Growth targeting: Should the monetary policy framework be reviewed? Financial Express 29th March 2019

Is it time to revisit the mandate of the MPC? The MPC had to target CPI inflation at 4% within a band of 2% on either side. Over the last two years or so, interpretation became hard for the market as different decisions and stances were taken on this number based on the distance from this norm. Further, inflationary expectations, too, kept the market guessing as policy outcomes would be different based on the same conjectures. To top it all off, the MPC also provided a stance which could be viewed as either neutral or one of calibrated tightening. The earlier lament of slow transmission exists even today. And, above all, singular targeting of inflation had, at times, led to growth being given a pass which was a view expressed by industry. It may hence be useful to relook at the principles.

Certain questions need to be posed. Firstly, is the CPI inflation the best inflation index to target or should we look at another indicator? Secondly, how often can the stance of policy change and can it be parameterised? Thirdly, should there be an inflation forecast every two months or should it be not more than twice a year? Fourthly, should growth enter the mandate of the MPC so that it is not just inflation that is being targeted?

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Using the CPI for tackling inflation through monetary measures runs the challenge of targeting a number over which monetary policy has little control. The weight of food items in this index is 46%, which is not affected by interest rates as rarely does one borrow to buy food. Other components like clothing, rent, medical, entertainment, education, fuel, etc, also are not driven by credit. Therefore, in a situation of rising inflation, increasing the repo rate with very good transmission is unlikely to bring inflation down.

The anomaly is stark when one looks at the factors that drove core inflation up in recent months. Rent is actually reckoned on the basis of cost of government employees that went up due to the Pay Commission’s recommendations. It is notional and is not reflective of inflation per se. More recently, the health and education indices increased which also cannot be tackled by monetary policy. These charges get revised periodically where fees of professional institutes are increased as are medical service charges.

The WPI is always a better inflation target because it is influenced by cost of funds as around 64% of its weight resides in manufactured goods. It, however, excludes services which can add to inflation as has been the case with the rent, health and education indices. Alternatively, it may be useful to create a new price index that reflects all sectors and aligns with the GDP composition (see attached graphic). This is the only way to make monetary policy effective as it can curb excess demand forces across the economy. Presently, most of the inflationary impulses emanate from the supply side where costs increase.

The stance of the policy has come to be interpreted as the possible change of direction in the coming months. Ideally any ‘stance’ should remain for some time unless there is a shock of an immense nature. The idea of a stance is that it has to be forward-looking and a precursor of future action taken before the change is invoked. Presently, there has been a tendency to make a change in rates accompanied with a change in stance which then makes the concept of stance amorphous. The third part of the policy is the inflation forecast. Can the forecast change every time the policy is announced? Ideally, such forecasts should be once or twice a year with the second one being a review along the way. The forecasts cannot be changing every two months, especially if there is a range being provided. Constant changes in forecasts cause volatility in the market that then tries guessing future rate actions as these forecasts have had a bearing on policy.

Curiously, ever since the monetary policy framework has been put in place, by a matter of coincidence, inflation has remained low at around 4% which was not the case earlier when CPI witnessed successive increases in the range of above 8% (2009-13). The policy, stance and forecasts have worked well so far as the inflation number has gravitated to 4% with the market guessing whether rate cuts happen when actual inflation comes down or expectations come down. It would be interesting to see how rates react when inflation soars, which is possible if there is a monsoon shock or oil prices start moving up.

The last consideration is whether inflation targeting should be the only variable that is looked at or should growth be as well. It has been seen that the critique of monetary policy has often had political language that borders around obsessions with inflation to the neglect of growth. If that is the case, should there be change in the legislative action that also includes growth as a variable to be targeted? It may be recollected that, in the past, monetary policy always spoke of growth and inflation and while there was no overt target for inflation, the general direction of movement of prices provided a clue on what the policy would be like.

