Reforms, an accident that Manmohan Singh leveraged for making a New India: Forbes 29th December 2024

 https://www.forbesindia.com/article/news/reforms-an-accident-that-manmohan-singh-leveraged-for-making-a-new-india/94950/1

Manmohan Singh has been associated with economic reforms which were introduced in 1991, which, in turn, changed the overall landscape of the economy. For the new generation, everything that can be seen in terms of access to foreign brands in consumer goods and dining, ATMs and subsequent enhancements in system of payments, free pricing of IPOs and so on were not something that existed before 1991. The reforms process, hence, was a turning point for the economy where scarcity gave way to surpluses and markets resembled those of the most developed western economy. Singh, as finance minister, showed the way.

Interestingly, there is a little-remembered story behind the reforms process. While Singh is credited with bringing in reforms, it was the coming together of several factors that made them possible. To begin with, the Indian economy was going through tough times with forex reserves depleting. The serving minority government had the game plan of reforms ready, but could not implement the same as Yashwant Sinha, who was the finance minister under Prime Minster Chandrashekhar, could not present a full Budget with the reforms as only an interim one could be put on the table. The IMF [International Monetary Fund] loan that was absolutely necessary would not have come without the reforms and hence, the nation had to wait for the new government under Narasimha Rao to announce the same.

Therefore, the economic reforms which Singh implemented had three factors working. First, the plan was almost already in place under Sinha. Second, the IMF had laid down reforms as a condition for giving the loan and hence there was really no choice as such for India. Third, prime minister Rao gave full support for the same which was significant because there was a sudden and drastic shift in political ideology.

This background was important because Singh was known to be a socialist economist and not one predisposed to markets in his formative years in the profession. Being a professor in economics, the trend in the 70s and 80s tilted towards the socialist model of growth. He had also headed the Planning Commission which was the hallmark of a socialist state. Under these conditions, it was remarkable that Singh shifted his ideology and stance to the changing times and aligned to the free markets dictum which literally pulled the Indian economy up.

So, what are the reforms which were pathbreaking. Three sets come to mind which we probably take for granted. Foremost was liberalisation in industry where enterprise was given a free hand, and the restrictions placed on expansion and diversification were removed. This allowed for higher investment which led to growth.

Second, foreign investment was liberalised. In the 70s, a decision was taken to put severe restrictions on operations of foreign companies in terms of even repatriation which caused brands like IBM and Coca-Cola to close shop. The new package saw the emergence of the common brands we see today like Pepsi, McDonalds, Nike, Adidas, etc.

Third, the exchange rate regime shifted from a fixed rate to a flexible one over a couple of years and logically ended with current account convertibility. Today, one can comfortably buy foreign exchange for travel or education as the limits are more than liberal. This was radically different from the quotas that existed prior to reforms.

Fourth, this focus on liberalisation logically spread to foreign trade where restrictions on imports were relaxed. From total bans to quotas to a system where only tariffs are imposed; the trade system has evolved. Today virtually all legal products can be imported freely, including fruits and vegetables. 

The second set of reforms which were remarkable—and at times have gone beyond what has been done in even the most developed nations—was in the field of financial sector reforms. Starting with banking, where another former RBI (Reserve Bank of India) Governor Narasimham spearheaded the committee, a series of changes were witnessed. Adopting to global standards on prudential norms to opening the field for new private banks, the entire landscape of banking changed. Here, the RBI played a role in bringing about continuous incremental changes so that there were no shocks to the system. At the other end, the reforms brought about changes in the capital market which were much ahead of times, starting with giving more power to SEBI (Securities and Exchange Board of India) to grow the market which was required given the liberalisation that was brought in. This involved the establishment of NSE as an online stock exchange and opening the gates for foreign institutional investors (now called foreign portfolio investors) to invest in Indian markets.

The third set, which came directly under the purview of Singh, was the budgeting process. Fiscal reforms got in the concept of fiscal deficit and in course of time did away with the monetisation of the same. Putting tabs on growth in public debt became a goal and all budgets had numbers that had to be defended as the final deficit numbers had to be reined in.

