Pressing the interest rate button? Wait for a day.

 

Will the RBI again pause the Rates?

Subbarao, the past Governor of the tumultuous times, authored a book on ‘Who moved my Interest Rates?’ Will the present Governor Shaktikant, acclaimed as the best central bank governor while the other central banks are still in uncertain policies, author another book ‘Who paused my interest Rates? Really, a big question mark. Can inflation be hounded by the RBI or for that matter any central bank in the world? The day of reckoning is tomorrow.

I am reminded of my childhood days when my father got my chappals (footwear) resoled with less cost than a new one and it used to last for one more cycle of use. Restitch the saree to make frocks for the daughters when the head of the household gets tired of using the saree for more than four or five occasions. How can the lady go to functions with the same saree?

European Commission 2008 quoted in a World Bank blog of 19^th September 2022 mentions: “national authorities must pay attention to measures that can facilitate the recovery of the so-called secondary raw materials or end-of-waste materials” arguing for a circular economy. https://blogs.worldbank.org/allaboutfinance/inflation-and-ecological-transition-european-perspective-part-ii?CID=WBW_AL_BlogNotification_EN_EXT

Is growth complacency driving this aspirational $5trillion economy? Is inflation in a growing economy an imperative? Should the RBI Monetary Policy Committee stick to the boundaries of inflation +/- 2 percent of 4 percent? Next quarter, are we going to see the soaring prices of tomato ketchup, tomato sauce, tomato soup and other processed foods using tomato base, touch the roof? Should the RBI see the warning signals more clearly?

Five states are bound for elections in the next few months and are in a mood of competitive populism. Once the schedule is out of the Election Commission  pigeon, several incentives directed to engage the voters have to halt. Make hay while the Sun shines. States within the FRBM norms hasten to implement their agenda pre-election.

GoI is comfortable with its GST earnings month after month. It cares little for whatever the economists say on federal relations and implementation of the recommendations of the Fifteenth Finance Commission. Consumption of durable goods is on the rise. With the festive season ahead, markets are preparing to stock as much as possible from the rural markets that are buzzing with economic activity. Farmers are increasingly adopting latest technologies aided by solid support from a few states like Telangana.

Crorepatis increased and even a tomato farmer of Karnataka, a press report says, bought a car worth Rs.45lakhs within a month’s sale of this crop. But the poor who are still around 240mn and the lower middle class are unable to make both ends meet. They seem to be toying with the idea of recycling the useable instead of replacing their old TV or nearly worn out durables with the new ones.

Can tomatoes and onions be recycled? My wife says: Tomatoes, if bought when cheap, can be sliced and kept in the deep fridge to last for more than six months. Pull them off, wash them with water at room temperature, they can be used as good as fresh tomato slices. But onions, by nature are more durable but storing them in a fridge stinks. There is no way to recycle. Prices of many vegetables soaring beyond the common man’s pocket at the moment can neither be stored nor recycled.

The latest buzz word in the US is super core inflation and James Powell argued for unemployment as a solution, ludicrously. Efficacy of inflation targeting remained an uneasy solution to the rising prices of all daily consumables.

An interesting discussion in OECD Economic Outlook Vol. 22 of 2022 highlights the current difficulties in targeting inflation post pandemic as both supply and demand factors pushed the inflation.

A S&P Rating Agency’s recent report says that the days for low interest rates and easy credit in Asia-Pacific markets are ending. India is largely demand-driven economy and the recent service sector PMI hovering above 65 is a strong evidence. PMI manufacturing is steady at 57.7 in July 2023.

Politics of economic growth in India cannot afford the luxury of inflation pushed either through hiking the interest rates or a dominating fiscal policy. Will these considerations bat for a pause in the interest rates or reduce by a tad, to please the tomato buyer by 10 to 20 basis points?

*The author is an economist and risk management specialist.

 

 

 

Recession - Far and yet Near.

 Opinion: On edge with recession fears https://telanganatoday.com/opinion-on-edge-with-recession-fears

Recession? Near and yet Far.

B. Yerram Raju

Several economists, in the wake of Russia-Ukraine war and the rise of global inflation index, have been talking of recession. It is important to understand the meaning of recession. It occurs when there is contraction of demand for goods and services consecutively for two quarters; employment falls precipitously; consumption declines; both exports and imports fall; credit markets shrink and finally, the GDP declines. This means that all the macro-economic indicators show an alarming trend.

