USA, Do it our way: Economic Times 23rd May 2023

 

Shadow of demonetisation as RBI withdraws Rs 2,000 note: Has the clock struck 8 again? May 21 2023 Indian Express

 With the RBI announcing a virtual demonetisation of the Rs 2,000 note, the 8’o clock syndrome was repeated once again, or almost. There were signs in the last six months that something like this was on the anvil, but it was never clarified by the central bank. Coming just hours after the government clarified on the issue of tax collected at source on international credit card spends, introduced on grounds of tracking suspicious transactions, this measure does fall in place with the current thinking on black money. So, how will it play out?

To begin with, it must be mentioned that when the Rs 2,000 note was introduced post demonetisation, it was a perplexing decision. If it was believed that Rs 500 and Rs 1,000 notes were a means to store black money, replacing them with Rs 2,000 notes did not help to attain the goal of curbing black money. Quite clearly there is a feeling today that these notes could be used for storing black money.

There were around Rs 4.28 lakh crore worth of Rs 2,000 notes in circulation as of March 2022. This involves around 214 crore physical notes. The RBI stopped printing these notes in 2018-19. Therefore, it was being subtly conveyed that in course of time these notes would not be preferred by the central bank. There are seven possible areas where the use of Rs 2,000 notes would have found favour.

First, households tend to keep a certain amount of currency at home for precautionary purposes. This was heightened during the Covid-19 pandemic as almost every household had to be prepared for the worst. The Rs 2,000 note would have found favour here as it is easier to handle.

Second is the real estate market. Today, it is axiomatic that almost all land deals involve payment of cash. The reason is clear. The developer would have paid cash to buy land, to get the permissions and pay the requisite bribes to various authorities. This is recovered through cash payments from customers. Therefore, it may not be right to blame the developers as the system has not changed much especially for the non-listed companies. This is prevalent even more in the semi urban and rural areas.

Third, there is a large informal market for gold and jewellery which could be bigger than the organised branded stores. Here, payments through cash are common as it works for both parties. One can escape paying tax and more importantly not be tracked. This is an old business, and while GST has corrected this to a certain extent, this model is pervasive in the hinterlands.

Fourth, there is also a big informal forex market where foreign currency can be bought quite easily in cash. Here, too, one can escape identification as well as pay a lower cost. This is rampant in almost all cities which have international airports.

Fifth is in the political domain. During elections, we do get to hear of stories where people are paid cash by various political parties to vote for their candidates. The denominations vary, but Rs 500 and Rs 2,000 are standard. Also, the Rs 2,000 note is useful for storage and can be used for other payments when campaigning is on. This segment will be hit hard as it is likely that large amounts have been stacked given that there are several upcoming state elections.

Sixth, weddings are another occasion where Rs 2,000 notes are used both in terms of paying for arrangements as well as in gifting. There will be disruption here as well. And seventh, donations to various religious institutions are also made in high value currency denominations and these institutions will have to opt for exchanging/depositing them. This was observed even in 2016 when notes were put into the donation boxes.

The interesting part here is that the rules for exchanging or depositing the notes are not very different from what happened during demonetisation. Banks have been told that there will be a limit of Rs 20,000 that can be exchanged at a time. This is bound to create panic and lead to long queues. While time has been given till the end of September, herd mentality will come into play. This will be challenging for banks. Going by the quantum of notes that will be exchanged, hopefully other denominations should be available. These provisions should have been made.

From the banking system’s perspective, there are two issues. The shadow of demonetisation will linger as individuals come to exchange notes. As a limit of Rs 20,000 has been placed, the use of agents cannot be ruled out. The first few days will be stressful for branch officials. Such a large exchange of notes runs the risk of fake notes also being pushed through.

At the system level, typically overall liquidity should increase as people deposit their notes and do not opt for withdrawals. The next three months will be critical to determine whether deposits are going to increase sharply or will currency be merely exchanged. While the latter will be liquidity neutral, the former will enhance it. This will lead to higher costs for banks in terms of interest paid on deposits.

It will be interesting to see if the RBI will consider bringing out a Rs 1,000 note in case the public requires something higher than the Rs 500 denomination note. The RBI will also be keenly following the identities of those depositing the money, and this could give some leads to the government. From here on, banks will be the main protagonists.

Mumbai Metro: Have we added the inconvenience cost? Free Press Journal 13th May 2023

 

What is evident to the common citizen is that ever since the construction work started, roads have been dug up which means that they have been almost permanently narrowed down. The existing side roads have been maintained in a shoddy manner which means that traffic crawls along.

