Boost Savings, Now

The alarm bells should start ringing any time now. An important component of the economy has been sinking and needs to be rescued urgently. This critical piece is “savings” and within this overall head, household savings is the one critical sub-component that needs close watching and nurturing.

While it is true that one of the primary reasons behind the current economic slowdown is the tardy rate of capital expansion – or, investment in infrastructure as well as plant and machinery -- all attempts to stimulate investment activity are likely to come to a nought if savings do not grow.  Without any growth in the savings rate, it is futile to think of any spurt in investment and, consequently, in the overall economic growth. If we source all the investment funding from overseas, it might be plausible to contemplate investment growth without any corresponding rise in savings rate. But, that is unlikely to happen.

Within the overall savings universe, the sub-component “household savings” is most critical. It provides the bulk of the savings in the economy with private corporate savings and government saving contributing the balance. The worrying factor is the near-stagnation in household savings over the past 8 years or so. What’s even more disconcerting is the fact that household savings remained almost standstill during the go-go years of 2004-08.

This seems to be counter-factual.  There are many studies that show that there is a direct relationship between overall economic growth and household savings. Therefore, at a time when India’s GDP was growing by over 9% every year, the household savings rate stayed almost constant at close to 23% of GDP. There was, of course, an increase in absolute terms, but it remained somewhat fixed as a proportion of the GDP.  

*As percentage of GDP at current market prices

What is responsible for this contradictory movement? The sub-group on household savings, formed by the working group on savings for the twelfth plan set up by the Planning Commission and chaired by RBI deputy governor Subir Gokarn, has this to say: “...a recent study...had attributed the decline in the household saving ratio in the United Kingdom during 1995 to 2007 to a host of factors such as declining real interest rates, looser credit conditions, increase in asset prices and greater macroeconomic stability...While recognizing that one of the key differences in the evolving household saving scenario between the United Kingdom and India is the impact of demographics (dependency ratio), anecdotal evidence on increasing consumerism and the entrenchment of (urban) lifestyles in India, apart from the easier availability of credit and improvement in overall macroeconomic conditions is perhaps indicative of some ‘drag’ on household saving over the past few years as well as going forward.”

India has another additional facet: a penchant for physical assets (such as bullion or land). Post the monsoon failure of 2009, and the attendant rise in price levels which has now become somewhat deeply entrenched, Indians have been stocking up on gold. Consequently, savings in financial instruments dropped while those in physical assets shot up. This is also disquieting for policy planners because savings in physical assets stay locked in and are unavailable to the economy for investment activity.

There is a counter view which says that higher economic growth does not necessarily lead to higher savings. According to a paper published by Ramesh Jangili (Reserve Bank of India Occasional Papers, Summer 2011), while economic growth doesn’t inevitably lead to higher savings, the reciprocal causality does hold true. “It is empirically evident that the direction of causality is from saving and investment to economic growth collectively as well as individually and there is no causality from economic growth to saving and (or) investment.”

Whichever camp you belong to, it is beyond any doubt that savings growth is a necessary pre-condition for promoting economic growth. The Planning Commission estimates that an investment of $1 trillion or over Rs 50 lakh crore will be required for the infrastructure sector alone. And, a large part of this critical investment will have to be made from domestic savings.

With savings -- particularly household savings – currently languishing, preliminary forms of the crisis is already showing up across different places. For instance, the lack of incremental addition to the savings reservoir is resulting in a liquidity crisis of sorts, thereby constraining the central bank’s actions. With deposit growth trailing credit growth, Reserve Bank has been forced to focus its efforts on ensuring adequate liquidity in the system. Hence, the repeated cuts in reserve requirements over the past few months.

The government has one Budget before it sets out for the 2014 general elections.  Reserve Bank has two shots before that -- its mid-quarter review on December 18 and the third quarter sometime in end-January, early February. Some solutions will be required to make households save more.

Traditionally, tax breaks were used to lure in savers. With the precarious state of the fiscal, policy experts will have to find innovative ways to provide tax breaks without jeopardising the fine balance. Second, inflation has to brought under control to wean households away from physical assets. Finally, ways must be found to ensure that some legacy savings sources – such as pension, insurance -- become more attuned to investor needs. Today, the real return from these sources is negative or just marginally positive.

