FY22 GDP estimates: Some surprises in the internals: Business Standard 28th feb 2022

 The NSO has been quite consistent in its GDP projections for the year. After revising the FY21 numbers earlier, the growth rate for FY22 stands now at 8.9% instead of 9.2% earlier. It was 8.8% earlier and hence, there has not been a significant revision. There would also be a rather wide price deflator with the GDP in nominal terms increasing by 19.4%, thus yielding a double digit number which is closer to WPI inflation. A question raised is whether CPI inflation is the right index to target for monetary policy.

But this also means that based on the 9 months growth so far, there would be low growth of 4.8% in Q4FY22 indicating that there will be a slowdown from Q3.

This has been achieved through a base effect numerically as all sectors have done much better than that last year. This is the positive takeaway from the estimates. The figures on capital formation, however, appear optimistic as the gross fixed capital formation rate is to increase from 26.6% to 28.3%, which is not supported by the activity in the debt and credit market. While the central government has committed to higher capex this year, one cannot be too sure of the states or the private sector.

Simultaneously, the share of consumption and government expenditure has come down in FY22, which is reflective of the economy not yet being fully back on track. The lower share of households’ consumption is a concern because this has to be the main engine to growth as has been reiterated by the Economic Survey. Lower consumption levels is also reflective of the state of employment, which has not been steady as the unemployment rates have tended to be high. The other worrying factor is the continuous increase in the share of valuables during the last two years which is a reflection of people moving over to gold in uncertain times. This is not good for savings.

The third quarter numbers are interesting. The picture is different across sectors: agriculture, manufacturing, construction, and finance have witnessed lower growth rates this year compared with last year. Construction growth has declined while manufacturing has just about been positive at 0.2%. This does come as a surprise because it was expected that the pent up demand story caught on in this festival season and that most companies did say in their corporate presentations that there was a recovery. However, IIP growth remained feeble, which reflected this sentiment. But profits of corporates has been buoyant and should have gotten reflected in better growth numbers. Even in case of construction, the government spending has been steady and it is probably the sale of inventory that was more vibrant than new construction.

The sectors that show higher growth are mining, electricity, trade transport and public administration etc, the latter two have been more on account of the base effect with negative growth being witnessed last year.

The job is still not over and FY23 does need a fresh impetus. Based on these numbers, the growth in the fourth quarter would be lower at 4.8%. There is need to push up both investment and consumption. The budgetary push will provide support from the government’s end. But the main booster has to be from the private sector. Hence, demand conditions have to be more broad-based with the consumer goods segment contributing significantly to overall growth.

Towards another milestone in the disinvestment journey: Indian Express 28th Feb 2022

 https://indianexpress.com/article/opinion/columns/towards-another-milestone-in-the-disinvestment-journey-7793696/

A pitch to remember | Book review: ‘Indian Innings: The Journey of Indian Cricket from 1947’ by Ayaz Memon: February 27 2022

 ricket needs no introduction in India, and countless books have been written on this sport that has the power to halt the nation. And yet, here comes a collection of write-ups on the game that takes fans down memory lane but still offers something new. Ayaz Memon, who is probably one of India’s foremost sports commentators, puts together various articles on the game of cricket in India, tracing the game from the Seventies. This was the time when Indian cricket reached its peak with victories in the West Indies and England. The author includes several articles that were published in various newspapers and magazines in the past, thus giving readers detailed perspective of the game that otherwise might be difficult to obtain from casual conversations or web searches. The second set of articles is by some distinguished names and tracks the game in contemporary times and cricketers such as Virat Kohli and Cheteshwar Pujara.

So, if the book includes recollections of Sunil Gavaskar who played the game, to Harsha Bhogle who has been a commentator for three decades, it also has perceptive views by eloquent writers Shashi Tharoor and Ramachandra Guha.

If one recollects the drubbing India got in 1974 in England with the infamous ‘42 all out’ at Lords, one can read what Khalid Ansari, then editor of the now defunct Sportsweek, had to say.

Today, of course, the game is very commercial but, in the past, it was not so. Sportspersons played the game for the pleasure of it and names like Gundappa Vishwanath come to mind who enjoyed cricket and never bothered about the outcome. Ramachandra Guha has an appreciative piece about him that many followers of the game in those days would identify with.

Another issue is the existence of politics in cricket. Today, we tend to talk about how cricketers are selected and how captains, coaches and managers are appointed, which are not always based on merit. But this was the case even five decades ago when things were dictated from the top. Clearly, the tendency for extraneous elements to intervene in team selection is a part of our DNA and nothing much has changed.

The matches that have been covered in the book are a combination of ones where India won and also lost, though the focus is more on the former, which in a way is good as it is inspiring reading. Some controversial issues like the betting incident have also been covered, which will give readers some idea of the darker sides of Indian cricket. The monkey-gate controversy, too, is included, which was another pressure point in our cricket history.

