What will the banking architecture look like going forward? MInt 28th December 2022

 Banks have been the fulcrum of the India growth story as they are the main channel for funding owing to the limited presence of alternative channels. As demand for credit from industry has been fairly tepid this year, the focus has changed to the retail segment where the appetite has revived notwithstanding rising interest rates. This change in focus is significant as the quantum of risk involved comes down significantly.

During the year, banks witnessed several changes which will set the tone also for 2023. First, the sector looks healthier than ever, with the pandemic induced slowdown giving time for banks to clean up their balance sheets and almost all PSBs are back to normal. Second, PSBs look better capitalized than before and hence when the FM draws up the budget, there will be less pressure on making provisions for capital. Third, two significant initiatives were taken up by banks and implemented that were part of the Budget. This was in the area of setting up digital banking units and the introduction of CBDC.

The former is a big step as this could be the way forward where brick-and-mortar structures will be complemented by the digital route to achieve financial inclusion. Along with this is the digital currency introduced by the RBI in both the wholesale and retail segments where banks have played a lead role.

The major challenge for banks was asset-liability management, which will persist in 2023, too. Ever since the RBI changed its approach from doing everything to preserve growth to fighting inflation, liquidity has been the challenge.

The stance of “withdrawal of liquidity" has had far-reaching consequences. As liquidity has dried up with credit growth outpacing deposits, banks have had to continuously fine tune the interest rates on both sides to ensure that mismatches were reduced. This has meant seeking recourse to bulk deposits and certificates of deposits at times. Given that this situation will persist in the first half of 2023, too, before RBI changes its stance and lowers rates, banks will have to be alert all the time.

2023 will probably be a little more predictable from policy standpoint with the RBI pausing post February (when it will still be confronting inflation of above 6%), and then changing the stance while keeping the repo rate unchanged, and probably lowering it by the end of the year. A positive fallout for banks is that a rising interest rate scenario means higher net interest margins, which is good for the bottomline, though treasury gains would be minimal or could also be negative.

However, what would be of interest is how structures and institutions evolve. First, the focus will be on the landscape of banking with a distinct focus on technology. The advances made in digital payments has been phenomenal and we would need to work on this mode for exponential growth in the banking business. In terms of structures, banks would tend to look at expanding business—both through the collaborative mode of leveraging the strengths of fintechs as well as independently working on furthering business in the digital space.

The second area of interest would be how NABFID evolves. The new financial institution for infrastructure would crystallize and hopefully be operative in 2023. Being headed by a pioneer in banking, who had actually sought to free the system by merging DFIs with commercial banks to form universal banks, is now going to show the way for the new FI. The market conditions have not changed much as the corporate debt market is still a restricted space for AA and AAA-rated companies. Therefore, something exciting can be seen in this space and banks will be watching this development closely as it affects the infra lending portfolio.

How much will cloth barricades hide? Free press Journal 24th December 2022

 Cloth partitions hiding evidence of poverty are not new – they were seen as far back as January 1978, when President Jimmy Carter became the fourth US President to visit India. He landed in Delhi and was there for a couple of days. The Janata Party under Mr Morarji Desai was in power. To ensure that the right picture was presented, the Government had evicted all beggars from the streets that would be traversed in these three days; and all signs of poverty were covered with the erection of white cloth barricades. This was the time when India would be called an underdeveloped country because we were still eligible for loans from the International Development Association, which gave loans to poor countries for long tenures at less than 1% interest.

Fast forward almost 45 years where India is a dominant economic power which has just hosted the G-20 Summit. It is a repeat of what one saw in Delhi. As Mumbai is a not too nice-looking city with slums everywhere and people still defecating on the roads (though not to the extent that Naipaul had overemphasised in his description of a wounded civilisation), the Government has painted the road dividers, put up lights along all roads that the delegates would travel; and put up the cloth partitions to ensure that the true India cannot be seen. Some may call this typical of a Potemkin state where there is a distinct ambivalent picture. For one who resides in Mumbai, the irony will not be lost when one views the rather long Andheri flyover, which was illuminated for festivity but houses hundreds of beggars permanently below the unintended shelter.

