Why we need norms on government spending: Indian Express 20th October 2023

 In a democracy, people vote political parties to office. The party or coalition that crosses the halfway mark forms the government and decides on where to spend public money. No referendum on the expenditure allocation or priorities is taken.

The choice of expenditure, where the money is actually spent, is fraught with controversy. The general belief is that governments should get the most economic value from their spending. This means that the multiplier effect to society and the economy at large should be maximised. This happens when more is allocated towards capital expenditure. However, more is allocated towards “non-development expenditure” which can also empower the recipients.

The basic principles of public economics talk about the state as being responsible for fostering equality through redistribution. The analogy with Robin Hood is stark though legal means are used. A progressive tax structure is followed. The concept of redistribution is, however, nebulous. For some, it can mean giving a “freebie” to the poorer sections of society.

The common man will prefer having “regular” trains, perhaps not Vande Bharat. For instance, an a/c chair car from Mumbai to Nashik costs Rs 380 on a normal train (Panchvati Express) while Vande Bharat charges Rs 720.

The common man will vote for projects which generate employment and income, not make them worse off, if, for instance, this involves giving up their land for the larger good. The issue of compensation is still contentious. And besides the landless labour attached to the land will be out of employment. But this decision is left to the government. This is why there are varied views on spending priorities.

Hypothetically, if all possible avenues of discretionary expenditure (which excludes fixed commitments like salaries, defence and interest payments) were put to a vote, individual choices would lean towards “freebies”. The Amma meal in Tamil Nadu, free electricity scheme in Delhi, free travel for women in public transport — these would find favour with the majority as most people belong to the lower end of the income distribution. The views of the richer/elites would be sidelined. This is why it has been observed that states tend to be more inclined to give freebies as they are closer to the citizens than the Centre.

States also have a different position on so-called freebies. There is an argument that when cycles, saris and dhotis are distributed for free, the expenses incurred are not totally wasteful as they do incentivise production in their respective industries. The same holds for free or subsidised meals. In fact, free power and water to farmers in Punjab has been defended on the grounds of wheat prices being kept subdued as in the absence of the same, the costs would have gone up. These arguments may be considered fair by some.

This line of thinking can also be extended to loan waivers. The argument goes that when bad loans of industry are provided for by banks or written off from their books, the depositors’ money is being unfairly treated, while a loan waiver comes clean as it is being provided for by the government for a vulnerable section.

How then are governments to decide where to spend their limited resources?

When parties contest elections, promises are made to the voters. While there is a divergence between promises and delivery based on fiscal constraints, in general parties do try not to renege. But this is a competitive arena as each party promises more than the other.

One way out is to put a cap. And to ensure that there is parity across all the levels of government. There is a need to revisit the subject of expenditure allocations. The next Finance Commission may consider drawing up such norms.

Israel-Hamas Imbroglio And The Economic Impact: Free Press JOurnal 14th October 2023

 The impact of globalisation has withered gradually with countries getting decoupled from one another in the economic arena. Hence, India for example has been able to do better than all other countries due to the lower reliance on the global economy. But one factor which we cannot get away from is the crude oil syndrome which has been the Achilles heel for long and does not seem to allow countries to decouple. This is why the Israel-Palestine or Hamas conflict is relevant.

If one looks at India’s links with Israel, it is more on the political side. We do export refined petro products and jewelry and do not have any significant imports. The value of exports would not be more than $ 8.5-9 bn per annum. Israel is not a supplier of crude to the world nor is Palestine. Yet there is palpable tension in this market. Why should this be so?

The politics of the imbroglio is complex and has not been sorted out for more than five decades and will remain so for longer. As long as the war is bilateral there should be less economic ramifications for the world. The problem surfaces once other Arab nations start taking sides. This is a possibility and cannot be ruled out. Israel started talking economics with Saudi Arabia earlier which can help in such a situation. But Iran has openly supported Hamas though maintaining that it has not been part of the recent aggression. Iran does not produce more than 4 mn barrels a day of oil which is just about 4%. But any blockades on the shipping routes (Strait of Hormuz) can upset the oil cart and make transport more expensive besides pushing up insurance costs. And there is also the possibility of other nations pitching in to support Hamas which can elevate the crude oil price.