The growth versus inflation dilemma has also been witnessed in the US where its president has been vocal in pointing a finger at the Federal Reserve. It is normally believed that interest rates are a panacea for growth. But this did not quite work out post the financial crisis where the Fed had to resort to unconventional measures to stimulate growth through quantitative easing programmes. If it is to enter the frame then, it would be necessary to state specific numbers that have to be targeted, which can be 7.5% or 8%. But then, balancing the two targets will be more complex.

Quite clearly, there is a need to revisit the framework. Firstly, the economic conditions have been quite congenial so far and have not tested stressful positions. Hence, if inflation starts going up due to a bad toor crop, and inches towards 6%, should there be a series of increases in rates? Further, if inflation moves towards 10%, then should the repo rate be closer to 8% or 9%? These questions would arise when the situation gets sticky. Secondly, the current battle against inflation is out of sync with the power of monetary policy. Higher rates cannot change prices of food, or medical treatment or education or rent. Therefore, a new index can be considered. Thirdly, continuous revisions in forecasts of inflation can create uncertainty in markets and hence should be limited. Lastly, some growth perspective should also be part of the monetary policy package if the government feels it is important.

The experiment, so far, has worked well under virtually no stress conditions. It may be useful to revisit the framework and make alterations if required to make it more inclusive. This would mean moving away from exclusively being monetarist to the neo-classical.

Book Review: The Wisdom of Finance by Mihir Desai Financial Express 24th March 2019

The subject of finance is interesting as it involves, at the end of the day, dealing with money and making profit irrespective of whether it is an individual or a company. The subject and the terminology could, however, be hard to understand at times. This is so because even though the concepts are plain enough, they are cloaked with a lot of jargon, which is so in any subject. We all know what is ‘risk’ and the dangers of taking too much of it in life; and as a corollary the need to mitigate the same. But as a practitioner, it is a challenge because there is a lot of theory that goes into it and when everyone plays along, all cannot gain. This is what has engendered a lot of interest in the subject. Also, almost any major economic upheaval in the world in the last century has germinated in some aspect of finance that has caused serious disruption through market failure.

There are different ways of approaching the subject, especially for a beginner. Standard books take you through the maze through arithmetic, graphs and all the jazz. When you read Mihir Desai’s book titled The Wisdom of Finance, you would be enthused because the approach is different. It is a storybook-kind of narration, where he takes us through some of the major concepts and relates them to novels, TV shows, movies and political developments. The concept of an ‘option’ in finance is quite rudimentary as it gives the person exercising it the right, but not the obligation, to go ahead and consummate a deal that has been entered into. When the author relates this to marriages in the novel Pride and Prejudice, the comparison looks agreeable as marriages in the western world (though not necessarily in India) would always be guided by this principle. But this is where the analogy ends, as further elaboration is missing.

The parable of ‘Jesus and the talents’ is used to explain what ‘value’ is. If I give you something and you return nothing more after a period of time, then you are a failure and are to be condemned. The same holds when your money is invested by, say, a mutual fund or a PE fund, which does not deliver an acceptable return. The person who you trusted your money with has not created value for you. Hence, investors expect something more than what was initially put on the table to agree that value has been created. Again, this sounds good, but the reader can say, “But, what next?”

Similarly, Desai extends this story to ‘becoming a producer’ where the principal-agent relation is explained well. The owners are seldom the managers, who create conflict of interest, as while the latter are to work for the former, one can never know. He gives the example of a situation where the CEO, who could be Tim Cook, decides to shift his office to the poshest part of Manhattan, which costs a bomb. Is that self-serving or is it for the better image of the company?

Hence, the book picks up some basic, though interesting, concepts in finance and gives interesting stories of how subjects like insurance came into the picture or how leverage is not bad and works well to create value and is, hence, useful. The latter is important because such an act was always historically considered to be perverse and was a hush affair without fair connotations. Shakespeare’s Merchant of Venice example is given to show how this works along with the implications. In fact, there are stories also on bankruptcy and how they are to be resolved, and in this context, Desai shows how Robert Morris, who was to feature on the dollar notes, finally went into oblivion due to bankruptcy!