The approach of hiding the true state of the city and country is now a habit. The country has made great progress in terms of constructing highways at breakneck speed. But city roads continue to be plagued by continuous digging, leading to potholes that are never filled. There are fantastic malls which have come up even in Tier 2 cities but getting to these structures takes a lot of time due to the congestion. The picture outside these places is similar — beggars straddling the entrances and exits hoping to make money. This scene cannot be missed even at traffic signals. The reason for the picture remaining the same is not hard to guess. The growth process in India has been lopsided, being focused on the top echelon. In the true capitalist spirit a lot of reliance has been placed on the trickle-down approach. This was especially true after 1991 when we went in for free markets reforms. This has made India a globally comparable economy when it comes to width and quality of manufacturing and services, but scant regard has been paid to the bottom of the pyramid. The World Inequality Report states that the bottom 50% of population owns 13.1% of income and 5.9% of wealth while the numbers for the top 10% is 57.1% and 64.6% respectively. The numbers say it all

The trickle-down process has worked, albeit slowly. This is why we observe that even when it comes to begging, which is a flourishing business in metropolitan cities, it is typified by the beggar community owning mobile phones but having no house and probably unsure of a meal. The situation is more distressing when one moves to the interiors. The reaction of the Government has been to indulge quite aggressively in terms of providing cash transfers and cheap/free food, through a variety of programmes. While this is commendable, the broader challenge is to ensure that they have a sustainable income going forward. Having PM Kisan, PM-GKAY, NREGA etc. are good fillers but cannot be made permanent. Even the West is lamenting the liberal dole system which provides incentives for remaining unemployed. The problem is that not enough jobs have been created.

We also have a distinct economic transformation which has seen the economy moving from agriculture to services, without having an industrial revolution as such. This is a major slippage because industry creates jobs that are sustainable. Also, while the composition of GDP has changed — services dominating with a share of 65% — agriculture still accounts for 60% of the workforce. This lopsidedness has resulted in the dualistic structure of the economy. Agriculture has witnessed limited improvement in productivity but is the epitome of disguised unemployment. There have been pressures to ensure that commercialisation is thwarted at all stages (remember the farm laws which aim to give power to the farmers). Jobs that are created in the services sector are not quite of the skilled variety. The boom in retail and hospitality sectors has created a large workforce that is involved in lowpaying jobs like delivery agents or service staff in the commercial complexes. Construction is another large employer, but the employment provided is temporary and involves relatively low wages.

This leads to the larger issue of employment linked with education. Today, whether one likes it or not, an English education is essential for anyone who hopes to enter the corporate world and earn better. This is something that is left out in the New Education Policy which has made it mandatory to have preliminary education in the mother tongue. Culturally it is good, but practically those who do not have an English education find it more difficult to get into professional colleges where competition is intense.

It may be time to introspect quite seriously on all these issues when policies are framed, so that there is a synchronised growth process which is more inclusive.

Crystal gazing for 2023: Financial Express 23rd December 2022

 Year-ends are for ruminating over what transpired during the year, and the lessons learnt. In this world of uncertainty, forecasting the next 365 days would be interesting, as the coming year will be crucial for us, considering India will, at least statistically, continue to present better growth numbers than most countries. But let’s see what forces will work through the year 2023.

First, no one knows when the war in Ukraine will end, but this may not matter as 2022 showed that, even as the war rages, economic surprises are minimal.

Countries have adjusted to commodity flows and supply-chain disruptions, with prices returning to normal. While the world is against Russia’s invasion, the power the nation holds over supplies of oil and gas has helped it keep its own in the economic arena.

Second, the Fed’s stringent tightening of interest rates, followed by other central banks, is now a known factor, with the direction being clear. The Fed will be taking the rate to around 5%, and will then take a pause as it would need to wait for these rate hikes to work on inflation (which happens only with a lag). While a reduction in Fed rate looks unlikely in 2023, a long pause is expected during the year.

Third, the dollar is already reverting to its normal, and the appreciation seen in 2022 will be a thing of the past. The dollar had crossed the parity level this year, with the US economy becoming stronger by the day—which called for Fed action. This will be comforting for the world as all currencies fell against the dollar; the adjustments were fairly volatile. In 2023, fundamentals are more likely to drive currencies.