Published as an Op-Ed in The Economic Times (December 13, 2012)

Football Politics

It was 1980 and a sultry Calcutta, August 16, afternoon. Tensions were running high in the city: the cops had marshalled their forces and the lumpen armies had sharpened their arsenals. Two bitter rivals were facing off  -- East Bengal versus Mohun Bagan, bringing the summer of the Calcutta football season to a crescendo. Like thousands of fans, I too trudged a dusty path to the verdant Eden Gardens, hoping to catch a classic derby from the concrete bleachers.

Hope brings prayers to the lips; but loyalty, a sense of belonging to a cause or a club can dredge up the ancient tribal instincts. And violence is what emerges from the churn. At the end of the game, 16 dead bodies were laid down next to each other, club affiliations be damned. Hundred others were bludgeoned and bloodied, but fortunate to have escaped the mindless soccer savagery.

But, what really topped the absurdity scales that day was the match result: Mohun Bagan-0 -- East Bengal-0. It was one of the worst displays of football I've ever seen. Poor skills, pathetic gamesmanship, appalling strategy. And, yet it provided so much conviction to fans that they ended up killing 16 and injuring hundreds of others.

That day was eventful for other reasons. I, for one, stopped watching Indian football from that day. I have never ever watched a Mohun Bagan-East Bengal match after that dreadful day; not on telly, leave alone the thought of going to the stadium. Skipped the parts about them in the local newspapers too. Sometimes, and these are rare occasions, I feel I have been a bit too harsh on my adolescent and youthful pre-occupations. Not worth it, my left side would shout out any such rising doubts.

But, as with family traits, the lessons of 1980 seem to have got scattered and weakened with the passage of time. A fresh resurgence of violence broke out again during a Mohun Bagan vs East Bengal game yesterday (read here and here). It's the same story. Reprise 1980 with one thankful omission: nobody died.

I have often wondered what could fan such passions? How can people still brave the elements and watch such dreary stuff? Improving satellite connections have weaned me off. Whenever I've tried to watch a similar derby on the box, I've immediately switched channels. The local stuff seems to be playing out in excruciating slow-mo, compared with the outstanding quality of European and Latin American soccer now available at the press of a button!

Which brings the mind back to mindless violence. I have often thought about that fateful August day of 1980 and inevitably concluded that the violence was the outcome of a new voice, a new sense of  empowerment sanctioned to a new section of lumpens co-opted by the then new ruling party. Cut to 2012 and the violence seems to be the handiwork of a new set of lumpens, patronised by a new political party. According to unconfirmed reports, the police have recovered a large and shocking cache of arms from fans (read here).

Who says it's just a game!

Investment Must Lead The Way For Economic Revival

The Reserve Bank of India was once again at the center of a expectations led rally -- that it would cut repo rates on October 30, while announcing its second quarter review of the 2012-13 monetary policy. Instead, RBI cut the cash reserve ratio (CRR). Here is my op-ed piece in The Economic Times, carried the next day:

The rate cut lobby should be worried for two reasons. The first one is obvious: despite their high-decibel clamour, RBI governor D Subbarao has not relented an inch. He is steadfast about holding interest rates till the rate of inflation blinks first.

In short, his message remains unchanged: interest rates won't budge till inflation does. But the second reason is far more worrisome. It depicts a state of economic stagnation that even deep rate cuts cannot remedy. The pointers lie in the second quarter review of the 2012-13 monetary policy.

Subbarao once again cut the cash reserve ratio (CRR, a mandatory provision that requires banks to maintain a fixed portion of their deposits with RBI) by 25 basis points, down to 4.25%, releasing an additional Rs 17,500 crore of funds into the system, which the central bank fondly hopes will result in credit growth to productive sectors.

This is the fourth time in the last one year that RBI has cut CRR; in fact, in the last 12 months, CRR has been pared down by 175 basis points. That is not all. Further, the central bank has cut statutory liquidity ratio, another mandated reserve that requires banks to invest a portion of their deposits in government securities, cut the benchmark repo rate by 50 bps in April and made liquidity available through export refinance schemes. Outside the policy framework, the central bank has been conducting open-market operations regularly and daily liquidity adjustment exercises.

It is, therefore, a bit surprising that despite the RBI's repeated emphasis on pumping additional rupees into the economy, attention seems to be still focused on petitioning for a cut in the repo rate, rather than worrying about drying up liquidity. And, significantly, this recurring deficit in liquidity is symptomatic of another economic crisis: slowing down of economic growth.

