FY22 GDP estimates: Some surprises in the internals: Business Standard 28th feb 2022

 The NSO has been quite consistent in its GDP projections for the year. After revising the FY21 numbers earlier, the growth rate for FY22 stands now at 8.9% instead of 9.2% earlier. It was 8.8% earlier and hence, there has not been a significant revision. There would also be a rather wide price deflator with the GDP in nominal terms increasing by 19.4%, thus yielding a double digit number which is closer to WPI inflation. A question raised is whether CPI inflation is the right index to target for monetary policy.

But this also means that based on the 9 months growth so far, there would be low growth of 4.8% in Q4FY22 indicating that there will be a slowdown from Q3.

This has been achieved through a base effect numerically as all sectors have done much better than that last year. This is the positive takeaway from the estimates. The figures on capital formation, however, appear optimistic as the gross fixed capital formation rate is to increase from 26.6% to 28.3%, which is not supported by the activity in the debt and credit market. While the central government has committed to higher capex this year, one cannot be too sure of the states or the private sector.

Simultaneously, the share of consumption and government expenditure has come down in FY22, which is reflective of the economy not yet being fully back on track. The lower share of households’ consumption is a concern because this has to be the main engine to growth as has been reiterated by the Economic Survey. Lower consumption levels is also reflective of the state of employment, which has not been steady as the unemployment rates have tended to be high. The other worrying factor is the continuous increase in the share of valuables during the last two years which is a reflection of people moving over to gold in uncertain times. This is not good for savings.

The third quarter numbers are interesting. The picture is different across sectors: agriculture, manufacturing, construction, and finance have witnessed lower growth rates this year compared with last year. Construction growth has declined while manufacturing has just about been positive at 0.2%. This does come as a surprise because it was expected that the pent up demand story caught on in this festival season and that most companies did say in their corporate presentations that there was a recovery. However, IIP growth remained feeble, which reflected this sentiment. But profits of corporates has been buoyant and should have gotten reflected in better growth numbers. Even in case of construction, the government spending has been steady and it is probably the sale of inventory that was more vibrant than new construction.

The sectors that show higher growth are mining, electricity, trade transport and public administration etc, the latter two have been more on account of the base effect with negative growth being witnessed last year.

The job is still not over and FY23 does need a fresh impetus. Based on these numbers, the growth in the fourth quarter would be lower at 4.8%. There is need to push up both investment and consumption. The budgetary push will provide support from the government’s end. But the main booster has to be from the private sector. Hence, demand conditions have to be more broad-based with the consumer goods segment contributing significantly to overall growth.

Towards another milestone in the disinvestment journey: Indian Express 28th Feb 2022

 https://indianexpress.com/article/opinion/columns/towards-another-milestone-in-the-disinvestment-journey-7793696/

A pitch to remember | Book review: ‘Indian Innings: The Journey of Indian Cricket from 1947’ by Ayaz Memon: February 27 2022

 ricket needs no introduction in India, and countless books have been written on this sport that has the power to halt the nation. And yet, here comes a collection of write-ups on the game that takes fans down memory lane but still offers something new. Ayaz Memon, who is probably one of India’s foremost sports commentators, puts together various articles on the game of cricket in India, tracing the game from the Seventies. This was the time when Indian cricket reached its peak with victories in the West Indies and England. The author includes several articles that were published in various newspapers and magazines in the past, thus giving readers detailed perspective of the game that otherwise might be difficult to obtain from casual conversations or web searches. The second set of articles is by some distinguished names and tracks the game in contemporary times and cricketers such as Virat Kohli and Cheteshwar Pujara.

So, if the book includes recollections of Sunil Gavaskar who played the game, to Harsha Bhogle who has been a commentator for three decades, it also has perceptive views by eloquent writers Shashi Tharoor and Ramachandra Guha.

