What's the ideal repo rate in India? October 27 2023

 

Give the market a green signal: Economic Times 26th October 2023

 

Will the Indian consumer justify our sales optimism this season? Mint October 24, 2023

 Come October, it is time for optimism as we enter India’s festive-cum-harvest season. The former actually begins in September and lasts till December and this is the time when spending peaks in the country, as it also coincides with a marriage season. It is not surprising that all consumer-facing companies are gearing up for big sales and the media is flooded with advertisements of products and services expected to log high offtake as part of a spending surge. But how realistic is this scenario?

It has been observed that CEOs and CFOs who present corporate quarterly earnings have spoken of this year’s second and third quarters being critical periods that would turn the tide, as the first quarter was quite lacklustre in terms of growth in sales. But this story has been repeated over the years; the forward guidance is always sanguine, and so much so that it has become a rolling hope that pushes optimism to the next quarter. One view is that this simply has to be done, as no CEO can say that the future does not look bright, for that will impinge on the company’s share price, which has become the most critical indicator of success.

At the official level, too, there is a lot of data to indicate that things are on the right track, but this tune played out in 2022-23 as well. So, what is one to make of these gung-ho themes that play out on a regular basis?

If one looks at high-frequency data, the picture is positive. The Purchasing Managers Index (PMI) for manufacturing has been at over 57 for all six months of this fiscal year, while the services PMI has been above 58.5. These numbers indicate that companies are selling more of their goods and services, employing more people, and so on. However, last year too these numbers averaged 54-55, and for a period which saw sales driven by pent-up demand. Therefore, while these numbers are very good, all this has not quite brought about a change in the profit-and-loss accounts of companies.

The Index of Industrial Production numbers have also been quite remarkable this fiscal year, with growth of 6% at the aggregate level for the first 5 months. However, growth for durable and non-durable goods has been at -1% and +7.4% respectively. The higher growth in non-durable goods comes over a negative growth rate last year—the famous base effect.

The other indicator which is used as a clinching argument to show that consumption is on a high growth path is India’s goods and services tax (GST) mop-up. As this is a consumption-based tax, if its collections are increasing, it suggests higher consumption. Growth in these first 6 months has been around 11%, which comes on top of 32% growth (which was a blip because of the 2021 covid lockdown). However, if consumer goods sales are not growing quite as rapidly, then it is possible GST collections are high because of inflation (which has been high this year) and increased tax compliance (which is clearly evident). Hence, the picture appears to be fuzzy on consumption trends so far.

On the other side, red flags have been raised. The first one is inflation. This has averaged 6.3% in the last three years and 5.5% in the current year, which spells a cumulative rise in the cost-of-living of almost 25%. Retail prices have risen relentlessly. Higher inflation lowers household spending power, and higher apparent consumption outlays have resulted in a decline in household financial savings. This is from Reserve Bank of India data, which showed that the financial savings of households came down to 10.9% of GDP in 2022-23 from 11.1% in 2021-22 and 15.4% in 2020-21.

The second is the pent-up demand phenomenon that provided an impetus in the last two years but could be getting exhausted now. After covid lockdowns, people went out of their way to spend money in a burst of ‘revenge spending.’ This cycle lasted two years, for sure. In 2021-22, it was manufacturing that got a boost, as households went out shopping in a big way. Crowds at shopping centres were witnessed across the country. In 2022-23, it was manifested in services, with people travelling to various destinations. Dining out also gained frequency, resulting in crowded restaurants and hotels. The hospitality industry received a boost and the severe losses it made during lockdowns were reversed. The question now is whether or not these effects will hold up this festive season. In fact, if diminishing pent-up demand as a factor is combined with high inflation, a boom in this sector might be too much to expect. Also the fact that the cricket World Cup is been staged in India during the same season could mean that one-off-event spending on tickets, travel and food can lower the capacity of people to splurge in traditional ways over the next few months.

Third, it has been pointed out that down-trading is the norm today; people are buying smaller quantities of goods or opting for cheaper alternatives than before. This is a reflection of both high inflation and a trail-off in pent-up demand as financial realities sets in.

Fourth, sales of automobiles are considered a good signal of the consumption of durables. The sales growth of passenger cars and two-wheelers, at 6.7% and 4% respectively in the first half of the year, has declined. In 2022-23, growth ranged between 25% and 35%, thanks to pent-up demand.