Apologists will argue that cutting rates is probably the only elixir for reviving growth. If that is indeed true, then the economies of US, Europe and Japan should have been growing at supersonic speeds, given their near-zero nominal interest rates. Look at the malady — the liquidity shortage — first.

The policy document of Tuesday states, "The wedge between deposit growth and credit growth, in conjunction with the build up of the Centre's cash balances from mid-September and the drainage of liquidity on account of festival-related step up in currency demand, have kept the systemlevel liquidity deficit high, with adverse implications for the flow of credit to productive sectors and for the overall growth of the economy going forward."

Data released by RBI on October 26 shows that aggregate deposits with the banking system has grown (on a year-on-year basis) by only 13.9%, compared to 17.5% growth in the previous comparable period. However, credit has grown by 15.9% (against 19.5% in the previous period).

While the wedge between deposit and credit growth seems to have narrowed during Q2 2012-13, compared to the wide gap that existed during Q1, the difference is still cause for worry. For one, the slowing down deposits growth is a direct manifestation of the slowing down savings rate in the economy. The continuing high inflation rates have dampened real interest rates, making financial instruments (such as fixed deposits) relatively unattractive compared to physical assets (such as gold).

Alower savings rate is bound to translate into a lower investment rate. It is by now common knowledge that one of the ways to kick-start growth in the economy is to rejuvenate the investment climate. In fact, some of the government's recent policy pronouncements have focused on improving the pace of investments in the economy. And, without the investment rate looking up, the savings rate is unlikely to improve, thereby worsening the feedback loop.

Therefore, the RBI policy document makes it clear that the recent spurt of feel-good announcements is not enough to warrant a cut in interest rates. The statement does not mince words, "...recent policy announcements...that have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions."

In the meantime, the CRR cut is not only expected to boost liquidity but is also likely to have some salutary effect on lending rates as well. While the RBI is loath to directly signal lower interest rates in the system right away, lest they rekindle inflationary expectations once again, the CRR cut is an apt signalling tool: it might still induce some banks to lower their lending rates, depending on each individual bank's balance sheet. This way, Governor Subbarao can still tick both the inflation and growth boxes on his to-do list.

Hormones And The Trading Floor

Here is the review of an interesting book that I wrote for Business Standard. The book is titled "The Hour Between Dog and Wolf: Risk-Taking, Gut Feelings and the Biology of Boom and Bust" and it's been written by a Wall Street banker turned neuroscientist, John Coates.

Folklore is full of stories about shape shifters, men turning themselves into wolves or other fierce beasts at the stroke of midnight on a full moon night. What probably gave birth to the myth was the chilling sight of vicious, bloodthirsty marauders on the rampage in ancient times. These intruders often wore wolf skins (or bear skins in some cases) for protection against the cold — and, maybe, to generate a sense of dread. Whatever it was, the ploy seems to have succeeded and a horror story was born, giving rise to a cottage industry of books and movies about imaginary werewolves.

A link was created between the shifts in lunar patterns and changes in physiognomy. While the apocryphal might seem absurd to the untrained eye, there is a whole lot going on just below the surface. The symbolism of man turning into beast has held the interest of assorted scholars for centuries. At the same time, philosophers and scientists began to peer inside the mind, trying to figure out whether the brain had any role in all this.

And now Wall-Street-trader-turned-neuroscientist John Coates comes racing down these old, familiar neural paths with a new gig in town. He shows how human beings think with their bodies in addition to their brains. Using the familiar setting of a bank’s dealing room, Mr Coates explores the impact risky situations can have on the mind as well as on the physiology. He shows how, when confronted with the threat of risk, biology takes over and transforms us into different people. Hence the analogy between dog and wolf.

Mr Coates shows how there is feedback loop mechanism between the body and the brain, and the two act on each other to prepare the entire being for responding to different situations — elation, depression, fear, grief, rage and so on. Using the events that led to the financial crisis in 2008, Mr Coates tracks the different desks and their dealers on the trading floor. The sequence of events and the reaction of the traders – we do not know for sure whether they’re real or fictional – set the stage for him to build his hypothesis.

Ask anybody on the Street about the reasons behind the 2008 financial crisis, and nine out of ten will probably tell you that untrammelled greed caused it all. Mr Coates, however, has a different take. He argues that the frequency of financial meltdowns has increased over the past few decades. One of the reasons is the fundamental change in the nature of the markets — deregulation, opening up of new markets across the globe (especially Asia), lower interest rates, relaxed margin requirements and easy liquidity. But there is another pressing reason: traditional partnerships on Wall Street and London have been replaced by corporate structures that have (supposedly) shifted the priorities from long-term stability to short-term profits.

