All the world's a stage and we got to play unexpected parts in 2023: Mint 28th December 2023

 

Reaching the $5-trillion mark is a good goal, but we need to think beyond: Free Press Journal 23rd December 2023

 Of late there has been a lot of enthusiasm on the size of the Indian economy. The numbers being spoken about are $5 trillion or $7 trillion along with the rank of the same in the pecking order. While this sounds good and is an achievement, on deeper thought, this is a truism. It is not surprising that China and India will both dominate the stage mainly due to the size of their populations. The combined population of these two nations is 2.8 billion out of a total of around 8 bn, which provides the size and scale that is required. In fact given the population dynamics, these two countries are the largest markets for any investor and it is not surprising that every company wants to have a slice of the cake by being in these countries. India, of course, has the advantage of being a progressive democracy.

India stands fifth in the global ranking when it comes to GDP based on current prices. It may be recollected that over a decade ago, India’s stature rose further when the concept of calculating GDP based on the purchasing power parity (PPP) theory was applied. Based on PPP we would be third, and also twice the size of Japan which we trail in the conventional method. Intuitively India and China will only increase their size and rank with time. Interestingly, if China’s nominal GDP increases consistently by just 6% and India’s by 12%, it would take 30 years for us to cross their GDP mark. Therefore it is a truism that India and China would be the largest economies for quite some time.

But it is often argued that the size of any economy goes up in case there are too many people, and what matters is the per capita income. This concept too may not be perfect as it does not say anything about the distribution of income. This is where the inequality matrix comes in, where the higher income groups account for a larger portion of the nation’s wealth and income. India’s rank slips to 120 when per capita income is reckoned at current prices in the conventional sense. In fact China, which tops the list under PPP, slips to 72 when it comes to per capita income. USA also goes down to 8. The per capita income in nominal terms would be just $2,389 for India as against $8,379 under PPP. In case of China it would be $12,598 and $21,476 respectively.

Just to get a fair idea of prosperity, the per capita income for USA is around $76,000. While there are smaller nations with much higher per capita incomes, the smaller population pushes up their income which is above $127,000 and $145,000 for Luxembourg. USA would be a better benchmark as it is the third most populous country. Indonesia, which is the fourth most populous country and is around 16th in the pecking order on the basis of nominal GDP, has a per capita income of between $4,500- 14,600 on these two scales of conventional and PPP approaches.

It can be recollected that in the eighties, when growth models were drawn up, the choice was between planning from below and above. The latter meant that the focus would be on increasing the size of the cake which could then be redistributed to the less fortunate. This was different from the paradigm followed prior to reforms, when the policies were geared towards those at the bottom of the pyramid which helped to alleviate their positions. Both the models had their advantages.

Once reforms were introduced and pervaded all fields, the growth model has been to go back to the top-down approach where the productive sectors were to deliver growth at a high pace and in the process take the economically weaker sections along so that there were opportunities for all. This has happened for sure, though not at the desired pace. This has meant that there has been a tendency for the government to still chip in with a large number of transfer schemes to help those at the lower end. Almost Rs 10 lakh crore is spent annually by both the centre and states as transfers for the underprivileged. While this is necessary, given the state of income distribution, it is also indicative that the trickledown theory has worked quite slowly.

As scale keeps getting built it is also necessary to equip people with better capabilities, and it is here that it is necessary to invest in health and education. These are the prerequisites that should be met before we think of anything else. Only then can we think of moving up the value chain in terms of skilling and creating more jobs. The not-so-good truth is that even today, the government is supporting 800 mn people through the free-food scheme, which means that it is necessary. This can reduce only in case people are more employable and jobs are created at all levels. Today the country excels at the highest levels of skills, as in IT and finance where India has made a name overseas. Also there is a plethora of opportunity in terms of jobs at the unskilled levels like construction, or services in retail and logistics. These address the present issue of earning an income, but are not sustainable.

This appears to be the missing link in our growth story. There have been aggressive policies at the centre for providing housing, gas cylinders, drinking water, roads etc. In developed countries a large number of services are paid for by the consumer. But given the inability for people in the lower income echelons to afford the same, the government has stepped in. It is an effective way to kickstart the process, but we need to move over to a system where people are able to pay for these services, which is possible if they have a good education and are healthy. This should be the way forward.