Fourth, as the days of easy money are over, unless the Fed starts QE under a different brand name (unlikely as of now), investment flows would be restricted and more discerning. For India, which depends on FPI and FDI to a considerable extent to steady the balance of payments, this will be something to watch.

Fifth, RBI will be taking a breather first, followed by a change in stance on accommodation, before finally looking at lowering rates. A rate hike in February looks likely as inflation will be above the 6% mark. But with the inflation rate moving down post March, one may expect RBI to consider lowering rates in the second half of the year.

Sixth, the government will hold an important lever when the Budget is announced. The fiscal deficit for FY24 will be more or less in range, helped by higher revenue earned as well as a larger base of nominal GDP, which will make up for the higher expenditure on account of food and fertiliser subsidies. The government is expected to go along the fiscal deficit prudency path and could target a deficit of 5.5-6% for FY24. Additional capex will be limited and in alignment with the growth in the overall size of the budget. In FY24, nominal GDP growth would be expected to be lower due to both real GDP and inflation (GDP deflator) being lower.

Seventh, the external scene for India will be under pressure. The trade deficit will be wider with exports slowing down further, but imports rising (India will still be the faster growing economy, which necessitates more non-oil imports). This, combined with a possible slowdown in software flows, can keep the current account deficit in the range of 3-3.5% for another year.

Eighth, the currency will be largely stable, with the average depreciation being replicated, possibly between 3-4%. In 2022, the strengthening dollar caused substantial chaos in the market. This external factor will be less potent this year.

Ninth, the banking sector will be more robust in terms of business, especially since the two major challenges of capital and quality of assets will be behind us. The focus will be more on furthering digitisation and lending. Here, we may expect the new financial institution to take some shape so that another tap opens for finance for infrastructure.

Lastly, the capital market will probably continue to witness buoyancy in both segments. As the economy grows, the IPO market will tend to look positive, with companies seeking to raise capital. The secondary market should ideally reflect the generally stable fundamentals of the economy and maintain the upward path.

While Sensex at 65,000 looks possible, anything above would be bordering on optimism as there will be phases when the global economic developments have an impact on domestic markets.

It would be a gradual movement to normal in 2023, with guarded monetary and fiscal policy that supports growth. This could be the appropriate platform for the economy to move to a higher trajectory in 2024.

All the world’s a stage and economic talk played its part" December 26th 2022

 All the world’s a stage and we are mere players. So said the Bard. The economics stage has had its share of events that will be remembered for some time. As 2022 draws to an end, it’s time for a light-touch rewind of all that occupied the media and conference discussions during the year. One can list several dramas from the domestic and global arenas.

The domestic stage had a big part played by the high-decibel epithet “fastest growing economy". India’s economic growth rate of 6.8%-7% estimated for 2022-23 got projected as a signal of our arrival on the global stage. We have taken on presidency of the G20 as well. But all agree that growth will slow down further in 2023-24. Yet, we have euphoria, which is good. But where are the jobs and why has investment stagnated at 28-29% of GDP since 2015-16? Don’t worry, say pundits, as production-linked incentives will deliver ₹40 trillion in additional output. All’s well that ends well, then? Clearly, it has been a good year for humour too.

Second, the spotlight on a $5 trillion economy has moved on to $10 trillion, as the former is passé. With so many great things happening around us, the goal has enlarged and shifted further away. It does not matter that we have been talking of the former since 2018 and are still at around $3.25 trillion now. Besides, this is nominal GDP, not real, so high inflation can make it achievable. A mid-summer’s night dream?

Third, in the arc lights was India’s retail inflation rate, which has been the cornerstone of all arguments on the economy or policy. We don’t like it when rates of interest are increased, even though our savings get a more respectable return. We argue for lower rates so that industry, which is yet to take advantage of the low-rate regime which held for over six years now, benefits. Much like Beckett’s Waiting for Godot. But that was theatre of the absurd.