The construction of the Mumbai metro system for all practical purposes commenced in 2016 after the first line between Andheri and Versova was launched in 2014. There has been a promise of a new Mumbai which now stretches across all the three cities: Greater Mumbai, Thane and Navi Mumbai. As of now there are two other lines which started in 2022 but the bulk of the transport system is still under construction. One is not sure when the comprehensive system would be operational and a best guess is that it could be 2030.

What is evident to the common citizen is that ever since the construction work started, roads have been dug up which means that they have been almost permanently narrowed down. The existing side roads have been maintained in a shoddy manner which means that traffic crawls along. Given that the BMC’s reaction during the monsoon is one of indifference, the potholes multiply and slow down traffic further. Highways are occasionally attended to especially if dignitaries are to enter the city from the airport. There is hence a difference in the speed of repair for roads to the airport and beyond this landmark.

What does this mean in terms of pure economics? Line 3 which is funded also by Japan International Cooperative Agency (JICA) has officially overshot the budget by Rs 10,000 crore with at least a 2 year delay. The other lines would be having their share of time and cost overruns which an audit would reveal. All of them were launched at different points of time and hence indicates absence of perspective planning. This all means that until the final line is launched, the citizens would have to live with broken narrow roads across the city. Add to this the myriad work undertaken by the BMC for storm water drainage work, water supply, electrical wiring, piped gas and so on, it is rare to come across any road without some work in progress. An accompanying habit is that once the work is done, the holes are filled with the existing stones and mud, with the levelling coming much later when the concerned contractor gets to work.

The cost for citizens as well as the nation can be mindboggling. All vehicles which are sold in the market offer a mileage of 15-20 kms a litre which is admittedly in ideal conditions which can be achieved once out of the city. In the city the mileage comes down to something closer to 8-10 kms/litre depending on the time one drives. With the present set of construction work in progress one tends to lose at least 3-4 kms/litre in mileage quite unwittingly. It would be higher for larger vehicles and lower for two wheelers. During peak hours an 8 km stretch on the two highways can take up to an hour both in the evening and morning. Hence the loss of 3 kms per litre is quite conservative and could be more.

There are no firm recent figures on the number of vehicles registered in Mumbai and Thane but a ballpark would be 40 lakhs in the former and 2/3 of the same in the latter. Out of the 65 odd vehicles let us assume that 50 lakhs ply on a daily basis. Ideally all rides would be losing 3 kms each way. Being conservative given the distances travelled by individuals would vary (buses and cabs run the whole day while private vehicles for 1-3 hours depending on the distance), one can assume that everyone loses 3 kms in mileage every day. This works out to 150 lkh kms a day.

Assuming again at an optimistic level, an average vehicle gives around 10 kms a litre, which can easily be contested, it would mean 15 lkh litres of fuel being wasted. At Rs 100 a litre on an average, this works out to Rs 15 crore a day, which multiplies to at least Rs 400 cr a month assuming there is less running of vehicles on Sundays. On an annual basis this cost would be around Rs 4800-5000 crore. As the metro project has been running now from 2017 onwards, for the five years that work is in progress (excluding the pandemic year), the citizens, city and nation have lost around Rs 25,000 crore of income as fuel expenses. This is large.

The reader can make her assumptions on the mileage front and arrive at different numbers. But the sum and substance of this calculation is that the nation loses a lot of money in the form of lower mileage due to poor planning and implementation of road projects.

Similar stories are narrated in other cities too like NCR, Bengaluru, Chennai and Hyderabad. All progress through such works invariably cause a lot of damage to the ecology as several homes, shops are dismantled to widen roads. Trees are uprooted to make way for progress. The citizens choke on roads while walking or get tense while travelling with the waste of fuel being enormous. Cumulatively the nation is wasting a lot of fuel even as our imports increase. The cost is not just citizens paying more for fuel but also the government which has to cut taxes at times to control inflation.

A more responsible approach to such constructions is the clue. The problem in India is that we all love to make announcements. But the follow up activity is sub-standard with the blame game justifying tardiness. The centre talks of highways, the state of state connections, municipals of inner roads. The blame passes from one to another with no visible action on contractors for bad work. There should be concerted action to change this matrix.