Nobel Winning Economist: Remembering Robert Solow: Financial Express 23rd December 2023

 

All economists are obsessed with growth; and this particular measure is used to denote success or failure of any economy. Traditionally, it was felt that everything happened due to labour and its productivity, and hence, there was the emergence of the labour theory of value. Subsequently, as societies evolved, the role of capital increased as machines made more goods than human beings. This was the conventional thinking after the onset of the industrial revolution. A breath of fresh air came in when Robert Solow argued that there were limits here too, and the only way out was technological progress. This was a very strong argument.

Winner of the 1987 Nobel Prize in economics, Robert Solow had his finger on the right switch when he put forward his theory on growth. The production function, which had only labour and capital as determinants, had technology as the overriding factor. This idea evolved in the 1960s, and hence, it can be said that he had great foresight and was far ahead of times. Today, all economic policies are wedded to technology. Even the highest valuations are of the tech stocks and the traditional field of banking has been taken over completely by technology.

His theory was founded on the premise that putting in substantial doses of capital will witness diminishing returns at a certain point of time and hence cannot be relied upon to drive economies. The stronger takeaway is that while savings and investment can keep increasing—which can lead to higher incomes for the capitalist—diminishing returns cannot be eschewed. There would be a need for technology to step in and take over.

This was called the ‘Solow residual’ that added the delta to growth. His mathematical analysis showed that only half of growth over a long period of time could be accounted for by labour and capital productivity. And even the capital he referred to assumed that there was a case of differentiation based on vintage. The newer capital had to be more modern and up-to-date than the older ones. This may sound like a truism, but is significant nonetheless.

Solow was more Keynesian than a free-market addict and advised governments to spend more on research and development. This is something that can give an edge to the growth process. If one looks at the total spending of governments on research and juxtaposes the same with the pace of economic growth, it can be seen that those who invested more have also benefited. Also, it has been seen that companies that invest more in R&D tend to do better in terms of investor interest.

At present, the talk is centred on how the digital economy will reach 20-30% of India’s GDP. This means that a lot of growth that will take place will be riding on technology. The rapid growth of the IT sector since the 1980s and 1990s is a good example of what Solow had prophesised. The sector has grown manifold and provided a lot of support to the current account balance. The growth has been quite remarkable and closely competes with exports of goods. Therefore, technology has been a tool harnessed well by India.

The indirect impact of technology is also equally important. The starkest example is the digital payments mode, which now pervades every facet of financial transactions. Ultimately, economies work on myriads of transactions, and if these are run by technology, the pace improves. Having machines do the work scores over human beings doing the same. But, the sophistication of the same is due to the advancement of technology which makes economies grow faster. This is natural as everyone demands quality, which is enhanced through better technology. We have also seen that resource allocation by government becomes more effective with the use of technology—the JAM trinity is a manifestation of the same.

Therefore, things are happening fast, and everything is moving together at different speeds. Hence, it could be hard at times to distinguish between growth caused by capital deepening and that because of technology. India’s case points to this dilemma. Given the lacunae in sectors such as infrastructure, capital deepening is required for accelerated growth and hence cannot be ignored. The Solow prescription would work directly better for countries that are already in an advanced stage where scope for capital deepening is limited.

Solow’s belief was that the ascent of capitalism was mainly due to technological process and this factor will continue to be the overriding differentiator in the next couple of decades. A factor that Solow had not quite conceptualised however was the dangers of having too much technology. While the use of AI-ML today looks more appropriate for countries which have a smaller working population and a larger share of the ageing population, it can be counterproductive in labour-surplus countries like India where technology can be labour displacing.  

It would have been interesting to have his take on AI as this is considered to be one of the biggest disruptions that cannot be avoided. The question that would remain will be whether unbridled use of technology can really be relied upon by countries when there is an employment consideration. This will hold not just for emerging markets like India but also Western nations where the recent slump in the last few years have made them closed to even immigration. But politics and political economy were different in Solow’s time.

The IMF hasn't got its anlaysis of the coutnry's forex regime right: Mint 22nd december 2023

 

2023: Many hits, some misses: Buisness Line 21st December 2023

 

Money playbook: A useful guide to financial planning: Financial Express 17th December 2023

 

Running an online portal, they have a lot of information on the visitors to the site, which helps in putting down a structured template.

The Bee, The Beetle and the Money Bug: Adhil Shetty, AR Hemant, Rupa Publications

When it comes to saving and investing, one normally becomes serious only at later stages in life. And when one gets down to doing so, there could be a muddle when one reads about what to do while perusing columns by experts in the media. There is a plethora of advice given in bits that can confuse rather than help in taking decisions. This is where Adhil Shetty’s book, The Bee, the Beetle and the Money Bug, is useful, as it tells you all in a simplified and logical manner.

