On NDTV : 18th July 2022

 https://www.ndtv.com/video/news/left-right-centre/everyday-essentials-services-get-more-expensive-643574

Rupee crossing 80 to the dollar is nothing to be startled about: Business Standard 19th July 2022

 https://www.business-standard.com/article/opinion/rupee-crossing-80-to-the-dollar-is-nothing-to-be-startled-about-122071900501_1.html

The GST experience has been largely positive: July 15th 2022, Hindu Business Line

 

t has led to greater formalisation of the economy. But the taxing of fuel must be sorted out owing to its inflationary impact

The GST was probably the biggest reform introduced by the government since 2014. A singular tax structure across all goods and services is efficient, though ideally a single rate should prevail. But given the complexity of federalism and the belief in the principle of ability to pay, different rates had to be introduced. It has, however, been maintained that the system is evolving and rates could be tweaked.

There was some hype created by economists on GST. The structure was to be revenue neutral. And as a corollary, when the economy grew tax revenue would accelerate. Second, it was claimed that GST would bring about significant growth in GDP — by 1-2 percentage points. The rationale was not too compelling, though the models did indicate such numbers. Third, it was argued that with tax rationalisation and removal of inefficiencies, it would lead to lower prices and hence less inflation. The profiteering clause was brought in to ensure that benefits were passed to the consumers.

With five years gone by, it will be useful to evaluate the success of this tax structure. First, the way things have gone, it does look like that rates have been altered within the five-slab structure. The GST Council is looking at fine turning rates to enhance collections.

Second, the inflationary impact has been either neutral or positive after these five years though the average tax rate has come down post GST. Where the rates have been increased, there has been a direct impact on prices which will also include the recent changes made by the Council.

Further, while the rates have been reduced for some items, the benefits have not gone done to the consumer. It is hard to establish that there has been profiteering as there are multiple inputs going into the production of any good with the net impact being nebulous.

Third, the impact on GDP is unclear as the economy was in slowdown mode even before the pandemic struck. Alongside, as prices have only tended to increase rather than decrease, there has not been a case for purchasing power increasing.

Fourth, revenue collections have been a major positive if averaged across this time period. The tax system has certainly brought about greater formalisation of the economy, which is commendable. As claiming a set-off from any purchases made involves having every layer of the supply chain sign in, the GST has brought about a rather radical transformation in the way in which business is done. There are exemptions available under the composition scheme, but in general, there has been better coverage of economic activity.

The least expected development in these last few years was the lockdown which distorted collections to such an extent that the States had to be compensated by the Centre which also ran short of funds. This was part of the GST deal of the Centre with States where the States were to be compensated in case their revenue did not increase by 14 per cent for five years.

While the lockdown was a black swan event, the possibility of severe slowdown in the economy cannot be ruled out in future; hence there is need for the agreements to be revisited to provide for such a contingency.

The States have a point, because joining the GST agreement means loss of power to tax commodities and services. It may hence be worth considering a way forward: whenever the GDP growth falls below, say, 5 per cent there should be an automatic trigger for compensation.

Taxing fuel

As for fuel, presently there is a constant debate on which government should cut taxes. The Centre imposes a flat rate, while the States generally have variable rates. The overall revenue earned is substantial for both the arms of the government and amounted to Rs. 7.14-lakh crore in FY22, compared with Rs. 6.37-lakh crore in FY21. It was Rs. 5.08-lakh crore in FY20 when consumption was higher at 214 million tonnes compared with 204 million tonnes in FY22.

The issue of including fuel in GST needs to be resolved because the inflationary impact is sharp and has secondary and tertiary effects in the economy. At times in order to protect the consumers, the OMCs are made to bear the cost of higher crude prices. While protecting the present level of revenue can be the starting point, a higher GST rate of, say, 70 per cent can be levied, which will make things more transparent. Arguably, the government may stand to lose revenue if crude prices fall sharply. But having a structure in place would be useful as this appears to be the major anomaly in the system.

The GST experience has been a learning exercise which has brought to the forefront the complexities in introducing such a structure. The Council has dexterously steered the economy through this labyrinth. There are some pressing ideological issues that have come up and can be addressed through more deliberations.

Book Review — CEO Excellence: The Six Mindsets that Distinguish the Best Leaders from the Rest : Financial Express 10th July 2022

 It is agreed that CEOs are the pivot of any organisation and often their names are associated with the success of the company. This is understandable as they take the responsibility of delivering shareholder value and also tend to be the highest paid personnel. Interestingly, it has been found that among Fortune 500s CEOs, around 30% last less than three years. And, more significantly, two of five CEOs fail within the first 18 months.

