Cheaper credit doesn't always spell faster GDP growth: Mint 28th June 2024

 

Book Review | One for free trade: Financial Express 23rd June 2024

 A collection of articles written by any author over around two and half decades may not sound too exciting for the lay reader today. This is so because articles in the newspapers are relevant in the context of time and what could sound compelling in say 1995 may not really be relevant today. Hence for a publisher it is a challenge to lay out such an agenda. However, it is different when it comes to Arvind Panagariya, whose book India’s Trade Policy: The 1990s and Beyond, defies this sentiment. The book focuses primarily on the subject of free trade and investment issues as they evolved over the past three decades or so.

Panagariya’s book is a delight for students for sure as they get to read his arguments, which are compelling, on the subject. What is significant is that the author has not changed his view that free trade without any hindrance in the form of tariffs or quotas is the best for all countries. Classical economic theory based on the principles of David Ricardo had supported this doctrine in the late 18th and early 19th centuries. Clearly the author is a proponent of this school of thought. This is important because often, over the years, ideology changes with time, especially for trade, where the entire world is moving towards some kind of protectionism.

The articles are short, as per the requirements of a newspaper, and are hence very readable. There is one section on the pitfalls of import substitution that is refreshing. This was an ideology we had pursued in the Sixties and Seventies when the spirit of nationalism was high. The same has been argued for in the past few years too, though not overtly, when the talk is on ‘Make in India’. His view is that once we get into this mindset, there is room for inefficiency as competition weakens. The end result is that consumers end up paying more for lower quality products. This is a reality and has to be accepted once countries go in for such modules. In fact, even today there is one school that argues that the PLI benefits given to the mobile phones industry has only led to greater import of components that are assembled and exported. Hence when the case is made of higher exports of electronics, it continues to be a basket of assembled components used to manufacture mobile phones that are exported. A corollary is that the concept of self-sufficiency in the global context is quite irrelevant.

There is another interesting section on exchange rate that is pertinent even today. One of his articles argues for a single tariff rate, which makes sense as it is transparent and does not keep altering with times. He had argued as contemporary as 2022 that increasing customs duties to garner revenue is not a good idea. This was done in 2018-19 when duties were hiked in 42.3% of tariff lines without much analysis. The ostensible reason was that GST had been introduced and its efficacy on revenue collections was not clear. Increasing tariffs aided in enhancing revenue for the government. He argues for a review of all such duty structures to club them under new goods, existing products, motivation, etc, so that decisions in future may be taken.

Further, he is in favour of letting the rupee depreciate if the circumstances so warrant, as that is the best way to reach equilibrium. It is also a way of making Indian goods competitive in the market, especially at a time when our exports compete with countries like Vietnam where price sensitivity is very high for importing countries. This means that the RBI has to be alert all the time and ensure that the rupee is not kept stronger for longer.

There are also sections on our trade relations with USA and China separately over time. For USA his views do indicate that there is a lot of ambivalence shown by the USA when it comes to honouring the principles of free markets. While they have used threats, more recently under Donald Trump, to hike duties from certain countries, they don’t apply same principles on issues like services and patents. China has been different, where India has been on the receiving end with cheap goods flooding the market that have been countered at times by sanctions. The author argues in one of
the articles that China is the major source of our imports if oil is kept out and it is just not finished goods but also raw
materials and components that are part of the basket. Sanctions are not the answer as they would lead to disruptions
and the solution is to widen the basket of imports to other countries, which would serve us better.

Being an expert in all areas in the external sector, there are also articles on the WTO and various free trade
agreements. Here his views on the WTO starting from inception through all the discussion ‘rounds’ are covered which
provide useful insights into what went into these thought processes. His belief is that if it has failed, the main cause
has been the USA rather than the developing countries. But there are lessons to be learnt. This can also be seen as
guiding blocks for future as India needs to focus a lot on such agreements with more countries to ensure that we become part of global supply chains. Free trade agreements are a good way out, considering that WTO for all purposes is idle if not defunct, and all countries are operating outside this perimeter through such agreements. This is the only way to become more global.