But, importantly, the market volatility ensuing from these changes has been heightened on both sides of the curve, primarily due to the traders’ biological reactions to enhanced opportunities and threats that occur far too frequently now than in the past. Mr Coates believes that the risk curve might have been amplified because of hormonal build-up in the body of the traders, thereby shifting their risk preferences to extreme levels.

This is what he says: “...under the influence of pathologically elevated hormones, the trading community at the peak of a bubble or in the pit of a crash may effectively become a clinical population. In this state it may become price and interest-rate insensitive, and contribute greatly to the violence and intractability of runaway markets...”

Therefore, the familiar exercise of risk modelling now needs to add another important variable to the stew pot — the clinical state of the trading community under extreme scenarios. This leaves room for a sequel: how to assign values to different emotional states.

It’s an interesting book written from an interesting perspective. Given the huge success of books attempting to decipher what’s going on inside the skull – the popularity of Vilayanur Subramanian Ramachandran’s books (Phantoms in the Brain, for example) is ample testimony to this phenomenon – Mr Coates has a novel approach. He has married his two familiar stomping grounds, the brain and the trading floor. But then, the thesis accords a secondary role to another critical ingredient in the mix: the role of perverse incentives. Seen in that context, it might be a bit too glib to explain away all that has happened to only hormones and changes in the body’s chemical balance. There is one way to test this hypothesis: try explaining it to those in the manufacturing sector who have lost their jobs because of the excesses in financial services.

Two Moral Dilemmas

My piece on the two glaring moral dilemmas in the Indian economy was carried on its Op-Ed page by The Economic Times. The first dilemma is about projects with long gestation period being denied long term funds, even though they exist in the economy and are actually being used to fund the government's fiscal deficit. The second one is about long terms sources of savings are being not deployed in long term investments, in the name of safety, and thus yielding negligible returns.

Read the piece here: http://bit.ly/Sje6oL

India At The Bottom Of Fitch Heap

India is now the worst country, in terms of credit ratings, among all the countries that make up "Emerging Asia", according to rating agency Fitch.

In simple terms, this means that if you are a global lender, wanting to lend some money to countries, then Fitch feels Mongolia or even Sri Lanka stand a better chance of repaying your principal and interest than India! And the developed Asian countries -- Australia, Japan, Singapore, Hong Kong and New Zeakland -- are, of course, in a completely different league altogether.

Here is where India stands:

Source: Fitch Ratings (Asia-Pacific Sovereign Credit Overview, dated September 6, 2012)






India, as you will notice, is at the bottom of the heap with a "BBB-" rating. The only other country with a similar rating is Indonesia, but it's outlook is "Stable" and hence better than India's "Negative". So, overall, that puts India behind Indonesia and at the bottom of the league tables.

There's now a suggestion among some of the global economistas and commentators that Indonesia should replace India as the "I" in BRICS.

 

Okay, granted that credit rating agencies are not exactly paragons of virtue or prescient in predicting value destruction. Examples abound: the sub-prime loan crisis is the best example. So, are the ratings given to Greece, Spain or  Italy just before they went bust! While you may or may not agree with this rating, it is a subject for another debate. But, that still doesn't take away from the central point that we're up shit creek without a paddle? Fitch just added another hole to this wobbly boat!

Revenue Foregone Argument Is Woebegone

Finance minister P Chidambaram has the unenviable task of reviving an economy after it was ruined systematically for over 36 months. One of the items high on his to-do list is to reduce the deficit, either by cutting expenditure or by increasing revenue collection. Forget the expenditure cut bit, primarily because it's political hara-kiri. In a chat with journalists on Monday, he expressed a view that companies paying an effective tax rate of 24-26% -- against the applicable rate of 30% plus surcharge -- might deserve a second look.



Courtesy: Wikipedia



While reporting on the FM's thoughts, newspaper Business Standard pitched in with a line on "tax foregone" because of deductions granted to the corporate sector (read here). It seems the reporter has added that one line, because no other paper has carried a similar sentence or attributed any such comment to the FM.