If one recollects the drubbing India got in 1974 in England with the infamous ‘42 all out’ at Lords, one can read what Khalid Ansari, then editor of the now defunct Sportsweek, had to say.

Today, of course, the game is very commercial but, in the past, it was not so. Sportspersons played the game for the pleasure of it and names like Gundappa Vishwanath come to mind who enjoyed cricket and never bothered about the outcome. Ramachandra Guha has an appreciative piece about him that many followers of the game in those days would identify with.

Another issue is the existence of politics in cricket. Today, we tend to talk about how cricketers are selected and how captains, coaches and managers are appointed, which are not always based on merit. But this was the case even five decades ago when things were dictated from the top. Clearly, the tendency for extraneous elements to intervene in team selection is a part of our DNA and nothing much has changed.

The matches that have been covered in the book are a combination of ones where India won and also lost, though the focus is more on the former, which in a way is good as it is inspiring reading. Some controversial issues like the betting incident have also been covered, which will give readers some idea of the darker sides of Indian cricket. The monkey-gate controversy, too, is included, which was another pressure point in our cricket history.

Memon has earmarked a separate section for the famous Ranji Trophy, which today is almost forgotten by fans and players alike. It was a prime tournament that also brought the game into the public domain, giving the regional public access to the game and when the stadia used to be filled even for league matches. Now it has been upstaged fully by the IPL, which has become an annual feature few miss.

The book includes at the end a speech made by Sanjay Manjrekar that is quite touching as he talks about how in the past, which is the Nineties, batsmen were scared of fast bowlers and would rather not face them. Things changed after Sourav Ganguly and company took over, with Mahendra Singh Dhoni changing the confidence with which we played. He also laments how no one wants to play Test cricket anymore, and how the Board, too, looks more at the shorter version of the game.

Some things stand out as one goes through these articles. Most cricket writers tend to be quite extravagant in their language and there is a lot of imagery that is brought into the writing about the state of the match and the climatic conditions. This has not changed, and for over five decades writers appear to have a predilection to exaggerate as they pump their pieces with emotion and passion.

There are some authors like Shobhaa De whose pieces look out of place in a serious book on cricket. But one can say it is the editor’s prerogative. The first chapter, titled ‘Pitching Stumps’ is his initiation into cricket, which is quite charming. He also includes his comments at the end of each chapter that prove quite interesting. He mentions in the beginning that, “an oft-propagated theory is that sports journalists are failed sportspersons living out their thwarted dreams and ambition second hand, so to speak.”

But rather unassumingly he follows this up with, “I don’t know”. The book can only be described as absolutely delightful and a must-read for anyone who loves Indian cricket.

Madan Sabnavis is chief economist of Bank of Baroda

Indian Innings: The Journey of Indian Cricket from 1947
Ayaz Memon
Westland
Pp 404, Rs 899

Russia-Ukraine War: What it portends for India

 The situation in Ukraine is now one of war, with Russia formally invading the territory even as the world has expressed umbrage and topped it up with some sanctions. This is a big blow for the world, as it is probably the first time that we are witnessing such an attack which is quite unprovoked. Russia is a major oil and gas player in the global economy. This means that any disruption in terms of a war or deeper sanctions that keep Russia in check have the potential to disrupt the global economy, which just appeared to be on the recovery path after the Omicron scare.

What does all this mean for us in India? The first impact has been seen in the volatile stock indices. This of course is part of the show, as markets swing either way based on all the information that is available. Such volatility will continue to pervade for some more time. Second, crude oil price has crossed the $100/ barrel mark. This was expected even earlier, but analysts are talking of $120/ barrel. This will be a concern, given that our oil import bill comes close to $150bn a year and hence, any increase in price will affect our trade deficit.

While consumption did fall during the pandemic in 2020, it has been back to normal and with pent-up travel demand increasing along with the proclivity to use one’s vehicle and eschew public transport, there has been an increase in the consumption of oil products. Hence even a 10 per cent increase in price on a permanent basis will increase our annual import bill by at least $10-15bn (there will be some balancing by higher exports of refinery products).