Hence the critical factor will be how long will the war last? Normally one could have assumed that the battle would end in a couple of weeks’ time. But all such soothsayers were proved wrong when a large and powerful nation like Russia invaded the much smaller Ukraine. The war wages on with several disruptions being caused. The price of crude oil had gone beyond $ 90/barrel just a couple of weeks back before declining to the sub-90 region. The ball would be in OPEC’s court on the production levels to be maintained.

A prolonged war can spell trouble for the global economy and a useful thumb rule to use based on past experience is that if oil stays above $ 90/barrel for a period of two weeks continuously then it will spell trouble as the price can test the $ 100 level next.

This is important for India because of the chain reaction that is triggered. The first impact will be on the import bill which will go up proportionately (~ $ 162 bn in FY23). Presently a number of $ 85/barrel has been assumed for all practical purposes for the year and an increase here will push up the trade deficit. Second, a higher trade deficit will increase or widen the current account deficit which can then test the 1.8-2% GDP mark. Presently it is expected to be within the 1.5-1.8% GDP mark for the year.

Third, a higher current account deficit combined with slower capital flows on account of the high cost of funds in global markets will mean that there will be pressure on the rupee. The rupee is already tending to be weak in the region of ₹83-83.40/$ as the dollar has been strengthening periodically every time the Fed makes a statement. Fourth, a declining dollar will make the RBI intervene at some point of time to steady the rupee. So far the RBI intervention has been selective. It looks as if the RBI has ensured that the rupee depreciation has gone with the flow but been somewhere at the median level of depreciation of the competing currencies. But this will mean release of forex reserves which will lower the overall level. Fifth, as RBI sells dollars, there will be a withdrawal of liquidity from the system which can pressurise banks in particular. Last, tight liquidity will also manifest in higher bond yields in the market. Hence the chain of effects will affect all the markets.

However, ironically the inflation picture will be ambivalent. The CPI inflation number will not change as the government looks unlikely to increase the prices of petrol and diesel with the elections in states starting next month right up to the General Elections next year. This in turn will mean that the higher cost has to be shared between the government and the OMCs (oil marketing companies). The other products like aviation fuel will witness a commensurate increase and as has been witnessed recently will result in the airfares increasing. But given a low weight in the index, this may not really show in the final inflation number.

The WPI inflation number however will witness a higher increase with the overall fuel basket having a weight of 7-8%. But given that the WPI inflation number is running at a low level of less than 1%, may not really matter. Therefore, the government’s call on prices will ultimately determine the sharing of the higher crude oil price burden.

The picture outlined is an extreme one based on a long and protracted war that gets more of the oil producing countries directly into the fray thus disrupting the production and supplies. The political machinations will drive this factor and hence the reactions of friendly nations on both sides need to be followed closely.

For the RBI, this will be another factor to keep in mind as it has been seen that crude oil prices tend to be volatile when there are such factors at play and can flare up any time and also recede with the same alacrity. It may be hoped that based on the Ukraine episode which caused severe disruption in the first few months but has normalised subsequently that the global economy also adjusts to this new crisis in a similar manner.

The unstoppable demand for cash: Business Line 10th October 2023

 

Goldin's Nobel is a wake-up call on women's work participation: Mint 10th October 2023

 

We need to uproot some of India's agricultural policies; mInt 4th October 2023

 

Blowing his own Trump(et): The megalomania of a president laid bare: Financial Express 1st October 2023

 

Donald Trump is known to be an egotist who believes that he has the right to be the president even if the people do not vote for him.

