More gold for their buck: Economic Times May 28th 2024

 

RBI has been managing liquidity in challenging times: 27th May 2024

 

Sources and Uses of RBI Surpluses: Financial Express 25th May 2024

 

The Two Big Policies To Be Watched After Election Results: Free Press Journal: 25th May 2024

 With the elections coming to an end and the results to be announced in the first week of June, the economic thrust of the new government will be watched. The stock market has been probably the earliest indicators of the voting trends and have exhibited considerable volatility ever since the long voting process began. The period has been one of panic selling as moods swung with every round of voting, and one view was that the market was driven primarily by these sentiments. However, presently it may be said that the indices have reverted to the mean and the noise witnessed can be ignored for all practical purposes. So, what is in store for the country on the economic front?

The first major policy announcement would be the credit policy that will be announced on June 7. While some analysts may like to link the outcome to the election results, it can be said with confidence that the decision taken will be independent. The Monetary Policy Committee would be taking the decision and there is really no relation with the government in power. The role of the government ends in nominating the independent members on the Committee. Once decided there will be a well debated and informed decision taken by the members, which is what will be announced.

The majority of the MPC members are most likely to agree to a status quo position on both the repo rate and stance. This is so because the inflation situation still looks hazy even though the headline number has come within the range of less than 5% in the last few months. The heatwave has triggered fresh increase in prices of vegetables, especially potatoes. This will continue to pressurise food prices. The water reservoir levels are also down to 25% of full capacity compared with 32% last year. Also several FMCG companies have increased the prices of several products which will get reflected in core inflation. The MPC will track the arrival of the monsoon and its progress before taking a view on potential inflation. The big comfort factor today is that growth appears to be robust across sectors and hence will not be an inhibiting factor on taking any decision on interest rates.

The second big announcement would be in the realm of the budget, and this is something which will be awaited. While manifestoes of all leading parties have common ground when it comes to expenditures, issues relating to taxation could be something which the companies would be watching closely. This can potentially be reflected in the stock index movements as there are divergent views on issues like wealth tax and inheritance tax. Industry generally prefers the status quo situation in case there is limited space available for sops.

But from the point of view of macroeconomics, there would be some issues on the table as the Budget would have to do something to spur both consumption and savings, and not depend entirely on the monsoon to further rural demand. It has been seen that consumption has been lagging in the last three years especially for goods.

Demand for services has been maintained mainly due to the pent-up demand though it has been restricted more to the higher income groups. High inflation and limited income have been the two reasons for rather lukewarm demand even during festival time. In order to change this trend, tax cuts would be expected this time. The Interim Budget had clearly stayed away from any proposal on this front on grounds of prudence. Hence there would be expectations on this side and would be on both direct taxes which is individual taxes as well as GST.

High GST rates have also been partly responsible for higher inflation as there is a double whammy when producers increase the prices of their products. As the fiscal side looks stable there would be scope for lowering income tax slabs as well as GST rates. A relook of the GST rates can lead to some kind of rationalisation that can effectively lower tax incidence.

The other area of concern for the economy has been savings where financial savings have not been increasing. This has been due to diversion to nominal consumption resulting from higher inflation. To check this tendency, there would be expectations of the government to widen the scope of tax benefits on savings and Section 80-C in particular could come up for review. In fact, ideally the limit should be indexed with inflation to ensure that real savings can be protected.

Industry on the other hand would be expecting a further fillip on investment and while the PLI has already been instituted for large industry, the SMEs could be looking for something similar. This is also required because private sector investment has been quite disappointing and restricted more to infrastructure-related industries.

Such benefits look plausible against the RBI deciding to transfer Rs 2.1 lakh crore of its surplus to the government. Other things remaining constant, this is a little more than the Rs 1 lakh crore targeted as dividend from the banking system which also includes the PSBs. There is hence scope to speed up consumption and savings by providing some tax breaks this time.

The government may also be expected to take some affirmative action in terms of focusing on increasing exports which would mean entering into more agreements with our trading partners. This is important as the world is getting more protectionist. There is also an opportunity to take advantage of China plus 1 strategy as most developed countries are looking at other emerging market for their investment.