Memon has earmarked a separate section for the famous Ranji Trophy, which today is almost forgotten by fans and players alike. It was a prime tournament that also brought the game into the public domain, giving the regional public access to the game and when the stadia used to be filled even for league matches. Now it has been upstaged fully by the IPL, which has become an annual feature few miss.

The book includes at the end a speech made by Sanjay Manjrekar that is quite touching as he talks about how in the past, which is the Nineties, batsmen were scared of fast bowlers and would rather not face them. Things changed after Sourav Ganguly and company took over, with Mahendra Singh Dhoni changing the confidence with which we played. He also laments how no one wants to play Test cricket anymore, and how the Board, too, looks more at the shorter version of the game.

Some things stand out as one goes through these articles. Most cricket writers tend to be quite extravagant in their language and there is a lot of imagery that is brought into the writing about the state of the match and the climatic conditions. This has not changed, and for over five decades writers appear to have a predilection to exaggerate as they pump their pieces with emotion and passion.

There are some authors like Shobhaa De whose pieces look out of place in a serious book on cricket. But one can say it is the editor’s prerogative. The first chapter, titled ‘Pitching Stumps’ is his initiation into cricket, which is quite charming. He also includes his comments at the end of each chapter that prove quite interesting. He mentions in the beginning that, “an oft-propagated theory is that sports journalists are failed sportspersons living out their thwarted dreams and ambition second hand, so to speak.”

But rather unassumingly he follows this up with, “I don’t know”. The book can only be described as absolutely delightful and a must-read for anyone who loves Indian cricket.

Madan Sabnavis is chief economist of Bank of Baroda

Indian Innings: The Journey of Indian Cricket from 1947
Ayaz Memon
Westland
Pp 404, Rs 899

Russia-Ukraine War: What it portends for India

 The situation in Ukraine is now one of war, with Russia formally invading the territory even as the world has expressed umbrage and topped it up with some sanctions. This is a big blow for the world, as it is probably the first time that we are witnessing such an attack which is quite unprovoked. Russia is a major oil and gas player in the global economy. This means that any disruption in terms of a war or deeper sanctions that keep Russia in check have the potential to disrupt the global economy, which just appeared to be on the recovery path after the Omicron scare.

What does all this mean for us in India? The first impact has been seen in the volatile stock indices. This of course is part of the show, as markets swing either way based on all the information that is available. Such volatility will continue to pervade for some more time. Second, crude oil price has crossed the $100/ barrel mark. This was expected even earlier, but analysts are talking of $120/ barrel. This will be a concern, given that our oil import bill comes close to $150bn a year and hence, any increase in price will affect our trade deficit.

While consumption did fall during the pandemic in 2020, it has been back to normal and with pent-up travel demand increasing along with the proclivity to use one’s vehicle and eschew public transport, there has been an increase in the consumption of oil products. Hence even a 10 per cent increase in price on a permanent basis will increase our annual import bill by at least $10-15bn (there will be some balancing by higher exports of refinery products).

Therefore a higher current account deficit seems to be on the cards for sure. Third, higher oil prices also mean that there will be pressure on the rupee and this is where the markets are getting jittery. The rupee had been strengthening of late but this will get reversed and there is potential for depreciation now, depending on how soon the oil prices climb. This, in turn, will depend on how strict the sanctions are because in case there is an embargo on imports from Russia, the potential rise in price could be phenomenal, given that it is the third largest producer of oil. The rupee is now down past the Rs 75/$ mark.

Fourth, the threat of inflation is real, again. The RBI had assumed that inflation would be 4.5 per cent next year and the Budget too was talking of it being in the 3-3.5 per cent range. Now, with the Budget not providing for higher subsidy on fuel as well as fertilisers and excise collections not assuming any cut in the duty rate, it does look like that the price hike in crude will be felt at the retail end. In Mumbai, for example, as we pay Rs 110 a litre for petrol, the cost to the refiner is Rs 48, with another Rs 4 going as agency cost. The excise rate is Rs 28 while the balance is VAT charged by the state. The price has not changed in the last couple of months, ostensibly due to the ongoing state elections and hence, it was expected even before this crisis that the price would be hiked.

Even with unchanged duty rates, 10 per cent increase in crude prices will lift the basic price to Rs 53-54 for the refiner and be reflected in an increase of 5-6 per cent in the final price. While this may not be very significant when it comes to the inflation index which is considered by the RBI, the pain will be palpable. In fact, the secondary impact will be sharper as freight rates increase, which gets embedded in the final price of all other food products too. Hence the situation is one of concern for us in India. The inflation impact will be sharper when looked at from the point of view of the WPI, where fuel products have a higher weightage in the index. Intuitively it can be seen that as there is a pass-through of this inflation to the final product, the price increase can get generalised even at the producers’ level.