There is another interesting story woven around the theme of ‘no romance without finance’. For one who has seen Harrison Ford and Melanie Griffith in the film Working Girl, this would appeal. Desai then goes on to explain at a completely different level the relation between the automobile manufacturer Ford, and Firestone, the tyre manufacturer, whose partnership did not last and ended in divorce due to commercial incompatibility, though the marriage in the family was cast in stone and candied with romance.

The book, hence, links common-day occurrences with various concepts of finance, which makes understanding easy. But the complaint could be that the concepts per se are rudimentary and it is only their working or interpretation that has become difficult of late with the complexities of mathematics and modelling that appear to pervade their presentation. Here, the reader would receive little assistance.

Desai, nonetheless, must be complimented for attempting to explain finance in a rather innovative way. The reader should not expect too much detail of how things work as it is the principles that have been linked to everyday instances. A problem with the book could be that the stories narrated resonate well only if the reader is familiar with them. Otherwise, it could mean moving from one dark corner to another searching for the light that is being attempted to be shown. So if you want to know what an option is, this is the place to go. But if one wants to understand the way they work or are priced and how they have failed, then the search for answers would be outside these pages.

Monetary policy: What to expect from the RBI? Free Press Journal 23rd March 2019

The upcoming credit policy to be announced on April 4th is quite crucial because of its timing. With the Elections to kick start in the same month leading to the appointment of a new government, there are expectations of further liberalisation in interest rates in an attempt to further growth. The decision is, of course, with the Monetary Policy Committee which is independent and has no political leanings.

Yet speculation is rife that there will be a rate cut especially so since the RBI had flagged growth as being a concern and the latest GDP forecasts for the year have been less encouraging with growth to be 7% in FY19. The link between rate cuts and growth has been quite ambiguous as decisions to invest are taken on other grounds as well especially those surrounding demand conditions.

Therefore, in the past, rate cuts have not led to higher investment and growth. The RBI has often nudged banks to improve the transmission process which is hard because when rates are cut, deposit rates need to come down first. Further, when deposit rates are reduced, they become effective only when deposits are renewed or are fresh. Existing deposits cannot be re-priced as it is a fixed rate contract between the deposit holder and bank.

On the other hand, lending rates get invoked on virtually all loans when the MCLR changes. Therefore, banks are slow to let the transmission flow. An interesting step taken by the SBI is of linking savings deposits of over Rs 1 lakh with the repo rate as part of the policy to use external benchmarks for determining interest rates. It would be interesting to see how deposit holders behave.

In the past, deposit holders have shown inertia and do not move from one bank to another even when savings interest rates are higher. However, in this case, there is a chance of savers using the sweep facility on term deposits which can increase the cost for the bank.

While the MPC may be inclined to push for a further rate cut based on the inflation numbers being benign and not looking likely to increase any time soon, they should also look at the savings side. Financial savings in the country have been coming down and within this category there has been volatility in the quantum of deposits held by households.

A declining interest rate regime is not good for savers who tend to move over to more risky assets with mutual funds being the more likely deviation.

This has led to an influx of funds into this avenue that has spiked the bond and stock market. But the result has not been good for the banking system. In FY19 so far, there has been an anomaly all through. Lower deposit rates have caused a migration of funds from banks to mutual funds. The situation looked stable to begin with as long as bank credit did not grow.

However, once credit grew especially at the retail end, there were chronic shortages of funds in the system that led to RBI intervention. To begin with, it was the repo window used to inject temporary liquidity which became durable when the central bank carried out regular OMO operations to buy government securities from banks which so far is around Rs 3 lakh crore.

The recent measure to let banks swap their forex balances up to $ 5 bn for cash for three years is another attempt to balance liquidity. Hence, every time deposit rates are going to be lowered, the pressure may fall back on the central bank to remonetise the system as deposits growth slows down. This is a call which the MPC has to take when debating on lowering of interest rates.