Dewar, Keller and Malhotra from McKinsey & Co, in their book titled CEO Excellence, tell us more on this subject after interviewing around 67 of these leaders from a pool of 2,400 companies that were scanned for this purpose. These include the heads of Sony, Microsoft, JP Morgan, Netflix and their like.

So. what did they find? To simplify their findings, they believe that there are six responsibilities of CEOs that sort of make or break them. The book focuses on these six areas of responsibility for CEOs.

The first is what they call ‘setting the direction’ for the company. Here it can be seen that the future course of a company would be driven by this goal, where the CEO should articulate the vision and roadmap. This would cover the growth areas, which can also include things like diversification or acquisition. This vision has to be accompanied with a clear strategy and the long-term goal has to be broken into short-term plans, given that the future would always be uncertain with shocks that have to be adjusted for. Having a vision and strategy also enables the allocation of resources that are limited.

The second is aligning the organisation to these objectives and strategies. This is where often there can be stumbling blocks. The new-age companies may be easier to align compared with older ones that have entrenched mindsets and structures. At times this alignment can be the biggest challenge. Here the authors talk of the culture of the organisation, which may have to change.

Associated with this alignment is ‘organisation design’, which can involve doing away with certain positions and verticals and creating new ones. This can be a challenge because everywhere people matter and the reskilling of staff becomes important. Traditionally, this has taken a lot of time for companies to change and successful CEOs have to shorten the same. Getting new talent can be required to become more nimble-footed but the costs have to be weighed not just in terms of the salary bill, but also taking along the staff.

The third is to identify leaders. Here, it has been seen that new CEOs have a preference for people with certain backgrounds, which can create a bias. But they need to get the mix right, because any plan can be driven by CEOs but has to be executed by various leaders within the organisation. This will then mean getting these leaders to form their teams either from within or scout for talent from outside. Such a task looks commonsensical, but can lead to a lot of dissatisfaction in companies where tenures and experience are brushed aside in the name of getting things right.

Fourth is a different kind of challenge which involves engaging with the Board. Here it has been seen that managing the Board is the biggest task. The Board members normally come from different backgrounds and are usually retired personnel with commitment that can differ as they meet only a fixed number of times. The question is how does one get the best of them so that the company benefits. The members will have questions to ask and the CEO has to answer them all the time. This can lead to conflict-like situations that have to be handled with maturity. Board meetings are the most important discussion tables because all strategies get approved only after deliberation. Therefore, CEOs have to work in an effective manner to take them along as they can give their independent view.

Fifth is connecting with stakeholders, which can range from shareholders and clients/customers to employees. Today, with increasing focus on ESG, CEOs have to engage with all the stakeholders concerned to ensure the company is on the right track. In fact, dealing with the government as well as regulators means that they have to spend a good amount of time to convey to these officials the progress being made by the company in these areas. Investors, too, have to be engaged with regularly as they are links with the market.

Hence, as can be seen, CEOs need to move away from the day-to-day functioning of the company once the strategy has been formulated and leave it to the leaders to implement them while they engage with the Board and other stakeholders on important issues. Here often CEOs stumble and ignore these two aspects, as a result of which they are bogged down by mundane activities that often feed their egos as they believe they are in control of the organisation.

Last, the authors talk of managing personal effectiveness which flows from the earlier point made where their time and energy has to be spent on what matters at their level. They become the company ambassadors and should behave like one. Delegation is important and often insecurity of the CEO can be a hurdle.

This is an interesting book on ‘what to do’. The problem with such books is that they appear to be stylised. The question is, can a CEO sit down and ruminate over these six issues and address them together so that she is a success? Enumerating the qualities is enlightening but the fact is that there are no templates that can be followed assiduously. The reason for failure is that no CEO is willing to accept that they are on the wrong track. No CEO is open to criticism and everyone likes to have people around that applaud their actions. This is why they fail.

CEO Excellence: The Six Mindsets that Distinguish the Best Leaders from the Rest
Carolyn Dewar, Scott Keller & Vikram Malhotra
Scribner
Pp 373, $30

Understanding oil — the joker in the pack: Free Press Journal 9th July 2022

 

Oil remains the joker in the pack as it has potential to cause considerable distortion. The price of oil is driven by three sets of factors – demand and supply topped by the extraneous factor of politics.