This book is a step-by-step account on how one should plan our financial lives, and the direction given is quite rudimentary and straight forward. Shetty is the founder of BankBazaar and hence has knowledge and experience in this field. Hemant is the head of communications in BankBazaar. Running an online portal, they have a lot of information on the visitors to the site, which helps in putting down a structured template.

They work on the basis of the ‘5S pyramid’. The pyramid structure has five elements and while they do suggest that we start from the bottom, one can start from anywhere and probably also follow a couple of steps at a time. It all depends on one’s inclination and ability. The idea is to have a blend of savings and investments that allow one to live a comfortable life with enough to fall back on either when one stops working or is laid off from work, which is quite common these days.

The five elements are clubbed under the following—save, secure, savour, strengthen and serenity. As can be seen, it makes a lot of sense to start from the first step and then move upwards purely from the point of view of affordability. While they are targeting the younger crowd, this approach would be useful for anyone who has not planned their finances. Hence, it is never too late to start.

The first step relates to savings where one can choose various options. Logically, when one looks at safety the first thing that comes to mind are fixed deposits and liquid mutual funds. These are useful in both building a corpus as well as having access to liquidity in times of a temporary crisis.

The second step is what they call the need to be secure. Here they talk of both physical as well as financial security. The financial security comes from insurance and they provide tips about what kind and quantum of insurance one must take. This holds for both life and health. Normally one gets covered by the company in which one works for health insurance and ideally should be used before dipping into one’s own insurance policy. This is to ensure that one keeps getting the bonuses coming which can be lost in case one uses the policy. Life insurance is also advocated not just from the point of view of death, which is the main aim of such covers, but also to provide for long-term contingency which can be education or marriage of children. Here they also club in vehicles, which is what one normally aspires for at an early stage in career.

The third step, which is called ‘savour’, is more to do with living a good life. Here they talk of getting into debt but in a measured way. Credit cards and loans are what they allude to. But there are warnings given along the way so that one does not get reckless. Should one have a single credit card or multiple cards? How much debt can one take in the form of a loan relative to earnings? These are the questions where they provide answers. They also point to the fine print in credit card usage as the interest rates charged are very high.

At the fourth stage they talk of strengthening the portfolio which goes back to asset creation. Houses have an advantage in terms of always appreciating unlike vehicles which depreciate over time. This will also take one closer to feeling more secure once there is a place to stay. Here they also talk of how to do cogent tax planning as one needs to know about all the laws so as to maximise net income. However, now with the new tax regime virtually dominating the structure, these avenues may be less attractive. There is some discussion on relative returns on various alternatives. Systematic withdrawal schemes hence also become useful at this stage in life just like the systematic investment schemes (SIPs) when one was in the middle of the career.

The last block for them is what they call serenity where one moves towards being debt free by the time one retires. This makes imminent sense as one cannot service debt when one does not have a stream of income. Here they talk of the value of pension schemes which one would have taken while in service. And as we come to this final stage of life there is also the need for having a will to ensure that things are smooth for the next generation.

These steps are well articulated and the tips provided are meaningful. BankBazaar has maximum visits from the youth in the age group of 22-35 years, but this playbook will hold for anyone who has not yet considered the future from the point of view of financial planning. This guide book will definitely be useful to anyone who is wondering how to go about this process.

RBI sends strong message against lending exuberance : Financial Express 9th December 2023

 

Of coffee talks and career paths: Review of my book Corporate Quirks in Financial Express, 10th December 2023

 

Neatly divided into chapters, which are further subdivided into sections, the book takes the reader on a fascinating journey of the corporate world, albeit on its quirkier side, as the author recounts observations and anecdotes based on personal experiences.

n his new book, ‘accidental’ economist Madan Sabnavis paints an insider’s picture of the cutthroat corporate world, outlining the written and unwritten rules of the game

Title: Corporate Quirks: The Darker Side of the Sun
Author: Madan Sabnavis
Publisher: KBI Publishers

It may take years to truly comprehend and digest the cutthroat corporate world, but trust Madan Sabnavis to make it a breeze, and the effort worthwhile, in his new book Corporate Quirks: The Darker Side of the Sun. Whether you are a fresh graduate trying to figure out everything on your own or a highly-valued professional excelling in your career, the book has as much of an aha moment for everyone as it has familiar undertones even for somebody working in the sector for just three to four years.