Therefore a higher current account deficit seems to be on the cards for sure. Third, higher oil prices also mean that there will be pressure on the rupee and this is where the markets are getting jittery. The rupee had been strengthening of late but this will get reversed and there is potential for depreciation now, depending on how soon the oil prices climb. This, in turn, will depend on how strict the sanctions are because in case there is an embargo on imports from Russia, the potential rise in price could be phenomenal, given that it is the third largest producer of oil. The rupee is now down past the Rs 75/$ mark.

Fourth, the threat of inflation is real, again. The RBI had assumed that inflation would be 4.5 per cent next year and the Budget too was talking of it being in the 3-3.5 per cent range. Now, with the Budget not providing for higher subsidy on fuel as well as fertilisers and excise collections not assuming any cut in the duty rate, it does look like that the price hike in crude will be felt at the retail end. In Mumbai, for example, as we pay Rs 110 a litre for petrol, the cost to the refiner is Rs 48, with another Rs 4 going as agency cost. The excise rate is Rs 28 while the balance is VAT charged by the state. The price has not changed in the last couple of months, ostensibly due to the ongoing state elections and hence, it was expected even before this crisis that the price would be hiked.

Even with unchanged duty rates, 10 per cent increase in crude prices will lift the basic price to Rs 53-54 for the refiner and be reflected in an increase of 5-6 per cent in the final price. While this may not be very significant when it comes to the inflation index which is considered by the RBI, the pain will be palpable. In fact, the secondary impact will be sharper as freight rates increase, which gets embedded in the final price of all other food products too. Hence the situation is one of concern for us in India. The inflation impact will be sharper when looked at from the point of view of the WPI, where fuel products have a higher weightage in the index. Intuitively it can be seen that as there is a pass-through of this inflation to the final product, the price increase can get generalised even at the producers’ level.

Russia is not a major trading partner of India and hence, on the external side, there will not be a major impact. But due to the currency and price effects, there will be disruptions. The government and the RBI will have to reconsider their assumptions in case the situation persists for a longer period of time. If the crisis is defused by March-end, then it might be considered a passing shock. However, if it does persist, action may have to be taken by the government by lowering taxes and the RBI may have to start increasing interest rates sooner than expected. The immediate barometer of all such expectations is the bond market. Yields have started moving up after coming down, after the RBI policy. The 10-year bond has gone past the 6.75 per cent mark in the last few sessions, after going below 6.70 per cent. Therefore, there will be uncertainty for a longer period of time.

Beware the blind rush for ESG ratings: Mint 22nd February 2022

 

Today, if one wants to see how a college is placed in the pecking order, one can get confused. Several ranking systems exist and their results are not consistent, especially if one excludes the top institutes. Now Environmental, Social and Governance (ESG) investing is the ‘next big thing’, with everyone talking of it. Are you ESG compliant? This question will be asked of every company and is hence very important. The government is talking of issuing sovereign green bonds and the recipient of funds must be green-compliant. Foreign investors are keen to invest in ESG-complaint firms. The Securities and Exchange Board of India (Sebi) has come out with a paper on how credit-rating agencies (CRAs) should go about this exercise. But wait. Some CRAs already have ESG grades for around 500-1,000 companies. Was that just a rudimentary exercise or has it been trivialized?

Such ratings have been assigned ostensibly based on the annual reports of companies. Sceptics suspect these self write-ups could loosely be called “bluff sheets", or, to be generous, “selectively crafted". Let’s see how. All companies claim that they are doing a lot for the environment. While businesses say they have changed bulbs and use auto switch-on/off power devices, how many have dispensed with, say, bottled water? Private firms in particular make employees work well beyond office hours, which consumes a lot of power with large servers running overtime. There is something amiss here.