The global economic environment is typified today by considerable volatility which transcends the markets and enters the real economy that involves basic GDP growth. The driving factor, in a way, is oil. Fickle oil prices have caused considerable distortion and the crux is hence getting a hold on how they will move. This has become very difficult, for a variety of reasons.

The price of oil has moved to less than $100 a barrel, which has given some relief to all countries. But the question is, for how long will this last? It may be recalled that until the point when the EU had decided to impose harsher sanctions on oil and gas from Russia, the price had come down to the $110 level which gave hope that prices could go below the $100 mark. But with the sanctions being imposed, the price went back to the $120/barrel level which had central banks taking a more aggressive view on interest rates.

The oil price forecast is hence the most critical factor for all policy formulation - especially monetary policy. As long as there is volatility in this market, there would be an upward thrust to overall inflation which in turn will influence interest rate actions. Global commodity prices have tended to move downwards post-May, which gives an impression that the worst may be over. But oil remains the joker in the pack as it has potential to cause considerable distortion.

The price of oil is driven by three sets of factors – demand and supply topped by the extraneous factor of politics. On the supply side there are conundrums. Theoretically there are around 1.65 trillion barrels of oil reserves which can last for around 50 years. The challenge is to make adequate investments to drill and make available this oil to the users. The decision to invest is based on demand forecasting, which is being influenced progressively by the focus on alternative fuels that has gained in fashion. With green energy being spoken of and countries aggressively exploring renewables, the oil producing countries have not been investing enough; this in turn has tended to cause supply shortfalls every time demand increases. Also, the development of shale fields in America has also caused drop in demand from conventional oil which in turn has kept investment down. Hence the willingness of the oil producing countries to invest will depend on their subjective judgments on future demand.

On the demand side, for the last decade or so there have been considerable swings in the growth trajectories of especially the western economies. Growth has not been smooth and unidirectional for countries in Europe as well as USA. Intuitively, as long as interest rates are benign in the west, it can mean that growth is still shaky and when central banks firm up rates, it is indicative of growth being on the fast track. The former situation means less demand for oil while the latter scenario would mean heightened demand, though not necessarily for non-shale oil.

The other factor which has played out is China. China was probably the fastest growing economy for almost two decades, as the model used was an investment-oriented one which also necessitated greater demand for oil. Industrialisation at a high decibel level increased the demand for energy. However in the last 5-7 years, the pace has slowed down as the investment-led model has its limitations in the absence of consumption growing at a similar pace. This has also led to a slowdown in the demand for oil.

The pandemic has upset the applecart further, with prices first plummeting and then rising as the world economy recovered. The Ukraine crisis has further exacerbated the situation with Russia, which is the second largest producer of oil, being eased out of the system virtually. The interesting thing here is that even a 1-2 mn barrel per day supply of oil can disrupt prices significantly due to the inability of other countries to produce more oil in the short run. Subsequently there have been different scenarios being presented on the state of the world economy. With the Federal Reserve as well as the European Central Bank to increase interest rates in the face of higher inflation, the expectations are that there could be a recession in the west. This is the irony with monetary policy, because any action to soothe inflation necessarily means that economic growth has to be slowed down on the demand side. This in turn has made markets bearish on oil, as a result of which the price has come down.

The question is whether or not this price of $100/per barrel can be sustained. The answer is that no one can tell, as while the price of any commodity is driven by the laws of supply and demand, the external factor which overrides the principles of economics is an unknown. Also, unlike other commodities, supplies cannot be jacked up easily as it is linked to investment.

Does this price matter to us? The answer here is yes, because presently with the price coming down, the oil marketing companies stand to benefit as they are making losses on sale of fuel ever since the retail prices were locked by the government. Hence the consumer gain will not be there while the companies will lower their losses. Lower price will reduce the import bill and hence there will be some comfort on the trade front, though exports of refinery products will also reduce in value terms. But if these prices are sustained, the RBI stance on rates may be less stringent as inflationary concerns have been linked inexorably with oil prices.

RBI's innovative approach to control the fall in rupee is commendable: Business Standard 6th July 2022

 https://www.business-standard.com/article/economy-policy/rbi-s-innovative-approach-to-control-the-fall-in-rupee-is-commendable-122070601027_1.html

Bring back futures trading in oils, pulses: Business line 26th June 2022

 The recent inflation spiral in India, going by both the CPI and WPI, has impacted all industries. This is so especially due to the surge in global commodity prices which range from crude oil to metals to food products including wheat and corn. Almost every industry has been impacted as a user or seller. Now the question is: have companies been hedging their price risk?

