The February exports puzzle: Business Line March 20, 2017

While it hasn’t been proved that a weaker rupee helps exports growth big-time, a stronger rupee will come in the way

The exports performance for February 2017 has been very impressive with growth of 17.5 per cent, which is one of the highest rates recorded in the last five years or so. In October 2014, growth was 14.3 per cent, which is the next highest growth rate. Is there reason to cheer?

Cautious cheer

Prima facie there is reason to be satisfied as growth has turned positive for quite some time now and it is reasonable to expect that growth will be in this zone in the coming months too given that global economic conditions are definitely not deteriorating even though the growth process is localised and sluggish. The exports picture today has, however, been distorted considerably in the last few years with global conditions being weak and the rupee particularly strong. The former is important as it reflects the inherent demand strength while the latter relates to the competitive edge that can be had by having a weaker rupee.

The January world economic outlook put out by the International Monetary Fund has projected growth at 3.1 per cent in 2016 for the world economy compared with 3.2 per cent in 2015, with world trade volumes slowing down quite perceptibly from 2.7 per cent to 1.9 per cent. Hence, demand conditions do not appear to have been very bright for the greater part of 2016, which could, however, change in 2017 with the US economy poised to revert to the upward growth path. The rupee has depreciated by just about 2 per cent during this period which was very moderate compared to the extent to which other currencies of the emerging markets were impacted. Therefore, the export advantage on price was not evident.

The cumulative picture till February reveals that growth was 2.5 per cent as against -16.4 per cent in FY16. Hence there has been a statistical base advantage this time. Growth in monthly exports for the period September 2016 to February 2017 witnessed continuous positive growth numbers and peaked in February. There were sharp declines in the growth rates in exports in the comparable months in the previous year which does moderate the initial emotion when viewing growth rates for FY17.

Preliminary data also suggests that engineering exports grew by 47.3 per cent which is impressive. Such data has to be treated with caution because if this number is to be interpreted as being resurgence in exports due to due to buoyant demand, there has to be a corresponding increase in production on the domestic front.

Juxtaposing the scenario presented by the index of industrial production, it does appear that there was a one-time increase in growth of capital goods by over 10 per cent (which however did come over negative growth of around 20 per cent in January 2015), which can probably explain the lagged effect on exports growth in February. Growth has to be witnessed on a sustained basis to convince that exports have really turned the corner. None of the other products have witnessed a high growth to provide assurance that growth in exports is well spread across all industries.

Another component that has grown sharply is refinery products, by around 28 per cent in February. Here growth can be attributed more to the fact that crude prices increased during this period, enhancing the value of these exports. In fact, when crude oil prices were reining at a high level in 2013, refinery products accounted for around 25 per cent of aggregate exports, which has come down now to around 10 per cent.

On the imports side too, there was an increase of 60 per cent in oil imports in February which again came over a negative growth of 21.4 per cent last year.

Therefore both the growth drivers of exports in February 2017 have certain qualifications attached.

Interpreting data in the Indian context has become fairly complex over the years due to the fairly volatile behaviour of various sectors, which is also reflective of unbalanced growth.

The new measure of calculating GDP has exacerbated these anomalies where the headline number does not rhyme with the individual components.

A sharp drop in growth rates in years for any variable has tended to overstate the extent of growth when there is a recovery. This has also been associated with sharp spikes in single months that have become quite common especially for industry. A couple of large orders or contracts being delivered or executed have caused these spikes in growth that get corrected subsequently. This also tends to get reflected in the growth numbers.

The thumb rule

Ideally a three-month period of sustained growth numbers can be a thumb rule to ascertain whether or not there is a turnaround. But even this formula can be misleading at times as is the case with exports growth this year.

Further, the delinking of such performance with the underlying, that is industrial industrial production does make interpretation more challenging.

The coming year will be interesting for our foreign trade as the US economy is expected to recover, which can be deduced from the Federal Reserve increasing interest rates and indicating more similar actions.

This can be good news for exporters who, however, will have to also contend with the negative effect of a strong rupee.

The recent appreciation may be considered to be a temporary aberration, but the Reserve Bank of India may have to keep a closer watch and intervene in case the rupee strengthens beyond fundamentals. Otherwise, while it has not been proved unequivocally that a weaker rupee helps in exports growth to the extent that it does, a stronger rupee will come in the way.