‘Social responsibility’ is also fuzzy. Every directors’ report talks of how employees are the most treasured resource. But look back. During the pandemic, private companies with big reserves sacked employees or made them take pay cuts. Was this employee friendly? Hence, while we see touching images of donations made to village schools, the harsh reality is that labour is retrenched every now and then on grounds of enhancing shareholder value. It is another thing that in these years, the top management laps up the cream in terms of increments. Therefore, self proclamations are often an eyewash.

Governance write-ups can be questioned. Typically, firms talk of their board composition, number of independent and women directors and the count of meetings attended. Does this mean these boards are good and the best practices of governance are followed? It is well known that in some owner-driven businesses, even reputed directors are mere dummies. As for professionally-run firms, how often have we heard of boards sacking incompetent and abusive chief executives? It’s very rare. Typically, members spend not more than 24 hours a year, earn ₹12 lakh upwards and are not really interested. One can recollect an infamous case of sexual harassment in the hospitality industry where the impotent board did not act and the lady had to leave. Even through the recent crisis of the shadow-lending sector, directors were not blanked out from other boards. The recent episode of a stock exchange’s governance further weakens confidence.

Therefore, assigning ESG scores based on annual reports is fraught with risk, especially if these are to be used for critical investment decisions. So, can CRAs do this job? Only a measured answer is possible because the past does not inspire confidence. First, CRAs have faced problems with getting data from companies when they rate debt. The number of ‘Issuer not cooperating’ cases for surveillance has increased manifold. Once such firms procure a rating, their continued cooperation is not easy to obtain. The recent announcement of entrusting CRAs to check the use of initial public offering (IPO) proceeds has thus drawn mixed reactions.

Second, there is inherent conflict of interest. CRAs have subsidiaries which would do such ratings. Given that rating shopping is the order of the day, if a large company that pays a CRA, say, ₹5 crore in fees for a debt rating also asks for an ESG rating, risks of a compromise assessment cannot be ruled out.

Third, CRAs have little competence in evaluating environmental and social impacts. Horses that are raced at Mumbai’s Mahalaxmi race-course differ from those that carry the elderly at hill stations, and the same applies here. Therefore, a careful evaluation of all CRAs is necessary, and a blanket permission for the job would be inadvisable.

Fourth, some CRAs are talking of using artificial intelligence and machine learning for rating operations, which can be disastrous because algorithms will use annual-report data that can’t always be taken at face value. This should definitely not be permitted. Humans must decide ratings, not machines.

So, what is the way out? First, Sebi should mandate that this job be done by research institutions that specialize in ESG assessments. Second, if CRAs have to be involved, it should be selective. Those that have stood the test of time could be allowed, while others should be evaluated more seriously. Third, even within CRAs, it should insist that those who work on these ratings should be specially qualified for the task. An external rating panel with experts in these fields should be compulsory until the system stabilizes.

As we embark on an important journey of ESG ratings that also involves India’s government now, we need to ensure that no loose ends are left that can return to haunt us. We must keep in mind past episodes of failure in the rating industry for a strong edifice to be built. A slow beginning is better than rushing in and then finding it difficult to go back. The crypto case is a cautionary example; it seems hard to control crypto proliferation and there are only compromises being made.

These are the author’s personal views

Facts & figures | Book review: ‘Whole Numbers and Half Truths’ by Rukmini S: Financial Express 13th February 20222

 Few of us believed the Covid numbers that were officially declared in India, or for that matter the resulting data on deaths, especially when one looked at the stupendous performance of Uttar Pradesh, which has a reputation for being one of the poorer states with inadequate social infrastructure. The answer is not difficult to guess. While it could have been that numbers were not being fully stated, the problem is really that when data is picked up, it is from public hospitals and not private ones. Therefore, the understatement may not all be deliberate but a system problem.