Russia is not a major trading partner of India and hence, on the external side, there will not be a major impact. But due to the currency and price effects, there will be disruptions. The government and the RBI will have to reconsider their assumptions in case the situation persists for a longer period of time. If the crisis is defused by March-end, then it might be considered a passing shock. However, if it does persist, action may have to be taken by the government by lowering taxes and the RBI may have to start increasing interest rates sooner than expected. The immediate barometer of all such expectations is the bond market. Yields have started moving up after coming down, after the RBI policy. The 10-year bond has gone past the 6.75 per cent mark in the last few sessions, after going below 6.70 per cent. Therefore, there will be uncertainty for a longer period of time.

Beware the blind rush for ESG ratings: Mint 22nd February 2022

 

Today, if one wants to see how a college is placed in the pecking order, one can get confused. Several ranking systems exist and their results are not consistent, especially if one excludes the top institutes. Now Environmental, Social and Governance (ESG) investing is the ‘next big thing’, with everyone talking of it. Are you ESG compliant? This question will be asked of every company and is hence very important. The government is talking of issuing sovereign green bonds and the recipient of funds must be green-compliant. Foreign investors are keen to invest in ESG-complaint firms. The Securities and Exchange Board of India (Sebi) has come out with a paper on how credit-rating agencies (CRAs) should go about this exercise. But wait. Some CRAs already have ESG grades for around 500-1,000 companies. Was that just a rudimentary exercise or has it been trivialized?

Such ratings have been assigned ostensibly based on the annual reports of companies. Sceptics suspect these self write-ups could loosely be called “bluff sheets", or, to be generous, “selectively crafted". Let’s see how. All companies claim that they are doing a lot for the environment. While businesses say they have changed bulbs and use auto switch-on/off power devices, how many have dispensed with, say, bottled water? Private firms in particular make employees work well beyond office hours, which consumes a lot of power with large servers running overtime. There is something amiss here.

‘Social responsibility’ is also fuzzy. Every directors’ report talks of how employees are the most treasured resource. But look back. During the pandemic, private companies with big reserves sacked employees or made them take pay cuts. Was this employee friendly? Hence, while we see touching images of donations made to village schools, the harsh reality is that labour is retrenched every now and then on grounds of enhancing shareholder value. It is another thing that in these years, the top management laps up the cream in terms of increments. Therefore, self proclamations are often an eyewash.

Governance write-ups can be questioned. Typically, firms talk of their board composition, number of independent and women directors and the count of meetings attended. Does this mean these boards are good and the best practices of governance are followed? It is well known that in some owner-driven businesses, even reputed directors are mere dummies. As for professionally-run firms, how often have we heard of boards sacking incompetent and abusive chief executives? It’s very rare. Typically, members spend not more than 24 hours a year, earn ₹12 lakh upwards and are not really interested. One can recollect an infamous case of sexual harassment in the hospitality industry where the impotent board did not act and the lady had to leave. Even through the recent crisis of the shadow-lending sector, directors were not blanked out from other boards. The recent episode of a stock exchange’s governance further weakens confidence.

Therefore, assigning ESG scores based on annual reports is fraught with risk, especially if these are to be used for critical investment decisions. So, can CRAs do this job? Only a measured answer is possible because the past does not inspire confidence. First, CRAs have faced problems with getting data from companies when they rate debt. The number of ‘Issuer not cooperating’ cases for surveillance has increased manifold. Once such firms procure a rating, their continued cooperation is not easy to obtain. The recent announcement of entrusting CRAs to check the use of initial public offering (IPO) proceeds has thus drawn mixed reactions.

Second, there is inherent conflict of interest. CRAs have subsidiaries which would do such ratings. Given that rating shopping is the order of the day, if a large company that pays a CRA, say, ₹5 crore in fees for a debt rating also asks for an ESG rating, risks of a compromise assessment cannot be ruled out.

Third, CRAs have little competence in evaluating environmental and social impacts. Horses that are raced at Mumbai’s Mahalaxmi race-course differ from those that carry the elderly at hill stations, and the same applies here. Therefore, a careful evaluation of all CRAs is necessary, and a blanket permission for the job would be inadvisable.

Fourth, some CRAs are talking of using artificial intelligence and machine learning for rating operations, which can be disastrous because algorithms will use annual-report data that can’t always be taken at face value. This should definitely not be permitted. Humans must decide ratings, not machines.

So, what is the way out? First, Sebi should mandate that this job be done by research institutions that specialize in ESG assessments. Second, if CRAs have to be involved, it should be selective. Those that have stood the test of time could be allowed, while others should be evaluated more seriously. Third, even within CRAs, it should insist that those who work on these ratings should be specially qualified for the task. An external rating panel with experts in these fields should be compulsory until the system stabilizes.

As we embark on an important journey of ESG ratings that also involves India’s government now, we need to ensure that no loose ends are left that can return to haunt us. We must keep in mind past episodes of failure in the rating industry for a strong edifice to be built. A slow beginning is better than rushing in and then finding it difficult to go back. The crypto case is a cautionary example; it seems hard to control crypto proliferation and there are only compromises being made.

