After-effects of Ukraine war and inflation on the economy, Free Press Journal: May 28th 2022

 

The biggest concern today is inflation for both the government and RBI. This is because at the current rate of above 7%, the chances of it going to the sub-6% level, which is the upper limit of tolerance of the RBI, looks a bit difficult this year. How exactly have we reached this situation considering that in the February policy the RBI had projected a sub-5% inflation rate for FY23 which was revised upwards in April to 5.7%, which also probably will be revised again this time?

The issue really is the war which has sent commodity prices northwards. It started with crude oil where Russia is a major supplier in the global market. With sanctions being imposed it was but natural that the payments system got disrupted leading to their supplies being removed from the system. Oil was still outside the purview of the sanctions, but there was a contagion that went into the other energy pockets. Russia is a big player in natural gas and coal. With these products also being under the embargo, prices started increasing as supplies dwindled. Next in line was fertilisers where the prices started going up given that natural gas is the main ingredient here. The spread of inflation entered the metals sector too where Russia has some presence in iron ore. Therefore, inflation from outside permeated the domestic corridors.

However, the contagion did not stop at just these energy and metal products as the food segment also got affected. Russia and Ukraine together are major suppliers of wheat as well as sunflower oil. With supplies being cut due to disruptions in the case of Ukraine, where the infrastructure has been destroyed and Russia due to sanctions, their supplies are not moving out of their geographies.

This has meant an acute shortage of wheat and edible oils which has led to prices moving up quite sharply. The wheat problem in India has been exacerbated by the fact that production is lower than expected with the heatwave affecting the crop. The opening up of export opportunities has caused wheat to be diverted to this market and over 10 mn tonnes have been exported which has led the government to impose a ban on exports.

A similar situation has arisen in the edible oil market. With sunflower oil being out of the reckoning, where India is the largest importer, demand for other edible oils has increased including palm oil. This has had a ratchet effect on prices of all traded oils going up as countries substitute other oils for sunflower. Indonesia, being one of the largest suppliers of palm oil, imposed a ban which is now being rolled back. But prices have increased sharply.

Inflation in India was already getting broad-based with almost all commodities witnessing an increase in prices. Manufacturers of several goods such as FMCG, food products, household goods etc. have started passing on higher input costs to the consumer in Q3 and Q4 of FY22.

With raw material prices going up again, there is an imminent threat of a second round of inflation. Consumers must have already realised that their toothpaste, shaving cream, biscuits, bread etc. have become more expensive or reduced in size if prices have not changed. This inflation was already in place when the war struck. With the war's impact catching on, one can see that prices of almost all products have gone up. Even services like health care, education, and recreation have become more expensive as companies have increased prices to make up for the losses suffered during the pandemic.

With such broad-based inflation, what can the government do? The centre has taken some progressive steps in lowering the excise duty on fuel products and reducing the price of LPG cylinders. This has been supplemented with the removal of cess on imported edible oil with some other reduction in duties on steel products. This will help a good measure in controlling inflation. But will it help to lower the inflation rate to 5%? The answer is probably not so soon. There has to also be monetary policy action.

This is probably the thought behind the RBI increasing the repo rate between policies in May with the guidance being given in the minutes of the meeting that it was not desirable to have a big increase in repo rate at one shot but phased it over time. Hence the 40 bps increase in May will be followed up with another 25-35 bps increase in June and further during the year until we reach a rate of 5.15%. The 5.15% rate has become significant today because this was the rate at the time of the pandemic from whence the RBI lowered the rate to 4%. Hence it does look like the interest rates are now going to be on the upward bend of the curve.

Is this necessary? Yes, if inflation is not curbed it will affect growth. As inflation eats into the purchasing power of households, they will have less money to spend on discretionary goods and services which in turn will affect GDP growth. Higher rates is not good news for home buyers as EMIs get elongated, but savers may heave a sigh of relief as they have been getting negative returns on savings, which can gradually turn positive provided the RBI continues increasing rates and banks follow suit.

The Morning Show of Business Standard: 27th May 2022

 https://www.business-standard.com/the-morning-show/video/full-show/tms-ep181-divestment-target-food-security-market-strategy-downtrading-1026.htm

On ETNOw debate on 24th May 2022

 https://www.timesnownews.com/videos/et-now/shows/what-next-after-action-on-sugar-edible-oil-india-development-debate-et-now-video-91773401

Export ban, dismal message: Indian Express 15th May 2022

 http://indiamediamonitor.in/ViewImg.aspx?acr98Rv7Mg9Uu+1oWMjUR5zlPghFmvrD1hdkji3+EpjNXfkZg/LHZT5+N2B3JtFuFQu6AvLy+tWhFftW/kir3H0aqqiTHRt0uJqCXF5mMKc=

The fickleness of GDP forecasting: Business Line 24th May 2022

 

Especially when conditions are uncertain, forecasts move at an accelerated pace along with the level of panic 

The news on the economy front has been sanguine for April. Yet, there is a lot of pessimism in the system and almost all economy watchers are lowering their growth forecasts ostensibly due to the war and its collateral effects on India. Is there something wrong somewhere?