Understanding the Black Economy and Black Money in India: An Enquiry Into Causes, Consequences and Remedies: Financial Express 19th March

An attempt to explain what constitutes black money and if demonetisation helped to check it

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Understanding the Black Economy and Black Money in India: An Enquiry Into Causes, Consequences and Remedies; book review

An attempt to explain what constitutes black money and if demonetisation helped to check it

By: Madan Sabnavis | Published: March 19, 2017 4:16 AM

The author does not believe that the arguments of low salary of the executive or high inflation, tax rates and regulation cause people to cheat by taking bribes.

Black money is the most widely spoken about subject in the country following the demonetisation move by the Narendra Modi government. This is understandable, considering that it has generated extreme views. Those who support it say that it had to be done and was an experiment worth trying out. Those against this move feel that not only was it an unmitigated failure, but was done without proper reasoning.

Arun Kumar, who leans on the latter, goes into the depths of the concept in this book to explain what constitutes black money and the measures that could be taken to control it, besides giving his take on the November experiment.
The author makes his own calculations on the size of the black economy, which is estimated to be 62% of the GDP; and works back to show how much money has been lost by the government in the form of tax collections since the Seventies, which could have been used to ameliorate poverty and improve the standard of living of the people. India would have been much higher in the order of wealthy nations, as the per capita income would be R7 lakh, or $11,000, instead of the abysmal number we see today.

There are three sets of people as per Kumar who are responsible for the creation of this economy. These are politicians (they are always a part of this definition by any author), businessmen and the executive. The executive is interesting, as the author defines this segment as comprising bureaucrats, police and the judiciary. Unless all three are appropriately put in place, it will not be possible to really reduce the incidence of black money.

He admits the argument that black money is a spending that aids growth, but argues that it holds only to an extent and gets lost beyond a point. Also, he agrees that when we calculate GDP, there are several imputations made for the informal sector that could subsume the black economy. But these numbers get understated because of the ‘triad’, which ensures that the black economy is robust.

The author does not believe that the arguments of low salary of the executive or high inflation, tax rates and regulation cause people to cheat by taking bribes. He gives a common example of housing in Delhi, where all parties are involved in permitting breaking of a law relating to the size of houses, as they are hand-in-glove, starting from the public sweeper to the courts that ensure that the owner gets what he wants. To top it all, we have criminals who join the fray and could be a part of the executive just as easily as politicians and businessmen. This ‘triad’ is of great benefit to all its constituents, as businessmen are able to influence policymaking and protect their ill-gotten wealth with the connivance of the executive. The other two need the businessman to invest and launder their funds. His take is that every politician has at least one businessman who provides such services.

Quite importantly, Kumar is critical of the demonetisation programme of the government and strongly argues that it was founded on spurious assumptions. Let us look at some of them. Almost all the demonetised currency was not black. Only 22% people have access to the Internet and can’t do Internet banking. Only 17% have access to smartphones and can’t do mobile transactions. The big fish were able to convert their funds thanks to the ‘triad’ links and hence only the smaller ones got caught, which is miniscule. Demonetising high-value notes and replacing them with denomination of R2,000 was absurd and should have been thought through. And last, it will only be some time before the counterfeit currency will come back. Unless we catch the counterfeiters, we can’t stop new ones from being printed.

What could be the way out for stopping such proliferation? The author is against amnesties for two reasons. First, they do not work and the record of the recent disclosure scheme is quite pathetic, given the size of this economy. The second is that it shows the government as being very weak that it admits it can’t catch the people and offers them a reprieve, hoping to flush out such funds.

Now what can work is having an effective RTI, which covers everyone and excludes nobody, with information being available on demand rather than having cumbersome processes that make access difficult. Further, when one is aware of wrongdoings, there is need to take action rather than keep things moving in abeyance, so that memory forgets, like the Lokpal Bill that has so far not led to the appointment of a Lokpal. This has to be combined with autonomy to institutions such as CVC, CBI, ED, RAW, etc, where the appointments should not be made by the government. This is important, as they have become tools for the government in power to cover up their own follies and put others in the dock.

In the medium-to-long-term, the tax policy has to be reviewed and changed, such as setoffs for corporates, which, he believes, are due to the ‘triad’ connection, where politicians protect the interests of corporates. Old laws need to go: haven’t we been talking of this for over three decades now? Reforms in the executive have been mooted. But the challenge is really as to how do we get this done, considering that this has been on the table for a long time now. The same holds for reforms in the corporate world and the role of the board of directors. Several measures have been taken, but at the end of the day, there is really no change in the way in which the ‘triad’ works. Here, one senses some despair with the author, as he writes on these subjects with a lot of passion.