Hence, the agenda for the new government is quite clearly laid out where the focus has to be more on enhancing growth through the consumption-investment-exports route. This is the only way in which sustainable jobs are created, which is the need of the day. With India well placed to push the growth rate upwards to above 8%, the environment is conducive to this move.

Five things the next government needs to focus on: Indian Express 16th May 2024

 

Reviving private investments, boosting consumption, increasing employment opportunities, turning around agriculture and becoming an integral part of global supply chains should be on the top of the policy agenda

The Indian economy has done well in growing by above 7 per cent for three successive years while other major countries have struggled to stay afloat. However, if one looks closer, the picture is not that straightforward. In the five-year period ending in 2018-19 (pre-Covid), the economy added Rs 41.9 lakh crore in terms of real GDP. However, in the next five years ending 2023-24, it added just Rs 33 lakh crore as the pandemic disrupted economic activities. This should be the starting point for the next government.

Demand holds the key

There are five areas that need to be focused on. The first is reviving private investment. The government has been very active on the capex front which has kept the clock ticking on the infrastructure front. Heavy investments in roads and railways through backward linkages have driven growth in sectors such as steel, cement, machinery and chemicals. But this is only one side of the story. The private sector now needs to do its part. Private companies run on profit motive and return on capital is the primary metric for any investment decision. But, for return to be meaningful, demand is necessary. The PLI scheme has had limited success so far. It has been visible in the mobile phone, solar panels sectors, and partly in electric vehicles so far. Widening the PLI to include schemes for SMEs can be something that should be taken up. Providing incentives like investment allowance would also be worth experimenting with.

The second focus area should be on increasing household consumption. Household consumption has been volatile in the last few years — the pent up demand during the pandemic led to a surge for services and partly for manufactured goods. That’s why we saw the hospitality and tourism sectors doing well. However, demand for consumer goods has not quite taken off. In fact, surplus capacity is one reason that investments in this sector have been muted. Add to this high inflation, and demand has been further compressed. Rural demand too has been weak as farm output was affected last year due to a sub-normal monsoon.

In order to increase consumption, the government has to work on the fiscal side and reconsider tax rates. The disposable income of individuals can go up by lowering direct tax rates and rationalising the GST slabs. It has also been observed that household savings have been declining. While taking a harder look at the existing tax structures, the government can also reconsider the old tax scheme and provide further avenues for savings.

The third action point is not directly under the control of the government as it relates to employment generation. This revolves around the private sector, though, on the government’s part, it can full up all the vacant positions, providing a small push to job creation. But, only with consumption taking off, will investments rise, creating the required employment opportunities.

Four, a decisive stance needs to be taken on agriculture. The farm laws, which faced a lot of opposition, must be brought back on the discussion table and should be debated and discussed with various lobbies so that an acceptable solution can be reached. Government participation in farming through state cooperatives must be actively considered as any crop failure that precipitates an increase in prices because a cause for government intervention. Further, the government’s stance on agricultural trade needs to be clearly enunciated, which will provide more certainty to the farmers. Having a standardised operating procedure for procurement and distribution is absolutely necessary so that there is less scope for knee-jerk reactions. Lastly, the ban on futures trading in products like oilseeds, pulses and cereals should be revoked and greater space must be made for the market to operate as this has the potential to improve overall productivity through a robust price discovery process.

Fifth, making India an integral part of global supply chains. This would mean entering into more free trade agreements with large trading partners. In the last five years or so, there has been significant acceleration in services exports with the IT sector taking the lead. But the same has not been the case in merchandise exports. This needs to change.

It is also expected that the government will work aggressively on lowering the fiscal deficit over the next few years. While the target of 4.5 per cent of GDP will most probably be achieved by 2025-26, the important thing is to move towards the 3 per cent mark. This will require deft balancing by the next government.