Neatly divided into chapters, which are further subdivided into sections, the book takes the reader on a fascinating journey of the corporate world, albeit on its quirkier side, as the author recounts observations and anecdotes based on personal experiences. That the ‘accidental’ economist—as he himself admits he became one due to his “inability to open other career doors”—has been in the sector for 36 years, of which 35 were in the private sector, helped in providing the “raw materials” for the book.

What does the entry into the world of St Corporate look like? How is the corporate world structured? What are its dynamics? Through detailed emotio-nal—though satirical—sketches, Sabnavis paints a vivid picture of the corporate world, outlining the written and unwritten rules of the game. He shines the ‘spotlight’ on the sector as he says: “‘tis not Hollywood but Corporate-wood”. His narrative on the ‘protagonists’ —the CEOs, CFOs, board of directors, colleagues, consultants, etc—makes it a ‘movie’ worth ‘binge-watching’ on.

The section on ‘coffee machine’, however, takes the cake. According to the author, a coffee machine is not just a dispenser of the popular and stimulating beverage. “It is a critical point of contact with colleagues who forget their departments and designations when they congregate here. It is the hot seat for sharing gossip and malice, which used to be done hitherto only in the rest rooms… the coffee vending machine is not just a refreshment machine but an entire congregation of bonhomie and camaraderie, which is otherwise not visible in the company,” he writes.

All the chapters and sections therein open with one-liners that clearly point the reader towards the direction that they are headed. But I would like to call them ‘punch’ lines, quite literally, as they hit you with the reality that exists otherwise. For example, for the section on ‘career progression’, he writes: “Don’t be irreplaceable. If you can’t be replaced, you can’t be promoted.” In a similar manner, he starts the passage on ‘compensation’ with: “As long as my company pretends my salary is high, I’ll pretend that I have a lot of work to do.”

However, Sabnavis clarifies that while the book brings out the darker or quirkier side of the corporate world, it does not take away any credit from how it has contributed to the nation’s progress. “In fact, it would be presumptuous to even think of questioning the accolades earned by the corporate leaders… But the quirkier sides exist and can amuse the reader,” he writes. This is the spirit in which the essays should be read, he adds.

The author saves the best for the last with what he calls the ‘corporate lexicon’. To put it in simple words, you say something, but you actually mean something else. These are phrases that you would hear in every company, your position or job profile notwithstanding. For instance, ‘I want you to think’ would translate into ‘I am not going to do this and it is your job to do it’ or ‘we should discuss it again next time’ implying ‘I am tired and bored’. Similarly, ‘we should work as a team’ would mean ‘I am your boss and will be a free rider’.

Sabnavis ends the book with a refresher on corporate tenets that are never to be forgotten. We all know about laws that concern the management of the company. But as an individual, writes the author, “there are unwritten, non-enforceable and practiced laws that you need to know… to survive and succeed in this grand world”. These include practising and mastering the art of making excuses, pleasing your boss, studying the HR rules carefully and ensuring you know how the system works, and so on.

Corporate Quirks is the kind of stuff that you would like to read when you are in the mood for something serious yet light, hard-hitting yet entertaining, as you take a break from crunching numbers and making PowerPoint presentations, or simply waiting to make your next career move.

Stock Market Peaks As Optimism Continues: Free Press Journal 9th December 2023

 

It has been seen that over time, households are becoming savvier when it comes to dealing with their savings. There has been a tendency to move to avenues where returns are better. Mutual funds are preferred by those who would rather not have to analyse patterns of single stocks.

The level of enthusiasm in the market can be gauged by the movements in the stock indices, and the rise witnessed of late has been phenomenal. In a way this reinforces the high level of optimism which is pervading the economy. Based on the reaction of market players this can be expected to persist in future too. But why has there been this sudden jump in the market?

The unexpected GDP growth

The leading factor has been the better than expected GDP growth numbers for the second quarter at 7.6%. The RBI has been indicating for quite some time that there would be a pleasant surprise for the economy in terms of this growth number. With this high number being driven by the manufacturing sector in particular, the mood has been boosted. In a way, it has been tautological because GDP is defined as value added which in turn is a sum of profits and salary bill. Hence high growth in GDP in manufacturing was due to high growth in profits which is already known and should have driven the market once the results were out. Clearly, the consolidated picture of GDP has been more potent than the micro numbers coming out in the months of October and November. The RBI’s forecast for growth this year has been upped by 50 bps to 7% which will be only marginally lower than the 7.2% witnessed in FY23.