The PMI numbers for manufacturing and services in April are higher than those for March, which means that business is up on the two critical sides. The IMD has forecast a normal monsoon, which signals that barring a few aberrations the kharif crop should be good. The GST collections for April have been at an all-time high which, according to some official indications, will probably be replicated in May as well. Exports continue to grow at close to 25 per cent in April.

All this means that in probably the most critical month after the war began in February, the Indian economy has done rather well. Yet, almost all economists had scaled down growth forecasts even before the RBI increased the repo rate on May 4.

The problem with forecasts is that they tend to become adaptive to the situation and any significant news can cause a revision. And once it is done officially by, say, the RBI, all other forecasters lower their estimates too and rarely does anyone go against the tide. At most, forecasts are retained. This is a practice not just in India but everywhere around the world. If this herd mentality is a trend, then do these forecasts make any sense?

The government of India needs to forecast GDP because the edifice of the Budget is built on this number — all tax collection projections have to be based on how the economy behaves. This done, the government rarely changes the forecast which is noteworthy. As the Budget is a one-time exercise, there is no need to fine tune this number. The revenue numbers remain sacrosanct and while expenditure can be increased through supplementary demands, there is no commentary on growth.

The RBI, however, has a tougher job. It has to take a call on both inflation and GDP growth when formulating policy. Therefore, the central bank perforce has to commit to numbers every two months as its stance and policy decisions hinge on these forecasts. This was not the case when there were only two policies — for the slack and busy seasons.

In a way, these numbers justify the action taken or not taken by the RBI or any central bank for that matter. Therefore, as the number of policies increase, so does the number of forecasts which are amenable to change frequently. In fact, there are forecasts given for every quarter or for half-years which stretch at times to the next year as monetary policy is supposed to be forward looking.

Therefore, official forecasts are necessary because they form the basis of fiscal and monetary policies. But then why should every organisation that houses economists or market analysts also do the same thing? While it is the job of economists to provide continuous prognosis on every aspect of the economy, the justification is that they need to provide such information to customers or investors. Often, everyone is talking to their global parents and have to per force inundate mailboxes with such forecasts.

But for sure the RBI change is the tipping point. While some calibrate their forecasts to an external shock like, say, war or Covid, any change in the RBI stance causes a revisit to the earlier ones even when none of the underlying conditions have changed significantly.

Tend to confuse

The problem with forecasts, especially when it comes from non-government arms, is that they tend to confuse. For example, before the pandemic began, the IMF had projected global growth to be 3.3 per cent in January 2020 even while China faced the first lockdown. In April, the forecast moved down 200 per cent to -3 per cent. Two months later, the forecast was replete with pessimism and went down to -4.9 per cent. Post October, the number went to -4.4 per cent and finally the fourth subsequent forecast was -3.1 per cent.

The movement of these forecasts was literally bell-shaped. This just shows how fickle forecasts are when conditions are uncertain. Quite clearly, they move at an accelerated pace along with the level of panic.

Over the years, the World Bank and the IMF have become standard references for forecasts as these are done across the board, which makes comparison possible. But being prone to large swings, these estimates have to be interpreted carefully and can be used as reference rather than for evaluation. Countries face challenges when it comes to making forecasts, which are pivots used by these multilateral agencies.

For example, the NSO brings out the first advance estimates for GDP growth in January while the provisional estimates come in May. Ideally, the advance estimates should be done away with as they add to the plethora of confusion. In January, the NSO has only the first-half estimates for GDP while there would be some information on metrics like industrial growth for October. Extrapolations are made to yield the final number.

For FY17, for instance, the initial estimate was 7.1 per cent, which finally turned out to be 8.3 per cent. In FY19, the advance estimate of 7.2 per cent got watered down to 6.5 per cent, while in FY20, which was the pre-pandemic year, the initial estimate of 5 per cent got diluted to 3.7 per cent. In one year, the NSO was very pessimistic while in the other two it had to lower its optimism.

Wide variations

Now, forecasts for GDP growth vary a lot across different forecasters and the FY22 second advance estimate of 8.9 per cent was sandwiched between 7 per cent at the lower end and 13 per cent at the higher end at various points of time. As every percentage growth number involves something like ₹1.35-lakh crore, the amounts being spoken of are quite large.