These are the author’s personal views

Facts & figures | Book review: ‘Whole Numbers and Half Truths’ by Rukmini S: Financial Express 13th February 20222

 Few of us believed the Covid numbers that were officially declared in India, or for that matter the resulting data on deaths, especially when one looked at the stupendous performance of Uttar Pradesh, which has a reputation for being one of the poorer states with inadequate social infrastructure. The answer is not difficult to guess. While it could have been that numbers were not being fully stated, the problem is really that when data is picked up, it is from public hospitals and not private ones. Therefore, the understatement may not all be deliberate but a system problem.

It is issues like this which make Rukmini S’ book, Whole Numbers and Half-truths, extremely engaging. Let us look at another serious data point. Data shows that most rape convicts are acquitted. We may jump to the conclusion that something is wrong with our system that allows such heinous criminals to get away. The truth is something different, which is surprising. Most of those acquitted, according to the National Crime Records Bureau, are men who were already in a relation with the women, and often the charges are pressed by parents of the girl to stop marriage or the affair. This may give false comfort, but the scary part is that rape cases are much higher but don’t get reported as people fear going to the police station, or the stigma attached is overbearing. Or, worse still, the cases are not registered when influential people are involved.

The author, a data journalist, provides a detailed and eye-opening view on several issues that we take for granted, or probably are not aware of. In fact, when she talks of marriages and customs, the revelations are quite startling. Even youngsters finally prefer to marry according to their parents’ wishes and hence the religion and caste divides remain, which can extend to sub-caste too. Men are found to obey their parents when it comes to choosing a life partner. This holds not just in rural but urban areas as well, which is quite a surprise, as we may tend to think that as society evolves and westernisation prevails, people become more open to inter-faith marriages. In fact, as an extension, even live-in relationships are not an option for most couples and hence stories which we hear of are clear outliers.

In a complex society as ours, we often tend to make several assumptions based on a limited liberal view which most readers of this paper would probably hold. But the truth is different, as conservatism is still the rule and no one wants to upset the applecart. This is why in various surveys no one really minds curbs being put on free speech, which is what liberal societies encourage. In fact, democracy is not something which people really want, and the majority does not mind being ruled by a tough hand. This is also clear as one can see today that lockdown in liberal societies of Europe have been opposed to the extent of mini rioting, while in India despite the trauma gone through by the poor, no one protested and was convinced that the government was doing the right thing. Even when the poor and migrants suffered during lockdowns, there was no outcry from those affected although civil society raised many flags.

The same held for demonetisation, where, at the end of the day, people did not reject the party that invoked what could be called a failed scheme. Most people surveyed felt that such freedom of expression was not even an issue worth discussing and what was happening was right. This is probably why when we do hear of stray cases of, say stand-up comedians being taken to task by cops or banned from performing, it may lead to some umbrage from a tiny class of liberals, while the majority really don’t care.

Rukmini S has various chapters on what we believe, how we earn money, how we spend it and so on. All these chapters are data supported without getting heavy, which is an advantage experienced journalists have relative to academicians who get bogged down in a plethora of numbers.

Her analysis on religion is also quite interesting. People still vote based on religion and caste and hence there is some polarisation. Personally, people do not really have any animosity towards people of other faiths, but would still like to live in their own community, and as stated earlier, marry within rather than outside. This does lead to the problem of ghettoisation for Muslims in particular, as they have to end up living among their own community. This is not an encouraging commentary on social life because even though the majority don’t believe in ostracisation of others, the preferences are for being with people who belong to their own social group.

She also raises the controversies over the consumption data that the CSO got embroiled in, when the data was supposedly not published because it did not reflect well on inequality. So the best way out, which is an Indian habit, is to get some well-known economists to rubbish the methodology and then recommend withdrawal of the survey results! This works.

Whole Numbers is a must-read book for everyone as lays out in stark numbers what happens around us. It also explains why often things don’t change, and we remain a conservative society that prefers not to upset status quo. Also, data is nimble and can be turned around and showcased according to convenience.

Whole Numbers and Half Truths: What Data Can and Cannot Tell Us About Modern India
Rukmini S
Westland Books
Pp 326, Rs 699

Are we liberal enough to allow crypto currencies? Mint 11th February 2022

 

The Union budget for 2022-23 has evoked different reactions from various sections. One can detect optimism among corporates, a fatalistic sense of resignation in the middle-class, and perhaps raised eyebrows among lower income groups. But the smug expressions visible in various TV debates were sported mostly by crypto dealers, who were clear winners at the end of the day. There have been off-the- record clarifications made to the effect that merely making crypto gains taxable does not confer legitimacy on crypto tokens. This is rather peculiar, because governments cannot levy taxes on illegitimate activity. But crypto exchanges and dealers appear to have taken the crypto tax announcement to mean that their business is now safe.