Revenue foregone is being equated with revenue squandered, especially in Delhi television studios and punditry columns. The rumblings are familiar: the bill for “revenue foregone” is huge, spend some of that money instead on the poor. The argument is inevitably drawn around the traditional rhetorical lines – tax foregone benefits only the rich (such as industry) while subsidies only benefit the poor. Therefore, the argument goes: abolish all exemptions, tax industry at a higher rate and use the incremental revenue to increase the subsidy budget. This is not only a specious argument but is dubious economics as well. Swaminathan S.A.Aiyar rightly calls it "claptrap" (read here).

It might be instructive to see why the rhetorical argument about revenue foregone can be misleading. For one, the numbers in the revenue foregone statement are based on a clutch of assumptions (for example, projections for 2011-12 are based on revenue foregone during 2010-11) and notional calculations. Therefore, to assume that it is indeed money “diverted” from necessary developmental expenditure is a bit of a stretch. Second, it assumes that all the revenue foregone is actually in the nature of funds granted to favoured entities, which could have rightfully been used for development purposes. That’s also somewhat fallacious. What cannot be denied is the fact that if no exemptions were granted, the government’s revenue collection would have been substantially larger. But, economic policy is all about balancing between different priorities.

The finance ministry tables a separate statement on “Revenue Foregone under the Central Tax System” along with the budget papers every year. This document reveals some of the government’s policy preferences through the lens of taxation. The document states: “Tax preferences may be viewed as subsidy payments to preferred taxpayer. Such implicit payments are referred to as “tax expenditures” and it is often argued that they should appear as expenditure items in the Budget. In this context, the basic issue is not one of tax policy but one of efficiency and transparency – programme planning requires that the policy objectives be addressed explicitly; and programme budgeting calls for the inclusion of such outlays under their respective programme headings. Tax expenditures are spending programmes embedded in the tax statute.”

Taken as such, the argument then boils down to choosing between one subsidy and another. Let’s look at what tax breaks to industry achieve, especially various direct tax exemptions. The debate on revenue foregone usually trains the spotlights on corporates. In the table on “major tax expenditure on corporate tax payers” projected for 2011-12, the largest chunk – Rs 36,468 crore (Rs 33,243 crore actually foregone in 2010-11) -- is taken up by the item “accelerated depreciation”.

Now, this is a tax break provided to companies which are investing in acquiring fresh assets. In a sense, accelerated depreciation basically provides a trade-off: it reduces taxable income in the current period in exchange for increased taxable income in the future, with the pointed objective of encouraging asset creation in the present to generate employment and income. This is a legitimate tax incentive used worldwide for motivating businesses to purchase new assets. This not only results in higher productive capacity for the economy but also increases employment opportunities. Had this money gone as a social sector subsidy, it would have been used up for consumption.

The next big chunk is claimed by “deduction of profits of undertakings engaged in generation, transmission and distribution of power (section 80-IA)” – Rs 8316 crore estimated in 2011-12 against Rs 7581 crore in 2010-11. This should be self-explanatory, given the huge power deficit in the country.

What is unmistakeable is the fact that many tax exemptions are targeted towards creating industrial assets, which will generate value, provide employment and become instruments of economic growth. This was followed even at the state level during the long Left Front rule in West Bengal. Most subsidies, on the other hand, induce consumption and do not encourage asset creation.

The data released throws up another big revelation: the effective tax rate (the actual tax paid as a proportion of the total taxable income) during 2010-11 for 2113 public sector companies is lower than the tax rate for the 457,157 private sector companies in the sample: 22.28% versus 24.61%, respectively. Incidentally, the report also states that the effective tax rate for the corporate sector as a whole has been steadily rising – from 20.55% for 2006-07 to 24.1% for 2010-11 – seeming to indicate that a large number of exemptions are being gradually phased out.

Therefore, the conclusion that all tax exemptions are largesse handed out to the wealthy may seem a bit hasty. There is no denying the fact that governments over time – and cutting across party lines -- have used the instrument of tax policy to reward their most-favoured industrial groups. But, then that doesn’t turn all tax exemptions into villains. Just like leakages in some of the current entitlement programmes do not diminish the merit of all targeted development plans.

What, however, should be debated is whether the implementation of the policy framework in achieving the stated objectives is actually as rigorous as the original intention. Or, there should be focused debate on whether some exemptions have been created to benefit some favourite industrial groups, instead of demanding that all exemptions be abolished.

Tweet Nothings!

The government today confirmed that is has blocked some twitter handles (read here).