Two other things to look out for from the economic standpoint will be the RBI view on growth and inflation. The RBI tends to be more balanced when taking a stance on GDP growth which will be crucial as this is a starting point for a lot of business firms. The Union Budget had spoken of growth of 11.5% in nominal terms which could broadly be taken to be 7.5% in GDP and 4% in inflation.

The RBI also gives periodic forecasts on inflation which will come up for review. With not much known on the monsoons and global commodity prices looking fairly benign, no known shocks are expected this year and hence the inflation target would hover at less than 4% for most of the time.

The RBI’s view on the pre-elections economy will be interesting to know as there will be substantial spending in the next couple of months which combined with the benefits announced by various governments – state and central on loan waivers, cash transfers, regular distribution of goods to the poor etc will tend to have an impact on the economy.

All this gets also into the fiscal deficit numbers of the governments which can lend an upward bias on inflation. Therefore, the markets would be looking at not just the major announcements but also the language of the central bank in this policy which is the last one before a new government takes is formed.

Curbing black money, GDP growth don’t solve problems of common man: Financial Express 20th March 2019

In this context, the economic indicators that prevailed just prior to the elections can be examined in the last five elections to deduce whether macro indicators matter or not. Hence, for the 1996 elections, the GDP growth of 7.3% is for FY96 and 6.4% for FY95.

With a blitzkrieg of publicity on the achievements of the Central government in the areas of health, education, housing, insurance, etc, it is pertinent to ask the question as to whether or not economics matters when shaping the outcome of an election. The coming general elections will be important from two points of view. Firstly, the record of policies introduced has been amazing with there being probably zero faults. Secondly, a number of economic indicators present a good picture but it is still not clear whether they will matter.

In this context, the economic indicators that prevailed just prior to the elections can be examined in the last five elections to deduce whether macro indicators matter or not. Hence, for the 1996 elections, the GDP growth of 7.3% is for FY96 and 6.4% for FY95.

In 1996, the Congress lost power even while the GDP growth of that year was higher. Government spending was high but inflation was nasty. The 1998 elections were won by the BJP which, consequently, fell and economic indicators were not the driver when the IK Gujral government collapsed.
Inflation had moderated to 6.84% but that did not matter. The last 4 elections that ran their full terms can be considered to be the test for the macro indicators as they were turning points for the respective governments.

The BJP came to power in 1999 on the back of higher GDP growth but very high inflation of 13.1%. This was the time when farm output had also climbed, thereby meaning that the rural community was happy. As it was a BJP government that fell and came back to power with a better majority, it looks unlikely that the economics mattered.

The 2004 elections was interesting because the ‘India Shining’ story of the BJP was bright with very high economic growth and low inflation supported by high farm output growth and a high deficit but which also meant liberal spending. Inflation, too, was very low and should have placated the electorate. Yet the government fell.

In 2009, the Congress went through the lowest GDP growth rate with a fall in output and very high inflation of 9.1%. But the government was voted back to power which was an achievement. The fiscal deficit was higher on the back of the stimulus being pursued by the government post the financial crisis. Here again, the macro indicators did not worry the electorate which voted the Congress back to power. The 2014 elections voted for change and, while the economy clocked higher growth in farm output and GDP on the whole, with support from the budget, the Congress was voted out of power. Inflation was high and could have worked against the incumbent government.

Hence, there does not appear to be a direct relationship with the macro variables which could be pointing in a very different direction. In the present scenario, the government has the advantage of very low inflation but has to face the challenge of slowing growth which means a lower pace of job creation, some farm distress and conservative budgets with the fiscal deficit at an all-time low of 3.4% in a pre-election year.

Hence, to make up for this weakness, there has been relentless advocating of the government’s achievements in the social welfare area, which includes health, education, affordable housing, rural employment, farm insurance, etc, in order to send the right signals to the people.