Rating agencies are unfair to India: Business Line 12th May 2023

 

Ratings wrangle. India’s growth rate, and macroeconomic and financial stability are reasons enough for an upgrade

There is an unmistakable rigidity about global credit rating agencies when it comes to their take on India. The sovereign rating of Fitch has been retained at BBB-, just about investment grade.The concept of credit rating is quite different when it comes to sovereigns. For companies it is straight forward as the agency evaluates the probability of default based on performance parameters.

However, when it comes to a sovereign rating, the overall economic structure is evaluated to gauge whether a country can default. The judgment is hence subjective, as country can always print currency to repay debt even at the risk of running high inflation.

Such an evaluation can be justified if countries have external exposure. However, for India,almost all debt is exclusively in rupees and even participation of FPIs is in rupee bonds. Therefore, there is never a case of forex risk for India. And the ultimate vindication of any country’s credibility is how investors perceive the economy. India is one of the largest recipients of FDI and is also high up on the scale of foreign portfolio investment.

Therefore, if foreign investors are bullish on India, a rating of just investment grade seems an anomaly. These are investors who are actually putting their money on the table and have never had any issue in taking it out, as there is full capital account convertibility there.

The reasons for a rating upgrade are quite compelling. Without making comparisons with other nations, growth of 7 per cent in FY23 and 6-6.5 per cent projected for FY24 is quite impressive. While it is lower than the potential of 8-8.5 per cent, coming out of the Covid blow, the performance is more than commendable.

Second, during the lockdown all nations upped their fiscal deficits in the form of payouts to ensure that people had money to spend. The Indian response was unique in so far as that while revenue was pushed back, expenditure was nuanced. The approach was more through the reform and policy route. As a result India has found it easier to unwind compared with the West.

Using banking channels to provide support helped industry while the guarantee schemes provided assurance to the financial system. Even today, there is determination to revert to the path of fiscal prudence in a minimal time period. In fact, expenditure is being rolled back, like the free food scheme being amalgamated with the food subsidy.

Third, the banking system has rebounded well, using the pandemic period to clean up the books. This means that it is better placed to provide funding to enable the economy to move on to a higher growth path.

RBI’s role

Fourth, the RBI has ensured a smoother path to normalcy compared with central banks of other nations. Here the withdrawal of accommodation has worked well and has been done in a non-obtrusive manner.

Also here interest rates have moved without any significant impact on growth. This is important because the kind of volatility that has been witnessed in the US on account of the Fed raising interest rates, has not been seen in India as bond yields have moved in a narrower band. The RBI template can be followed by other central banks. Fifth, the forex situation in India remains strong. Here again the RBI has ensured a couple of things.

First, as the dollar appreciated, the rupee always remained at the median level of depreciation compared with other currencies, which ensured there was no market panic while retaining the competitive edge for exporters. Second, forex reserves, which declined mainly due to valuation issues, has regained its level subsequently with a comfortable import cover ratio of just above nine months. This provides a lot of support to the balance of payments.

Sixth, the quality of government spending is again significant. The Budget has increased the share of capex from around 12-13 per cent pre-pandemic to 22 per cent for FY24. Despite the number of upcoming Assembly elections this year, the Budget has plumped for fiscal prudence.

Seventh, an important development during the year was the way in which India was able to initiate new thinking on the trade front, as seen in the rupee trade agreement with Russia which has now found favour with several countries. This is a major step as these arrangements can help countries move away from the dollar-euro dependence which will add to their economic strength.

While admittedly this is a slow process and will take time to work out, the strategy to go-domestic is a unique model. This needs to be appreciated by the rating agencies as it is a model that several emerging countries will find worth pursuing.

Lastly, India’s strides in digitisation have been remarkable, spanning from banking transactions to the Covid vaccination drive. The digitisation drive has brought about structural changes in the economy making systems more efficient.

In fact, India has carved a unique niche on this front.

Quite clearly the global credit rating agencies seem to be operating with a fixed mindset where it is believed that emerging markets can never really move up the scale. The highest rating that India has achieved is BBB. The CRAs need to reinvent themselves to retain their credibility.

The rating methodologies need to adapt with the times and old shibboleths need to be revisited and changed. Quite ironically the commentary given normally always seems positive and never justifies the low rating awarded.

On the other hand western countries with negative growth rates and higher inflation along with elevated unemployment levels never get downgraded by even a notch. Similarly serious bank failures don’t seem to raise the red flag in these nations. India certainly deserves a fair and unbiased evaluation.

