doctors give the same treatment. And we often talk of how some doctors always recommend several tests or inundate the patient with a plethora of pills while others are less demanding and believe in minimalism. Here, too, it is a case of subjective judgment.

How do we reduce noise? Even setting rules that guide judgments will not eliminate the same, as interpretation is important and it goes back then to the human being who takes a call. Using algorithms is a way out, say the authors, where several court judgements can be evaluated by such micro formulas that reduce individual biases.

In the West, often if the convict is poor and coloured and resides in certain localities, there is an inherent bias that manifests in the final judgment call made. It can be argued that even when algorithms are formulated, it would be essential to ensure that they should go through several rounds to ensure there are no biases that come in.

But there are criticisms too where algorithms could make several silly mistakes, as they may fail to include some answers to questions never asked when being formulated. Sometimes it is recommended that there should be multiple judges for, say, an essay competition. This may work well, though the background of the judges is again necessary. Further, having multiple people give judgments may become unwieldy and inefficient. Therefore, this, too, may not be the best way out.

Will having rules work? Here, too, the authors show how approaching two different insurance offices for a quote can give different opinions even though the company is the same.

If one traces what happens to a cheque which is deposited, the process is well defined, and rules can be applied with no deviation. But not so when there is any element of judgment that can be applied by any human being.

Another option provided by the authors is that the judges should look at the cases statistically, which means examine what were outcomes of similar cases in the past across other courts and not just the specific ones they are evaluating. Here, too, there can be problems of biases in earlier cases that can just be carried through in the new ones.

Another way out is to break the case into several parts and judge them independently. This, however, may not really be possible in reality.

The authors argue that even though the cost of removing noise can be high, it may be worth the effort as it leads to a better solution. This can be justified when it comes to life or death sentences, but if the issue is minor, may impose a monetary and time cost on society. Here we can think of interviews for jobs where some companies put a person through a series of interactions that can be six-10 layers. The idea is not so much to pressure the candidate but to ensure that these subjective biases are adjusted for. There can still be mistakes made, but such layering allows for better judgment.

In short, one cannot really avoid noise or bias in life and several decisions taken are based on subjective judgments. Human beings are unreliable decision makers. These can at the extreme level affect the lives of convicts and hence need to be reduced. But while it can be lowered, it is impossible to eliminate the same and that is the crux of the issue of noise.

Madan Sabnavis is chief economist, CARE Ratings

Noise: A Flaw in Human Judgment
Daniel Kahneman, Oliver Sibony and Cass R Sunstein
William Collins
Pp 454, £16.99