The reaction of people is hard to guess. In India, with a federal structure, a large part of the electorate may not be able to distinguish between the roles of the different layers of the government and could tend to attribute the gains and losses to a single government i.e, the Central one. They may not be swayed by announcements of schemes or achievements in numbers and might be more likely to vote for the government in case there has been a direct benefit gained from a concerned programme.

What will work for the government is the following: cash transfers as announced in the budget will be helpful to secure votes as it is a direct benefit. The smart move was to have this scheme introduced for FY19 itself which was not in the original budget so that the people know they are getting `2,000 this time which will be topped to `6,000 next year. The peculiar thing is that, once introduced, such schemes cannot be withdrawn and are also taken for granted and may not deliver additional brownie points for the next government in power. This happened for NREGA which worked the first time but then became part of the system.

Insurance for individual families and farmers will work only in case people see benefits in terms of claims getting settled. Otherwise, they would be mere numbers spoken about which the voters may not be able to relate to. Hence, creation of toilets will not garner votes unless it is actually being used by the public. Incomplete toilets or those without lights and water will only lead to scepticism of the project and can become a negative factor.

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While debates on job creation can continue, the proof will be in the voters getting such a benefit. If jobs lost during demonetisation and GST have not just been recovered but accelerated, people will commend the policy. Otherwise, it is not of much importance just like, say, how India flexes its economic muscle on the global stage. Curbing black money does not solve the problems of the man on the street unless it results in a tangible gain for the individual. That is why GDP growth numbers do not really matter nor does the DoingBusiness rank or reforms brought in for industry.

Slogans like Make-in-India work at the corporate level but not for the voter who is more interested in work, income, health, education and so on.

Inflation of 2-3% is not relevant as the voter gets swayed by potato or onion or toor dal prices increasing—even if it is just one product.

Therefore, factors which drive the voter will be different and would be based on actual benefits delivered. This will be besides the decisive issues of religion, caste, regional identity, cow preservation, temples and so on. True, today, with competitive largesse being promised by all parties, there would be confusion. Loan waivers by state governments and promises of more by all parties in all states can be jarring and may not strike the right cord unless it is actually given.

The so-called elites, which may be less than 5% of the voting population, would be looking at the macro indicators which do not matter at the end of the day. In a way, it can be argued that microeconomics matters more than the macros, which are meant for the elites who do not count in the voting process. That is why the language of the government in the last 4 months or so is geared towards practical issues.

How to Rig an Election| Account of how polls are often a farce: Financial Express 17th March 2019

Rigging an election is done broadly in six ways and is an eye-opener, as it can happen even in western countries. The first is ‘gerrymandering’, where the district borders are redrawn, so that there is a mismatch between the votes polled and seats won

he book, How to Rig an Election, is a very interesting one on how despots use the phenomenon of elections to showcase to the world that they run democracies. The authors, Nic Cheeseman and Brian Klaas, base this book on the inside stories of elections held in different countries over the years.

Both the rise of despotism and the attempt to turn democratic have taken place due to external pressures. The Cold War was a turning point when most of the countries in Latin America, Africa, eastern Europe and parts of Asia turned despotic, with both the USA and erstwhile USSR propping regimes to maintain democratic or communist regimes. The turning point, according to the authors, was the 1990s when the Soviet Union collapsed and triggered a race for democracy. But it was western pressure that made dictators try and put up a facade that they were democratic, and the best way to do so was to hold elections. Moreover, with the World Bank and the IMF providing aid on preconditions laid in the form of governance, the despots were forced to show that they held fair elections.

We, in India, often witness how the ruling governments before the elections offer freebies and make lofty promises to the poor in exchange for votes. Budgets are also earmarked for this exercise. This, according to Cheeseman and Klaas, are legitimate means and do not interfere with the democratic processes. What then constitutes rigging?