The release of this book is timely, because it comes from an expert in the area of black money. While there is a lot of theory explained with possible solutions, it does buttress what has been in the minds of most people that the demonetisation exercise has not quite worked the way it was expected, mainly because it was based on questionable hypotheses and was clearly not thought through properly. Kumar takes the stance that this has damaged the economy, which may not be a general feeling, though one may have to just wait for some time to figure out where the truth lies. There are at best only mixed signals available today on the course of the economy following this grand plan. The rest, time only will tell.

Arrow, India and elections: Impossibility of solving the Impossibility theorem: Financial Express 13th March 2017

Having all sections participate in governing the country leading to policy formulation sounds fair enough, though at the end of the way there are other factors at work which make governments pay more obeisance to these forces like globalisation, fiscal prudence, etc

Kenneth Arrow’s famous impossibility theorem is compelling not just from the point of view of working out the math involved, in the lecture theatre of Delhi School of Economics, but because the contemporary developments in the world today make this theory relevant. It has a lot of applicability in our framework of political choices and economic decisions, where we always feel that the final result of any system of selection is never close to what one can call a collective view.

Arrow’s theorem basically says that when we have a system of voting to arrive at a collective social choice, we can rarely have one which satisfies five basic tenets. These are first, a situation where everyone has the chance to rank all the preferences that are offered. The second is transitivity in the ranking where if A>B and B>C, then A>C always holds. Third, the solution is Pareto efficient in so far as if every citizen prefers an option to another, then it is socially the best one. Fourth, there is definitely the absence of a dictator who overrules and decides what is good for the citizens, and last, decisions taken are independent of irrelevant alternatives.

One of the conditions put here is that we must have at least three alternatives rather than a referendum variety where the choice is between a ‘yes’ and ‘no’. Curiously, the Brexit had its share of critics. It was argued that a decision taken by a majority vote which was defined as being marginally over 50% though reflecting the ‘majority’ could still not be ideal. It was argued that higher ratios like 67% or 75% must be used. But if the 51% rule is not used and a higher cutoff is pitched for, then there will rarely be any mCloser to home the UP elections can be a good illustration of Arrow’s impossibility theorem. How about the other axioms? People surely did have their choices or preferences between the BJP, Congress-SP and BSP. If these parties are denoted by N,C and B, respectively, in general it could be argued that N>C based on what happened in the elections at the centre. Further, it may be assumed for the sake of argument that if C>B, then N>B must hold. But this will not be so as people in society have different ways of reacting to parties and persons as well as the perceived dogmas. Therefore, transitivity cannot be taken for granted in this case.

This conclusion will come out sharply in case one of the parties does not field a candidate. Let C not be in a constituency. Will all their votes go to N which should be the case if rational behaviour held? Unlikely again, and it is just possible that all the votes for C could go to B. This is why when multi parties contest the elections those which win may not need to get more than 30-35% of the votes and only have to ensure that the rest get a lower share of the votes. This is the condition of ‘irrelevant alternatives’ skewing the show while N is preferred to C which is better than B, when C steps out, B could emerge the winner. This has invariably been the case when it is a three or four cornered contest.

The same can be taken into the world of economy policy making where we assume that since there is a government that has been elected by the majority rule–which as discussed above could flout the logical way of social choices being expressed, now has the power over policy formulation. A look at the budgetary options can illustrate this point.

Let us assume that there are three options for allocation of funds which address the concerns of different segments of society. These are infra spending, subsidies and salaries. The rich talk of infrastructure as they would like to have swankier airports and highways where they can drive their BMWs. The poor will be happier with more subsidies as this affects them the most and this class which is not bothered about the wastages or leakages as long as they get something. The middle class is happier with salaries being increased because at the end of the day they need to run their households with a decent level of comfort.

In this situation too one can never reach a transitive state, as the rich will prefer infra to everything else with subsidies being the third preference. The poor will have an order of subsidies, infra and salaries while the middle class would have salary at the top of the list and could toss between the two. However, if the subsidy part is deemed irrelevant when going for a vote, then salaries may be preferred to infra creating an anomaly. Hence, if social choice is to be decided by logical ranking of all preferences based on numbers, the scales may tilt to subsidies as most people would like it and infra could be the last.