It is exceedingly strange that political parties and regimes wedded to the notion of individual liberty and freedom of speech across the free world are indulging in censorship and gagging dissent.

Three examples stand out. The Indian government --under the guise of maintaining law and order -- has banned some twitter accounts. The ostensible reason is to avoid social media being used to fan communal hatred, especially in the wake of the recent violence in Assam. However, among the twitter handles being banned are also included some which belong to spoof  artists -- those who try to impersonate the prime minister's official twitter feed. This was highly unavoidable as it shows the government bloated up with a sense of self-importance. Finally, and this is dangerous, the list also includes some commentators and right-wing sympathisers.

I feel we are treading treacherous territory here even if this blogger isn't a right-wing supporter. If the right wing nutcase is using his/her social media account to spread hatred and advocate communal violence, then there might even be some justification for the government's actions. But, the notion of a democratically elected government muffling free speech is downright noxious. The reason is today it might be right-wing loonies, but tomorrow it could be anybody. What is to stop the government or its factotums, in a fit of righteous conceit, to start viewing any protest or dissent as a threat to law and order? Once you start going down that path, it's actually a very slippery slope.

The news agencies, a few days ago,  filed an interesting story on what the government is doing to keep its babus away from social media. The story (headlined "Govt cracks whip, orders babus not to post 'unverified' facts on Facebook, Twitter" in Indian Express) can be read here. The attempt again is to ensure that bureaucrats and officers do not use social media to air their views, which could well turn out to be anti-thetical to the government's standpoint. Will they then stop the officer's spouse or even daughter/son from airing their opinion? Where does it stop?

Finally, US president Barack Obama's office recently urged the Indian government not to curb internet freedom, especially in the social media space (read here). This issue came up at a routine briefing conducted by the US State Department. However, the US State Department's concern and comments drew some acerbic comments from journalists and observers. The US has been incredibly thin-skinned while dealing with the transparency of the internet, case in point being the persecution of Julian Assange and Wikileaks.

Meanwhile, an image of a poster is being shared around on Facebook, which reads as follows: "If Govt limits the SMS because it's being misused for spreading rumours, can we stop paying taxes as our money is being misused for corruption?" Now, how will that be treated? Seditious? Disruptive? Communal?

GDP Blues: April-June (2012-13) Data Sums Up Economy's Woes

The year has begun according to expectations. GDP growth figures for the April-June quarter of 2012-13 – at 5.5%, measured on a year-on-year basis -- reveals that the slow growth trend thrown up by the final quarter of 2011-12 (at 5.3%) continues.

This is not entirely unexpected. In fact, many analysts had predicted the growth number close to the final number. For instance, Bloomberg and Reuters had predicted the growth number at 5.2% and 5.3% respectively. Rating agency ICRA had estimated 5.1% while Moody’s assessment clocked in at 5.2%. Some analysts have tweeted that at 5.5% Q1 GDP growth is actually better than expected.

However, there are a couple of issues that must be noted immediately. One, at this growth rate, India is no longer the second-fastest growing economy in the region. It now lags behind Indonesia and The Philippines, with Malaysia nipping at its heels. Niranjan Rajadhyaksha has a nice short piece on it in Mint (read here).

There are is another source of anxiety. Manufacturing growth during the quarter, measured on a year-on-year basis, comes in at a dismal 0.2%, continuing the trend from the previous quarters. So what really saved the economy seems to be a 10.9% growth in construction and 10.8% growth in the segment titled as “financing, insurance, real estate and business services”. This seems to be a bit of an anomaly: if construction grew by over 10%, then it must have consumed cement and steel. Yet, this does not reflect in the manufacturing numbers -- unless, of course, the construction industry was running down its accumulated inventory of raw materials. Also, steel and cement combined have a decent weight in the index for industrial production.

The pathetic manufacturing data pretty much reflects the slowdown tightening its grip on the economy. Given that 0.2% growth also means people consumed almost exactly as much as they consumed during April-June 2011, does it also reflect slowing down demand? Could be true, given that private consumption expenditure grew by only 4.7%. This is lower than the growth registered by consumption expenditure in the past few quarters, particularly 6.% in the immediately preceding quarter. After all, wasn't it the boast of policy wonks that the consumption story had kept the India story vibrant during the global slowdown? That engine of growth seems to be sputtering now.