Putting both sides of the argument together, it becomes difficult to judge whether consumer demand has revived or slumped, as there is data to support both cases. Corporate commentaries tell only one side of the story because a large part of the demand for goods and services is met by the unorganized sector, which they do not capture.

Consumption has been a persistent challenge for India, as it affects capacity utilization rates, which in turn determines the pace of private investment. This was a conundrum even before the pandemic. The answer for the present is a shoulder shrug at best, until a clearer picture evolves in the next 3 months.

Corporate quirks: The Darker Side of The Sun: Review in Business Line 23rd October 2023

 

If it is about quirks, there should be one about the author as well. So the blurb describes Madan Sabnavis as an “accidental” economist, who became one due to his inability to open other career doors.

A corporate economist for more than three decades, Sabnavis now dons the hat of the Chief Economist of a public sector bank. Obviously, his brush with the corridors of India Inc has given him not only insights but lowdowns as well. Even as he has crunched data, drawn charts and commented as an economist— mostly even-handedly — his impish second self has not failed to notice the trappings of life in corporate offices.

Breezy take

These observations are the stuff of “Corporate Quirks”, a breezy roundup of what happens offscreen , away from the board and meeting rooms.

It is part slapstick, mostly amusing, facetious at times but entertaining nevertheless. The kind of minutiae you may want to read on a flight when you are in no mood for serious stuff.

His one-liners which open some of the passages are clear pointers of where we are headed as we travel with him . Like, “the opulence of the front office décor varies with the fundamental solvency of the firm”. Or, “to steal ideas from one person is plagiarism, to steal from many is research”. More telling is this: “Every organisation has an allotted number of positions to be filled by misfits. Once a misfit leaves, another will be recruited”.

Anecdotes galore

The author clarifies that the little stories that he narrates are “quirks” but relate to people whom he has worked with . His employers have been ICICI Ltd, ICICI Bank, L&T,NCDEX and CARE Ratings. You then get an idea of the precincts of these lores. Those who have worked in these corporates may be able to put names and faces to the author’s anecdotes. The people alluded to have contributed greatly to these organisations, of course, as he avers.

But there are certain human feelings and reactions, born out of egotism and greed, friendship and antagonism, jealousy and worse, which are the same whether in a BKC glasshouse or a Dharavi shack. And more than the balance sheet and P&L numbers, stories of these themes, add colour and flavour to our understanding of what happens among the suited and the booted.

When the anchors of business channels ask “can you provide some colour to your numbers” after the quarterly results, what a funny bone would expect is perhaps this kind of yarn but what gets spun before the camera is a different warp and woof. The unreported tales are grist to the Sabnavis mill. Sample the following.

“There are several examples of CEOs in these professional organisations who never want to retire….The Boards always agree for such continuation…The media blows the bugles. At the AGM, the issue of extension of tenure and higher compensation package for the CEO would need approval of the shareholders. The presiding Chairman of the Board would start the deliberations by stating that all the institutional shareholders which constitute over 75 per cent of the shareholders have already voted in favour of this resolution. Does anything more have to be said.”

Or, this. “The CEO of an organisation I worked in the financial centre of Mumbai had a lift dedicated to him and others could only look and not travel. His time was precious and saying hello to anyone who did not matter was a waste of time. There was a small group who all had similar academic backgrounds from the prestigious IIM-A who could have access to him”. You cannot fault anyone in the metropolis if they wonder whether the gender in this para is a “terminological inexactitude”.

Where would one normally pick up these threads ? Sabnavis had key positions in the organisations he worked. But the Delhi School of Economics post-graduate and Stephanian did not have to strain too much . Inputs came from all around including the peons. 

Coffee talk

“The coffee-vending machine,” he writes “is not just a refreshment machine but an entire congregation of bonhomie and camaraderie, which is otherwise not visible in the company. Colleagues who you abhor become your friends and mates, when disseminating such information. Often, the gossip that you start seriously comes back to your ear of what is going on and you may just believe that someone else has said the same thing”

The author ends the book with what can be called corporate lexicon. Yes, what one says is not what one means, often . Thus, ”We are a merit-based organisation” translates into “We can rook you anytime and hence don’t take increments for granted” or “You learn a lot here and it is a helluva experience” means “Don’t expect any monetary rewards” or “We have an open system here” which actually implies “We are as closed as Hitler’s cages for the Jews”.