The declaration that there will be a central bank digital currency (CBDC) issued by the Reserve Bank of India (RBI) has been taken as a further sign of crypto legitimacy: If RBI is doing it, then there can be nothing wrong. But there is a big difference. Our CBDC will be an e-rupee and thus a substitute for paper currency, and it cannot be traded as its value is what is on the paper or in the account. This is not so for crypto coins. The two cannot be likened. The temptation of CBDCs across the world is ostensibly to leverage blockchain technology. Here, technology seems to be an end and not the means, which deserves more deliberation.

Giving some kind of legitimacy to crypto trading raises some serious questions for regulators. First, do we know whether all the trades that are taking place in cryptos are dealing with actual cryptos, or is it a case of these exchanges mimicking what happens overseas? There is a distinction.

If the dealing is in actual cryptos, then RBI should ask whether there have been violations of India’s Foreign Exchange Management Act, as one is not allowed to use forex for speculative purposes. Payments for most cryptos have to be made in foreign currency, originally, and only after possession can they be sold domestically in rupees. But the origin must have a forex link which may not be accounted for. Even derivatives dealings are not permitted in overseas markets. Crypto buyers could argue that cryptos are not specifically banned while making use of forex under our Liberalized Exchange Rate Management System, and hence nothing wrong was done. Still, RBI should clarify this.

If on the other hand this is about mirrored trading, which is analogous to what is called “dabba trading" in our stock and commodity markets that is banned, then there would be no forex violation. This is like watching a stock-market terminal and trading separately without any trail being left and gains and losses being netted off. But that is not permitted. In fact, some crypto dealers have boldly declared in the media that the 30% tax will only drive transactions underground. Now that is not a good sign for RBI or Securities and Exchange Board of India.

The curious thing about such trades is that even in the NDF (non-deliverable forwards) market that is based overseas and used for hedging and speculation, no currency actually gets exchanged, but only the net gains and losses change hands.

The financial system has gotten complex with all kinds of financial engineering going on.

Another issue is the origin of the crypto tokens being traded in India. How can we be sure that purchases were not made from drug dealers or mafia groups residing overseas? There are strong rules against smuggling and hence these issues will trouble regulators once legitimacy is given.

The third is an ideological issue. If we allow trading in cryptos, it would be similar to trading in fiction. In we go ahead, there would be a case for making gambling of all sorts legal and letting casinos open across the country. There are lots of people who would like to try their chances in casinos and would be willing to pay 30% tax on their gains.

This is no different from crypto trading. Both are driven by chance and the chips in use have no underlying value. If cryptos are allowed and so is Dream11 (for online gaming), then even casinos must be permitted. This could also rake in good tax revenues for local authorities. Note that for every trade on any exchange, there is an exchange of a share certificate or commodity or currency. But here, there is no such back-end. As with a roulette table, crypto trading cannot distort any real market, which makes it alluring.

The indirect acceptance of crypto trading is definitely a bid odd, as regulators are still working on the same. As crypto dealers have argued, just like people should not trade in equities without knowing the equity market, the same holds for cryptos. Customer protection, therefore, should not be incumbent upon regulators. As an extension, one can ask whether trading in fiction is comparable to trading in a commodity, stock or debt. If it is like none of these, existing exchanges should be allowed to deal in cryptos, since these tokens have no underlying value and their clearing and settlement is an easier process. Commodity exchanges should be permitted such trading, as their scope has already been restricted with regular bans being imposed.

This may be a good time to reflect on what should be permitted and what not. If we are liberal-minded and follow a more open moral code, then everything goes. And if this is broadly the approach we take, hold your breath, why not also allow sex-work and tax such income? Germany and others do it.

The credit policy packs several surprises: Business Line 11th Feb 2022

 The credit policy has provided some pleasant surprises for the market which includes banks. The first is that there has been no change in any of the policy rates.

An increase was expected in the reverse repo rate to move it closer to the 3.75 per cent mark which would be a reversion to the 25 bps corridor between the repo rate and the reverse repo rate.

The RBI has stated quite clearly that since it has been using the VRRR to absorb surplus liquidity the weighted average return on these funds has increased from 3.37 per cent in August to 3.87 per cent of late which means that surpluses are already being rewarded with a better rate. This has obviated the need to increase reverse repo rate.

The second is that while it was expected that the RBI, like the Fed, would talk about how the surplus liquidity would be tackled, the policy had clearly stated that from now on the VRR and VRRR would be the tools used to manage liquidity. This is a change from the overnight auctions which till the time of the pandemic were the main tools used to manage liquidity. Therefore instead of focusing on rolling back liquidity, attention has shifted to managing the same.

Third, the RBI has made a projection of 7.8 per cent in GDP growth for FY23. Normally a call is taken in the April policy but considering the Economic Survey’s growth projections of 8-8.5 per cent which were reiterated by the Finance Ministry in the Budget, the RBI view is important.

Now, the RBI has said that the basis for this projection is really investment. There are hopes that the private sector investment cycle will take shape as capacity utilisation rates have also improved of late. The big push given by the government on capex will help to push growth.

Consumption blues

However, it is less bullish on consumption which it believes is trailing. This actually can also be traced to the employment issue which existed even before the pandemic.