Forecasts vary depending on the assumptions made by the economist and lead to such variations. Just like how it is said that predicting the stock market is equivalent to monkeys throwing darts with their eyes covered, the art of forecasting is more serious for sure, but closely resembles this.

As forecasts move to other metrics like inflation, they become even more fine-tuned to pivots which are provided by the RBI. Almost quite certainly when the RBI has its round of revised forecasts in June, one may expect all other estimates to change!

Capitalistspeak | Book Review – The Struggle and the Promise: Restoring India’s Potential by Naushad Forbes" Financial Express 22nd May 2022

 Reading Naushad Forbes’ book The Struggle and the Promise, several cartoons by RK Lakshman and little quotes from the works of PG Wodehouse come as a surprise in a book on economics. Clearly, the author has a great sense of humour that is displayed through the book, which otherwise provides a purely capitalist view on how to push the economy to another level. Being the head of CII for two years and a very successful businessman, the author knows what ails the economy and how to uplift it, so the book is not an academic prescription.

Forbes firmly believes that the Indian economy can go the trajectory of 8-9% growth in GDP, provided we get certain things in order. Manufacturing has to be the driver and this is something that has been acknowledged all along, though little has been done as the services sector has grown disproportionately. Also, we have to stress on education and this is something that has to be the focal point for the government. We need to have well-qualified workforce with expertise in fields that are relevant.

Along with such a workforce we need to have rapid innovation and companies need to focus a lot on research and development, as this is the way to go. Interestingly, he does say that the CII is to start a university soon that will mainly cater to the not-so affluent sections of society. This is good news considering that most institutions of excellence are meant for the privileged in India, be it school or university, which reinforce the self-fulfilling spiral where the better get better-off.

Forbes has some detailed chapters on these aspects where his extensive research from other countries as well as takeaways from accomplished economists provide a lot of food for thought. He is for free trade and does not mince words when he points out the double standards of some of the industry chiefs who seek protection every time they see imports as a threat.

He points to the famous case of the Bombay Club, which welcomed economic reforms but opposed free flow of imports when it affected their industry. Hence, there is ambivalence in the way in which industry views reforms.

One very significant point made by the author in the course of his book, which he says was imbibed when he was young, is that to do well in business one must not be in a field that is not dependent on the government. This is a golden rule for all entrepreneurs who are seeking to get into business because invariably one gets caught up in a maze of bureaucracy. Hence, anything to do with natural resources is prima facie a risky business because one never knows where it will lead to, as was the case with mining or telecommunication. The second is corruption. Coming from an industrialist this is another pointer towards how business should be done. Being in engineering business, Forbes has managed to eschew this pain of doing business. But this may not always be possible as it is felt that speed money is essential in India to get things moving or else one can have capital stuck.

The last few chapters are extremely entertaining as he has a no-holds narration of his time as CII head. He recounts an official party where the chief minister and other dignitaries abstained from liquor, which was instead presented to them as soup with ice floating, which shows the double standards prevalent in society. While having photos of the President and PM in various government offices is understandable, the canvas has expanded with more localised heroes embellishing walls.
Quite interestingly, he points out that the North Block, which has great architecture, is not well maintained, which anyone who has been there will attest to. However, when one enters the ministry of defence in the South Block, things are very different, which begs the question of whether the upkeep is dependent on the ministry? The same distinction holds for the ministries of commerce and external affairs where there is a wide difference. The broader point that he makes here, which is disturbing, is that can ministries that are to implement fairly complex projects be relied on to do so efficiently when they are unable to handle their own premises?

Some other anecdotes that he narrates will have the reader nod in agreement. He did once tell a minister that ideally people like Kanhaiya Kumar of JNU fame should have been ignored by the government. By not doing so, the media came in and made him a hero and finally a politician. There was agreement on this view. He also is critical of industrialists who on a one-on-one basis are highly critical of the government, but act different once in a public forum. One of them called the FM the greatest in Indian history, which evinced the biggest surprise on the face of the FM!

One can have some differences of opinion with Forbes as he argues that foreign-grown Indian economists have not been favoured by the government. Here, the alternative view is that they may not have excelled and lacked ground knowledge which domestic nurtured economists have. He does not mince words when he says that the government is not tolerant with opposing views and this was also voiced by a couple of industrialists in the past. The media also gets targeted by the establishment for carrying articles that criticise the government and hence there is no scope for brainstorming.

Quite clearly, this book has been written from a capitalist’s point of view as it is believed that industry will be the driver of the economy. Not surprisingly, the narrative does not really have anything to say about agriculture, which some may argue is the basic pillar of future growth. Similarly, while the CII view is of large industry in general, the role of SMEs which will have a lot to do in fulfilling the promise has been underplayed here. This, one may say, is the author’s prerogative.