To the credit of Singh, the package was one of big-bang reforms in all areas which ensured there were no inconsistencies; and all sectors witnessed the same degree of traction. This legacy has carried on through over three decades across different governments in power. This acceptance is a vindication of the idea that was to become the new India.

(The writer is chief economist, Bank of Baroda. Views are personal)

Reforms, an accident that Manmohan Singh leveraged for making a New India

Manmohan Singh's cotrarian thinking l

The case for direct cash transfers: 26th December 2024 Business Line

 

Transiting from 2024 to 2025 will have its uncertainties: Mint 26th December 2024

 https://www.livemint.com/opinion/columns/economy-rbi-repo-rate-fdi-agriculture-private-sector-investment-forex-reserves-tariffs-corporate-tax-inflation-11734502216920.html

Full of sound and fury: what the Bard may have said about 2024: Mint 25th December 2024

 https://www.livemint.com/opinion/online-views/full-of-sound-and-fury-what-the-bard-might-have-said-about-2024-william-shakespeare-2025-rupee-urban-stress-trump-rbi-11734934906970.html

The conundrum of repo rate arguments: Financial Express 14th December 2024

 There is a growing voice that the repo rate needs to be cut; and this message also comes from some of the minutes of the Monetary Policy Committee (MPC) meeting. The advocates of a rate cut have also reiterated that when inflation is high due to food inflation, a high repo rate cannot quite bring down prices of food items. Therefore, logically, the focus should be on growth which could be under pressure.

he important point here is that the MPC has been mandated to target headline inflation at 4% within a band of 2%. This target is cast in stone and bringing in any other consideration may be viewed to be outside its mandate. So, if one wants to leave aside food inflation it would mean going back to the mandate and changing it. There are talks of revising the composition of the consumer price index, which is fair enough. Once done the weights would change, and if food has a lower weight it should reflect in the overall index.

Now, the Reserve Bank of India (RBI) did consciously deviate from this mandate during Covid-19 when it did everything to support growth that in turn would help preserve employment in tough times. So, an exception was made when the repo rate was lowered to 4%. With conditions being normal, it would be hard to justify the stance of doing everything to support growth. Besides, it is generally argued that growth is stable and that the 5.4% number for Q2 was a blip. The projection for GDP growth is still in the range of 6.5-7%, a far cry from the negative growth rates during Covid. Also considering India remains the fastest-growing large economy, the justification of rate cuts to support growth is not fully in place.

The next question to ask is whether cutting the repo rate actually increases lending and hence growth. The theoretical argument is that lower policy rates make banks lower lending rates and industry borrow more to invest leading to higher growth. But in reality, it does not work in this simplistic manner.

The RBI has been publishing what is called the weighted average lending rate (WALR) on fresh loans since 2015-16. This rate is more relevant from the point of view of borrowers as it reflects the actual cost of funds and normally tends to be lower than the quantum of repo rate change. In this nine-year period, on two occasions growth in credit increased when the WALR declined. In 2017-18, the increase in credit growth was 13.3% as against 10% in 2016-17, while in 2021-22 it was 8.6% compared with 5.6% in the previous year. There was otherwise a direct relation between the two.

Interestingly during FY20 and FY21 the WALR came down by 160 basis points (bps) and credit growth was 6.2% and 5.5% respectively. And once the repo rate was hiked following the Ukraine war, the WALR rose cumulatively by 148 bps. Yet credit growth spiked by 15% and 20.2% in FY23 and FY24. This is not surprising because industry does not borrow merely because interest rates are low. Credit is linked to a purpose which is always related to demand. Companies borrow when they need to expand capacity as demand increases. If demand growth is sluggish, there is less incentive to borrow. After all, borrowing and not using the machinery to generate output does impact profitability. This also applies for the retail segment, which has borrowed a lot post-Covid as there was pent-up demand for automobiles and homes as well as consumption that led to more leverage. The cost does not matter here.

An interesting part of the lending cycle is that normally most loans are on floating interest rates. This means the interest rate is reset periodically. These rates are based on either the marginal cost of funds-based lending rate or external benchmark lending rate which can be the repo rate or a government security. As loans are now on floating rates, when anyone takes a loan the rate will vary every year depending on the resets. Hence, the cost will fluctuate during the entire tenure of the term loan. The current interest rate would apply only for the time period when the repo rate is unchanged.