The number on its own may not be very significant but the scenario has been described by the RBI as not indicating durability as yet. And durability is important because as long as growth is not firm, the view taken since 2020 is that the policy has to be accommodative.

The fourth is that the stance has been maintained as being accommodative, which was expected. The surprise element is that the MPC has indicated that this stance would remain for FY23 too which is against the present groupthink which believes that there would be at least two hikes in the repo rate cumulating to 50 bps.

Fifth has been the view on inflation. The projection of 4.5 per cent has been very aggressive in the downward direction. The central bank evidently believes that the price shocks today in oil are temporary and would normalise soon. Also pass through of higher input prices may not materialise this year as demand conditions are still weak.

While these are fairly strong assumptions, a sub-optimal monsoon and persistent geopolitical tension on the oil front can upset calculations. This is probably the only factor that can offer a counter surprise for the central bank.

On the whole, the policy has given guidance for stability in policy and continued support for growth while facilitating the government borrowing programme.

ON panel discussion on Budget 2022-23 hosted by ENQUBE

 https://www.youtube.com/watch?v=G5WtU5TvhQk

On Mirror Now discussion on employment.

 https://www.youtube.com/watch?v=XkALa5ETF8c

Green bonds are something of an enigma: Business Line 10th February 2022

There are a host of imponderables, the key ones being compliance by the recipients of green funds, pricing of the bonds, and mode of issuance

The Budget has an interesting announcement in the area of sovereign green bonds. A green bond, simply put, is like any other debt instrument, except that the proceeds are used to fund projects which are environmentally compliant. There have been some, though limited, issuances in the private sector.

A government coming up with such a bond in India will be novel given that ‘environment’ and ‘greening are catch phrases today. In fact, if successful, States too will be able to do the same, as the goal is common.

As a corollary, as the market evolves, the corporate ‘green bond’ market will also develop as there are several investors who take decisions based on fulfilment of this objective. The details will be spelled out in course of time, but it would be interesting to conjecture on the form it will take.

Borrowing programme

The government has a gross borrowing programme of around ₹14.95-lakh crore. It seems that, to begin with, around 5 per cent could be targeted as sovereign green bonds. These bonds when raised will be used exclusively to fund projects which have something green about them.

If one looks at the capex of ₹7.5-lakh crore, around 65 per cent is devoted to roads, railways and defence. Essentially, the government either buys machinery from private players or gives contracts to private or public companies if they are in projects like roads. Normally, funds are fungible and it may be hard to determine how they are utilised.

But in this case there will be earmarking of the amount raised to specific targeted projects. Therefore, the crux is that the recipients of such funds should be complaint. This is where certification is required, and the onus will be on the company to prove that the norms have been followed. How this certification can be obtained has not been formalised so far; hence, there could be some ambiguity here.

Monitoring challenge

Being green is a fuzzy concept and it ends up with companies trying to tick several boxes to show they are compliant. Besides, monitoring can also be an issue as companies could be compliant at the time of such certification, but less so subsequently. There would be a challenge with respect to monitoring how this green grading performs.

A power or road project that is declared green should ideally not be flouting the norms, but the larger question is who will monitor the same. This will be a challenge until such time the system of evaluation is streamlined as deviations from the norm are hard to capture.

Pricing issue

Next would be the pricing of these bonds. Should they be lower than the regular bond or higher? There has to be a difference. Otherwise the idea would be vitiated. Ideally, it needs to be higher; this is because investors need to be rewarded for choosing to promote ESG goals. Therefore it can be, say, 10-25 basis points (bps) higher than the normal yield on a bond. On the other side it can be argued that the rates can be lower than normal because investors like to reward green projects, anyway.

Besides, lower rates would make green bonds viable for corporates and project developers. Hence, it needs to be seen as to how the pricing system evolves amidst these forces.

On the demand side, who would typically buy these bonds? If the rates are higher, it would be universally attractive. Else, there may not be much interest among investors, unless banks, mutual funds and pension funds have back-end commitments for lending or investing in green-friendly bonds. Or, as mentioned earlier, there could a group of environment-oriented investors (not too many in India today).

The regulators would have to discuss among themselves whether there should be a special dispensation for green bonds to make them attractive. A way out would be to launch them as tax-free bonds with a yield of, say, 7 per cent for 10 years as this appears to be the likely rate for government bonds of similar maturity.

This will evince a lot of interest especially at the retail end. Funds can be locked in for a long tenure and the government can procure the same without putting pressure on the bond market. This will be a win-win situation for all parties concerned.

Overseas launch

The option of launching them overseas is tempting. Here there can be a choice between masala bonds where they are issued in rupees. The Indian community may be interested if the returns are good and would be constantly weighing them relative to the interest on NRI deposits. But here the government will have to bear the forex risk which may not be acceptable. Masala bonds are attractive for investors because they are free of forex risk.