This then is the flippant side of life in the corporate world. Those who have lived this life know that “whispers in the corridors” are juicy and riveting than formal deliberations. These however may be open secrets, among those who know their corporate beans. Also, the book could have done with better editing, eliminating constructions like “R.K. Laxman whose caricatures told so much” or “Just like the anthem that we taught to recite when in school”.

Behind closed doors: Boardroom politics deconstructed by industry insiders: Financial Express 22nd October 2023

 In short, they explain how different kinds of behaviour displayed by directors may often not be aligned with the objective of having them on the board.

Inside The Boardroom: How Behaviour Trumps Rationality

R Gopalakrishnan, Dr Tulsi Jayakumar

Pp 224, Rs 595

Writing a book on what happens in the boardroom is always a daunting task because of the opacity that prevails in most companies. What we hear is not what really transpires as all good companies have directors who have high brand value and considered to be the epitome of knowledge and rectitude, given their larger-than-life images. R Gopalakrishnan, a very well-known name in industry with the pedigree of Levers and Tatas, and Tulsi Jayakumar, a renowned economist, have authored a book titled, Inside the Boardroom: How Behaviour Trumps Rationality. In short, they explain how different kinds of behaviour displayed by directors may often not be aligned with the objective of having them on the board.

Now, this book is quite exemplary as it provides a theoretical framework of how directors should behave, based on patterns drawn on real experiences, as one of the authors has been on a number of boards. It is often the case that CEOs control the boards. Directors are also at times either not interested or confident of expressing their views. The authors are discreet when providing descriptions of where directors falter, but steer clear of providing names lest it lead to legal issues. The examples provided where things went wrong are now well documented—Yes Bank and Satyam. Rajat Gupta is another safe example to give as there have been several articles on what he did which got him into trouble.

One of the more interesting chapters is on what they call early signs of governance failures where the reader can try and match company names. There are 15 traits put down, which are extremely pertinent that can point to a possible problem in governance. Connections with people in high places, too much leverage, high profile in media, individualising the company to a person, etc, are some of them. The reader can start looking for examples of companies or persons who would get 10 or more tick marks. In fact, when one looks at some of the corporate controversies of late, this chart will make you say ‘of course, this should have been known’.

There are several suggestions made on governance systems and how directors should behave. This may be difficult to implement because rarely would any retired or renowned successful CEO sitting on a board of any big company admit that she or he does not speak their mind. Hence, while it is largely prescriptive, it is unlikely to bring about a major change in the way in which they conduct themselves.

There are some provocative issues brought up for which the authors need to be commended. What should be the responsibility of the board when appointing the CEO? If the CEO is to be removed, can the board stay on, as they also need to take some responsibility? They also strongly disagree with the concept of a transition of a CEO to the chairperson. Now this is ‘big’ because often the CEO never wants to leave the saddle and continues as the chairperson. One may never know if the authors are referring to a CEO who transitioned to a chairman as the board wanted him and took the stance of not drawing a pay. Or another celebrity CEO who even after becoming non-executive chairman openly states that he is coaching and mentoring a person who has 40 years of experience! Here, the authors point out rightly that what holds for employees should hold for the CEO too. If every head of a function wants to continue to mentor the next line, there would be no end.

Another delicate issue that is brought to the table is the tenure of the CEO. Now, this will make the reader jump, especially when one looks at some of the iconic names of industry who never seem to relinquish power as the boards keep providing extensions. One again never can tell if the authors are referring to some of these icons. But the innuendo can be attached to several CEOs who have led for beyond six to seven years. The authors do indicate that normally multinationals in India do follow the policy of such terms which give scope to bring about change without cementing their chairs for eternity.

A

The dynamics in the boardroom are discussed in some detail. The ‘authority’ bias may pertain not just to owner-driven companies but also powerful CEOs of widely held ones. The ‘group think’ bias is probably the most vital feature where the leader has the way with everyone nodding. Here, dissent is not encouraged and often discussion material is never given in advance. Another bias that comes in is predilection for the ‘status quo’ where change is dodged as far as possible. Solutions are also proposed in terms of having specific terms for the directors or getting in diversity. But at times there may be a cozy acceptance of the existing structure which ensures continuity.