Donald Trump is known to be an egotist who believes that he has the right to be the president even if the people do not vote for him. His brusque tone when communicating was combined with a lot of prevarication when he was the president of the most powerful country. One gets to know more about the person in the book, The Trump Tapes, written by Bob Woodward, an associate editor of Washington Post. Besides a series of interviews with the then president, there are copies of his letters written to the North Korean despot Kim Jong Un.So what do these transcripts reveal? Nothing really surprises the reader and more often one is convinced about the Machiavellian machinations that went on during his regime. Some of his best friends included Vladmir Putin, Kim Jong and Xi Jinping. One may just conclude that they got along well because they were like-minded. Fortunately, the systems are different in the USA and Trump did not manage what the others did—to remain in power.These 20 interviews were officially recorded and hence are authentic.

He not just liked dictators but also admired them. One example is the Turkish head, Recep Tayyip Erdogan. Trump was open when he said that he got along well with him even though no one else could. He seriously believed that he got along well with people who were ‘tougher and meaner’ due to his charisma and straight talk, which reveals his pompousness. He had also declared that Egyptian President Abdel Fattah el-Sisi was his favourite dictator.More absurdly, he was unabashed in saying that he was the only leader Kim Jong Un was willing to speak with and that he was the only person who understood the five nuclear facilities in Korea, not because he studied them but because his uncle worked at MIT!

His conduct of foreign relations was astounding as he wanted to do everything alone and did not take along the CIA or the generals. This made him largely unpopular even within the administration. Staunch allies, who were critical for the US maintaining stability in the region, were treated with disdain. For instance, he openly opined that South Korea should pay the US for defending the nation. At some point, he also said that there was no reason for him to defend this nation as he did not care. This was the treatment to allies while he admired the despots who played to his ego.Interestingly, Woodward likens Trump to the CFO of a company who is always praising the performance of the organisation.

He tended to exaggerate the economic situation and was proud of having created this situation, when it was far from the truth. He was rarely apologetic about the fiscal situation even while his government ran the highest deficits even before the pandemic.Trump publicised the fact that his deal with China was a winner when it was well known to be a bust. His inconsistency in narrative was characteristic of his twisting facts. He had said that China had the worst year in the last 67 years—while the same numbers went as 27, 52, 54 and 35 in a space of a few months.

This showed that he just said what he wanted believing that the people would be convinced and hence never seemed to speak the truth. In a way, it was arrogance which typified his style that worked on the premise that everything he said had to be believed because he was Donald Trump.One of the more preposterous views that he propagated was that there was a cure for Covid which was the use of hydroxychloroquine. The doctors did not agree with this theory but Trump was convinced he knew better and asked for the administration of this medicine to all people, which, in fact, was an anti-malarial drug. When the doctors said with certainty that this was not right, he felt it was the right cure as the president of America. The clinching argument was that because he ‘felt good about it’. The final outbreak and spread was probably the most disastrous in the USA among recorded cases across the world that led to over a million deaths. He was against a lockdown; and even when the vaccine was available, he was not willing to make it mandatory for people to be vaccinated.

Trump’s handling of the infamous George Floyd case, where a coloured American was brutally killed by the cops, again reflected his thinking. He blamed the Democrats for the riots and always said that things were under control when asked to speak on the subject even as they spread across the country. There were no visible signs of him being personally upset by his death and attention was more on the rioting which followed that also led to the burning down of a church. He got defensive by saying that he has done more for the Black community than any other president. When the movement of Black Lives Matter spread, he referred to them as ‘fascists’ and ‘Marxists’.

In short, The Trump Tapes shows the ex-president in his own words. His shortcomings are revealed and it is clear that he is unfit to lead the US. Instead of understanding his responsibilities to the country and the world, he is continuously consumed by the past and unable to let go of his grievances. He loves to combat and is defiant all the time. The presidency is his narcotic and fuels his heroic energy. Yet he has the biggest group of followers and loyalists and has managed to raise more funds than any other candidate. He has managed to exploit the notoriety of his scandals, investigations and political warfare so that he can dominate and keep his grip on American politics. The ending of the book quite summarises the man—Trump aspired to be a colossus like FDR. He lives his own self-inflicted melodrama—“Everything is mine. I do what I want.”

