On TV: India Development debate: ET Now 13th June 2022

 https://www.timesnownews.com/videos/et-now/shows/the-spectre-inflation-continues-to-haunt-india-development-debate-video-92188665

Gauging The Odds: Business World 13th June 2022

 The USD 5 trillion target is a number that will be achieved. But credit would be given based on the number of years taken to achieve this and whether the 15 per cent growth rate has more real GDP growth and less inflation

One of the medium-term goals set by PM Narendra Modi is for the economy to reach the size of USD 5 trillion. This in broad terms would translate to a size of around Rs 380-390 lakh crore in nominal terms. As per the budget, our GDP for FY23 is to be around Rs 258 lakh crore. This means that we need to grow by an average of 15 per cent per annum to accomplish this target latest by FY27 if there are no disturbances.  

Assuming inflation is anchored at around 5 per cent, the economy has to grow by at least 10 per cent per annum in real terms on an average which is a tall but doable task. For such growth to be maintained on a sustainable basis, we need to have a few elements fall in place.   

Consumption Takes The Lead 

The thrust to an economy comes from consumption which can be kept ticking provided growth can provide more jobs to the people. More jobs mean more income which in turn is spent making it a virtuous cycle for growth.  

Therefore, the crux here will be job creation at all levels and the focus will be on small and medium-sized enterprises and startups to provide the foundation that will be built by the corporate sector while agriculture provides the necessary support. A corollary here is that agriculture has to be consistent in the next three-four years with stable growth as a sub-normal monsoon has distortionary effects on growth.   

Investment Matters 

The private sector needs to fire continuously when it comes to investments. One part of the investment story will be linked with consumption because as consumption increases the capacity utilisation rates will improve leading to fresh bouts of investment. As long as capacity utilisation is less than 75 per cent, the incentive to invest will be low. For investments to take place, it will be necessary for utilisation levels to increase.  

This will start from consumption goods and travel back to linkages to capital and intermediate goods. The other aspect is private investment in infrastructure which is lagging today due to legacy issues with the Insolvency and Bankruptcy Code working to resolve several such issues. The private sector needs to get into the act here and the legacy issues which plagued steel, power, coal etc. are behind us now.   

The Financial Triad  

The financial sector involving banking, debt and equity markets must work together to provide the funding required to keep investment ticking. The banking system was pushed back post the Asset Quality Review (AQR) process but is now out of it and banks are well capitalised and have made enough provisions for potential non-performing assets, which bring much optimism.   

Along with the banking system, the debt market needs to become deeper and offer space for the lower-rated paper so that there is an opportunity for companies that have ratings of at least ‘BBB’ and ‘A’ to access this market. This becomes necessary for infra companies that have long gestation lags and will tend to be rated lower. Last, the equity culture should continue to tick so that companies can create the right leverage ratios to keep their enterprises up and running.  

Government as a Spender 

The fourth element is that the government, both Centre and states, need to keep spending on capex with no slowdown. The Centre has done a remarkable job so far with few compromises while states at times have been hesitant to spend when the fiscal targets are under pressure.  

The government capex is always the starting point for the investment cycle and hence this has to be a continuous process. Intuitively the areas to benefit the most would be roads, railways and urban development.   

Internal & External Balances 

The fifth point is that RBI will have to always deal with the delicate balance of growth and inflation with a finely tuned monetary policy. As economies grow, there is a tendency for them to get overheated which requires monetary action. The RBI along with the Monetary Policy Committee will have to play a very important role to keep inflation under check at around 5 per cent while allowing interest rates to be altered both ways to ensure that businesses get funds at the right price while keeping inflation under check.    

The sixth is that the external account has to be in balance and here again the RBI will have a role to play in ensuring that the rupee moves along the right path that steers clear of volatility. High growth will invariably mean a rise in imports that will widen the current account deficit. Rupee depreciation is essential to make sure that exports are competitive but too much of the same can be inimical for the balance of payments.  

Foreign Investments  

India has had very good success in attracting FDI through its pro-business economic policies. With FDI crossing the USD 80 billion mark, the momentum has to be maintained in the coming years.  

For this, the Doing Business environment has to be worked upon, especially at the state levels. The government at the Centre has already brought about major reforms in taxation, credit and insolvency resolution which apply at the national level. At the state level, the administrative machinery needs to be more nimble so that there is competition among states which finally attracts more FDI.  

On a positive note, it can be said that most of these elements are already in place and with the regular tweaking of policies the right environment has been created. However, the policy response is always uneven and this is what elongates the process of growth.  