Rigging an election is done broadly in six ways and is an eye-opener, as it can happen even in western countries. The first is ‘gerrymandering’, where the district borders are redrawn, so that there is a mismatch between the votes polled and seats won. Here, the authors show that even a country like the US has not been free of this phenomenon. They call it the case of the “foxes guarding the henhouses”.

The second is where votes are bought by giving money. This is an expensive process and one can still not be sure of the outcome, as people can take the money or gifts, as they do in Africa, and still vote for someone else. Often, money earned through corruption is used for this purpose. While despots may try and see who votes for which party at times, this may backfire due to great global scrutiny and is usually avoided. At times, to ensure that people take the money and vote for them, communal punishment is used when the autocrat comes to power and the village that has not voted is taught a lesson.

Third, the autocrat can ensure that the opposition is not able to compete by excluding their names, or more hilariously, have similar-named people standing to mislead voters. At times, the opposition leaders are beaten up to ensure that they are not seen. In Madagascar, the opposition leader’s plane was not allowed to land and he could not enrol, while in Pakistan, the main challenger was assassinated.

If these three are not possible, then the elections can be hacked, as was done in Azerbaijan, where the people got to know the results before the polls opened. This is how the electronic route is used to rig elections. Fake news is used effectively to give the impression that the autocrat has all the votes, which becomes self-fulfilling. The controversy regarding the infamous Cambridge Analytica is pertinent here, which was used effectively in the last US elections.

Fifth, stuffing the ballot box is the more obvious way, where people are intimidated and not allowed to vote, but their votes stuffed in the box. In Liberia, the autocrat got 17 times the number of voters! In some districts in Uganda, 100% of voters voted for the ruling president. Also, negative votes can be excluded in counting or just dumped in dustbins, as was done in the recent Turkish referendum by the AKP party.

And last is to ‘play the international community’, which legitimises the polls. This is done especially when the country is of strategic political importance, like one owning oil, where such endorsements are given. This is done through the Potemkin route, where foreign agencies involved are selectively shown how well the elections have been conducted, so that there is an endorsement from the west.

The question is, why do despots rig elections? Normally, when autocrats are known for corruption and cruelty, they are too scared to be replaced by legitimate rule, as they would be killed by the new regime. Moreover, all the regimes get money from the west and keep the army happy, which, in turn, ensures there is no opposition. If power is lost, there would be physical danger for them. Therefore, they have to ensure that they continue to be in power and, hence, rig elections.

The authors have found that while more countries are getting democratic, on a scale of 1 to 10—where 10 has the fairest elections—the average would be just 6, and in continents like Africa, it would go down to 5. In 2016, almost twice the number of countries became authoritarian than democratic.

The way out is to have effective systems for voting (electronic, where India scores), close monitoring and evolution of civil society. While the authors have spoken of what has to be done, the message is that checking rigging of elections will not be easy until these countervailing forces are balanced. Also, the influence of the west may be declining and with the power of countries like China and Russia increasing, we may be going a few steps back on the basis of external pressure to have fair elections. This makes it hard to be very optimistic about the future

Trade face-off: Asian Age 11th March 2019

The Trump administration’s decision to take India off preferential trade list has triggered the talk of India imposing retaliatory duties on US goods. Care ratings chief economist Madan Sabnavis feels India must not take decision without understanding the consequences.

The Generalised System of Preferences (GSP) is a set of trade laws in the United States of America introduced some four and a half decades back in 1974. Under the GSP, the US allows imports of various goods from a set of over 120 developing countries at zero tariffs. The idea was two-fold. The first was to enable developing countries to increase their exports and growth and second to get in cheaper imports that would lower domestic cost of production as the goods covered were mainly raw materials and intermediate goods. It was hence a win-win situation for all.

India has been singled out by President Donald Trump for keeping tariffs on US goods high and making laws restrictive in terms of fostering trade and investment. In fact when Mr Trump took over as the President his trade related objective was to straighten out such unequal practices of trading partners and while China was the main target, India did not escape notice. While the initial objection was on export of automobiles to India (the Harley Davidson case), it came down to medical products, dairy goods etc. among others. While the FDI rules relating to ecommerce did not get specific mention, the US is not too happy over the new rules which affect Amazon.