It is issues like this which make Rukmini S’ book, Whole Numbers and Half-truths, extremely engaging. Let us look at another serious data point. Data shows that most rape convicts are acquitted. We may jump to the conclusion that something is wrong with our system that allows such heinous criminals to get away. The truth is something different, which is surprising. Most of those acquitted, according to the National Crime Records Bureau, are men who were already in a relation with the women, and often the charges are pressed by parents of the girl to stop marriage or the affair. This may give false comfort, but the scary part is that rape cases are much higher but don’t get reported as people fear going to the police station, or the stigma attached is overbearing. Or, worse still, the cases are not registered when influential people are involved.

The author, a data journalist, provides a detailed and eye-opening view on several issues that we take for granted, or probably are not aware of. In fact, when she talks of marriages and customs, the revelations are quite startling. Even youngsters finally prefer to marry according to their parents’ wishes and hence the religion and caste divides remain, which can extend to sub-caste too. Men are found to obey their parents when it comes to choosing a life partner. This holds not just in rural but urban areas as well, which is quite a surprise, as we may tend to think that as society evolves and westernisation prevails, people become more open to inter-faith marriages. In fact, as an extension, even live-in relationships are not an option for most couples and hence stories which we hear of are clear outliers.

In a complex society as ours, we often tend to make several assumptions based on a limited liberal view which most readers of this paper would probably hold. But the truth is different, as conservatism is still the rule and no one wants to upset the applecart. This is why in various surveys no one really minds curbs being put on free speech, which is what liberal societies encourage. In fact, democracy is not something which people really want, and the majority does not mind being ruled by a tough hand. This is also clear as one can see today that lockdown in liberal societies of Europe have been opposed to the extent of mini rioting, while in India despite the trauma gone through by the poor, no one protested and was convinced that the government was doing the right thing. Even when the poor and migrants suffered during lockdowns, there was no outcry from those affected although civil society raised many flags.

The same held for demonetisation, where, at the end of the day, people did not reject the party that invoked what could be called a failed scheme. Most people surveyed felt that such freedom of expression was not even an issue worth discussing and what was happening was right. This is probably why when we do hear of stray cases of, say stand-up comedians being taken to task by cops or banned from performing, it may lead to some umbrage from a tiny class of liberals, while the majority really don’t care.

Rukmini S has various chapters on what we believe, how we earn money, how we spend it and so on. All these chapters are data supported without getting heavy, which is an advantage experienced journalists have relative to academicians who get bogged down in a plethora of numbers.

Her analysis on religion is also quite interesting. People still vote based on religion and caste and hence there is some polarisation. Personally, people do not really have any animosity towards people of other faiths, but would still like to live in their own community, and as stated earlier, marry within rather than outside. This does lead to the problem of ghettoisation for Muslims in particular, as they have to end up living among their own community. This is not an encouraging commentary on social life because even though the majority don’t believe in ostracisation of others, the preferences are for being with people who belong to their own social group.

She also raises the controversies over the consumption data that the CSO got embroiled in, when the data was supposedly not published because it did not reflect well on inequality. So the best way out, which is an Indian habit, is to get some well-known economists to rubbish the methodology and then recommend withdrawal of the survey results! This works.

Whole Numbers is a must-read book for everyone as lays out in stark numbers what happens around us. It also explains why often things don’t change, and we remain a conservative society that prefers not to upset status quo. Also, data is nimble and can be turned around and showcased according to convenience.

Whole Numbers and Half Truths: What Data Can and Cannot Tell Us About Modern India
Rukmini S
Westland Books
Pp 326, Rs 699

Are we liberal enough to allow crypto currencies? Mint 11th February 2022

 

The Union budget for 2022-23 has evoked different reactions from various sections. One can detect optimism among corporates, a fatalistic sense of resignation in the middle-class, and perhaps raised eyebrows among lower income groups. But the smug expressions visible in various TV debates were sported mostly by crypto dealers, who were clear winners at the end of the day. There have been off-the- record clarifications made to the effect that merely making crypto gains taxable does not confer legitimacy on crypto tokens. This is rather peculiar, because governments cannot levy taxes on illegitimate activity. But crypto exchanges and dealers appear to have taken the crypto tax announcement to mean that their business is now safe.