Fourth, one would have heard economists use the term ‘base effect’ almost every time data is released. This pops up whichever way the number goes, up or down, as the base is driving the direction. Clumsy explanation, but statistically cannot be contested. But what, really, is the situation: Is GDP of 9.7% in the first half good or bad? Does 5.9% CPI inflation mean it has finally come down, or is it high? As you can never really tell, it comes down to as you like it.

Fifth, the Global Hunger Report, which placed India low down the pecking order, evoked umbrage and was rubbished. We were at No. 101 last year and No. 107 now. It did not matter then, but matters now. We cannot be hungry if the country is growing the fastest and on the verge of becoming a $10 trillion economy. The study’s methodology was dissected and found to be flawed. Besides it spoke only of children being stunted and malnourished, not adults. That cannot be a true hunger report. Much ado about nothing, really.

At the global level, it was the same. First were sanctions which meant that one could not deal with Russia except if one were buying oil or gas, which Europe continues to do. Duplicity is the word that resounds here. Russia was cut off from Swift payments, which had a positive collateral effect in terms of countries working out trading arrangements in domestic currencies. All this did not quite work as Russia continues to do what it wants to. But the world suffered from high commodity inflation, which affected each and every country. Why did we have sanctions in the first place? A comedy of errors?

Next, global inflation made Jerome Powell a superhero. Everything the US Fed’s chief said affected all leaders of central banks. The view held earlier that monetary policy was a domestic phenomenon was a thing of the past. Everything the Fed did had to be taken seriously because it affected every country as investment flows became ever so volatile. So it was measure for measure.

Linked to the above was the US dollar, which for the first time crossed the parity level reflecting American economic strength that the Fed wanted to suppress. This meant that all other currencies went down together, diluting the export advantage of depreciation and pushing central banks to use forex reserves to steady currencies. It’s what happens when an apple cart is upset, a subject George Bernard Shaw alerted us to long ago.

Fourth, the crypto boom ended in a bust, with the FTX fiasco as its last gasp. As this involved an entrepreneur with the name of Bankman-Fried, irony was not lost. Crypto was always an enigma with perils, given that it was unregulated. High returns was its temptation, and in India, the government and regulators smelt trouble, though did not ban it. Conceptually, cryptocurrency is a Ponzi-like scheme, with no underlying value. So it was a tempest that was brewing.

The last was this year’s Nobel Prize, which former Fed chief Ben Bernanke shared for his contribution to finance. Helicopter Ben, as he was called, had propagated showering the economy with money in a crisis, as was done via ‘quantitative easing’, which was followed by other central banks. But taking it back is always a challenge, one left for successors to take on. ‘Quantitative tightening’ is what is being spoken of, but how does one do it, especially with a world disrupted by covid and moving towards a recession as the Fed fights high inflation? Can we ever get out of this conundrum? Remember the great epic Mahabharata and its famous chakravyuh? It’s easy to enter, difficult to exit. A Nobel Prize should be awarded to whoever can provide a solution for it. Happy New Year!

Economic crisis: Where are the jobs? Free Press Journal 19th December 2022

 

For an economy like ours which takes pride in the demographic dividend, it is essential to create meaningful jobs to ensure there are no social repercussions. For this we need the manufacturing sector to expand and provide more opportunities

mazon, Microsoft, Meta, Twitter, OYO, Zomato, BYJUs, Udaan, Ola, Vedantu, Salesforce, Unacadmey, Ola, Cars24 are now household names and everyone knows about them. There is a commonality across all these brands. And this is not that they are coming closer to all of us, but they are in the process of downsizing their staff. Some of them are global decisions but the repercussions will be in India too as young professionals who joined these firms with stars in their eyes will now have to try and ensure they don’t fall into depression.

Actions taken by Indian and global companies have different motivations. At the global level, it is more a case of companies reacting to the recession which has enveloped the developed world, especially the US where business models are being revisited. Change in ownership at Twitter has caused large-scale layoffs, the effect of which is being felt here in our country too. This is the power of globalisation where India may be insulated from recessions in the west in terms of GDP growth (we still will be the fastest growing large economy), but will face the wrath of a slowdown through layoffs and loss of business (IT firms will face the heat here as export of services will get impacted).