They also write in detail on the manifestation of power in the boardroom and cover issues of narcissism and psychopathy which are often the overbearing force in all such interactions. The dynamics at times can be confrontational where the CEO may not like to take advice and looks at the board members with suspicion. This often manifests in sudden resignations of CEOs.

This book describes well how boards and directors should function. The broader question can be whether the protagonists are willing to accept their shortcomings. Similarly, are CEOs willing to change their behaviour and become more professional? And more importantly can any structure dislodge some of the really big names who remain CEOs for as long as they choose or migrate to the chairperson or take on the role of some category of board member to ensure their presence is omnipresent even as titles change. The jury is out on this one for sure.

Why we need norms on government spending: Indian Express 20th October 2023

 In a democracy, people vote political parties to office. The party or coalition that crosses the halfway mark forms the government and decides on where to spend public money. No referendum on the expenditure allocation or priorities is taken.

The choice of expenditure, where the money is actually spent, is fraught with controversy. The general belief is that governments should get the most economic value from their spending. This means that the multiplier effect to society and the economy at large should be maximised. This happens when more is allocated towards capital expenditure. However, more is allocated towards “non-development expenditure” which can also empower the recipients.

The basic principles of public economics talk about the state as being responsible for fostering equality through redistribution. The analogy with Robin Hood is stark though legal means are used. A progressive tax structure is followed. The concept of redistribution is, however, nebulous. For some, it can mean giving a “freebie” to the poorer sections of society.

The common man will prefer having “regular” trains, perhaps not Vande Bharat. For instance, an a/c chair car from Mumbai to Nashik costs Rs 380 on a normal train (Panchvati Express) while Vande Bharat charges Rs 720.

The common man will vote for projects which generate employment and income, not make them worse off, if, for instance, this involves giving up their land for the larger good. The issue of compensation is still contentious. And besides the landless labour attached to the land will be out of employment. But this decision is left to the government. This is why there are varied views on spending priorities.

Hypothetically, if all possible avenues of discretionary expenditure (which excludes fixed commitments like salaries, defence and interest payments) were put to a vote, individual choices would lean towards “freebies”. The Amma meal in Tamil Nadu, free electricity scheme in Delhi, free travel for women in public transport — these would find favour with the majority as most people belong to the lower end of the income distribution. The views of the richer/elites would be sidelined. This is why it has been observed that states tend to be more inclined to give freebies as they are closer to the citizens than the Centre.

States also have a different position on so-called freebies. There is an argument that when cycles, saris and dhotis are distributed for free, the expenses incurred are not totally wasteful as they do incentivise production in their respective industries. The same holds for free or subsidised meals. In fact, free power and water to farmers in Punjab has been defended on the grounds of wheat prices being kept subdued as in the absence of the same, the costs would have gone up. These arguments may be considered fair by some.

This line of thinking can also be extended to loan waivers. The argument goes that when bad loans of industry are provided for by banks or written off from their books, the depositors’ money is being unfairly treated, while a loan waiver comes clean as it is being provided for by the government for a vulnerable section.

How then are governments to decide where to spend their limited resources?

When parties contest elections, promises are made to the voters. While there is a divergence between promises and delivery based on fiscal constraints, in general parties do try not to renege. But this is a competitive arena as each party promises more than the other.

One way out is to put a cap. And to ensure that there is parity across all the levels of government. There is a need to revisit the subject of expenditure allocations. The next Finance Commission may consider drawing up such norms.

Israel-Hamas Imbroglio And The Economic Impact: Free Press JOurnal 14th October 2023

 The impact of globalisation has withered gradually with countries getting decoupled from one another in the economic arena. Hence, India for example has been able to do better than all other countries due to the lower reliance on the global economy. But one factor which we cannot get away from is the crude oil syndrome which has been the Achilles heel for long and does not seem to allow countries to decouple. This is why the Israel-Palestine or Hamas conflict is relevant.

If one looks at India’s links with Israel, it is more on the political side. We do export refined petro products and jewelry and do not have any significant imports. The value of exports would not be more than $ 8.5-9 bn per annum. Israel is not a supplier of crude to the world nor is Palestine. Yet there is palpable tension in this market. Why should this be so?