The history of the repo rate shows there are almost the same number of increases and decreases as it varies with the inflation rate. Since 2010 it was raised 23 times and decreased 18 times. The argument that companies don’t borrow because interest rates are presently high is not convincing. Besides, if the economy is doing well and demand is robust, the higher interest cost can be absorbed (the ratio of interest cost to turnover varies from 2-5% in non-finance industries) or passed on. Therefore, to assume that lower interest rates are necessary for credit to increase or for investment may be misplaced.

This also raises the issue of the ideal repo rate. There are studies which talk of a real rate of 1.5-2%. This is something that has to hold over a longer period and not on a monthly basis. Hence if we are targeting 4% inflation, a repo rate of 5.5% or 6% looks fair. But inflation in India tends to be in the region of 4.5-5%, in which case the range of 6-6.5% seems appropriate.

Monetary policy always triggers debate as theoretical arguments on both sides — repo rate induces investment or repo rate lowers inflation are equally strong. If one were a monetarist the inflation argument would be compelling. A Keynesian would pitch for the growth paradigm. Ultimately it is a judgment call taken by the MPC with a lot of subjectivity coming in. This makes the exercise extremely interesting.

The ten trillion dream dented: Financial Express: 15th December 2024

 The $10 Trillion Dream Dented is a thought-provoking book on the state of the economy and future path by a bureaucrat who has worked with the government in probably one of the most important ministries—finance. Subhash Garg, who is a prolific economic commentator in the media today, presents a very balanced view of the economy, though at times is blunt when commenting on both performance and policy. Having worked in the government and overseen various activities, he quotes extensively from published data and shares several insights that could otherwise escape one’s attention.

The title is interesting because it has become quite common to talk of a 5 or 10 trillion economy with timelines being extended when not achieved. This is what Garg has picked up and analysed in great detail. He is critical of these numbers and targets. He is also not too convinced of the ‘developed country’ status, which is to be the final goal when India celebrates its century of independence in 2047. He uses data to show how the task is challenging given that past misses were mainly due to the requisite growth rates not being achieved. One important suggestion he makes in this context is that we need to have some intermediate goal posts when talking of the economy 10 years or 20 years down the line so that we know where we stand which helps for introspection. All his arguments are backed up by data and hence none of the conclusions are impressionistic.

There are some public policies on which he is candid, such as the Covid-induced lockdown. He is critical of the lockdown that affected enterprises, many of which have not recovered till date. This appears a fair point in the narrative because he also uses data to show that our growth has been pushed down to the extent that the incremental output added by USA and China in the last few years is higher than the absolute GDP of the country.

He does some number crunching as well as policy analysis of the two regimes of the incumbent government. He highlights major reforms implemented in the first regime of the government in the form of GST and IBC as impressive. However, the second tenure did not show the same intent or pace of reform. While the conclusion cannot be contested, the point is that there was a major disruption in the form of covid where it may have been difficult to push forward some reforms that were drastic. He, however, is all praise for the digital push, which has been quite transformational. Also, the fiscal correction of off-balance sheet items was a major correction that has made accounts more transparent and easier to interpret.

Purely from the point of view of how economists look at budgets, especially capex, Garg does some dicing of numbers that is enlightening. He explains some subtle nuances that are generally overlooked. He talks of how analysts need to take out loans given to states, for example from the central capex, so as to get the right number as the money would be spent by the states.

Quite cogently he highlights how some part of PSU investment has been shifted to the budget and hence ideally one should look at the combination of central government and PSU investment together. Quite revealingly, the overall number then gets moderated substantially. He also puts on the table the thought that all government expenditure only has a primary effect when it is spent and ends there as there are no secondary effects.

In a similar vein, Garg explores the PLI scheme in detail and concludes that it has not quite been successful if one looks at the actual amount disbursed by the government in the budgets to the 14-odd industries. He concludes that the PLI has hardly made any difference to Indian manufacturing, with the only exception of Apple, which shifted around 10% of its production to India. Otherwise both the Make in India campaign and PLI scheme have not really uplifted Indian manufacturing.