Putting together a series of 70 articles published in various newspapers and journals over two and a half decades is a tall order as synchronisation under various broader issues is required. The recurring ideology of the author has been liberalisation and there has never been any deviation from this ideology. Therefore, the task of the publisher is easier due to the prevalence of consistency. Hence the views when read today would be compelling as there is a section of experts in this field who believe that with greater protectionism enveloping the world economy there is a loss of benefits of free trade for all countries. This tendency to move towards protectionism should stop.

The author is chief economist at Bank of Baroda.

India’s Trade Policy: The 1990s and Beyond
Arvind Panagariya
HarperCollins
Pp 360, Rs. 599

Consumer Protection Is Needed In The Non-Financial Sector, Too: Free Press Journal...June 22, 2024

 

The middle class, which can be broadened to be called consumers, is one which gets affected on all fronts but does not find an utterance

There are several lobby groups for industry which continuously indulge in advocacy for this large constituency. The government on its own initiative addresses, or tries to resolve, issues when it comes to the lower income groups under the umbrella of ‘inclusive growth’. But what about the middle class?

The middle class, which can be broadened to be called consumers, is one which gets affected on all fronts but does not find an utterance. Let us see how this shapes up. First, this class gets little respite from taxation and all changes in the tax structure end up increasing the burden or reducing the benefits. While it is hard to define this class, it is the one that pays the highest amount of taxes to the government. This happens in terms of both direct taxes as well as GST. As one moves up the income echelon there is a tendency to consume higher value products which immediately results in payment of higher tax rates. This can be consumer goods or services.

There is no protection like what is provided to farmers for instance where there are price support programmes. Further, this is the class which saves the most in financial instruments but pays the regular tax rates on the earnings on them. There are preferences in taxation to equity over debt which increases the tax incidence for these savings.

The second area where the consumers get affected are in the overt charges levied on several services that are used. The first thing which comes to mind is the convenience charge that is levied by airlines or the railways. It is never clear as to what these charges are for. In a world where the government is pushing digitisation it would be an anomaly to pay for using the digital mode of payment. Further, notwithstanding the opposition made to the levy of a service charge by the hospitality sector, it continues to be included in the final billing. This becomes cumulative as the GST is imposed on the sum total. Another area where consumers are at the receiving end is when they are perforce made to reserve tickets for entertainment purposes through a couple of platforms which are virtual monopolies. The charges could at times be as high as 10-20% of the face value of the tickets. Given that the entertainment industry is growing at a rapid pace, these costs get subsumed and rarely are objections raised on this issue.

The third is the very distinct monopolistic or oligopolistic structures that have evolved in various segments of the services industry. The Railways, which is run by the government, is the largest monopoly where there are no cheaper alternatives. This concept of the lowest cost service provider gives the railways the power to price the fares differentially. While Tatkal was a service that began the process of differential pricing, the fares are now variable through the calendar and resembles the airlines.

The airlines industry on its part was supposed to have competition when the skies were opened up in the nineties. This led to several entrepreneurs coming in with variable success. The present situation today can be best described as being an oligopoly if not duopoly. While some airlines like to still call themselves a low-cost airlines, the difference in prices tends to be marginal as they tend to converge. In fact, often the prime-time flights have no such distinction.

Closer to home the suppliers of power or natural gas are absolute monopolies and consumers have little choice given that these parts of infrastructure are bulky and cannot by definition have too many players. This leads to distributors having the pricing power which can be misaligned from costs with rarely any authority exercising control over pricing. The sector is confusing because at one end of the spectrum the state electricity boards make losses as the governments are loathe to increase tariffs. Where the private sector is involved, the prices tend to be higher though admittedly the supply is better.

The story stretches to other infrastructure facilities like highways and telecommunication services. The Mumbai Pune Expressway started in 2002, there was reason for one to pay for use. However, over time the parallel old highway also became a toll road with the rates being lower. The justification given here is that there are no free lunches for anyone and everyone has to pay user charges. This is the economic rationale. But then the larger question is whether there is any control over the pricing. While it can be justified that all infra projects have to be self-sustaining, a cost-benefit analysis is necessary because the same is not permitted in say the agriculture markets where the government comes down heavily on so called profiteering when there are shortfalls in supplies of onions or potatoes in the market.

Further, the government had tried to open up the telecom space with private players coming in after the state monopolies fell behind. After a rather enthusiastic start with several companies providing services, the country is back to just three major players. A reason for players exiting is the high spectrum fees that are charged at every stage that cannot be recouped. Here is the conundrum because pricing once again seems to be converging after the initial teaser rates and facilities provided by the newest entrant.