In layman’s language, when your neighbour loses his job, it is recession, while depression is, when you lose your job. Before going into the macro-economic indicators that prompted such prediction, the discussion is timely because price stability is viewed as necessary precondition for growth by the authors of the Currency and Finance Report (RBI), 2021-22. This is the wake up call to the Monetary Policy Committee meeting on May 2 and 4 calling for a rate hike close to the rate hike in Fed-US.

Impact of global recession is seen in the backdrop of Covid-19 variants making aggressive re-entry unnerving many economies. Externalities like Russia-Ukraine war, collapse of Sri Lanka in our immediate neighbourhood, strained global value chains added fuel to fire. Fuel prices are not likely to relent in the short term and edible oil prices are touching the roof.

A bit of History

Unprecedented banking crises in the past triggered recession both in advanced economies and emerging economies. Advanced economies: Herstatt crisis in Germany, Japan in 90s, Norway in 1988-92, Spain in 1985, Sweden in 1985, UK in 1995, USA in 1980s to early 90s, and emerging economies: Brazil 1994, East Asian Crisis in 1997 hitting Korea, Thailand, Malaysia, Vietnam, and the subprime crisis of 2006 hitting the whole world are examples of recession if we leave 1930 recession way behind. The Economist, London in its special report of May 16,2009 said: ‘the dirty secret of the golden age of finance was that it was obscenely easy to make money.” Interest rates rose and housing prices fell.

Rate Hike:

Latest hike in the basic rates announced by Governor Shaktikant in a huddle on May 5,2022 shocked the stock markets. Lenders, rating agencies, and investors commented that this hike is just the beginning in the wake of unrelenting inflation for the past three quarters in a row.

Gross Domestic Product:

The most important macroeconomic factor is decline in GDP {[C+I+G+(x-m)], where C= consumption; I=investment; G=Government spending; x= exports and m=imports} . Total goods and services produced in the economy declines. Currency and Finance Report (CFR 21-22), mentioned that economic growth slowed down since the second half of 2016, taking the average of GDP growth between 2017-20 fiscal to 5.7 percent. There is understandable decline post 2020 due to Covid-19 that saw irrecoverable loans in all segments, rents prohibited for more than a year in several states in 2020-21, unoccupied hotels and unmoved airbuses hitting tourism and aviation industry, several drivers losing their jobs and cabs parked in sheds with a steep fall in fuel consumption.

Inflation:

One must begin with inflation. Data released four days after the MPC's April 8 decision showed Consumer Price Index (CPI) inflation saw a seventeen-month high of 6.95 percent in March. Wholesale inflation index rose to a four-month high of 14.55 percent the same month.  This data was in the RBI’s pages even three weeks before. Should it be behind the curve in announcing the rate hike for so long? A question that would have few answers from the powers that be. Money Control, a financial blog, vents its disappointment over the RBI Governor’s statement:” CPI inflation has been above the medium-term target of 4 percent for exactly two-and-half years. In these 30 months, CPI inflation has been above 5 percent 27 times and above the 6 percent upper bound of the RBI's flexible inflation target 16 times. So, to state now — after not saying anything in the last two years — that inflation expectations could get unanchored is a tad disconcerting.”

Unemployment:

CMIE data released almost simultaneously reveals that urban unemployment rate was 9.22 percent, and rural unemployment rate was at 7.18 percent.

International Trade

Trade balances were hit badly all over the world. Thanks to seizing the right opportunities, India’s trade balances moved to $400bn in April 2022. Several measures taken under Atma Nirbhar Bharat Abhiyan (self-reliant India) started yielding results. Startups swelled to encouraging levels. Thanks to agriculture and pharmaceutical sectors, the economy looked up during the covid time. There were no deaths due to hunger. More than 4.58crore population had been vaccinated – first, second, and precautionary and child vaccines together. To keep the export markets diversified, PM Modi is on Europe tour. This may also signal export markets that India is keen to see that the war between Russia and Ukraine ends sooner than later.

India’s consumption, growing at 12 percent pre-pandemic, nose-dived during the pandemic. But it recovered fast and is at 17 percent with a likely 10 percent annual growth in the next decade, according to Managing Partner, Boston Consulting Group. E-commerce is on the rise. It is likely to reach US $130bn by 2026.

For recession to set in there are certain conditions: Foreign capital should flee; people’s confidence should evaporate; stock markets should take a deep dive continuously; melt-down of global markets; tumbling currencies; flight of assets to safety; financial institutions blowing cold on credit; increasing government interventions in every sphere; federal politics on hostile note; and trust deficit in the governments. Banks will be on the nervous hook. Banks have always been on a weak wicket because of their inherent mismatch between the assets and liabilities. After digitalization, the risks went beyond their normal reach and added to that are the crypto currencies and cybercrimes.