On the fiscal side he is quite critical of the budgetary deficits, though admittedly they rose mainly during the Covid period. There is hence an explanation here. His view is that there has been too much of centralisation from the point of view of the tax system where cess and surcharges have gone up, which is not shared with states. This he believes is against the spirit of federalism as it puts them at a disadvantage. This is also a view which has been voiced by some sections where it has been argued that all of them should be abolished and subsumed in the existing tax structures.

His narrative hence weaves all these pieces together to show the faultlines, so as to call them, which need to be covered to ensure that the growth goals are achieved. He does get too critical at times when he highlights through IMF and World Bank numbers on GDP that India may still be underperforming compared with other nations like Vietnam or Sri Lanka. This is why it is necessary to set intermediate goals so that there can be review along the way given that the Viksit Bharat goal is still two decades away.

If one gets a sense that Garg tends to get too critical, he compensates very well with his suggestions. This probably is the best part of the narrative, because often economists tend to critically analyse all developments but have less to say about solutions. Here the author covers almost 50 areas that need to be worked on where he provides answers to the questions. He is for less government in activity, which the private sector should be in, favouring large-scale privatisation, which also includes letting private players take over new financial institutions that have been set up. Similarly, keeping a track of the very poor and providing direct cash transfers is a sensible solution with intervention for the rest only when the vulnerable turn poor temporarily.

Such a thought process also supports removing shackles from agriculture and also doing away with the large-scale operations of the government through MSP. A sin tax of 24% on pollutants at every stage of production is another rather bold step that he suggests, though this can have an inflation impact as these costs tend to be offloaded on customers finally. There are similarly reforms spoken of for the tax system. Being part of the budget making process, Garg’s ideas do get more credence.

The $10 Trillion Dream Dented is a data-driven, well-researched book that should make policy makers and analysts think deeper. While applauding the achievements of the government, Garg does not hesitate to show the mirror when it is required. His solutions are cogent and to the point and would certainly spark a fresh round of discussion at the policy level. Students will be delighted as the book talks about the last decade through numbers, analysis and solutions—a true omnibus.

Book details:

The $10 Trillion Dream Dented: The State of the Indian Economy and Reforms in Modi 2.0 (2019-2024)

Subhash Chandra Garg

Penguin Random House

Pp 424, Rs 999

IT's time the centre's employment push changed gears: NDTV 13th December 2024

 https://www.ndtv.com/opinion/centres-employment-push-should-shift-gears-now-7237968

In with the new: Indian Express 11th December 2024

 

Steering RBI through turbulent times: Business Line 11th December 2024

 

Maha Kumbh Mela Will Boost Economy Of Uttar Pradesh: Free Press Journal 7th December 2024

 

The Maha Kumbh Mela would be probably the biggest social extravaganza in the country in the ordinary course of activity. This is because it is a periodic event and is quite predictable. Unlike the IPL or any big sporting event, this festival brings people from across the country to one single location based on faith and belief. It is probably the largest congregation of people in the world which is expected to be around 400 mn over a period of 45 days starting on January 13 right through February 26. This festival has historically been an exposition of how good India is in planning such events which generally goes off very smoothly notwithstanding the numbers and logistics involved. Needless to say, it creates a temporary economy for this period of time covering a vast multitude of economic activity. Specifically it would provide a boost to the economies of Uttar Pradesh and hence India. Hence, going beyond faith, the event is very significant for the economy at large.

The Mahakumbh festival comes every 12 years while smaller gatherings take place periodically, with Haridwar, Nashik and Ujjain being the other centres. The economic impact can be gauged from the fact that over 400 million visitors including pilgrims would be visiting Prayagraj on this occasion. This is much higher than the 250 mn which visited in the last festival. In fact, the number would be higher than the overall population of Uttar Pradesh which is around 250-260 mn. The festival attracts a large number of overseas visitors and the accommodation that has been created aligns with the varied backgrounds of visitors.