The domestic story is different. Startup Tracker speaks of almost 18,000 jobs being lost in 2022 so far and this number will only rise. Start-ups as a rule, based on global experience, point to failure where 80% wind up within 3-5 years. This is because the models are not scalable and hence cannot be sustained. Start-ups generally tend to be in the fintech space and use technology to run their business. Online food delivery and education were big ideas that worked very well during the pandemic where it was felt that people will live life differently. The ultimate victory was online education and this is where there was proliferation in the number of players. Prima facie it appears to be a smart and efficient model; it works as long as there are business volumes. When children were at home and could not attend school or college, online education was the panacea. But with return to normal, things have changed, and from a hybrid model, most activities are moving back to the physical mode. This is where the business models need to change.

Several businesses like online retail and food delivery have worked well in the past where discounts were offered. Rates were lower than what the manufacturer or restaurant was charging, and with added advantages of returns (for retail), it went down well with consumers. But at the end of the day it is a zero sum game and the companies or start-ups took the discount on their books. It is little wonder that a large number of start-ups which went for an IPO had only losses to show besides a bright future, and got good valuations which failed subsequently. This has led to considerable downsizing and will be the way in the future too.

This highlights the serious problem of employment in India. With manufacturing down for almost 6-7 years now most jobs have been created in the low-income service sector where shopping malls and online delivery offered a plethora of low-paying jobs. The commissions offered to these staffers, or agents/associates as some were called, has come down sharply as companies are making consumers pay more and absorbing less of the losses. Those employed will find it hard to get other jobs and will continue doing delivery rounds on bicycles instead of scooters due to the absence of alternatives. The private sector while dishing out salaries of above Rs 1 crore to several fresh recruits will be balancing their head counts with employee cost. After Covid, most companies have shifted to greater use of technology through artificial intelligence and machine learning (AI and ML) which is a direct threat to future employment generation.

The Government is evidently cognisant of this problem. Notwithstanding the data provided by EPFO which shows more people employed, in October there was a rollout of 75,000 employment letters to various categories of staff by the government. This is part of the plan to provide 10 lakh jobs which was promised earlier. Interestingly the head count of Government departments has also undergone a transformation, where the focus was on austerity all this while. As of March 2019 there were 36.16 lakh central Government employees which has come down to 34.65 lakh in March 2022. The central bank has also lowered the head count from 18,132 in 2011 to 12,856 as of December 2021. Hence there has been a move towards bringing in higher efficiency with existing staff, and wider access to technology.

For an economy like ours which takes pride in the demographic dividend, it is essential to create meaningful jobs to ensure there are no social repercussions. For this we need the manufacturing sector to expand and provide more opportunities. Besides the social concerns of having less people employed, there is need to have more spending power to drive the economy. For this jobs have to be created on a sustained basis. Without income there will be less spending, which will keep investment at bay as no company will invest unless it sees future demand. This is the main reason why manufacturing stagnated outside the infra space even before the pandemic struck. The onus is on the private sector as Governments can only supplement the effort. Also, there may need to be less reliance on start-ups for creating jobs as the story so far has been more hype and less content.

Discussion on World Bank on Economy etc. on ETNow 7th December 2022

 https://twitter.com/ETNOWlive/status/1600158431364919297?t=Y8gVE2Mj0luXXxAUkIRerg&s=08

On Buisness Standard: The morning show talking on credit policy. 8th December 2022

 https://www.business-standard.com/the-morning-show/video/full-show/tmsep320-rbi-policy-and-inflation-a-warmer-winter-markets-and-elss-1872.htm

RBI policy on expected lines, but clarifies a lot: Financial express 8th December 2022

 

A green tax will help augment government revenue: Mint 8th December 2022

 

India Inc can step up investment: Business Line 7th December 2022

 A suggestion which is made by almost everyone to the government is to increase capex allocation in the Budget. In FY23 the government had budgeted for ₹7.5 lakh crore which was roughly 19 per cent of total outlay. In FY22 it was around 16 per cent. Is this really a panacea for our investment problem?