Government asserts that and the RBI reinforces its argument in that growth is here to stay as banks, corporate enterprises and agriculture are all looking up. Credit from institutions for the second month in a row saw a rising trend. But unlike in 2006 crisis, Indian financial system is not a closeted financial system but exposed to global value chains.

Globally, forex markets nose-dived. Commodity markets are on continuous decline. Industrial production everywhere wears a disappointing look due to the war and continuing Covid-19 variants making economies nervous. Volatility exists in all the stock markets. Several FIIs are keen to pull back their investments.

It is this backdrop that still makes economists nervous to feel that recession is very likely.  India is far and yet near. It’s export thrust in the wake of volatile forex markets is enough cause for worry. Further, the freebies, rising public debt, indiscrete valuations of public assets put to sale, large official haircuts in official IBC resolutions need rethinking if India would escape recession. Next two months in a row, we may witness rate hikes to contain the galloping inflation.

The views expressed are author’s own.

 

Inflation - the hydra

 

Inflation – the hydra

B. Yerram Raju

Times of India Blogpost dated 29.04.2022.

Sweltering heat makes us look to June’s first monsoon showers as much as the monetary policy of the RBI looking at taming the inflation as its uppermost task. When Bloomberg mentions that the world is experiencing a synchronised inflation outbreak that previously seemed related to the US and Europe, and that producer prices are rising in Japan, South Korea, India, and all economies are feeling the heat of fuel and food prices, it has to be viewed seriously.

I tried to look at it from what is happening in the working class both in urban and rural areas in our country. Several state governments are indulging in competitive populism, notwithstanding the ever-rising fuel prices.

My house cleaner has a couple of acres of land in Mahbubnagar district of Telangana. She gets her minimum wages when she abstains from the work in our house, at least four days a month and seven days at least once in a quarter. Her logic: Every office has one Sunday and two second Saturdays as holidays. Why should I not get the same? She works as house cleaner for ten houses with an average income of Rs.2000 per month per household. She gets free ration; free medical treatment in the government hospital if she or her family members have illness or accident. Her husband is a fruit-seller on bicycle. His net income is Rs.15000 a month and recently he got a loan of Rs.10000 under the street vendors’ scheme that helped him buy a cooler to the house. She has put both her sons in a social welfare residential school. She is also not bothered about income tax though her family income exceeds the taxable income. She has Aadhar card and felt needless to have PAN card! She is least bothered about inflation.

In a chat with her, I and my wife realized that most house cleaners are in the same boat as her and they only have to pay rent. Some of them are also expecting to move to their own two-bedroom flat promised by the government. I went to a village on the way to a temple in Sangareddy district. That was a shandy day. Hence most villagers are in shandy either as buyers or sellers. I got down from the car, a little uncared for the anger of my wife. She knows that when I get down on such errand, I would take at least thirty to forty-five minutes to be back.

I enquired from around twenty persons regarding the price-rise. They mentioned only two things: one, Fuel price and two, Oil price. No others mattered to them. At least one person in every house has a motorcycle. Every family has a piece of land either owned or leased. They are bothered about the wages for the farm labour. They sky-rocketed. They are planning to go for farm machinery either in groups or go for hiring it to reduce farming costs. They are bothered more about increasing unrest in villages due to family feuds.

Inflation therefore has not figured much in the conversation. Rise in wages is an issue but related to inflation. Not that the rising inflation indices – consumer price indices crossing the RBI headline boundaries – is not a worry. The fact is that there are several factors that do not get into inflation accounting. The rents in urban areas are on the rise despite a boom in real estate and housing and cheap housing loans.

If interest rates rise, the cause will not be so much the inflation as the non-performing loans in the retail sector, protracted corporate loan recoveries after severe haircuts, under the most permissive route of Indian Bankruptcy Code proceedings.

Union government has a responsibility to look at the fuel prices beyond the revenues that are earned out of them. Most of the states have genuine concerns over the cess and it is time to be transparent and remove all the cess as the purpose for which cess is levied and spent are never coordinated. For example, look at the similar rise in fuel prices globally in 2014 and 2015 and the domestic prices. Can we get back to the comparable barrel prices and retail prices of fuel and gas?

Once the interest rates rise, the scope for real interest rates to pare up and comfort the savers exists and the hapless senior citizens will have a sigh of relief. Real interest rates are currently negative and hopefully the June monetary policy of the RBI will bend the hydra.