The politics of the imbroglio is complex and has not been sorted out for more than five decades and will remain so for longer. As long as the war is bilateral there should be less economic ramifications for the world. The problem surfaces once other Arab nations start taking sides. This is a possibility and cannot be ruled out. Israel started talking economics with Saudi Arabia earlier which can help in such a situation. But Iran has openly supported Hamas though maintaining that it has not been part of the recent aggression. Iran does not produce more than 4 mn barrels a day of oil which is just about 4%. But any blockades on the shipping routes (Strait of Hormuz) can upset the oil cart and make transport more expensive besides pushing up insurance costs. And there is also the possibility of other nations pitching in to support Hamas which can elevate the crude oil price.

Hence the critical factor will be how long will the war last? Normally one could have assumed that the battle would end in a couple of weeks’ time. But all such soothsayers were proved wrong when a large and powerful nation like Russia invaded the much smaller Ukraine. The war wages on with several disruptions being caused. The price of crude oil had gone beyond $ 90/barrel just a couple of weeks back before declining to the sub-90 region. The ball would be in OPEC’s court on the production levels to be maintained.

A prolonged war can spell trouble for the global economy and a useful thumb rule to use based on past experience is that if oil stays above $ 90/barrel for a period of two weeks continuously then it will spell trouble as the price can test the $ 100 level next.

This is important for India because of the chain reaction that is triggered. The first impact will be on the import bill which will go up proportionately (~ $ 162 bn in FY23). Presently a number of $ 85/barrel has been assumed for all practical purposes for the year and an increase here will push up the trade deficit. Second, a higher trade deficit will increase or widen the current account deficit which can then test the 1.8-2% GDP mark. Presently it is expected to be within the 1.5-1.8% GDP mark for the year.

Third, a higher current account deficit combined with slower capital flows on account of the high cost of funds in global markets will mean that there will be pressure on the rupee. The rupee is already tending to be weak in the region of ₹83-83.40/$ as the dollar has been strengthening periodically every time the Fed makes a statement. Fourth, a declining dollar will make the RBI intervene at some point of time to steady the rupee. So far the RBI intervention has been selective. It looks as if the RBI has ensured that the rupee depreciation has gone with the flow but been somewhere at the median level of depreciation of the competing currencies. But this will mean release of forex reserves which will lower the overall level. Fifth, as RBI sells dollars, there will be a withdrawal of liquidity from the system which can pressurise banks in particular. Last, tight liquidity will also manifest in higher bond yields in the market. Hence the chain of effects will affect all the markets.

However, ironically the inflation picture will be ambivalent. The CPI inflation number will not change as the government looks unlikely to increase the prices of petrol and diesel with the elections in states starting next month right up to the General Elections next year. This in turn will mean that the higher cost has to be shared between the government and the OMCs (oil marketing companies). The other products like aviation fuel will witness a commensurate increase and as has been witnessed recently will result in the airfares increasing. But given a low weight in the index, this may not really show in the final inflation number.

The WPI inflation number however will witness a higher increase with the overall fuel basket having a weight of 7-8%. But given that the WPI inflation number is running at a low level of less than 1%, may not really matter. Therefore, the government’s call on prices will ultimately determine the sharing of the higher crude oil price burden.

The picture outlined is an extreme one based on a long and protracted war that gets more of the oil producing countries directly into the fray thus disrupting the production and supplies. The political machinations will drive this factor and hence the reactions of friendly nations on both sides need to be followed closely.

For the RBI, this will be another factor to keep in mind as it has been seen that crude oil prices tend to be volatile when there are such factors at play and can flare up any time and also recede with the same alacrity. It may be hoped that based on the Ukraine episode which caused severe disruption in the first few months but has normalised subsequently that the global economy also adjusts to this new crisis in a similar manner.

The unstoppable demand for cash: Business Line 10th October 2023

 

Goldin's Nobel is a wake-up call on women's work participation: Mint 10th October 2023

 

We need to uproot some of India's agricultural policies; mInt 4th October 2023

 

Blowing his own Trump(et): The megalomania of a president laid bare: Financial Express 1st October 2023

 

Donald Trump is known to be an egotist who believes that he has the right to be the president even if the people do not vote for him.