Little justification to tax rich more: Free Press Journal 11th May 2024

 

Stock market indices have little to say about economic growth: Mint 13th May 2024

 

Shrinking savings: No major worry for economy so long as savings are adequate to finance investment: Financial Express 11th May 2024

 There has been some concern expressed on the declining savings of households in India. While the data available is up to FY23, the disturbing trend is the sharp fall in the ratio of net financial assets to GDP to a five-year low. Prima facie, it appears the situation may not have been reversed in FY24. What exactly are the issues here?

There are two aspects to the growth in net financial assets of households as individuals are both savers and borrowers. As savers they are the dominant contributor to national savings. The latter has picked up pace in the last couple of years. There is a growing belief that living on leverage is no longer a taboo. In fact, it is a preferred choice to move up the spending ladder and has been beneficial for the consumer goods segment.

The graphic gives information on the ratios of net financial assets, financial assets, and financial liabilities of households to GDP in the last five years. Net financial assets are defined as financial assets minus financial liabilities.

There are two concerns here. The first is on the ratio of financial assets to GDP, which is coming down; and the second is the sharp spike in the ratio of financial liabilities. A combination of the two raises a red flag. FY21 can be taken to be an aberration as this was the Covid year, which saw a fall in economic activity and avoidance of any kind of consumption leading to significant increase in savings. Hence the ratio of financial assets crossed 15%. The ratio of financial liabilities did not come down but inched up marginally with home loans providing the traction.

What can be a worry is that the ratio of financial assets has come down from 12% in FY19 to 10.9% in FY23, which means people are saving less. This can be attributed mainly to the fact that households were spending more on consumption and at the cost of savings. Real consumption increased by just around 5% in these five years and slowed down further to 3% in FY24. Further, given that inflation has been high at 6.2% in FY21, and 5.5% and 6.7% in the subsequent years, there was a tendency for the households to pay higher prices for a limited basket of goods. This led to compromises on savings. Further, the pent-up demand for consumption also contributed to a dip in savings.

Also, interest rates in banking were low leading to near-negative real interest rates which could have been a deterrent while market-savvy people had moved to the stock market. But the fact that savings have gone down is serious and has to be reversed.

On the liabilities side, there has been a sharp increase in FY23 from 3.8% of GDP to 5.8%. This is a result of higher borrowings mainly from banks and non-banking finance companies. In fact, the financial system has been pushing retail loans at a time when corporate demand for funds was weak due to low investment. This began around 2015 when asset quality review was undertaken as corporate non-performing assets had gone up sharply. Banks directed their efforts to the retail side where the probability of delinquency was low in a market typified by a growing aspirational class.

Three segments have witnessed a sharp increase over the last five years. The first is home loans, where the government has given a boost in the affordable segment. The second is auto loans, which have picked up momentum as the demand for automobiles (cars and two-wheelers) has increased. The third part is unsecured loans, which has grown at a quick pace and is used for consumption purposes, drawing the regulator’s attention. Last year, the capital requirements were enhanced for these loans. There has also been an increase in the use of credit cards, although not very significant in terms of share in total credit.

There is a strong argument that if households are borrowing to buy a house or car, there is an increase in investment, too, as it is linked to a fixed asset that is good for the economy. Unsecured loans, along with credit cards, have been considered to be financing options for consumption and need to be kept in check.

There are two divergent views here. While borrowing for consuming isn’t normally looked upon as prudent even for the government, it is considered risky for households who may not necessarily have the financial strength to service the same. However, if one looks at developed countries, growth in the ’80s and ’90s was accelerated due to consumerism that was supported by leverage. Hence shopping for groceries and paying by credit cards does add to aggregate demand, and has strong backward linkages with the relevant industries and can spur investment. Therefore, consumption with leverage is not really a bad thing within limits.

It can be argued that leverage-based consumption has increased the financial liabilities of households and led to also savings being lowered over time. As long as the savings are adequate to finance investment, there would be no major problem for the economy. However, once investment picks up and is not backed up by domestic savings, there would be greater dependence on foreign capital. This finally gets reflected also in the macroeconomic concept of current account deficit, which is the difference between the two and has a different set of challenges.