This is where the dictator plays the part which could be the PM or FM or FS where it is decided that society needs infra the most followed by salaries and subsidies and hence a decision is reached. Hence, the final outcome of any policy will never be the view of the majority and is invariably that of the elites which have been elected by the people to serve them.

This deduction is interesting because it can take one back to the theory of social contract where Jean Jacques Rousseau questioned whether there can be a legitimate political authority. By having such systems which Arrow spoke about, it may appear that at times people may be better off in isolation. When people in a democracy elect a government, which as can be seen may not be consistent, then individuals surrender their freedom to this government which then decides what is good for all. The policies which go beyond the Budget as was explained earlier would again tend to wean towards the elites and may not lead to an optimal social decision.

Is there a solution to this conundrum? Not really as there can never be a system where all ends meet. Having all sections participate in governing the country leading to policy formulation sounds fair enough, though at the end of the way there are other factors at work which make governments pay more obeisance to these forces like globalisation, fiscal prudence, etc. But quite ironically people still get swayed by slogans and not express themselves differently the next time at the ballot box.ajority decision which can be arrived at.

The Wealth Wallahs: : Book Review in Financial Express March 5, 2017

BIOGRAPHIES ARE quite common these days, with the author narrating the story of the protagonist. In The Wealth Wallahs, Shreyasi Singh talks about first-generation entrepreneurs who have made a mark for themselves in the world of business. These persons are in the age group of 40-60 years. By tracing their backgrounds and business lives, and based on their outlook, Singh has been able to draw some patterns, helping draw some generalisations. This is what makes it so refreshing, as the book is developed around a theme and the characters fit in unlike other books, where authors choose the character and then fill in the story. It makes a difference to the reader who is better able to appreciate the value created by these people.

The Wealth Wallahs is broadly divided into two parts, where the first focuses on how first-time rich people approach business, which is quite distinct and different from conventional and well-established business houses. This theme is developed quite well by the author, where perspectives are also provided on our attitude to wealth and the inequality that goes with it—this has become a big issue, especially after Thomas Piketty wrote his epic book focusing on the problem. The second part of the book is focused more on wealth management, with emphasis on a single company, IIFL Wealth, and the stalwarts there who have created value not just in terms of ‘company valuation’, but also in terms of clients.

An interesting point made by Singh is that first-generation entrepreneurs have a certain idealistic goal of creating ‘value’ rather than ‘money’—the examples of Raghav Bahl and the entire IIFL Wealth set-up point to this. Unlike the progeny of successful businessmen—the author doesn’t take names, but the indication is clear—this class of people is different in terms of lifestyle and approach to business. While they are wealthy, they are not ostentatious and this makes a huge difference. There is humility not just in speech, but also in living. Hence, having a good house in an upmarket locale isn’t flaunted. The values inculcated at home are also simple. Here, Singh draws a comparison with Chinese entrepreneurs who live an ostentatious life and love to show off.

The author also points out the views of these new-age entrepreneurs when it comes to philanthropy and this makes interesting reading. While all businessmen talk about it, this generation means it and does so silently.

A large part of the book is devoted to wealth managers and this is where IIFL Wealth takes over. There are lots of stories about several persons, where the names might not be too familiar to the reader, but make interesting reading nonetheless. Perfunctory remarks have been made about IIFL founders Nirmal Jain and R Venkatraman, the faces of the organisation. However, there are also several other wealth managers who are covered in this book. The strategies that have been adopted by them when approaching clients, as well as while deploying funds to maximise returns have been elaborated in the book.

There are several tips given on how to approach a client and do business. The trick is to balance aggression with restraint. While one should be client-centric, it should not come down to servility, says the author. There is, hence, considerable maturity required when dealing with clients.

There are definitely some takeaways for entrepreneurs looking to get into this field, as the book provides a roadmap for them to pursue. It talks about values, which should not be lost and provides a clue on what not to do when running a business. Chasing value creation should be the goal, which results in wealth, but an untrammelled quest for wealth might have pitfalls in terms of compromise in principles, governance and value creation. These are some points that can be drawn from Singh’s work.