Economics Weather Warning: Indian Express 11th May 2023

 

Let’s not be misguided that the dollar will be displaced: Mint 4th May 2023

 

Beyond the ‘fastest-growing economy’ tag: Financial Express 1st May 2023

 

While the economic growth CAGR of 3.1% over the 2019 level is impressive for India, the fact is that the growth rate needs to be a lot higher to generate the jobs needed.

The epithet of ‘fastest-growing economy’ for India has been a confidence-booster, especially since the world economy is poised for a major slowdown in 2023, according to the International Monetary Fund (IMF). While the IMF forecasts 5.9% growth for India in FY2023 against RBI’s 6.5%, the number is still very impressive. Without going into the intrinsic quality of the growth rate of 7% or it’s thereabouts for 2022, it would be interesting to compare growth rates with other countries.

Based on IMF data, what strikes us is that there are some smaller economies that are part of the group of emerging economies which also registered fairly impressive growth rates in 2022. Ireland, for example, is the fastest-growing country with 12% recorded for the year. It would not have been significant but for the fact that it was part of the infamous PIGS group which was responsible for the euro crisis in the early part of last decade. In fact, growth was very impressive even during 2020, the Covid year, at 6.2%. Quite clearly, being small has its advantages.

The other three countries that are much smaller in size than India and had impressive growth rates in 2022 were Philippines (7.6%), Malaysia (8.7%) and Bangladesh (7.1%). A comparison with these nations may not be proper but should be recognised.

Single-year comparisons can always be misleading as base effects play a major role. Such distortions began in 2020, when Covid ensured lockdowns of various magnitudes across several nations. This was the time when negative growth was the norm is most economies as economic activity had halted for a period of 2-4 months depending on the intensity of the disease there. It was coincidental that no country had an alternative solution to a lockdown, and this caused GDP to fall.

Not surprisingly, as countries started to come out from the lockdowns, there was a tendency for the growth rates to get pushed up due to the negative base effect. Therefore, positive effects were felt across the board in 2021 and, further, in 2022. This added impetus to these smaller nations in 2022.

In 2020, negative growth was the norm. Turkey, Taiwan, Bangladesh, China and Ireland were the only nations not to witness a fall in GDP as growth rates were positive. The UK witnessed a 11% de-growth as did Spain (11.3%). This helped bring about buoyant growth in 2021 (7.6% and 5.5%, respectively) as well as 2022. Growth in the UK was 4% and 5.5% in Spain in 2022. But the UK will draw little comfort from the same as it is expected to register negative growth in 2023 once again.

Argentina witnessed 9.9% de-growth in 2020 and 10.4% and 5.2% in 2021 and 2022, respectively. Even in the case of US, growth fell by 2.8% in 2020 but recovered to 5.9% in 2021 before moderating to 2.1% in 2022. Therefore, the important conclusion is that growth rates over 2021 have a base effect—this has propped up growth numbers across countries.

How does then one look at growth rates, given that base effects distort numbers in both directions? One way is to look at growth over a neutral year, say 2019. By calculating a compound growth rate for these nations a better picture emerges on the recovery process. Here the results are interesting as the growth now pertains to average annual for a period of three years.

Also read: A saga of pending reforms

Ireland continues to be the best performer with 10.5% CAGR growth. This is followed by Turkey with 6.2%, Bangladesh 5.8%, Taiwan 4.1%, China 4.5% and India 3.1% (this will be slightly higher if 2022 is taken at 7% instead of 6.8% as per IMF). The Indian performance is still very impressive, given, other than China, the countries in the pool are much smaller to warrant comparison.

India would rank third in terms of size going by PPP, with China being the largest. Turkey would be around 29% of India’s GDP and is the largest among the other nations which have witnessed higher growth rates. Taiwan is around 12% the size of India, Bangladesh 10% and Philippines 6%. Intuitively, it may be seen that with a smaller size of GDP it is easier to post higher growth rates, which is what has happened for the smaller nations.

While a 3.1% CAGR for economic growth for three years is creditable, it will still take some time for India to clock the 8% growth rate that it requires on a sustained basis to create more jobs and ensure that poverty is under check. Job creation is important, given, the debated on whether poverty has come down or not notwithstanding, the fact that the government gave ‘free food’ under the Pradhan Mantri Garib Kalyan Yojana till March 2023 to over 800 million indicates that the number of needy requiring support from the government is high. This can only be addressed by creating more jobs.

Hence, while the epithet of fastest-growing economy should be inspirational, there is still a lot of work to be done and should not lead to complacency. Growth of 6-6.5% in FY24 is achievable but will only be improving, albeit marginally, the status quo.