Forbes must be credited for this amazing book which is very well written and he has done a lot of work to make it readable and insightful.

The Struggle and the Promise: Restoring India’s Potential
Naushad Forbes
HarperCollins
Pp 375, Rs 699

ET India Boardroom: Webinar on FDI

 https://www.youtube.com/watch?v=kWAy0Wd1ixs

The new order: The pandemic might be waning, but its lessons will linger on: 15th May 2022

 Excerpts of my latest book: Lockdown or Economic Destruction published by Atlantic Publishers.

The pandemic might be waning, but its lessons will linger on. Excerpts from Lockdown or Economic Destruction? throw light on how some sectors will change

Automobiles

This is another segment which will witness cross currents which can affect the final outcome. Let us see what works in the favour of the industry. With social distancing being the norm, there would-be reluctance to travel by public transport and the natural corollary would be higher demand for automobiles and depending on the income level of the person the choice would be between a two-wheeler and a car. This will increase demand for vehicles in general also leading to more congestion on the roads. In particular, two wheelers would be preferred by people in larger cities on account of adapting to congestion.
A countervailing force would be in the form of lower demand due to greater propensity to work from home and offices also preferring to have their staff operate from home to save on office space. This will lower the demand for vehicles which would be used more for leisure activity rather than for commuting to place of work. Several offices have given up space and introduced the norm of partial working from home where staff come to office on rotation and make do with the existing or truncated office space. This makes travel less of a concern and hence the need to own a vehicle may come down.
As long as these new trends emerge and get cemented, the industry will have to keep this factor in mind.

Real Estate

This industry too will have to contend with differing forces. With companies now realizing that staff can operate from home quite efficiently there can be a reduction in demand for office space. Hence, commercial property will definitely see a decline and this sector has to be prepared for the same. We have also seen an increase in co-working spaces in urban India where professionals have preferred to rent out pace in common offices where overheads get defrayed over the tenants. Over the months of lockdown where everyone operated from home the tenants have realized that it is also possible to do business from home and hence would reconsider their options. Therefore, this entire business concept would be in jeopardy and the spaces that have been set up over the last few years would function with lower capacity utilization. This can lead to fall in rents and hence income for the promoters.

Commercial property also is manifested in malls and retail set ups. The impact of covid has had a sharp impact on both of them. Companies with their own showrooms had perforce to close in the first couple of months of the lockdown and would reconsider options based on the demand. This holds for garments, toys, cosmetics, phones, electronics, etc. Competition from the ecommerce format always existed and will increase sharply under these conditions. Malls had already reached the stage of having surplus capacity in big cities and will be challenged further with entry restrictions and SOPs affecting footfalls. Therefore, construction of new structures will witness a slowdown.

Even on the residential front there would be developments that can change the way in which people live and hence affect the realty players. Metropolitan cities and other urban areas which have been afflicted with the pandemic may not be the first choice for most people looking to buy houses. Congestion and slums would be influencing factors and while people may be forced to work where jobs exist, where choices exist would be exercised. Similarly, the penchant for having multiple homes in places like Mumbai and Delhi would be a thing of the past as investments in satellite towns and cities would make more sense in terms of cleaner living.

One may hope that the long-lasting impact of the pandemic would be change in living where hygiene dominates and people in cities also modify their way of living. This can mean creation of more homes that are spread out in the distant suburbs which offers benefits of social distancing and rather than live in crowded tenements which is the case in industrial-based-slums people prefer to live outside the city and commute to be safe. Individuals also would have to look for more space at home as families closeted in small apartments cannot manage business, education, and leisure in the limited space as family members fight for space and network connection.

These are possibilities and while one can never be sure of how individuals react, the commercial part of the story will definitely rule and hence real estate developers will have to be prepared for such a changing scenario.

Aviation

This is one segment that has to reinvent itself for sure in India. The airlines industry has always been under stress of high debt and high losses. Some have managed to break this link at times, but more often than not succumbed to this syndrome. The shutdown impact on this industry has been sharp and will continue to be challenging.