By taking India off the list, exports of $5.6 billion would be affected in leather products, carpets, textiles, gems and jewellery etc. The US is a major trade hub for India and exports are valued at around $50 billion. The government has argued that this is just 10 per cent of exports to the US and the cost would be $190 million which is not much when we look at the larger picture. Individual industry units would get affected by this move of the US even though aggregate exports may not get impacted significantly. The argument is that with the tariffs coming in, their relative export competitiveness would get affected which can make other country imports to US cheaper. This cannot be ruled out. And given that these products typically have inelastic demand, getting replacement markets will not be easy.

How is one to look at this issue? To begin with it must be said that getting extra privileges under the GSP is quite anachronistic as India is no longer the country it was in 1974. We do lay claims to being the fastest growing economy and along with BRICS have sufficient economic clout in the world economy as well as at WTO. Therefore, it is time we moved out of this shelter.

Second, being a sovereign nation, India has a right to decide on its trade rules and hence should not bend back for the US. This was a case of standing by our principles and not getting pushed around. This is important because when GSP was introduced at no stage did the US talk of reciprocal rights. This has been an addition brought by Mr Trump and hence was new.

Third, Indian exporters too need to be pushed to become more competitive and look for more markets rather than depend on the US only. As long as there is an implicit protection, there would be less drive to become self-reliant.

On the other side from the point of view of exporters which would tend to be in the SME sector, this comes as a shock. Although this was on the cards, it was assumed that it would be excused just as China has been given some more time for negotiation. The 60 days period for us is too short to expect any change of stance. The Indian exporters have always been crying for relief from the government as they have several disadvantages in the international market. Therefore instead of getting support, they have to fend for themselves and would expect the government to come up with some alternative package for them just like they do for other sector like textiles or sugar or steel. It may pointed out that most of the goods affected are labour intensive and hence can lead to some employment challenges if these exports are not made up. Also, for the present China can leverage this loss of GSP status for India to push their goods to the US at a lower cost.

The US position is also quite singular. At a time when it is fighting a hard trade battle with China, it may have been expected that it would cosy up to India. But it does appear that President Trump is more keen on furthering his policy of equal trade treatment by its partners. India may not be a big exporter for the US at around $50 billion but there is a deficit run (around $24-27 billion) which makes it important.

At the broader level, India may have to be more flexible with the trade relations with the US as GSP has to be seen with respect to both political issues as well as future investment. At the political side, the US need to be made an ally especially with hostile neighbours which includes China. While non-alignment is the stated policy, taking a flexible stance on issues like tariff could help India in the long run.

The other part is that if there is any thought of retaliation with the US on the trade front, it would affect us more as it is our major export market and with India competing with countries like Bangladesh, Sri Lanka, China, and East Asia, there could be further repercussions.

On the investment front too, India may have to relook at its policies as we need more of such flows and the policies pursued in the past have been less friendly at a time when funds have other options. Therefore, there is a view that we should also be ready to talk rather than be brash about FDI in the name of protectionism especially in case of ecommerce as it sends wrong messages which can take the flows away from the country.

While compromising domestic industry should certainly not be allowed taking a stance of hubris may also be detrimental especially at a time when the world is getting closed with protectionism as limited growth in the last decade has made countries more inward looking.

Therefore, before we really consider retaliation, it may be useful to understand the consequences as another event called Brexit  is on the anvil which has consequences that are not evident to us presently. But one can never tell.