The declaration that there will be a central bank digital currency (CBDC) issued by the Reserve Bank of India (RBI) has been taken as a further sign of crypto legitimacy: If RBI is doing it, then there can be nothing wrong. But there is a big difference. Our CBDC will be an e-rupee and thus a substitute for paper currency, and it cannot be traded as its value is what is on the paper or in the account. This is not so for crypto coins. The two cannot be likened. The temptation of CBDCs across the world is ostensibly to leverage blockchain technology. Here, technology seems to be an end and not the means, which deserves more deliberation.

Giving some kind of legitimacy to crypto trading raises some serious questions for regulators. First, do we know whether all the trades that are taking place in cryptos are dealing with actual cryptos, or is it a case of these exchanges mimicking what happens overseas? There is a distinction.

If the dealing is in actual cryptos, then RBI should ask whether there have been violations of India’s Foreign Exchange Management Act, as one is not allowed to use forex for speculative purposes. Payments for most cryptos have to be made in foreign currency, originally, and only after possession can they be sold domestically in rupees. But the origin must have a forex link which may not be accounted for. Even derivatives dealings are not permitted in overseas markets. Crypto buyers could argue that cryptos are not specifically banned while making use of forex under our Liberalized Exchange Rate Management System, and hence nothing wrong was done. Still, RBI should clarify this.

If on the other hand this is about mirrored trading, which is analogous to what is called “dabba trading" in our stock and commodity markets that is banned, then there would be no forex violation. This is like watching a stock-market terminal and trading separately without any trail being left and gains and losses being netted off. But that is not permitted. In fact, some crypto dealers have boldly declared in the media that the 30% tax will only drive transactions underground. Now that is not a good sign for RBI or Securities and Exchange Board of India.

The curious thing about such trades is that even in the NDF (non-deliverable forwards) market that is based overseas and used for hedging and speculation, no currency actually gets exchanged, but only the net gains and losses change hands.

The financial system has gotten complex with all kinds of financial engineering going on.

Another issue is the origin of the crypto tokens being traded in India. How can we be sure that purchases were not made from drug dealers or mafia groups residing overseas? There are strong rules against smuggling and hence these issues will trouble regulators once legitimacy is given.

The third is an ideological issue. If we allow trading in cryptos, it would be similar to trading in fiction. In we go ahead, there would be a case for making gambling of all sorts legal and letting casinos open across the country. There are lots of people who would like to try their chances in casinos and would be willing to pay 30% tax on their gains.

This is no different from crypto trading. Both are driven by chance and the chips in use have no underlying value. If cryptos are allowed and so is Dream11 (for online gaming), then even casinos must be permitted. This could also rake in good tax revenues for local authorities. Note that for every trade on any exchange, there is an exchange of a share certificate or commodity or currency. But here, there is no such back-end. As with a roulette table, crypto trading cannot distort any real market, which makes it alluring.

The indirect acceptance of crypto trading is definitely a bid odd, as regulators are still working on the same. As crypto dealers have argued, just like people should not trade in equities without knowing the equity market, the same holds for cryptos. Customer protection, therefore, should not be incumbent upon regulators. As an extension, one can ask whether trading in fiction is comparable to trading in a commodity, stock or debt. If it is like none of these, existing exchanges should be allowed to deal in cryptos, since these tokens have no underlying value and their clearing and settlement is an easier process. Commodity exchanges should be permitted such trading, as their scope has already been restricted with regular bans being imposed.

This may be a good time to reflect on what should be permitted and what not. If we are liberal-minded and follow a more open moral code, then everything goes. And if this is broadly the approach we take, hold your breath, why not also allow sex-work and tax such income? Germany and others do it.