 

Preparations for this festival from the government started from April onwards and has reached its peak in November. The first thought which will strike the reader is the amount of money that would be involved in this festival. As 400 million people would be visiting and coming from far and wide (besides the local population which would almost certainly be present), spending for travel and food (excluding stay) would mean a minimum expenditure of between Rs 20,000-30,000 crore assuming Rs 500-750 is spent on a per capita basis. This is so as there would be several families coming to engage in these celebrations. The amount spent could be much higher.

Let us look at the hospitality business which would witness a major boost. It has been reported that there would be over 2000 luxury tents set up in this area as well as over 25,000 public accommodation. Besides, these structures which would be put up, there would be several hotels in Prayagraj as well in its vicinity which would offer space for visitors and also include homestays which are registered for this purpose. The rates vary from as low as Rs 2500 to Rs 25,000 per night depending on the amenities that are provided. The overall business would vary between Rs 1500-2000 crore over this time period.

 

In terms of softer infrastructure, the preparations include nearly 70,000 additional street lights to facilitate movement from the river to the various tents/hotels/home stays. To ensure that security is tight around 23,000 CCTVs are to be installed. This will provide a major boost to the suppliers of these services/products. Over 7,000 roadways buses, 550 shuttle buses, and 3,000 trains would be plying during the course of the festival which can give an idea of the revenue to be generated by each of these facilities. It may be assumed that most of these vehicles would be rented and hence may not directly lead to purchases of vehicles. The hiring costs would work out to around Rs 500 crore for these 45 days. The railways would also simultaneously be generating revenue due to movement of pilgrims/visitors.

 

Intuitively it can be conjectured that the travel and tourism industry would be one of the biggest beneficiaries of this extravaganza as it would also mean ensuring the upkeep with a large retinue of staff which could be temporary. The authorities have spoken of erecting over 1.5 lakh toilets to cater to the requirements of the visitors which is a boost for the manufacturers of such facilities. There is also mention of over 10,000 staff being hired to maintain the hygiene in these toilets. Demand for these facilities would be on the rise providing a boost to the producers of these mobile toilets. The project for cleanliness has been valued at around Rs 240 crore.

Add to this the fact that another 25,000 craftsmen have been involved in doing up the decorations as well as statues/paintings that go along with such festivities, and one can get a feel of the high employment being generated by the event. This festival hence would be a very good platform for employment of gig workers in both the skilled and unskilled spaces. Besides, these specialists jobs, the government administration has put out advertisements for hiring specialists in areas of event coordination, customer support, logistics support etc. with these jobs being for a period of three months. An advertisement put out for recruitment of Kumbh fellows speaks of hiring qualified persons for specialist jobs with a remuneration of Rs 40,000 per month for 6 months.

The local authority has also focused on the catering requirement for this event. This has involved in getting all the street vendors together and educating them about the logistics involved as well as the hygienic conditions that have to be maintained all through the period. This will be a boost to the micro enterprises as most of them would be this category as there will be steady business during this period. In fact, other vendors of religious artefacts and emblems, toys, decorations etc. would flourish and would be in the realm of micro-shops.

The government on its part has been involved in cleaning up the city and upgrading the roads which would be used for travel to the river for these many tourists. Hence, this is another boost being provided to the Kumbh economy which will also address the issue of capex spending by the state government. The focus has been on constructing new roads and bridges through the breadth of Prayagraj which is essential to facilitate smooth movement of visitors. These are permanent structures and would add to the infrastructure wealth of the state.

Hence, the UP economy would be well positioned to register higher growth on account of the festival. Anecdotally, any extravaganza which attracts large audiences and creates new structures provides a boost to the local economy. The Olympics have been an example of adding significant growth impetus to the countries organising the same. As has been seen here, the Maha Kumbh Mela will provide the right push the economy which augurs well for the state and the nation.

 

pivot-wait-credit-policy-points-to-a-rate-cut-in-february-: Livemint 6th December 2024

 https://www.livemint.com/opinion/online-views/pivot-wait-credit-policy-points-to-a-rate-cut-in-february-rbi-monetary-cash-reserve-ratio-inflation-shaktikanta-das-11733408010166.html

Simplifying inflation isn't simple: Economic Times: 6th December 2024

 

Resolving the base year conundrum: Businessline 5th December 2024

 

Q2 GDP numbers have positive takeaways": Financial Express: 2nd December 2024

 The GDP numbers for Q2FY25 came as a major surprise as no forecaster predicted a figure close to 5.4%. But there are several positives when one looks closer. Sector-wise analysis shows that four of the eight did better than last year while one recorded high growth on a high base, though numerically lower.