Second, the results of the state elections can be considered to be a major booster for the market. The clear success of the NDA has rung the right note not because of the government at the centre making big gains, but being a reflection of what could happen in 2024 when the general elections are held. The final word on any successful policy framework is given by the electorate. The fact that three of the four major states have voted for the NDA is a vindication of the success of the ruling government and has been extrapolated to guide the results in the general elections too.

Corporate actions rely on certainty

This is significant because a lot of corporate actions are based on certainty in the policy environment. With this being a signal for continuity, the market has taken heart that private investment will continue unhindered and probably recommence in full swing even before the elections take place.

Third, there have been positive FPI flows into this segment which could be due to the other two factors. Also, the fact that the Fed will not be increasing the rates from hereon is a signal that funds flows to emerging economies would continue. This means that the pace of flow will increase and this is something that can continue through the end of the financial year. Also, it has been noticed that there is no longer a pattern of FPIs selling off in the last month of the year to book profits to pay their customers, which is encouraging.

A buoyant secondary market is evidently good for investors who are able to make money on their investments. But there are two other collateral benefits from a buoyant secondary market. The first is that there is a direct bearing on the IPO issuances as higher valuations are a precondition for companies to raise capital at this point in time. With stock prices high in the market there will be incentive for companies to fulfil their plans. This will be useful for the government in particular in case there are any disinvestment cases in the pipeline. As there is considerable slack on this front so far during the year, this buoyancy can provide an opportunity to the government to expedite the process. Hence the market will be looking out for such announcements for sure.

The mutual fund industry

The other benefit is for the mutual fund industry. It has been seen that over time, households are becoming savvier when it comes to dealing with their savings. There has been a tendency to move to avenues where returns are better. Mutual funds are preferred by those who would rather not have to analyse patterns of single stocks. With debt mutual funds already becoming less attractive due to the withdrawal of the capital gains tax benefit, one may expect more funds to move to the equity and hybrid schemes. This is good for the mutual funds industry though it would mean migration away from bank deposits on an incremental basis.

It may be recollected that in FY23 households moved their savings away from bank deposits to capital market instruments where the rewards were higher even though the risk involved was commensurate with the returns. The RBI did increase the repo rate last year and banks did see some migration back to deposits. But the deposit rates have almost peaked for most banks which are conscious of a possible turnaround in deposit rates. A result has been that they have increased interest rates on deposits with a shorter tenure of less than 2 years or slightly higher than one year. Under these conditions there can be a preference for the market as seen by a sharp increase in AUMs with mutual funds.

This could be a good omen

Stock markets across the world have behaved in a different manner compared with the growth tendencies witnessed in the developed countries. This can be because of the peaking of the interest rate cycle and a softer landing for these economies compared to what was prophesised earlier. The fallout will be more primary issuances that will translate to higher capital investment, something which has been lagging in the last few years. Therefore, this may be a good signal of the state of things to come. The RBI’s outlook in the policy announced yesterday points in the same direction.

With rates likely on hold listen to the commentary: Mint 6th december 2023

 

Ambiguities in Q2-GDP numbers: Business Line 5th December 2023

 

Book Review: Madan Sabnavis's 'Corporate Quirks': A Zany Look At A White-Collar World: Free Press Journal: December 2nd 2023

 If it’s going to be quirky, it must be written by an off-beat author, right? Well, Madan Sabnavis – whose regular columns on finance you may be following on the Editorial page of the FPJ — is described as an “accidental” economist, who became one due to his inability to open other career doors! Accidentally though it may be, he has been a corporate economist for 36 years now, and it is his wide-ranging experiences in this sector, coupled with his knack of seeing the wacky side of things, which have resulted in this entertaining book.

Readers who are in the midst of the corporate jungle might find many of the passages and anecdotes familiar; that’s because some of these are universal, applicable to CEOs and bosses mostly everywhere. Moreover, while the “quirks” are amusing, what Sabnavis writes about are actually serious things, which will probably resonate with most people.

Did you think meetings and strategies are boring chores? Check out the ‘Humdrums of Corporate Life chapter where you will find that “A meeting is an event where the minutes are kept and the hours are lost”. Get the gist?

It’s not all jokes and fun, though the reading is consistently enjoyable. Sabnavis comments, bringing to bear his experiences and world view, on aspects of corporate life that may have intrigued or even bothered some of you. Talking about subjects like career progression, sycophancy, “best practices”, even retirement... Reading chapter after chapter you might feel as if you are having an informal chat with one who can see both sides of the coin, and advise you on them too.