All these examples show that the consumers are not really protected when it comes to pricing of services. This is mainly due to the absence of regulators; or often the case of the government department being a part of the system. In the financial markets the regulators ensure that consumer protection is of paramount importance. This is still maintained in the agricultural markets where there is substantial intervention in all forms to find a balance between the consumer and producer. However when it comes to services in particular which are ‘necessities’, there is no such umbrella provided.

A suggestion here is that the Ministry of Consumer Affairs should take on this larger role with probably a separate department overseeing these markets and ensuring fair play.

Capex: India Inc has to do its part: Business Line 20th June 2024

 

Economic Theory was at play all through the Lok Sabha Elections" Mint 11th June 2024

 

Growing feeling that a change is in the offing : Financial Express 8th June 2024

 https://epaper.financialexpress.com/3876796/Mumbai/June-08-2024#page/7/1

After Market Craziness, It’s Business As Usual: Free Press Journal, 8th June 2024

 https://www.freepressjournal.in/analysis/after-market-craziness-its-business-as-usual

The markets surely were crazy this week. The Sensex closed on May 31, which was also the day that the GDP growth numbers were released, at 73,961. The release came out after the markets had closed. On Saturday as the final round of polling was completed, various agencies had their exit polls which showed a clear majority for the BJP party and even higher for the NDA. Naturally the markets were enthused that the exit polls gave very positive signs for the future of the economy and the Sensex increased to a high of 76,468 on Monday. This spooked expectations that there were even greater things in store. However, the party was spoilt on Tuesday when the election results were declared. The NDA had the majority, which the BJP didn’t, and the Sensex ended lower at 72,079. The notional gains and losses in market capitalisation were calculated and the picture was nothing short of being dramatic on both the days.

Markets are driven by irrational exuberance. There was no reason for the increase of almost 4% on Monday. After all, the ruling government was expected to come back to power and the only conjecture was the number of seats. Similarly when the coalition got the majority, the fact that the leading party didn’t should not have shaken the market. But both happened, and this is how the market works.

On Wednesday, June 5, which is one session after the election results were out, the Sensex recovered to end at 74,382 which is still higher than the May 31 closing. What is one to make of this madness? In short, the market still believes that the economy is on the right path with the coalition government in place and hence has reposed faith. The fall on the 4th was a knee-jerk reaction. The continuation of the era means that things will be business as usual. The policy framework will remain more or less the same and while there can be some tweaks to accommodate the coalition partners, the structure will remain unchanged.

What will be watched from here on by investors will relate more to the finances because the fiscal deficit is the most singular indicator of the health of the finances of the country. Therefore, the glide path to the short-term goal of 4.5% of GDP by FY26 is one area that will be monitored. Here there is little reason to be sceptical as the government has guided the deficit in difficult times. Now that growth is expected to be on the path of upwards of 7% in the next few years, there is unlikely to be any external pressure on the deficit. As long as growth is in the range of 7-8% this year with inflation under control at less than 5% there is reason to believe that there will be revenue slippages. GST collections for the first two month appear to be on the right path giving confidence to this belief.

The other related area would be capex of the government. The biggest victory over the last 10 years has been the progress made in the digital space as well as capex by the government. Both have had strong backward linkages with the related sectors thus providing a fillip to the economy at a time when the private sector has been slow to invest. The budget to be presented in July will provide direction here. The amount allocated in the interim budget is fairly high at Rs 11 lakh crore which would have to be largely spent in nine months’ time. Therefore, it does not appear to be a tricky situation on account of the coalition government.

The coalition partners at their respective regional level have been progressive in terms of reforms and hence there is little reason to conclude that there could be any impediment along the way. There are touchy issues like labour, land and agricultural reforms which have not been addressed even in the past, and hence would not be ones that would take the government by surprise. These are works in progress where a consultative approach is called for, especially when it comes to the farm laws. However, this is something the government should take up as the farm sector is the only one which has not witnessed any reforms in terms of improving productivity or marketing.