Travelers are of two types, business, and leisure. Both the engines need to fire to keep the industry going and there are problems here. Business travelers will take time to come back as the work from home practice has shown that business can be conducted from home and one need not travel to places to meet clients, customers or officials. This new style of working has benefited companies too which have saved on cost as the work is being conducted through technology without moving out. While traveling to other places has conventionally been considered to be an entitlement or perquisite especially as one moved up the corporate echelon, companies would be more discerning from now on. Also, executives may be apprehensive of travel and hence may prefer to do from home. Besides the fear syndrome there would also be the willingness of companies to pay for such travel which in turn will be linked to overall business prospects.

etailing through Brick and Mortar

The lockdown made everyone turn to ecommerce and supermarket options where available. Certain large players have managed to capture the wallet share of customers during this time period and made major forays of investment in this area by delivering groceries at competitive prices. E-commerce always had the advantage of convenience where doorstep delivery made it an attractive option. Amazon in particular has made substantial gains in this area of ‘pantry business’ which had scaled up substantially over this period. This is not good news for the local retail store of the mom-and-pop variety. Their business was affected to begin with by irregular and erratic supplies which made it difficult to address the demand of customers. This was the time when Amazon, Flipkart and the other existing platforms like Big Basket and Grofers were able to leverage their financial clout and supply chains to enter the doors of several households. The local kiranas will find it hard to make up for this lost ground and given the limited financial wherewithal would probably have to wind up at some point of time. Such business in rural areas will still survive but metro and larger urban areas would see a distinct transition.

Excerpted from ‘Lockdown or Economic Destruction?‘ by Madan Sabnavis, by permission of Atlantic Publishers and Distributors

Lockdown or Economic Destruction?
Madan Sabnavis
Atlantic Publishers and Distributors
Pp 222, Rs 595

After the repo rate, the axe falls on the rupee again: Free Press Journal: 14th May 2022

 The RBI’s surprise repo rate hike did send the message that the inflation situation is grim and that the central bank will now do everything to contain it. The commentary has changed from growth to inflation. But somewhere in the background was the currency which was a worry as the rupee has been under pressure for long and the RBI has been trying to steady the ship through intervention. But volatility continues to prevail in the forex market and there is market panic.

The rupee has for long been between the Rs 76-77 range supported by RBI intervention through the sale of dollars and swap arrangements with banks. But things have changed with the Fed raising rates aggressively and promising more in the coming months, the forex market has been hit hard. There are roughly three factors that need to be looked at to understand the future course:

Inflows and outflows of dollars from the system

The financial year has just begun and hence there are no trends as such to see. But given the developments taking place, the following can be conjectured. The trade deficit will widen this year for sure because while exports growth may be maintained, imports will rise at a faster pace.

The reason is that both oil and non-oil imports would increase. Oil has been going up more due to the price effect. For non-oil imports, the demand is related to the growth process and as industry picks up demand for imports also goes up.

Add to this the fact that global commodity prices have been rising, this means that the overall import bill will increase. The relatively subdued global economic conditions will come in the way of growth in remittances (the expat population need to have jobs overseas) and software receipts. We are really talking of the current account deficit increasing this year to closer to 3% of GDP, which will be almost double of that in FY22.

Capital flows will tend to get whimsical. This is already witnessed in FPI flows that are negative presently and will remain so as the Fed is aggressive in its rate hikes and investors look internally rather than at emerging markets. FDI flows too could plateau off at the present levels as investors look at the opportunities being offered in the USA (which is the largest supplier of FDI to the rest of the world). External commercial borrowings may no longer be attractive given that interest rates in the West have increased - the 10-year US-Treasury is close to 3% which is almost 150-200 bps higher than in FY22. All this means that the external account would be in a deficit and the accretion witnessed last year will probably not be replicated this year.

2. The external factor

When the dollar strengthens, there is a tendency for other currencies to weaken and this is a global phenomenon. Therefore, a depreciation cannot be ruled out and in fact is necessary to ensure that our exports do not lose their competitive edge. This is something over which we have little control. It does look like that the dollar will keep strengthening along the year as the Fed tightens controls.

3. RBI action

So far, the RBI has ensured that volatility is reduced by intervening selectively. But for how long can the central bank do so as any support directly through swaps or sale will mean depletion of forex reserves. Putting all these factors together a rupee depreciation looks inevitable and a rate of Rs 78 or 79/$ will be tested in the coming months.

Now, what does a weak rupee mean?

First: Import costs go up which further widens the deficit.

Second: Imported inflation results where higher raw material costs get transmitted to the consumer through higher prices. This is obvious for fuel but would also work for chemicals, metals, electrical machines etc. which will make automobiles, electronic goods etc, more expensive. Imports are roughly 20% of GDP in nominal terms which is quite high.

Third: The government would be better off as tax collections would increase with GST, excise, and customs yielding higher returns with taxable income increasing.

Fourth: The RBI will have to be additionally worried about inflation as this will come in the way of measures being taken to control price rise.

Fifth: Borrowers from overseas markets will have higher servicing costs especially if not hedged adequately. This will be something that lenders will be worried about. In fact, this will also come in the way of companies borrowing from this market with costs going up.