Because, of course, in the corporate world there are the bosses and there are the employees... and sometimes they even meet! In light of the bigger picture, however, everyone is merely a player on the stage of (corporate) life. And it’s the stories that link these personalities which put the quirks into the corporate, skilfully drawn out by Sabnavis.

Our topsy-turvy money market needs a remedial plan: Mint 28th November 2023

 

Evaluate E, S, and G separately: Financial Express 27th November 2023

ESG (environmental, social, and governance) is the latest buzzword in the corporate world, and all companies worth their salt are trying to do well on environment, social responsibility and governance. There are several pages dedicated in the annual reports elucidating what is being done on all three fronts by them. Hence, going paper-less, using less power, growing trees are some manifestations mentioned in the Directors’ Reports. Similarly, donating water coolers to schools is depicted as companies doing social good; and, of course, there are best governance practices reiterated over a few more pages. Hence, all companies do tend to show they are ESG-conscious.

Regulators over the world are also trying to put in place systems to grade companies on ESG performance and, hence, there is a lot of work going on here. The idea is to score companies regularly on ESG so that the progress can be gauged. This is useful for various investors who believe in funding ventures that are ESG compliant. Hence, getting good ESG scores have become a must for companies in order to catch interest of these investors, many of whom have set up dedicated funds. This is one reason why companies are striving to score on these issues. But, does this concept really make sense?

While the three concepts are relevant and, without doubt, need to be pursued by the companies, they capture three different facets of a business’s running which are not related to one another. Protecting the environment is a tricky concept considering that progress made by a country involves negative externalities for the environment. Highway projects, for example, involve cutting of trees and other vegetation and changing patterns of land use, be it farm land or even mountains, to make travel easier. This has no doubt enabled commerce, but the recent episodes of crumbling hills in Himachal and Uttarakhand highlight the broader issue of whether we are doing the right thing in these vulnerable geographies. The Mumbai metro-rail, which will ease a lot of traffic congestion, has already led to the cutting of thousands of trees and can have a deleterious impact on the city in terms of flooding at some point of time.

Then, there are some industries that are inherently environment-unfriendly (a rather obvious instance of this would be the entire petrochemical chain). The question that arises here is whether, by pursuing an activity that is dangerous in the long run and planting trees to offset this impact and become ‘net zero’ by a certain timeline, amends can be considered to have been made. It is worth recollecting that when the wide-scale use of paper gave way to plastics, it was considered to be a major paradigm shift in the way in which society operated, as it meant “saving trees”. But, the proliferation in use of plastics has created a new problem for civic administration in terms of disposal. One never can tell what the sudden shift to EVs can mean in the medium term in terms of negative effects. That said, these issues are completely different from social responsibility, which the government has addressed already by making companies spend a certain portion of profit on CSR (corporate social responsibility).

This has no linkage with what a company does to the environment. Hence companies can be polluting the lakes or rivers with effluents on the one hand but contributing significantly to schools, hospitals, orphanages, etc. Therefore, while finalising any score or rating, can one really put the two on the same plane? The answer is no as the objectives are very different. Further, often only a formal obeisance is paid to such expenses and there may be no real commitment, as companies end up spending exactly 2% of the net profit that is mandated.

The third concept,, that of (corporate) governance, is more of an internal issue where companies are to adhere to rules laid down by regulation. Hence, they need to have a certain number of directors, and a certain number of these directors have to be independent members of the board and there have to be an obligatory female members. A quorum (minimum attendance) of the directors have to met for the Board meetings and there have to be committees to address different issues. These could just mean ticking all the boxes, given how rarely there are deviations from the prescriptions. But, it is well understood that governance cannot be linked with either environment or social responsibility, though companies often have a special committee that looks at the same.

Given this backdrop, it is pertinent to ask if the three can be clubbed together when assigning ratings or scores. Will the three aspects have equal weights or will they vary? A very good score on one of these objectives can go with a low one on the other. Quite clearly, this has become a jumble, because the issues are so different.

While having green bonds make sense as they target just one aspect of ESG, combining the three for any purpose makes the concept fuzzy. It can be argued that environment affects the society at large, but social responsibility is more of doing good for humanity. Here, too, companies that espouse CSR may see nothing amiss in laying off workers on grounds of protecting shareholder value while at the same time spending on social good, quite like what happened during the Covid times. Governance is more of a mandatory compliance that has to be followed, and hence almost all large companies would be fully complaint.