In FY22, total gross fixed capital formation was ₹68 lakh crore and Centre’s capex was ₹6 lakh crore. Can ₹6 lakh crore of funding drive ₹68 lakh crore of capital assets? A lot of government capex is actually carried out by private players, with the former acting as a financier, generating a stream of downstream investments. Despite this interdependence and the prevalence of PPP funding, government capex cannot replace private investment; it can only supplement it. Hence when there is a clarion call from India Inc to the government to increase capex, it indicates some helplessness on the part of the private sector to perform its role.

In fact, if the overall allocation of ₹7.5 lakh crore of capex for FY23 is looked at closely, some interesting insights can be obtained. This includes ₹1.11 lakh crore of transfers to the States which in turn also show a similar amount of capex. States normally have budgets for capex of an equivalent amount as the Centre; and in FY22 ₹6.67 lakh crore was targeted as against ₹5.54 lakh targeted by the Centre.

Govt, a catalyst

Governments, it should be remembered, provide finance for specific projects like roads or railways or irrigation. For the Centre, of the balance ₹6.4 lakh crore that was to spent in FY23, defence (₹1.52 lakh crore), roads (₹1.88 lakh crore), railways (₹1.37 lakh crore), telecom (₹0.54 lakh crore) and housing (₹0.27 lakh crore) accounted for ₹5.58 lakh crore. Therefore, the canvas for big ticket investment is restricted to five sectors.

Quite clearly the heavy lifting for capex has to come from the private sector, led by corporate India. The NSO data for FY21 is useful here where the contribution of various sectors can be gauged for gross fixed capital formation. The table gives the shares of various sectors in total gross fixed capital formation in FY21. There are indications that the share of SMEs in capital formation, included in the household component in the NSO data, has taken a hit on account of the Covid impact.

There is therefore a need for the private sector to ramp up its investment. In 2015-16, that is just before the NPA issue surfaced post AQR, the share of private non-financial companies was as high as 40.3 per cent. This position has to be restored, but that is perhaps easier said than done.

The first reason for that is private sector investment in infrastructure has slowed down substantially with funding as well as risk aversion being the two main factors. Profit margins have taken a hit in the wake of commodity inflation. Banks have preferred to cherry pick their customers and changed focus to retail lending. At the same time companies evaluated risk before venturing into areas like power or telecom.

Besides, consumption has not been growing at a fast pace to improve capacity utilisation rates which is required for fresh investment to be considered. Capacity utilisation rates have been capricious. After peaking at 75.3 per cent in March 2022, it has dipped again to 72.4 per cent in June 2022 going by RBI data. It does look like that investment has been more sector specific rather than broad based. The environment has to change.

The PLI scheme

The government has been pragmatic on the PLI scheme which has an outlay of ₹2 lakh crore spread over around 15 sectors. The idea is to enthuse them with incentives of 4-6 per cent of value of turnover provided certain norms on investment and turnover are met. The response has been good in terms of applications and intention and it needs to be seen as to how much of this fructifies given that there are time lines of at least three years provided for most of the sectors.

The other issue with government capex is that while the Centre is able to largely meet its commitment because it is not bound by a sacrosanct fiscal deficit number, States do not have such liberty. States tend to wait and watch till the end of the year before putting in their money. The reason is simple. As the fiscal deficit ratio of 3-3.5 per cent is something that cannot be compromised, if revenue pick up is slow, they tend to cut back on capex which is the discretionary element in the budget.

In FY21 for example, States had budgeted for ₹5.98 lakh crore of capital outlay but ended up spending just ₹4.59 lakh crore mainly due to the fiscal constraints.

Hence while there is a lot of attention paid to government capex, the core issue being missed is the role of the private sector here. The low interest rate regime especially in the Covid years helped the government keep its cost of borrowing down, which helped in capital formation. The response of the private sector was weak on this score though admittedly the uncertainty in the economic environment hindered the revival of animal spirits.

Government capex can hence be a good starting point for roads for instance but for manufacturing and other infra segments like airports, ports, power, telecom, the private sector has to take the lead to have an impact. The economy has to get back to the ratio of 33-34 per cent of GDP for gross fixed capital formation. Banks are in a better shape to provide finance, now that the books have been cleaned up.

But the real push has to come from India Inc.

Counting the poor: Indian Express: 6th December 2022