Hence, the forex side of the economy is the new emerging challenge for policy makers. First it was inflation followed by interest rate hikes. Currency too, now, is in the limelight and the task of the central bank becomes tougher. Intervention leads to expectations of more. Doing nothing also becomes self-fulfilling. Therefore the central banks have to manage this trinity of prices – commodities, capital and currency, this year with a balancing act.

A rate hike and the likelihood of the economy slowing down: Mint: 11th May 2022

 

We should blame weak demand rather than higher interest costs for a likely reduction in economic growth this fiscal year

With the Reserve Bank of India (RBI) having increased the repo rate, considerable concern has been expressed over its impact on growth. Spread sheets are already being reworked to check how India’s growth in gross domestic product (GDP) could be affected. Those against tighter credit conditions feel that just when the Indian economy was showing signs of a pick-up, the Monetary Policy Committee’s (MPC) decision to hike rates will affect its path. But that is exactly the purpose of any rate hike.

Theoretically, when rates are increased by a central bank, both deposit and lending rates ought to increase, though the extent could vary. Lending rates increase with alacrity because all loans get repriced, while deposit rates rise by a lower quantum and with a lag, as old deposits will be repriced only at the time of renewal. Therefore, if monetary policy has to work, it must lead to higher rates at the first stage.

Policy rate insensitivity

Second is the impact on credit growth. Here too, when rates increase, growth in credit slows down. That’s because the raison d’être of a tighter-money policy is to slow down the economy by making capital more costly. If policy cannot achieve this, then further hikes are needed, or else the purpose is defeated. The US Fed is also hiking rates because of an urgent need to slow down the American economy and contain high inflation; growth is steady and joblessness is falling. India’s story is similar. Official data suggests that GDP is doing very well, with India the world’s fastest growing major economy. Also, contrary to data from the Centre for Monitoring Indian Economy, which is at odds with official statistics, our unemployment rate has fallen. Add to this new studies that show India’s poverty ratio is down, and in the context of high inflation readings, there is reason to believe that the brakes must be applied—which is what the MPC did on 4 May.

The important question to ask is whether this will help slow down the economy or not. Also whether rate hike will help slow down growth in credit, because this is the route taken by the policy transmission mechanism. The accompanying table offers data on policy rate actions over the past decade or so, along with growth in credit. There are evident leads and lags in all such exercises that are hard to analyse because it’s always a challenge to separate the effects of extraneous developments from those of monetary policy. But the table does throw up some interesting results. In the decade ending 2009-10, growth in bank credit had averaged 22.4% per annum, indicative of a boom. Subsequently, there has been a distinct slowdown in credit growth, partly due to India’s rather uneven overall growth performance. In the 15 years selected here, there were three years when the repo rate was kept unchanged. There were five cases of the repo rate being raised, and the last one after 2013-14 was in 2018-19. Seven fiscal years saw the rate lowered. The distribution is quite even, with a tilt towards RBI’s so-called ‘accommodative stance’, which is interpreted widely as a disposition not to raise rates. Therefore, from the point of view of industry, there has been a proclivity towards lower credit costs for business.

Interestingly, the five years of high repo rates did not really slow growth in credit extended by the banking system. In 2007-08, this growth was 22.3%, which was the decade’s average. In 2011-12 and 2012-13, while growth was higher in the former, a slowdown to 17% was still indicative of strong credit expansion; indeed, this rate has never been exceeded since then, even though the policy stance has been accommodative. In 2013-14, credit growth was virtually unchanged at 13.9%, compared with 14.1% in 2012-13, while 2018-19 saw growth improve.

The story for the years when RBI’s repo rate was lowered is a study in contrast. In six of the seven years, there was a reduction in credit growth when the rate was lowered. The exception was 2015-16. Rate status quo had improvement in credit growth in two out of three years.

What does this record indicate?

The crux is demand. As long as it is buoyant and markets are expanding at a rapid pace, a higher interest rate does not matter much for large business players, though at the micro, small and mid-sized enterprise level, it does hurt, even if it is still manageable. The reason is that a big company’s interest cost as a proportion of turnover is typically just 3-5%, which is too low to get in the way of investment decisions if robust demand is spotted. The extra cost can either be absorbed or passed on in the final price of products. However, when demand conditions are not upbeat, investments are deferred and a higher working capital cost tends to pinch. This is especially so for smaller companies with a heavier interest ratio burden.

So, how can one interpret the 40 basis points repo rate hike of 4 May, considering that it was almost a fait accompli, with an increase expected of at least another 50 basis points? It will all depend on the demand story. Consumption will continue to be under pressure, as there have been no firm steps taken to control the prices of fuel and edible oils, which have high secondary rounds of impact on inflation. This will denude the consumption baskets of most households. While private investment was looking like getting back on track, it was always going to be contingent on a pick-up in demand and capacity utilization.