An important question to ask here is how would investors who take decisions based on ESG scores evaluate this puzzle. Ideally, the three issues need to be evaluated on a standalone basis so that it can be seen as to how the company fares on these parameters. Besides, while environment is certainly a national and global issue, social responsibility is more in the realm of ethics, and, ideally, can’t be merely related to any economic activity undertaken. Lastly, governance is again a habit of the boardroom that gets reflected in neither of the other two objectives. 

The Truth About The $4-Trillion Economy: Free Press Journal NOvember 25th 2023

 

What matters for growth in any economy is real GDP growth which is expected to be 6.5% this year. Nominal GDP does not indicate the same because high inflation can push up this number and make things look very good

Even as the nation was shocked on November 19 when Australia overwhelmed India in the World Cup cricket finals, there was an interesting bit of news on social media which claimed that it was time to rejoice as India had crossed the $4 trillion mark in GDP. This news circulated quite widely and it was believed that the economy was truly accelerating, more so as there has been talk of India becoming a $5-tn economy with various timelines being put about.

Unverified Social Media Buzz

The news was evidently incorrect and was never verified, though the chart put made it look like a live ticker. There was some reference to the IMF to make it sound credible. It is hence necessary to put in perspective the numbers relating to GDP.

First it needs to be understood that GDP is not a market quantity like share or currency or bond where there are live tickers. It is a comprehensive calculation which is painstakingly carried out on a quarterly basis based on information feeds from various sources and a large number of imputations. Therefore, a real-time knowledge of GDP is impossible. This holds not just for India but all countries in the world.

Second, this information comes out on a quarterly basis two months after the quarter ends. Hence the information for Q2 of this year will be out on November 30. The annual number is announced on May 31 and hence the actual GDP number for FY24 will be known on that date only.

Official GDP Data and Forecasting

Third, no external organisation ever calculates the GDP of any country independently as they do not have the capacity to do so. They make forecasts or arrive at certain numbers by using official data and then making some changes based on their assumptions. Hence it would be incorrect to say that the IMF has similar numbers for India’s GDP at any point of time because it uses data that is provided by official sources.

Fourth, the National Statistics Office which comes under the Ministry of Statistics and Programme Implementation is the sole organisation that publishes this information and this is done four times a year. Therefore, any other number which is presented could at best be private forecasts but not the official position.

Now as to the number of $4 trillion of GDP, it would translate to roughly ₹332 lakh crore assuming an exchange rate of ₹83/$. In this context it is pertinent to state that this would be the nominal GDP, which is different from the real GDP which is reckoned at constant prices which means that inflation effects are removed. Therefore for FY23, real GDP was ₹160 lakh crore and nominal GDP ₹272 lakh crore. Hence when one is speaking of GDP crossing the $5 trillion mark (which is ₹415 lakh crore) or the $4 trillion mark or ₹332 lakh crore mark as was stated, it is the increase of nominal GDP of ₹272 lakh crore going up.

Official GDP Forecast for FY24 in the Budget

The official forecast made by the government on nominal GDP for FY24 is in the Budget for FY24 as this serves as the basis of all calculations. Here it was projected that growth would be ₹302 lakh crore. The numbers projected in the Budget are normally never off the mark and hence this would be the number attained by March 2024. This is ₹30 lakh crore short of the $4 trillion mark. Therefore, this number should be ignored.

But this will also bring into focus the $5 tn or $7 tn numbers being spoken of in various forums. Under normal conditions the nominal GDP grows at 12-13% per annum though there have been exceptional years as in FY22 and FY23 where growth was 18.4% and 16% respectively. This was due to very high inflation which hopefully is behind us. This means that assuming growth of 13% per annum we will take 2.5 years post FY24 to cross the $5 trillion mark — which is in FY27.

Real GDP Growth and Its Significance

In this context it is also necessary to reiterate that what matters for growth in any economy is real GDP growth which is expected to be 6.5% this year. Nominal GDP does not indicate the same because high inflation can push up this number and make things look very good as it was in the last two years. It is the real GDP growth number which leads to job creation and spending which is necessary to keep the tempo up. Therefore nominal GDP is more of a theoretical concept with limited use to describe what is happening in the economy.

However, nominal GDP becomes relevant when any economic ratio is calculated. This holds particularly for fiscal deficit and current account deficit. The former is a very critical ratio for all countries as it throws light on the fiscal situation as well as future buildup of debt. This ratio has to be controlled by all governments and as the fiscal deficit is denoted in current prices, the denominator also needs to be similar. The same holds for the current account deficit or any other external sector ratio like external debt or exports, where the nominal GDP matters.