Companies have been increasing the final prices of their products due to the rise in raw material costs. This started from the third quarter of FY22 and has continued since, which has in turn added to CPI inflation for household goods and consumer products.

Vegetable oils have already been under strain as India imports around 60 per cent of its edible oil requirements. With international prices being distorted due to the Ukraine war where both Russia and Ukraine are major global suppliers, the impact has been quite severe with prices almost doubling in a year. The government has had to do some firefighting by cutting duties to cool prices.

Similarly the wheat episode is remarkable because a country with one of the highest outputs has witnessed an increase in prices. The reason is that with supplies from the war region being cut off, there is an incentive to export to cash in on higher prices, leading to lower domestic procurement.

The oils and wheat episodes have impacted industry besides households. The entire food processing industry as well as services such as hospitality, tourism, airports etc. are affected by higher prices which get passed on to the consumer. Ideally manufacturers of oils, confectionery, bakery products, hedge their raw material risk on commodity exchanges.

But this is not possible today as there is a ban on futures trading in the entire oil complex (seeds and oil) as well as chana and wheat. This means that there is no option to hedge the price risk and the higher cost has to be absorbed by the firms. They would do so up to a point beyond which the consumers will have to pay higher prices.

The rise in prices can be seen already in the MRP of various products and menu cards of restaurants and there could be more hikes in the offing.

The irony of a ban on futures trading in oils and wheat is stark. The ostensible reason for this ban is to curb the rising prices. This is a hypothesis that has never been proved and is more impressionistic.

But by banning such hedging options, companies perforce pass on the higher raw material (input) cost to the consumer which adds to inflation. This anomaly needs to be corrected by removing bans on futures trading in agricultural commodities.

No proof

Interestingly, there is no evidence so far of futures trading fuelling inflation. An expert committee set up under Abhijit Sen over a decade ago pointed to this aspect. Subsequent studies have also not established any causal link between futures trading and inflation. Yet, successive governments have instinctively banned futures trading whenever prices increase, on the mistaken notion that futures trading leads to inflation.

As all futures contracts are delivery based, which means that open positions have to be closed out or result in delivery, it is hard to distort the market. Besides exchanges have in place sound risk practices such as position and price limits to restrict volatility in the market.

Bans have been in vogue in this market since 2007 when tur and urad were banned for futures trading. These were rather robust contracts where the dal and spices mills were actively hedging their risk. Subsequently, there have been bans on rice, wheat, soya oil, soyabean, guar seed, guar gum, sugar, chana etc. The latest set of bans include rice, wheat, moong, crude palm oil, Chana etc.

Besides companies dealing with these products, even user industries like the farsan (bhujia) segments, have been impacted and they have been compelled to increase their prices by passing on the higher input costs, as they would not be in a position to hedge their price risk on both — besan and edible oils, which are the main ingredients.

By imposing a ban the market has been pushed back and the entire value chain ends up being impacted which ends with the farmer. The restoration of futures trading in 2003 was done with the idea of commercialising the agricultural sector to ensure the benefits percolate to the farmer.

Exchanges like NCDEX have had good deliveries taking place indicating thereby that value chain participants were trading.

Further, farmer producer organisations (FPOs) have been active in the market with SEBI taking some aggressive initiatives. At the same time corporates find hedging useful even when they don’t take physical delivery as it is a powerful tool to protect their margins.

Companies even today hedge their price risk on international exchanges when opportunities are denied within the country. Metal companies hedge on LME, though the contracts offered by MCX have found favour over the year. The same holds for crude oil related products. The ban on futures trading on oils and wheat as well as chana needs to be withdrawn immediately. This will help in multiple ways.

First, it will help companies hedge their price risk. Second, it can help to reduce further increases in prices. Third, it will help strengthen Indian commodity exchanges which need business to survive. An exchange like NCDEX which had dominance in agricultural products, today is barely able to clock even ₹1,000 crore of average daily volume.

Today it has been seen that there are only two exchanges that have survived, and while MCX has done well in the metals and energy domains, NCDEX has been sliding down in the present environment. There is need to grow the market and not destroy it.

The present scenario is scary for the market. It affects not just the exchanges which provide a platform for trading but the entire value chain that has been built and nurtured in the last two decades.