Two sides of a coin | Book Review: The Future of Money by Eswar S Prasad: Financial Express 12th June 2022

 The origin of money goes back centuries and we have come a long way from the use of metals like gold to fiat money, which includes currency. The historical figure of Kublai Khan had started this concept of money backed by him, the king. Evolution of payment systems also means that we have gone beyond physical currency to banking where transfers are enabled by various systems and hence the use of cash has come down. What then is the future of money?

In his book, The Future of Money, Eswar S Prasad takes us through the plethora of changes that are taking place in the world where money will no longer be defined by the notes we hold or even the deposits that we own in banks. Picking up a book with 485 pages on the future of money could be a bit daunting for the reader, but the way in which Prasad writes makes it an easy read.

The author takes us in stages through the multitude of changes taking place. Fintech companies are here to stay, and a large part of lending takes place through these modes. Also, the various payments that we make using the digital mode that go beyond plastic cards are manifestations of this revolution that has picked up steam post-demonetisation. One also need not go to a bank for a loan and peer-to-peer lending is catching up. These companies surely pose a threat to banks and we have seen the latter working on their digital platforms to compete with them. Hence, while fintech firms give loans online, banks have started doing the same for certain levels of loans, especially at the retail or SME level. Can they replace investment banks? One cannot rule this out as algorithms that are being built can also do what these institutions end up doing. It is possible to say that while we need banking, banks may not be required.

Prasad talks a lot of the emergence of bitcoins and other cryptocurrencies. This is probably the biggest change taking place and while everyone is cautious in their views, their proliferation has caused central banks and governments to take closer notice. He explains the basics of these currencies and how blockchain technology works. Coming to the fore just after the financial crisis, bitcoin was a novel piece in the financial world. Central banks and governments don’t quite protect the sanctity of their currencies with their wayward policies. That’s why cryptos came up as alternatives. Today, with trillions of dollars in these currencies, we have to accept them.

Here the author extends the concept to central bank digital currency (CBDC) which is the next big thing. Several central banks are working on them and they could be a reality. How soon will this be? One cannot tell. A central bank digital currency has the advantage of tracking every transaction that is antithetical to crypto, which flourishes due to anonymity. Therefore, we can look at central bank digital currency to be an improvement over crypto though the author does point out that even crypto is not fully anonymous and some dealings have been traced by the investigating authorities.

Also, CBDC, while being a different way of enabling holding of money and making payments, does not make any currency stronger or weaker in the global financial system and monetary policy and other economic factors will play a role in determining the value of the currency. Hence if all rupees in the system are in digital form and there is no paper currency, that will not make the rupee stronger in the global system. It has to be backed by credible monetary and fiscal policy.

There is also the serious question of hacking or a situation where systems fail when people need to transact. Often, we see that ATMs are not working or the RTGS/NEFT cannot process transactions on holidays. How will CBDC accommodate these concerns? Technology is not infallible and any disruption can create chaos in the global payments system. Therefore, one cannot be sure whether these new technologies are better than the existing ones.

Prasad takes us through the entire gamut of changes that are taking place and putting them in a perspective, thus giving readers a detailed view of how these new systems work, what are the pitfalls and their eventuality. The concept of money that we read about in textbooks as being a medium of payment, store of value, etc, will attain a new dimension with these new systems in place. The promise is of more transparency and convenience. There is, of course, a question mark on how soon will they sweep the nation, especially emerging countries which still have different degrees of sophistication.

Blank vertical book template.

The important thing is that it is a matter of time before cash disappears from the system. But it will not be replaced by cards and phones but cryptos and even the central bank digital currency. Even companies like Amazon and Facebook will join the game which goes beyond their wallets that exist today.

Interestingly, Prasad argues that the dollar will still retain its hegemony in the world of finance. While other currencies could try and become a mode of acceptance for cross-border trade, this will be only temporary. Also, even today most of the cryptos are primarily quoted against the dollar and hence while these currencies came into being because there were too many dollars in the system due to QE, ironically most trades are still reckoned with the dollar value.

But all these innovations in the technology side come at the cost of privacy and we may not like it but have to be prepared for it.

The Future of Money
Eswar S Prasad
Harvard University Press

What does the credit policy say about the future? Free Press Journal 11th June 2022

 

The RBI now has a forecast of an average of 6.7% for inflation. This is serious and worrisome because continued inflation of 6.2% in FY21, 5.5% in FY22 and now 6.7% in FY23 would mean that cumulatively the cost of living has gone up by 18.4% in three years after the pandemic and lockdown affecting the economy.