Importance of Distinction Between Real and Nominal GDP

Hence the distinction between real and nominal GDP is essential. Further, these numbers are published only by the government department and no one else. This comes out four times a year with a two month gap. Any number on GDP during the course of the year is at best a conjecture based on subjective judgments. For sure, no one can give this number on a real time basis as it is never known!

Leaning towards optimism:Indian Express 22 November 2023

 

India wants gold, not gold bonds: Businessline November 20, 2023

 

Words Worth: Profit & performance: 12th November 2023 Financial Express (book review)

 

The story of former GE CEO Jack Welch is a grim reminder for many corporates taking a similar direction today

The video clip of the now infamous Zoom meeting where the boss abuses his team for not meeting targets is now a template used to show how capitalism has degenerated and become toxic in terms of work culture. What matters most is profit and nothing else. The end, which is seeing the company price going up, is important and the means not really that relevant.

The genesis of this behaviour goes back decades back in the 1980s when Jack Welch, then chairman and CEO of General Electric, became an icon for a different work style. What was important was shareholder value which could be driven up by making higher profits at any cost. Welch understood this and was quite unabashed about this goal; and the means used to attain it were not relevant. This is the core of the book written by David Gelles, titled The Man Who Broke Capitalism.

Welch was the most revered corporate head who knew ‘how to kick’ to get the desired results. There was no case of emotion coming in the way and it was only performance that mattered. The Friedman theory of markets was embraced by the government; and presidents like Ronald Regan were a true believer in this ethic.

There was a three-point formula assiduously pursued which not just won plaudits to begin with but also became examples for others to follow. He had become a role model. The first was downsizing; and he brought into American capitalism the concept of retrenchment in the name of fostering efficiency. This held not just for GE, which was an electrical company that provided products for the households, but the several other companies that he acquired through takeovers or mergers. The starting point of such ventures was large-scale ruthless layoffs. The shareholders did not mind as profits rose as did the share prices.

The justification was that if profits had to increase, costs had to be curtailed along with growing sales; and this meant cutting down on the labour force. The concept of outsourcing caught on where jobs hitherto done in the company were given to outsiders. This fell in well with the tenets of capitalism where there had to be creative destruction along the way. This model may sound familiar in India even today where several companies think nothing amiss about terminating services of labour based on the efficiency argument. Welch became a hero and for those who worked in the Eighties, Nineties and first decade of the 21st century. Almost every CEO loved to display his book, Straight from the Gut, on their shelves.

His behaviour was outright abusive and one had to fall in line to survive in the company. Employees were too scared to walk close to him as they expected him to be nasty. Whenever he lost his temper at anyone he would say: shoot him, which meant getting the sack. He had become such an icon that the media loved him and with all the interviews on TV channels and columns in magazines, he became a role model for success. In fact, buying a company that ran the NBC channel helped in this image building. This was American capitalism at its macho best.

The second was deal making, which was part of the package. The number of deals of buyouts and sales reckoned in this two decades of rule was amazing and each deal spelt trouble for the staff as the Welch paradigm was adopted. Once deals were done they would be headed by anyone he liked.

The third was financialisation, which meant making profit at any cost. This did not preclude braking laws and fudging numbers. It did not matter as long as it was not found out as every quarter mattered when it came to convincing shareholders that things were just too good. And as he delivered returns exponentially, everything worked in his favour.

The book goes into details of how companies were run under his aegis and the absolute power wielded by him. The unions were made non-existent and cultural centres turned into fancy clubs meant for elite groups. The performance-driven culture meant that those who did very well prospered and the infamous Bell curve which meant sacking employees every year took shape under his regime. Corporate America just loved it as it spoke a tough language of success. His close colleagues, including Immelt who took over the reins after Welch moved out, continued on the same path to maintain continuity. Fortune wrote that when any company was looking for a CEO they would poach on the stalwarts of GE.

Gelles does lament this extreme state of capitalism not just because of the human factor but also the use of immoral techniques to keep the accounts looking very good. He also points out that nothing much has changed as seen even in recent times when Microsoft and Meta have laid off a large number of workers. Elon Musk has now earned the title of Neutron Mush which was first given to Welch, as he resorted to sacking 50% of Twitter staff after taking over the company.

The reader would have to take a call on whether she admires this kind of culture or not. To the normal person this sounds repugnant, but such a model has made many shareholders richer and happy. He changed the way in which companies are run. It is no longer a case of preserving family values, but working as a team all the time. Companies are now moving away from such extremism, but as seen in India, too, the culture of Welch has already gotten ingrained and one needs to look through the windows to smell this.