GDP growth: New estimates have put CSO in the news again: Financial Express March 3, 2017

The new intellectual inputs that went into the computation of the new series of GDP with terms like basic prices and distinction between product and production taxes being thrown in, has added to the level of confusion when interpreting these numbers. Nobody can pin point as to what is amiss in the methodology, and hence it must be right. But every time the estimates come out, there is scepticism as the numbers do not quite gel with the ground reality. The Q3 results add to this debate as it demonetisation did not quite matter in terms of impact on growth—the number is really good at 7%. No agency or economist expected such a positive scenario.

To be fair, the CSO numbers do tell us that compared with FY16 when growth was 7.9%, FY17 would be inferior at 7.1% which means that 0.8% has been shaved off due to demonetisation as there was nothing else amiss in the economy. Q3 and Q4 were to be the leading quarters, and hence it is possible to argue that at 7% in Q3, growth would have been higher in case there was no demonetisation. In fact, at the start of the year, it was assumed that growth would be around 7.6% and with a bit of luck could touch 8%. Hence, the economy has definitely come lower this year.

Further, the segments that were affected quite sharply were real estate, consumer goods and construction, which is what the Q3 growth numbers do reveal. Consumer goods, however, remain an enigma as manufacturing has grown at a high rate of 8.3%.

Two issues need to be addressed by the CSO. First, it is essential to create a series for the earlier years prior to FY12, so that one can benchmark these growth rates. The present series which keeps GDP growth broadly in the range of 6.5-7.5% for the last 5 years or so, may have had much higher numbers in the good pre-2011 years when the FY05 base year yielded growth rates in the region of 8-9%. A conjecture could be that this could be 9-10%, in which case it is possible to position the growth rates of 7% in the present context.

The other is to match growth in physical numbers with value added, which holds especially in industry where there are clear corresponding numbers available. For instance, value added in mining, manufacturing, electricity and construction grew by 7.5%, 8.3%, 6.8% and 2.7%, respectively in Q3-FY17. In physical terms, IIP shows that growth rates were 5.2%, 0.20%, 5.25% for the three major segments, and steel (12.5%), cement (-0.85%) which are taken to be synonymous with construction. The difference for the three leading sectors is 2.3%, 8.78% and 1.5%, respectively. So, low production lead to high value addition. The argument that manufacturing is producing more high value items which even on low physical production numbers yields high value addition no longer holds as this would be the case for all the years and does not reflect a single year phenomenon as the base for comparison would be progressively higher. As value addition is sum of profits and salaries, does this mean that while jobs have not increased, value addition has and led to disproportionate gains for owners of capital? This would be of interest to Thomas Piketty.

Another area which has to be addressed is the case of constant revisions to GDP estimates, which has become a norm. The FY17 numbers released in February 2017 would be different from those in May 2017 when the first annual estimate is provided which will then further undergo a change when the first advance estimates for FY18 come in January 2018 with revised FY17 numbers.

For FY17, the GVA numbers for the first two quarters have been revised downwards by up to 0.4%, while GDP growth numbers have improved. In FY16, the variation in GVA between the first set of estimates and the ones provided this time was as high as 0.9% in Q2, while GDP strayed by 0.6% during this period. Such deviations are serious as they could change the judgement from being good to ordinary or the other way round. Based on such experiences, it could be possible to work on the assumption that there could be up to 0.5% change in the number when the final estimates arrive.

The issue to be debated is whether or not the CSO should be in a hurry to bring out high frequency data which is susceptible to wide swings. The counter argument would be that having some indicative numbers is better than not having any such guidance and if all operators work on the principle of ‘plus/minus 0.5%’, things will still be manageable.

The major challenge for the CSO is the existence of a very large unorganised sector. Agriculture is tough because even the ministry works on guesses all the time as a large part of the output never enters the market as the marketable surplus is lower and has to be estimated. Further, all sales transactions are not recorded which makes it difficult to arrive at the output numbers. Satellite imaging helps because there is no alten both manufacturing and services, unorganised sector is large. SMEs do not have reporting statements. This also holds for unorganised retail, transport, professionals, hospitality, where there could be under-reporting. Monetising the economy is a way out and introduction of GST should make things more transparent.

There are evidently no easy solutions as the economy is complex and largely unorganised. Getting in the National Agricultural Market and GST which involves online recording will help to diminish the noise elements in the data. The push given to e-filing is also useful. The local bodies especially the panchayats need to be involved aggressively and harness technology to improve the systems of reporting. This surely will be a long process, but should be expedited with a time frame kept in mind while bringing all levels of the government on the same platform.rnative.