The economy may be expected to go along the existing path of high growth with the government providing support through enabling policies. Hence measures to up industrial and exports growth would be something that would be expected as they remain the weak links in the growth story. On social welfare there would be some bit of introspection as there may be need to address specific concerns of some of the stakeholders. But this can be subsumed in the available space provided by the fortuitous higher transfer of RBI surpluses to the government.

From the point of view of the market, it should be back to normal. There will continue to be some volatility until the new government is sworn in as markets factor in all possibilities until the final decision is taken. The content of the budget will be important here as that will be scrutinised in some detail to gauge the strength of the resolve of the coalition government. The rest will be driven by the corporate performance as it would also be the time when the first quarter results would be out and a better picture of the monsoon would emerge. Foreign investors however will continuously monitor what happens in the corridors of power while looking out for all messages that come from the government on reforms. Hence articulation will be very important on the policy front to reassure investors when a coalition government is in power.

Turning to the budget: Businessline 5th June 2024

 

How to deal with the GDP growth variations in forecasts: Financial Express 4th June 2024

 

Lok Sabha 2024 poll results: What could be policy roadmap of the new govt? Business Standard 4th June 2024

 Lok sabha elections 2024:The Indian economy looks well poised to move to a higher growth trajectory path in the coming years. The latest gross domestic product (GDP) growth numbers point to the inherent resilience in the economy. Against this background, the following can be the main agenda points for the new government.

First, the need to boost consumption is important and here the Budget could be used as the right platform. With tax buoyancy being very high in the last few years as well as the first two months of the year, there is room to rationalise tax slabs under GST. Further lowering of income tax rates is also an option to increase disposable income and hence spending power. The biggest achievement in the last five years has been in better compliance by taxpayers as all loopholes have been plugged. This provides scope for giving concessions.

Second, private sector investment has been lagging and restricted to specific sectors. To make it broad based, from the policy perspective five non-infra based sectors can be identified to bring about some buoyancy. These can be food processing, textiles, pharma, auto and housing. These have linkages with other sectors as well as exports and can be the focus for the next 5 years where there is potential to be leveraged.
 

Third, the government along with the industry associations need to get the right mix of free trade agreements that are signed to ensure that India can get integrated with global value chains in the next couple of years. Here, it would be essential to also bring in the SMEs and to begin with there has to be some initiative taken to create a pan India association for SMEs so that there is a common voice as well as targeted focus. As MSMEs contribute to 40 per cent of exports, they need to have a voice in decisions and should not be just followers.

Fourth, a nagging issue which has had socio-political implications are the farm laws which have the potential to transform the way agriculture performs. More importantly agriculture needs to be commercialised and hence a special committee needs to be set up which discusses the same with the stakeholders in a time bound manner to have a tenable solution. This will also include a firm stance on policy relating to exports and imports and futures trading. This will ensure that the sector which has been outside the purview of reforms for almost two decades gets back the vigour that is needed to make the sector stronger. India is the largest producer or consumer of almost every farm product and logically should be a price setter.

Fifth, there is still quite a bit of inter-state disparity when it comes to economic development with the southern states having better economic parameters. Here the focus would be on elevating the economic status of states at the lower end of the scale through specific transfers (which could be recommended by the Finance Commission). Also, the central government could work with the concerned states to reach out to the private sector to invest.

Lastly, the policy focus has to be multi-layered to ensure that there is dividend to be had from the demographic distribution of population. This points to the need for having a skilled labour force; and work has to start from school level. Hence education needs a fresh look to ensure that the demand for such skills in a fast growing economy is met. In parallel, the need to improve health conditions is also necessary for which the centre will need to work with states.

Given the strong platform already constructed by the present government, it would require more fine tuning measures to take the economy ahead. The unfinished agenda in the last round can be completed with relative ease so as to reach both the medium and long term goal of becoming a global economic behemoth.

How do we pick a new base year? Business LIne 3rd June 2024

 

Book Review | Grease the friction: Financial Express 2nd June 2024

 Now, this will be familiar to everyone who works in an office. A plethora of meetings where the same things are discussed and decisions are taken only to be reversed, and then taken again. Hundreds of hours are spent preparing for these weekly or daily meetings which do not decide on anything new. A series of emails are sent in the night where one is expected to respond immediately. Many readers could have been in such situations, even more so post-Covid where it is assumed that these meetings can be called just anytime of the day. Welcome to The Friction Project by Robert I Sutton and Huggy Rao. These frictions, they describe, exist in every organisation and cannot be avoided. But when they become destructive, then it is a concern for the company as well as employees, and need to be corrected soon. They identify these pain points in all companies and suggest what leaders must do to eschew them.