*Author is an economist and risk management specialist and the views are his own.

https://timesofindia.indiatimes.com/blogs/fincorp/inflation-the-hydra/

 

 

India's Growth Story

The Apparent and the Real Growth Story of India

B.  Yerram Raju*

There was a chorus from some economists with former FMs joining against the transitory decline in the GDP growth as though GDP is a strong determinant of growth. High growth and high inflation are good friends (see the table below) and the net result has resulted in poor becoming poorer and rich, the richer.

S.No.	Particulars	Average 2009-10 to  2013-14	2014-15	2015-16	2016-17	2017-18 First quarter
1	Real GDP@ market prices (%change)	7.4	7.5	8.0	7.1	5.7
2	Inflation (CPI-Industrial workers) (average %change) Wholesale price Index (average % change	10.3 7.1	6.3 1.3	5.6 -3.7	4.1 1.7	1.8 1.9

Source: RBI Annual Report 2016-17 and monthly Report September 2017.

Notwithstanding some of the good things that NDA government has done like the laws to regulate the Real Estate sector and the Insolvency & Bankruptcy Code, amending 87 rules for FDI in 21 sectors, abating corruption in some quarters and the GST introduction etc., resounding alarm has been the faulty(ed) demonetization, the GST glitches and the enigmatic oil prices that have lost the relationship with the crude price variations.

In the context of monetary policy announcement there is another chorus for reduction in interest rates as though such reduction in the backdrop of risk aversion of the banks due to the unrelenting NPAs would kick start fresh demand for credit. All the rate cuts thus far failed to result in any fresh credit or a pass through to the existing clients to spur demand. It is doubtful that RBI would have the luxury of another rate cut in the emerging economic uncertainties and falling rupee on the Forex front. Stock markets became nervous with the global undercurrents of rising unrest between North Korea and USA.

While demonetisation set in a trail that closed the a lakh and odd shell companies and disqualified 3lakh directors apart from around Rs.30000cr tax evasion, GST is in the process of bringing in better tax compliance. Going by global experience, GST will take a minimum of two years to stabilise. However, what the GST missed out is a big worry: skipping the petrol, diesel and trade in waste and scrap. A rough estimate says that the city of Mumbai alone has a turnover of Rs.1trn a year in waste and scrap. Huge black money hides here because all deals are in cash even now.

Rising fiscal deficit is another major concern. The States in the emerging political context and certain states by habit have been indulging in distributive justice without productive gains. Gujarat elections are a case in instance where the insurance companies against no fall in agriculture production are in line for responding to unsustainable claim settlements under PMBY.

In addition dragging farm sector despite good monsoon, education and health sectors are the other bigger causes for the present imbroglio in the economy.

Pragmatic government would have started addressing more worrisome issues like the rising unemployment and declining manufacturing, certainly not as a consequence of the reforms but as a cause.

Nation with more young population in the backdrop of consistent unemployment rate of 7-8% during the last three years is also facing the rising aged working population with bulging demand for high pension budget. NSSO 2011-12 Employment Survey – the one quoted by NITI Aayog in its Vision 2017-20 – admits to 51% of the workforce employed in manufacture and services, contributing to 83% share in the economy.

The Vision Document failed to make MSMEs the centre of manufacturing and employment growth.  MUDRA should move to targeting micro manufacturing enterprises in the ‘Tarun’ window. A crore of Rupees investment in manufacturing MSEs would give rise to average of six persons while six crore rupees in medium and six hundred crores in large enterprises would give rise to employing no more than ten and a couple of hundreds respectively. Its emphasis on the high-productivity high-wage jobs in the large industry sector is misplaced while its focus on infrastructure investment is laudable.

Before any strategic corrective interventions are made, the government must listen to dissenting voices both from within and outside. While fresh investments in infrastructure like Rail, Road and Ports are welcome, corrections to the failed infrastructure would require less investments if the Industrial Estates of the yester-era do not turn into havens of real estate instead of manufacturing hubs.

If the next budget typically focuses on elections and fails to provide the much needed investments in education, safe drinking water, health and bolstering manufacturing sector realising that the Make-in-India and Start-Up India remained as slogans both the economy and the NDA are going to witness a decent burial. If every citizen in the country can get safe drinking water health budget of the poor would come down by 70-80 percent. This should be the next mission of the Government.

http://www.moneylife.in/article/the-apparent-and-real-growth-story-of-india/51803.html?utm_source=PoweRelayEDM&utm_medium=Email&utm_content=Subscriber%2327753&utm_campaign=Daily%20Newsletter%2004%20Oct%202017