If the bonds are issued in foreign currency, foreign funds could evince interest. ESG is a big theme globally; there are several funds which invest in ESG compliant stocks or bonds. Coming from a sovereign, such bonds will carry credibility. The downside is that once the government goes global, then credit rating will matter a lot as all bonds issued globally need to be rated by the Big Three.

Are we prepared for this? The downside is that once one is rated by them, there is constant scrutiny on domestic policies. Presently, this does not matter because the government of India does not borrow from the overseas market. The rating given of BBB- is clearly out of sync with the strengths of the economy and this is an argument that has been reiterated by several analysts and economists.

Under these circumstances, it is reasonable to expect that these bonds will be issued only within the country. The overseas option would not be on until we are at ease with the idea at a policy and ideological level.

RBI is still very dovish, but will inflation really remain low? Business Standard 10th February 2022

 The February credit policy review of the Reserve Bank of India (RBI) would not have been considered to be critical under normal conditions. But with the Union Budget projecting borrowing of Rs 14.95 trillion for fiscal 2022-23 (FY23) and not giving clear guidance on inflation, the markets went into a tizzy with the 10-year bond increasing by over 20 basis points (bps).

Subsequently, there has been volatility in the market and the announcement made on Tuesday that the Friday auction has been called off after considering the cash balances of the government, the impression gotten is that this year's borrowing will probably be even lower than budgeted. This has assuaged the market for sure.

Let us see what the main issues were that were expected to be addressed in the policy. First was the view on GDP growth, as last time the monetary policy committee (MPC) of the RBI had felt that it was not yet durable. Here, the RBI takes a different view, where it believes that unlike the Budget 2022 assumption of higher growth of 8-8.5 per cent, the RBI is pitching for 7.8 per cent, which is in line with our estimates, which is 7.75-8 per cent. Therefore, the indication is that an accommodative stance will continue into the next year too, as long as inflation remains stable. The omicron effect, though less potent than the earlier waves, appears to still weigh on growth prospects. Therefore, this indicates that it is not yet time to turn attention to inflation, even in case it increases as the pandemic led non-durable growth objective takes precedence.

Second is the view on inflation for the year. Here, the RBI is very hopeful as it believes that inflation today is more due to base effects, which can be debated. The important take is that inflation will come down from 5.3 per cent in FY22 to 4.5 per cent in FY23, which also means that there is no reason to believe that inflation will increase. This is a fairly optimistic view given the state of the crude oil market, where Brent has been hovering around the $90 mark. We need to see the inflation number to change drastically for any further RBI action to be taken on interest rates.

Taken together, the RBI has spoken of an accommodative stance to prevail for an extended period of time as inflation comes down. An accommodative stance means that there are fewer possibilities of the repo rate being hiked which should be good news for the borrowers at a time when the private investment cycle will turn around.

Third, is the state of liquidity and move to normalisation. Here, the guidance is that there is no change in overall stance except operational issues in terms of how the repo and reverse repo auctions would be held. Liquidity management will now be through the 14-day term reverse repo, while the variable rate repo auctions would be used when required. Similarly, the timings for these windows have gone back to normal.

It is not surprising that bond yields have come down as such a dovish view was definitely not expected in the policy. Against this background, the decision to keep all rates unchanged is indicative not just of status quo today, but also lower probability of change in the coming year unless there is substantial change in the projections of GDP and inflation.

tock pickers | Book review: Diamonds in the Dust by Saurabh Mukherjea, Rakshit Ranjan & Salil Desai: Financial Express 6th February 2022

 Today there is a scramble for equities and this mad rush is understandable given the crazy heights reached by the stock indices. It may be necessary to pause and ask some questions. First, is this the best way out for an individual?  Second, can we invest everywhere as all stocks appear to be going up?

To get answers, Saurabh Mukherjea and his co-authors come up with this cracker of a book called Diamonds in the Dust. It not just answers your questions but also tells you how to go about the task. And mind you, it is not easy as it is advisable to go through an adviser.

This book is a must read for any stock investor as it is written in easy-to-understand language. They start off by telling you that to win in the market, you must be patient, and this is not the place for a novice who is looking for short-term gains. Therefore, you should bat like Rahul Dravid, which means not just being patient but also plan out your investment.

Their view is that equity is the way to go as they bust certain myths on savings. Gold is good but is positively correlated to equities and hence there is no advantage of diversification. Debt funds are sub-optimal, and you may not be better off over the long run when compared with low rewarding bank deposits.

Real estate can get you something like 3-4% as rentals, but given the cost of borrowing is 7%, you are not better off. It is different in the West where you get similar returns, but the cost of capital is lower.

Now they recommend equities but start off by debunking the two theories we like to talk about, because they do not hold well in India. The first is the efficient market hypothesis and the second is the CAPM—Capital Asset Pricing Model— which does not quite work.

So, if these two known models are not working, how should one go ahead? Here they talk of ‘crushing risk’ and point out four risks that underly most companies. The one they harp on a lot is accounting risk, as notwithstanding all the efforts made by all regulators, companies still misrepresent their books.