The credit policy was an eagerly awaited announcement as usual. While it was almost certain that the repo rate would be hiked, there was speculation on the quantum of the hike and the stance to be taken by the MPC. And for banks, there was some apprehension if there would be more action on the CRR.

The fact that the market reaction was sombre is indicative of the fact that there was no major surprise as things have gone according to expectations. The ten-year bond yield has remained in the region of 7.50%, and has come down below this level, to begin with. What is one to make of this policy?

The first is that the RBI has signalled that inflation will be our Achilles heel this year with three quarters registering higher than 6%. This also means that the repo rate will only go up which is good for the deposit holders but not for borrowers. There have been indications given that the RBI would be on the path of withdrawing the extraordinary accommodation which was provided during the pandemic. Hence this can be interpreted as saying that the repo rate will go back to 5.15% for sure, which was the rate before the lockdown. And, of course, there are chances of being increased further especially if the inflation rate will be above 6% till December. There are policies coming up in August, October, and December and hence it will be interesting to see how many more hikes there will be. A measured guess will be that it could go up by 75 bps at least.

The second is what happens to deposit rates? Normally deposit rates tend to increase with a lag and it is only new deposits that would get the higher rates. Typically, the elasticity of deposit rates would be around 50% meaning thereby that if the repo rate increases by 100 bps deposit rates should increase by 50 bps. However, the current situation is different because there is surplus liquidity in the system and the banks do not need extra funds. Hence, there will be steeper lags in increase in deposit rates. There is no point in increasing deposit rates and gathering funds that are invested in the SDF for 4.65%. The credit cycle should turn.

Third, lending rates will react disparately for customers. Ever since the concept of external benchmarks has been introduced, banks have linked loans to the repo rate or a Gsec benchmark. Loans such as those on homes are linked to the repo rate. Here there will be a swift transmission of higher interest rates to the borrowers. In case of the MCLR however, the movement will be sluggish as it is based on a formula that has also deposit costs as a component. Therefore, loans linked to the MCLR will see less traction than those tied to the repo rate. In case of loans tied to the government security rate, there will still be some respite because both treasury bills and Gsec yields react at a slower rate as there is also central bank action in motion which ensures there are no spikes in rates. Besides, the RBI had assured in its policy that it would be separately talking about how the government borrowing programme would be conducted with minimum distortions.

Fourth, the RBI has not invoked a CRR rate hike which is a relief for banks because such impounding of funds earns no interest for them. The earlier 50 bps hike withdrew around Rs 80,000 crores which even at the SDF rate of 4.65% would mean a loss of around Rs 3700 crores

Fifth, the RBI has not changed its position on growth for the year which is to be at 7.2%. This sounds fair as the first two months of the financial year have been good for the economy. GST collections continue on the accelerated path. The PMIs for manufacturing and services have been up. Exports are still buoyant and the core sector data for April was surprisingly high despite the high base effect. Therefore, the economy has shown resilience to the war and its impact on the growth front.

Sixth, the RBI now has a forecast of an average of 6.7% for inflation. This is serious and worrisome because continued inflation of 6.2% in FY21, 5.5% in FY22 and now 6.7% in FY23 would mean that cumulatively the cost of living has gone up by 18.4% in three years after a rather tumultuous journey with the pandemic and lockdown affecting the economy quite perceptibly. This can come in the way of consumption this year because the pent-up demand phenomenon has played its part in the third and fourth quarters of FY22 and would get diluted further this quarter as households satiate themselves in travel and holidays for the season.

Therefore, the future remains a bit uncertain and needs monitoring from the policy perspective. The centre has done its bit on taxes to control inflation. But something more has to be done if inflation has to be brought back to the 6% mark soon. The tax framework of the centre and states can be revisited.

Retail investors dont seem ready for complex offerings : Mint 8th June 2022

 http://indiamediamonitor.in/ViewImg.aspx?rfW3mQFhdxZsqXnJzK5Xi2kwfdqmEKTvZpdt9e4OtpUzsWIgNL5cUJk9QvMmysZzuH4G+z++3uQW6hYc4DMge2ZEvhwNOgPmBIVPakevdvQ=

RBI Monetary Policy review: Clear direction given by credit policy: Business Standard 8th May 2022

 https://www.business-standard.com/article/finance/rbi-monetary-policy-review-clear-direction-given-by-credit-policy-122060800341_1.html

Global economy in grip of tailwinds: Hindu Businesline 7th June 2022

The Ukraine war, ensuing sanctions, EU embargo on Russian oil and China’s opening up can raise inflation

The course of the Russia-Ukraine war was always going to be uncertain, given the rather recalcitrant stance taken by the former even after sanctions were imposed. The emerging situation in China and the EU embargo on Russian oil over the next six-eight months have added a new dimension to global prices, growth and trade.