Thus, higher growth can be expected in Q3, when the crop is harvested. Add to this the high reservoir levels, and this means that the rabi crop can be expected to be very good in the absence of any weather shocks in March-April. Hence, the rural story can only get better in H2, which is positive for consumption. This bodes well for fertilisers and other inputs on the supply side and two-wheelers, tractors, electronics, and consumer goods on the demand side.

Second, the services sector has posted higher growth rates this quarter. The trade, transport, hospitality, and communication segments grew by 6% over 4.5% last year. This is indicative of the spending seen this quarter, which will only accelerate in the coming months. There has been a major push in the “experience spending” by households this season, which will manifest in continued expansion. The Q2 numbers do not capture the festive spending, which has shown enhanced sales both in physical outlets as well as e-commerce sites.

The finance and real estate sector grew by 6.7% compared to 6.2% last year. It should be remembered that this was also the period of slower growth in bank deposits as savers migrated to capital markets, keeping growth subdued. This had been reversed subsequently, and higher growth can be expected in H2. Further, the economy is now in the conventional busy season, where demand for credit picks up. This can be seen in the rather stable growth in credit to large industry as of October. Therefore, higher growth in this segment may be expected in Q2.

The third component — public administration, personal services, and defence — recorded the highest growth rate of 9.2% across the sector over 7.7% last year. A significant component here is government expenditure, which was subdued in November. In fact, government spending was slow in the first few months of the year and has picked up quite sharply in the last couple of months. This means that the tempo of growth will be maintained as the different departments work to meet expenditure targets.

Therefore, the picture on two major segments — agriculture and services — is positive, with little apprehension. Then where has the problem been? The value added from construction was lower at 7.7%, which is impressive as it follows 13.6% growth from last year. Prospects here are linked with both road construction (in the government’s purview) as well as housing, which witnessed a lull in September but has since picked up during the festive season. This means that the underperformer has been industry, which includes mining, manufacturing, and electricity.

In case of mining and electricity, growth was 0.1% and 3.3% respectively. Here, the base effects were stark, at 11.5% and 11.1% respectively. While these segments did pull down overall growth in industry and GDP, the statistical base effect did play a role. These statistical effects are important insofar as future growth rates of segments in industry and services can be influenced by them, as the overall economic growth was high at 8.2% last year. 

In fact, electricity consumption was high in Q2 until mid-August due to extreme heat conditions in several states, pushing up demand, which does not get captured. Further, mining typically slows down during monsoon. It can be expected that production would get better in H2.

This leaves manufacturing, which has been the major under-performing sector. It has a weight of 17-18% in gross value added (GVA). Here, the performance has been K-shaped, with some sectors doing well and others lagging. This is revealed in the profit and loss accounts of companies for Q2. This has been the single most important factor for pulling down growth, as profitability has been low at the aggregate level. Sectors such as steel, refinery, chemicals, etc. have recorded lower growth in profits, which has affected value addition.

The government too has done some subsidy front-loading this quarter, as can be seen in the monthly budgetary accounts. This has created a negative wedge between GVA and GDP growth. Therefore, while the Q2 numbers are a negative surprise, the internals reveal stable growth in several segments. Consumption growth at 9.6% in nominal terms is higher than that of nominal GDP growth, which is a positive sign.

Based on farm prospects as well as the government’s aim to meet budgetary outlays, H2 growth would be higher. The risk factor would be corporates, also facing rising input costs. Besides, the base effects of high growth of 8.6% and 7.8% in H2FY24 will also affect the future growth numbers. Based on the buoyancy seen in services in particular and a possible rebound in industry to an extent, growth of around 7.5% in H2 cannot be ruled out. This can make the overall growth average around 6.6-6.8%, which, though lower than earlier projections of above 7%, would provide a base for stronger growth in FY26.