Similarly, there is a revenue risk that comes in when the product dealt with is not an essential. Marico and Asian Paints are safer bets because their products have a steady demand.

Then there is profit risk, which all companies face as we spend too little on R&D and prefer ‘imitation’ which is cheaper. But the innovator loses out on the first-mover advantage soon. Last is liquidity risk where little trade takes place on the exchanges.

The authors talk a lot of a consistent ‘compounding formula’ which involves clean accounts, competitive advantage and capital allocation which are the drivers of share value at the end of the day. Here their research shows that 80-90% of companies are in category ‘A’ where the return on capital employed can never exceed cost of capital for an extended period of time. There is another 5-10% which is ‘B’ class which can grow by 10-12% consistently which can be considered. But their bets are on just the 1% set of companies which they classify as ‘C’ which can get you above 20%. The book takes you through the subtle nuances of what one should look at when investing. Always see who are on the Board of Directors and see if relatives of the owners dominate. Look at the cash flow from operations and cash flows on investments—the former should exceed the latter for sure. Contingent liabilities and related party transactions should be looked at in detail, which their company Marcellus does in detail. There are other interesting red flags that they point out, like a company which often hires investment bankers should be looked at with caution. Similarly, whenever a P& L account is impressive while the balance sheet isn’t, one should take a pause.

Marcellus looks at 11 accounting practices when analysing companies and the authors’ take is that 70% of banks and NBFCs have poor accounting standards. That is quite a revelation especially when we think of riding the wave and making equity investments in this sector.

They do give tips on their favourites. Companies which get their competitive advantage due to ‘innovation’ like Asian Paints and HDFC Bank are good takes. The same holds for Garware tech Fibres. The ‘brand’ works well for HDFC AMC and Page Industries. In terms of what they call ‘architecture’, TCS and Pidilite score. From the point of view of ‘strategic activities’, Abbot and Divi Labs are winners. The list does go on, and one can peruse these pages to get a better sense of the good companies to buy.

This book also goes through all the scams that have taken place starting with Satyam and through the Amtek Auto, Cox and Kings, Yes Bank, DHFL, etc. Hence, if one wants to know how things went wrong and what one could have seen through, there are separate boxes explaining these signals. While one cannot still blindly buy into the stocks which the authors call ‘C’ class, one definitely has been provided the framework that should be applied when evaluating such investments. And most importantly, one must take a long-term view and not a shorter one when picking the diamonds in the dust.

Macro effects of the Budget : Financial Express 2nd Feb 2022

 he Budget impact can be analysed from the point of view of how different economic indicators are affected. Here there does appear to be some clear indications given by the proposals. Some of the variables that Budgets have the power to influence are growth, savings, investment, interest rates, inflation, and consumption. The Budget presented for FY23 does provide some clues.

First, can this be called a growth-oriented Budget? While it has assumed a growth rate of 11.1% in GDP which is lower than that in FY22, the proposals do not quite provide direct incentives in the form of tax breaks to push growth. Given that the Economic Survey spoke of growth in real GDP of 8-8.5%, can one say that inflation will be just around 3%?

Second, will this spur investment? It is done however to a sharp extent on the expenditure side where the spending on capex will help to push though not accelerate growth as it is as high as Rs 7.5 lakh crore or Rs 10.68 lakh crore if grants to states for capex are also included. However, states and the private sector have to also chip in with their contribution to make the investment wheel move.

Third, is there something for savings? The answer is really no. The Budget has not quite looked at enhancing savings which could have been done by providing incentives like enlarging the limits under Section 80C.

Fourth, will the Budget lead to higher consumption. This would normally get related to the disposable income of the households.

The provisions in the Budget do not give a push to consumption directly for sure. Given that there has been cumulative inflation of nearly 12% in the last two years consumption has been at the cost of savings. However, if one looks at the increase in GST collections assumed in the Budget then it appears that the Budget is betting big on consumption reviving as these collections are to rise by 15.5%.

Therefore, there could be a wee bit for the consumer oriented industries.

Fifth, will employment increase? Here the answer is yes as the expenditure of the government directed at capex as well as channelling of funds to the needy sections will provide scope for job creation. But this will come with a lag and hence we may have to wait for some more time.

Sixth, is the impact on inflation. The GST is outside the purview of the Budget and hence commodity price inflation driven by the Budget is minimal in terms of impact. Now the Budget has lowered both the fertiliser and fuel subsidy and hence the indication is that if crude oil prices rein high, we cannot escape higher inflation.

Seventh is industry-specific impact. The Budget provides a distinct thrust to industries like cement, steel, and capital goods to the extent that capex is higher. Others to benefit would be technology related like telecom, data centres, defence, etc.

Last, how about interest rates? Bond yields climbed just after the announcement of the Budget as the gross borrowing programme is almost touching Rs 15 lakh crore.

This indicates that interest rates will definitely increase next year and while the RBI will have to rise the repo rate as inflation climbs, the markets will hasten the pace.