The book is based on several research projects conducted by the authors in different companies involving interviews with staff at all levels. The narrative is engaging and will make the reader smile as well as feel slightly uneasy. Smile, because it sounds funny, and uneasy, because more often than not such habits demotivate employees and bring down efficiency levels. This happens not just in offices but also medical institutes like hospitals, which have also been surveyed extensively by the authors.

hey point to five friction traps that the ‘friction fixers’ need to fix through effective intervention. The first is what they call ‘oblivious leaders’ who are not aware of what happens at the micro level because they live in a world where they think they know best and are running the institution in the ideal manner. There are long communications which run into thousands of words but fail to convey what the leader wants. Or there is amnesia about decisions already taken, which are discussed over and over again with no one bringing it to the notice of the head. Meeting rooms for the top management which are seldom used are kept out of bounds for the rest of the staff, making the rest struggle to meet customers and vendors. At times there is what the authors call ‘sham participation’ where leaders have taken decisions but give the illusion that they are hearing other views which will never be considered. All this takes time and saps energy and demotivates the rest of the employees.

The second source of friction is the ‘sickness for addition’. Any plan to restructure an organisation will always involve more additions to the existing structures and never subtractions. Further creating long processes erode enthusiasm of employees as the papers or mails go through various channels of approval. This is the familiar red tape which is often justified as having processes and accountability in place and create logjams instead.

The third friction area is something everyone will experience which they call ‘broken connections’. Several departments and layers ensure that coordination becomes complicated thus hindering flow of information and views across the organisation. Hence, while departments are created to address specialisation needs, everyone ends up working in silos where the tendency is not to communicate but also to hide information. This can be seen in companies which start small and then become big where departments do not talk to one another. Such snafu is what consultants capitalise on when they are paid to draw up future plans!

What would the reader understand from the words often used by leaders— “let’s leverage our core competencies to create synergies that move the needle?” Or the Mckinsey use of the term ‘helix organisation’ or ‘squad to squad meetings’ or ‘fit for purpose accountable cells’. This in short is called ‘jargon monoxide’ by the authors, which is the fourth area that needs to be addressed. This needs to stop and the friction fixers have to abandon such crummy talk. Leaders need to reward colleagues who speak straight with useful suggestions rather than those who involve in smart talk. This convoluted crap is what we hear all the time everywhere! Here one can distinguish between subject jargon within the relevant departments and that used to impress or confuse.

Last is the syndrome of ‘fast and frenzied’ which is a potential threat to any company. Organisations normally either plod or push making things slow or are too hurried to meet targets and get things done. This is again something the reader can see in their own organisation. The tryst to go fast often means breaking laws or bypassing regulations that may not quite blow up immediately, but does so with a lag. A study on violation made by corporations like McDonald’s, 7-Eleven, Marriott, etc, showed that 559 franchises fell in this bucket over a period of 10 years. Organisations which follow this path have some common traits that  are expounded by the authors. There is burnout in employees, a culture of bullying where the seniors are literally trampling on their subordinates all the time. Incentives that get linked to performance forces short cuts by employees which can contravene regulation. The work culture is toxic and there is a sharp element of selfishness that comes in where everyone strives to get ahead of others and refuse to help out others. All this comes in the way of creativity.

These are the five traits seen in most organisations and if the leader wants to take the organisation ahead in a cohesive way, there is a need to change the way systems work. The authors stress on how leaders should strive to make the right things easier and the wrong things harder. Typically one needs to have what they call ‘grease people’ who are un-bureaucratic and are comfortable taking risks and doing new things. Such persons are also the ones who trust others and avoid monitoring others and downplay errors so that there is creativity all around. This is contrast to the ‘gunk players’ who are just the opposite. The gunk people should be kept where friction needs to be high while the grease people are where friction ought to be low.

This book is for CEOs who should do deep introspection on how they are running their companies and make an effort to get things done the right way.

The Friction Project: How Smart Leaders Make the Right Things Easier and the Wrong Things Harder

Robert I Sutton & Huggy Rao
Penguin Random House
Pp 304, Rs 799