Indian Bonds In Global Indices- Has The Best Outcome? 30th September 2023

 

Just as FPI flows have boosted the stock market as well as flow of foreign exchange, there are good chances of withdrawals too which can spook the market. Hence it will also be necessary for other institutions like mutual funds to step in and support the market.

A major development which took place last week was the news of the inclusion of Indian bonds in the JP Morgan bond index for emerging markets. This has been a long-standing expectation which will finally materialise in June 2024. This development fits in with the global face that India has exhibited throughout the year which hence does justice to the effort put in over the last few years to make India truly global. In a way it is an acceptance of India’s economic strength.

In simple language, Indian government securities would be a part of the global index of JP Morgan. The weight assigned for Indian bonds will be around 10% in the index and their inclusion will be gradual over time starting at a rate of 1% per month. By March 2025, the total weight will be 10%. This means that any fund which buys the index in global markets would automatically be investing in Indian bonds. This is so because index investment, which is probably the most popular form of passive investment, will allocate every dollar to the components of the index and hence there will be demand for these securities. It is said that 23 such securities would constitute this 10% allocation.

Intuitively it can be seen that FPI investment will increase in the debt segment. Today, investment is permitted but not more than 20% of the permitted limit gets absorbed as interest is limited. With the inclusion in global indices, there will be automatic interest generated. Further, just like how funds trade in specific scrips of the Sensex which behave in a certain manner when the index moves, there will also be additional interest in buying such securities in the bond index. Hence there will be secondary interest too in GSecs.

The immediate advantage is that there will be more dollars flowing into the market. Hence the pressure on domestic investors, which are primarily the financial institutions, will come down. In fact, banks will have more space to lend to the commercial sector. On the other hand, as these 23 securities are already issued, the demand for such paper will rise leading to a decline in yields assuming the status quo in other financial conditions. Hence typically once included in the bond index, interest rates could move downward in the market. The beneficiary will be the government as it will be able to raise funds at a lower rate, other things being the same. The benefit for corporates or households will not change as their borrowing rates will continue to be linked with the repo rate that is guided by inflation perspectives.

There is hence some reason to be excited about this development. Prima facie it appears that there can be around $ 25-30 bn that can come in once the share of Indian government bonds in total goes up to 10% of the total weightage in the index. This may not be a large amount, but considering that flows have been whimsical so far, a steady inflow will be useful to strengthen the balance of payments situation. The collateral effect is that once included in a global bond index there will be a nudge to other owners of indices like Bloomberg, Morgan Stanley, and Goldman Sachs etc. to also include Indian securities. This is so because often traders arbitrage across indices thus adding to the volume of transactions. Hence, this can be another positive outcome for India.

One must however remember that just as FPI flows have boosted the stock market as well as flow of foreign exchange, there are good chances of withdrawals too which can spook the market. Hence it will also be necessary for other institutions like mutual funds to step in and support the market though admittedly they will be constrained by their investor preferences. But it may be useful for the market to evolve stabilising traders who can offer support when there are erratic swings inflows. These swings can be caused both by perceptions of the Indian economy or even extraneous developments.

For example, a high fiscal deficit of the government or even a failure of a disinvestment process can cause ripples in the bond market. At the same time, a decision of the Fed to do away with the support of the liquidity programme can lower the quantum of investable funds thus causing a withdrawal from emerging markets. Or at times investors may just like to book profits which can cause a sale in the market. This is something that we have to be prepared for which is the case with any developed and evolved market.

The immediate reaction to the news was positive with bond yields coming down by 5-7 bps. But it has been back to normal subsequently. So clearly the benefit will be seen only when the inclusion actually takes place and funds come in. In the interim period, there could be certain positions taken in the market in anticipation of the inclusion in the index which can add some buoyancy to the market. This however needs to be monitored.

The inclusion of Indian government securities in the bond index is also a strong signal sent to the global credit rating agencies that they need to take a different view of India’s sovereign rating. If the trading community now recognises the strength of the Indian economic story, there is the reason for an upgrade for sure. This is definitely signaling a victory for India that it is not just the FDI investors but also the market investors who smell great opportunity here.