Right now, things don’t look too exciting. Hence there is reason to believe that growth in credit will slow down, even if it turns out numerically higher than in 2021-22, mainly on account of certain infra-based sectors being in expansion mode thanks to the government’s capital expenditure push. Yet, it can be a touch-and-go situation. GDP growth will be lower this year than in 2021-22 for sure, but—while both factors work in the same direction—this will be because of demand weakness rather than higher interest rates.

MPC overturns standard assumptions: Business Line May 8 2022

 

Surprise can work in achieving policy goals. MPC has left stakeholders guessing on timing of hikes and use of tools such as CRR

The MPC/RBI announcement on rates on May 4 is unique not only because it came from the blue but also because the language and tone were quite different from what one normal.ly expects. The idea of having a bi-monthly monetary policy is to ensure there is certainty in expectations, where the market players can take a call without there being the ‘noise’ element. The pandemic did definitely cause a deviation as the MPC (Monetary Policy Committee) met any time that was required and policy decisions were taken.

But now that a precedent has been set in normal times, what are the takeaways from this exercise?

The first and the most obvious is that the MPC can meet without prior intimation. Normally, the protocol is that the public gets to know that the members are meeting. But the surprise element here is significant because going by the doctrine of economics under the ‘rational expectations’ banner, which was popularised by Thomas Sargent and Neil Wallace, policy works only if the market is surprised.

There is a lot of truth in this theory. When everyone expects the RBI to increase/decrease rates and the MPC decides accordingly, then it is said that the market has already discounted the action and there is no material difference. In such a case, one says that the policy is not really potent. Surprise can be a new way of making monetary policy more effective.

Accommodative stance

Second, the term ‘being accommodative’ has to be viewed differently when it comes to the stance of the MPC. Earlier, an ‘accommodative stance’ was interpreted as a position where the RBI is there to provide liquidity whenever required. Later it was clarified that such a stance meant that the repo rate will not be increased. But now we have a situation of being ‘accommodative while focusing on withdrawal of accommodation’, which can be a tongue twister. This has been accompanied by increasing both the repo rate as well as the CRR.

Therefore, the conventional way of looking at monetary policy stance has changed and the market has to guess every time what accommodative stance means. Interestingly, a question can be asked as to what would then be the ingredients of a neutral stance.

Third, inflation targeting may not be the only variable besides GDP for the MPC. It may be recollected that the MPC had the mandate of targeting CPI inflation at 4 per cent with a band of 2 per cent on both sides. But once the pandemic set, central banks across the world pledged to do everything that was required to stabilise growth which meant following ultra-easy monetary policy. This focus on growth has so far held the RBI back from addressing inflation.

In the April policy, the RBI did highlight the threat of inflation but left the rates unchanged. Interestingly, nothing much has changed since then and hence the sudden convening of the MPC can be attributed to the fact that there is concern on the external front, too, where FPIs have been negative and there is relentless pressure on the rupee.

Currency management

With the Fed planning rate hikes, it does appear that currency management has also entered the consideration of the RBI/MPC. This makes sense as repo rate hike narrows down the interest rate differential with, say, the Fed’s anchor rate. But will this then mean that every time the Fed keeps increasing rates, we will have to follow the same path?

Fourth, conventionally, the RBI has been changing the repo rate by 25 basis points (bps) at a time. In 2019, there was an experiment with 35 bps from 5.75 per cent to 5.40 per cent while in 2020 the pitch was for 40 bps to bring it down to 4 per cent from 4.4 per cent. Therefore going ahead, the changes in repo rate need not be in multiples of 25 bps and an odd 35 bps cannot be ruled out at some stage. This can be a surprise element for the market.

Fifth, the CRR, though reduced by 100 bps during the pandemic, has been virtually moribund for a long time. But the use of CRR now to withdraw liquidity of ₹87,000 crore is interesting as this is a permanent removal of liquidity from the system. The amount of surplus liquidity in the system has been ₹5-7 lakh crore for more than a year now and the market has been guessing for long as to how this amount will be withdrawn from the system.

The signal sent is that while OMOs (open market operations) are there and there could be sale of securities at some point of time, the RBI would also use the CRR to impound funds. Therefore, there can further rounds of CRR hike. For banks this is not good news because OMOs would have meant holding securities which gave a return of 6.5-7.5 per cent, while this permanent withdrawal of liquidity means a monetary loss for banks, because even if kept in SDF for a year they would yield around ₹3,600 crore. There is hence an opportunity cost involved.