Banking sector to become less labour-intensive, automation the way forward: Financial Express 12th March 2019

The creation of jobs has always been the focal point of debates in the country. The banking sector has been a large employer with a 1.3 million workforce in 2017-18, up from 1.1 million in 2012-13. The question is whether or not this number has been increasing at a significant pace and, if there has been any change in the composition of the same. A five-year period has been considered from 2012-13 to 2017-18. The CAGR was 4%, which is just about the industry standard given that services tend to involve more jobs. The banking business, on the other hand, has been increasing at a far higher rate than that in the stock of workforce.
The graphic shows that the dominant segment has been private banks that have expanded at a sharper rate than the PSBs which had an increase of just 1.1%. The private banks’ growth number is slightly on the higher side given the mergers that have taken place with other institutions. But their share has increased from around 25% to 32% during this period. The interesting part here is that the two non-officer categories have shown a distinct declining trend with there being a shrinkage in the clerks and sub-staff categories. The ratio of clerks and sub-staff to officers was still above 1 for PSBs at 1.09 while it was low at 0.09 and 0.06 respectively for private and foreign banks. But PSBs have lowered this ratio from 1.39 in 2012-13 and private banks from 0.39 the same year. This means that banks across all categories are following a similar pattern in terms of staffing.

Two emerging conclusions are significant. The first is that shrinkage in the non-officer category is mainly due to the declining use of sub-staff as their jobs are either replaced with technology or are being done by officers.  The negative growth in workforce also means that replacements are not being made for those who leave due to retirement—voluntary or ‘in-course’. The second is that efficiencies have been ushered in as a corollary where fewer hands are required due to automation. The growth in digital banking has made this possible. It, however, raises a more serious issue in the future because, with talk of the use of AI in banking, there will be a serious threat to job creation in this sector. There will definitely not be a reversal here.

The face of banking is changing as can be seen in terms of the composition of staff in banks over this period. The share of officers has increased while that of clerks and sub-staff has come down. This may, to an extent, sharpen the picture as there has also been the tendency for banks to outsource several of the administrative jobs like security, delivery, housekeeping etc, which, in turn, increased administrative expenses but lowered the staff size. The preference for such a model is that there is no long-term liability for this category of staff and the banks are out of the purview of unions. Therefore, labour relations tend to be very smooth.

The signpost for the future is that banking will become progressively less labour-intensive as customers switch to the digital line and most transactions at the retail end would be completed here. In fact, for PSBs, the workforce could accelerate downwards as the process of mergers takes place and staff members are offered voluntary retirement schemes and not replaced. Lending is also an activity which can see a transformation, especially with fintech taking over at the SME level where the emphasis has changed to speed and online delivery. The 59 minutes approval of loans relies on technology and less on human intervention. With algorithms determining the quality of the borrower, especially when the ticket size is small and due diligence is not required as CIBIL, GST returns, PAN, etc, address these issues, the demand for staff would come down further.

It would probably be more in the treasury and risk management areas where banks would still need highly qualified staff. With governance issues also grabbing the headlines in the recent past, compliance would require more hands.

RBI, too, has been staff conscious over the years as the graphic shows. The central bank has not only lowered the quantum of staff from 21,494 to 14,785 during 2007-2017 but has done the same across all categories of staff. The sharpest reduction was in the Class III- and Class IV-type, which are the support staff in the form of assistants. What is significant here is that the ratio of support staff to Class I has come down from 1.77 in 2007 to 1.13 in 2017. Interestingly, at the turn of the century in 1999, this ratio was 3.24. The focus has changed today with less support being provided and technology being leveraged. The replacement of staff has been more parsimonious and directed towards the officer category where there is a greater pressing requirement.

This is a harsh reality where the banking sector will not really be contributing to employment generation directly. While the outsourced model will add some jobs on the sales and back office front, they would be more on the support side. This would be the trend in other financial segments going ahead, too. The securities market that was dominated by brokers has been streamlined with dematerialisation of shares and online trading. Insurance policies can be procured online which obviates the need for having agents which was a major constituency of the industry. Automation in banking has done away with the need to have more people at the service level and even the skilled manpower requirement will decline over time. Training is also being administered online as a larger community can be reached. This has happened in the west in commercial banking and it would only be a matter of time in India when this transformation takes place. We need to be prepared for this change.