With the war, commodity prices had spiked with supply distortions getting exacerbated as energy, metals and farm products like wheat and edible oils became vulnerable. This resulted in a spurt in commodity prices for the second time after 2021. Central banks sprang into action by commencing the process of raising interest rates. With higher interest rates and inflation, economists started talking of stagflation as a global slowdown and inflation looked very much on cards. All growth forecasts were revised downwards gradually, but surely. The war became a new crisis affecting all countries and the difference from the pandemic is that it is a man-made one. The war has crossed 100 days with no end in sight.

In China, fear of a new wave of Covid led to a stringent lockdown for two months. With the Chinese economy coming to a virtual standstill (though different from 2020), the overall demand in the world economy slowed, thus providing some relief from the relentless price increase. This was unexpected and hence reduced the pace of economic activity.

A China slowdown meant two things for the other economies. The first is that demand slowed and exporters from other countries had to search for other markets. The second is with limited movement of goods from China, importers had to also scout for other suppliers as prices increased.

Russian oil

Meanwhile, the EU embargo on Russian oil implies that Russia will be pushed back further in terms of forex earnings, and the EU will have to get oil from other sources. Now the oil dynamics is quite interesting. Russia would be the third largest or joint second largest producer of crude oil based on 2021 data. Per IEA, out of the total production of 95.6 mbpd, Russia produced 10.78 mbpd while Saudi Arabia was a tad ahead at 10.84 mbpd. The US is the largest producer with 18.9 mbpd.

Russia exports nearly 10 per cent of its production, which at 1.1 mbpd may not look big. But the limited scope for expansion in production in other nations due to under-investment in the past has pushed up the price. Of this, around 750,000 mbpd goes to Europe. With this amount being blocked, it means that the EU will have to look at alternative sources that will push up demand in the global market and put pressure on prices.

Crude oil price had been largely stable, in the $110/barrel range, for quite some time and it was felt that the worst was over for the global economy in terms of commodity prices. But now clearly this is not the case. With a rather tenuous demand-supply matrix emerging in the oil market after Russia being nudged out, a slight increase in demand would put pressure on prices and make them volatile. This means we should be prepared for higher volatilityin prices as hopes of crude prices going down to double-digit levels look distant now.

This development goes along with China emerging from the lockdown. With two months of virtual, static or limited economic activity, China will be aggressively focussing on growth and this comes at a time when inflation is already high. China is one of the largest consumers of metals and agrarian products. A sudden revival driven by the quest for rapid growth has the potential to further ratchet up up inflation.

Two scenarios

Hence if the two developments are put together, two things look likely. The first is while the West may slide in terms of growth with the aggressive monetary policy positions being taken by central banks, inflation will continue to accelerate with China re-entering the market. Hence the commodity boom in 2021, which was expected to end in 2022 with stability being predicted by the World Bank, may reappear with a difference.

In 2021 it was due to good times emerging as countries came out of the Covid-induced lockdowns and moved to normalcy and economies boomed on the back of low base effects. This was manifested in both commodity prices and growth rising, which is not a bad thing for policymakers as jobs get created as consumption and investments accelerate. This time, the difference is that while growth is slowing in most countries, inflation will be moving at a faster pace. This is why economists are talking of possible stagflation, though technically the concept of stagflation requires growth to be negative for two successive quarters, which is not presently being witnessed. But going forward one cannot tell.

The Russia-Ukraine war has been quite singular from other battles that have been fought, especially in West Asia in the past. A war which is still entirely localised to one country has global economic effects, mainly because the tool being used by the Western powers to push back Russia from Ukraine are economic tools rather than direct military intervention. Iran was different because it had nothing except oil to offer and hence the spillover effects were minimal.

This combination of war and sanctions has turned out to be more pernicious in terms of supply disruptions of food, fertiliser and energy in particular, leading to fresh rounds of inflation. It has led to an economic contagion over which there is little control as globalisation has made economic borders extremely porous. Polices have to be alert while in reactive mode.