Sixth, the timing of the policy on the day of the LIC IPO is also interesting. It would have been known that the stock market would fall once the repo rate was hiked. But this has not deterred the MPC from taking a call on rates, as probably timing it before the Fed announcement took precedence over stock market considerations. This independent view is significant because clearly the MPC is looking closely at fulfilling its objectives of working to tame inflation.

It must also be remembered that the RBI also is the banker to the government and hence has to manage the cost of debt. This has been one reason why the central bank has to also work to keep interest rates down. But now with the repo rate being increased, the Centre and States will have to pay more for their debt.

This announcement may just be the beginning of another variety of monetary policy presentation in terms of timing and content. Should markets be ready for more surprises?

Philosophy marries mythology | Book review: ‘The Stories We Tell’ by Devdutt Pattanaik Financial Express May 8 2022

 Devdutt Pattanaik is the best known name for interpretation of mythology in India, who has transcended barriers of religion to encompass not just Hinduism but also Buddhism, Jainism, Judaism, Islam and Christianity in his writings, lectures and podcasts. During the pandemic, he talked about how mythology can teach us lessons in our everyday life in a series of lectures that have been summarised in his latest book, The Stories We Tell.

There are 72 short chapters in just under 200 pages, which means that each one runs for two-three pages. He justifies the number 72 with mythology again, making fascinating connections. Jesus came back to life after 72 hours. Jacob dreamt of a ladder with 72 rungs that connect the earth with heaven. The Jewish Kabbalah has 72 names for god. There are 72 stupas in Borobudur, as are number of temples in Angkor Wat. Finally, there are 72 Houris of Jannat according to Islam. This is quite remarkable research that ends up with the number 72.

The Stories We Tell has stories that make for interesting reading for sure. However, if the reader were to relate to the second part of the title—mythology to make sense of modern life—she could be left searching as the loose ends are not quite tied up by the author.

Let’s take for instance the story of famous king Vikramaditya and the ghost. The question asked is that a lady had three admirers and when she died there were different responses. One jumps into the pyre, the second continues waiting endlessly for her at the crematorium, while the third brings her back to life, which also means that the lover who jumped into the pyre also is alive. Who should the lady choose? The rationale for the answer is fascinating as the king explains. The man who was waiting is entitled to become husband because the one who brought her back to life is now the father for giving birth. The one who joined the pyre comes back with the lady and hence is the brother. Therefore, logically, the one who is entitled to the lady’s love is the third person. Good logic one would say, but does this have a moral for us? Not really, or if there was one, needed to be explained.

There is another tale told about Ravana being a very learned person who, however, had the evil strain. Is there a lesson for us here? The author says that we need to be good people and not let arrogance take over when we have superior knowledge. This sounds fair, but one could often relate hubris with all people who have fallen from grade. There is another story of how Vikramaditya gets killed which meanders along to the end till we are told that one cannot survive with knowledge of just one language but should be conversant with all. While this sounds fair, one can argue that the world moves along without the need to know multiple languages in the Internet age.

One can still find this book engaging, as is the case with most works of Pattanaik, which are refreshing for being able to cross-pollinate views across religions. Hence almost all of them refer to the same subject, and here the author draws how spring time is celebrated by all religions through different names of the festivals.

The book is entertaining, no doubt, especially for the uninitiated, which holds for most readers who may know things about their religion but not others. He explains in one chapter as to why the Buddha goes with the hair knot in most statues, though the laughing Buddha is bald. Most stories spoke of him moving around without hair. The reason is that baldness is considered to be inauspicious and that’s why people who shave their heads after a funeral leave a little bit behind. On the other hand, baldness is supposed to signify renunciation of life, which is why most monks go this way. When one mulls over this concept, it is quite interesting, though the Oscar awards faux pas had other consequences.

Pattanaik is quite the expert in his interpretation of what all of us see but do not stop to think about. His take on creation of temples is fascinating as he compares the Hindu structures with Buddhist stupas. The Buddha’s belief of impermanence of the body did not stop his followers from putting various parts of his body in various places and building stupas on them. The chaitya came for people to walk around and worship and the vihara was the third creation to allow for accommodation for the priests. The Hindu temples, too, have similar structures, except that at the centre is the garbha griha, which is the centre for creation, and is what the womb symbolises, while for the Buddhists it is the ideal of death.

The Stories We Tell is definitely a book that should be on the shelf if one is interested in religion and what is stands for, as it narrates philosophy through mythology. There are very useful takeaways from each bit of mythology, if one can interpret them the right way, which is Pattanaik’s trademark.

The Stories We Tell: Mythology to Make Sense of Modern Lives

Devdutt Pattanaik
Aleph Book Company
Pp 197, Rs 499