Donald Trump is known to be an egotist who believes that he has the right to be the president even if the people do not vote for him. His brusque tone when communicating was combined with a lot of prevarication when he was the president of the most powerful country. One gets to know more about the person in the book, The Trump Tapes, written by Bob Woodward, an associate editor of Washington Post. Besides a series of interviews with the then president, there are copies of his letters written to the North Korean despot Kim Jong Un.So what do these transcripts reveal? Nothing really surprises the reader and more often one is convinced about the Machiavellian machinations that went on during his regime. Some of his best friends included Vladmir Putin, Kim Jong and Xi Jinping. One may just conclude that they got along well because they were like-minded. Fortunately, the systems are different in the USA and Trump did not manage what the others did—to remain in power.These 20 interviews were officially recorded and hence are authentic.

He not just liked dictators but also admired them. One example is the Turkish head, Recep Tayyip Erdogan. Trump was open when he said that he got along well with him even though no one else could. He seriously believed that he got along well with people who were ‘tougher and meaner’ due to his charisma and straight talk, which reveals his pompousness. He had also declared that Egyptian President Abdel Fattah el-Sisi was his favourite dictator.More absurdly, he was unabashed in saying that he was the only leader Kim Jong Un was willing to speak with and that he was the only person who understood the five nuclear facilities in Korea, not because he studied them but because his uncle worked at MIT!

His conduct of foreign relations was astounding as he wanted to do everything alone and did not take along the CIA or the generals. This made him largely unpopular even within the administration. Staunch allies, who were critical for the US maintaining stability in the region, were treated with disdain. For instance, he openly opined that South Korea should pay the US for defending the nation. At some point, he also said that there was no reason for him to defend this nation as he did not care. This was the treatment to allies while he admired the despots who played to his ego.Interestingly, Woodward likens Trump to the CFO of a company who is always praising the performance of the organisation.

He tended to exaggerate the economic situation and was proud of having created this situation, when it was far from the truth. He was rarely apologetic about the fiscal situation even while his government ran the highest deficits even before the pandemic.Trump publicised the fact that his deal with China was a winner when it was well known to be a bust. His inconsistency in narrative was characteristic of his twisting facts. He had said that China had the worst year in the last 67 years—while the same numbers went as 27, 52, 54 and 35 in a space of a few months.

This showed that he just said what he wanted believing that the people would be convinced and hence never seemed to speak the truth. In a way, it was arrogance which typified his style that worked on the premise that everything he said had to be believed because he was Donald Trump.One of the more preposterous views that he propagated was that there was a cure for Covid which was the use of hydroxychloroquine. The doctors did not agree with this theory but Trump was convinced he knew better and asked for the administration of this medicine to all people, which, in fact, was an anti-malarial drug. When the doctors said with certainty that this was not right, he felt it was the right cure as the president of America. The clinching argument was that because he ‘felt good about it’. The final outbreak and spread was probably the most disastrous in the USA among recorded cases across the world that led to over a million deaths. He was against a lockdown; and even when the vaccine was available, he was not willing to make it mandatory for people to be vaccinated.

Trump’s handling of the infamous George Floyd case, where a coloured American was brutally killed by the cops, again reflected his thinking. He blamed the Democrats for the riots and always said that things were under control when asked to speak on the subject even as they spread across the country. There were no visible signs of him being personally upset by his death and attention was more on the rioting which followed that also led to the burning down of a church. He got defensive by saying that he has done more for the Black community than any other president. When the movement of Black Lives Matter spread, he referred to them as ‘fascists’ and ‘Marxists’.

In short, The Trump Tapes shows the ex-president in his own words. His shortcomings are revealed and it is clear that he is unfit to lead the US. Instead of understanding his responsibilities to the country and the world, he is continuously consumed by the past and unable to let go of his grievances. He loves to combat and is defiant all the time. The presidency is his narcotic and fuels his heroic energy. Yet he has the biggest group of followers and loyalists and has managed to raise more funds than any other candidate. He has managed to exploit the notoriety of his scandals, investigations and political warfare so that he can dominate and keep his grip on American politics. The ending of the book quite summarises the man—Trump aspired to be a colossus like FDR. He lives his own self-inflicted melodrama—“Everything is mine. I do what I want.”