The other engine of growth -- investment -- also throws up a depressing picture. Investment growth during Q1FY13 came in at a measly 0.7%. The Indian economy at this point seems like an aircraft with both its engines seizing up.

So, where is this 5.5% impetus coming from? Consumption of services? Perhaps, especially because of money distributed by the government in the form of social sector hand-outs. The segment “community, social and personal services”, which captures these payouts (or considered an euphemism for all kinds of social sector hand-outs), grew by almost 8%. The government’s own expenditure – under the head “government final consumption expenditure” – has also grown 9%.

This pretty much sums up the problem facing the economy: largesse distributed by the government is distorting income levels, creating a spike in aggregate demand without an accompanying boost in investment activity (or creation of sustainable assets). This, in turn, is leading to a situation of low growth and high inflation.

Rating agency Crisil has come up with two interesting reports, one of which states that rural consumption now out-strips urban consumption. This outcome is primarily a consequence of money doled out in the rural areas by the government, described by some economists as money thrown from a helicopter.

But, that still leaves many unanswered questions in this puzzle -- for instance, if the rural consumption story is really so strong, and growing apace, why isn't manufacturing responding by increasing capacity? Is it being discouraged by the current policy paralysis? Or, are expectations playing a major role: that this rural story may not be a secular trend and might peter out soon? Or, expectations that interest rates might not soften in the near future? Methinks it's a combination of all the three expectations.

Inflation Eases, But Don't Dream Yet

The inflation figures for July, released today (Tuesday, August 14, 2012), paint a confusing picture. Overall inflation has relented a bit and comes in at 6.87%, measured on a year-on-year basis. This is lower than most expectations; various polls had estimated the figure close to 7.5%.  Last year, the inflation figure for July had come in at 9.36%.

So, what's brought the price levels down? Manufactured products actually, which have a weight of about 65% in the index. Prices in certain product categories -- such as "beverage, tobacco and tobacco products", "paper and paper products", "leather and leather products", cotton textiles -- are at the same level as last July.

That is a relief and the stock markets rallied immediately, in the hope that Reserve Bank will now have enough moral and economic fire-power to cut interests rates. 

However, that seems unlikely to happen so soon.

For one, RBI doesn't act on the basis of data for only one month. It has to be convinced that the rate of rising prices is slowing down on a secular basis.

But, more importantly, there are some bugs and time-bombs hidden away in the data. For instance, food inflation is up to 10%, compared to 8.2% in July 2011. Now, that's a source of worry -- given the reluctant monsoons this year, food prices have the potential of ratcheting up further.

Look at what's bumping up food prices. Potato (yes, that most humble of vegetables) prices have jumped 73% in July compared to the prices prevailing in July 2011. In fact, potato prices have almost doubled since March 2012! Prices of vegetables on the whole are playing havoc -- prices are up 24%! 

Even the protein sector is looking scary: pulses are up 28%, while prices of  eggs, meats and fish together are up 28%. 

Therefore, this current dip in prices may not bring the kind of succour that people were expecting. 

You Say Off-Shoring, I Say Outsourcing-I

And now comes news about the US authorities cracking down on Standard Chartered for allegedly side-stepping rules that prohibited dollar dealings with Iran or Iranian entities. The crack-down on StanChart raises many questions, leaves many issues unanswered.

For one, as already mentioned in the first instalment of this series, this recent development involving StanChart could be another example of the lax rules that get built into an off-shore risk and compliance centre. The reason for building a global risk and compliance centre in India is to primarily save costs, and not to tap into the fabled Indian talent pool. So, it could be India today and god-knows-where tomorrow.

However, as more news of the StanChart saga emerges, it seems there's more to it than meets the eye. Here are some conjectures.

1. This is another example of bullying and interference that has gained US so much notoriety over the past one century. It’s the with-me-or-against-me syndrome. In fact, when StanC’s US director warned the London office about the regulatory risks involved in dealing with Iran, one senior chap went apoplectic. You can read his outburst here, though there is no confirmation whether this really was the guy or not.

2. This is eager beaver Benjamin Lawsky trying to prove his credentials. He is Superintendent of the New York State Department of Financial Services, an office that has been created recently and he wants to demonstrate that he has what it takes. Read his profile here.

3. There is a suspicion that all this could part of an orchestrated political manoeuvre, with an eye to the upcoming presidential elections a few months later. Democrat nominee Barack Obama has been vocal about jobs being “exported” to India; and now, in a remarkable coincidence, you have examples of offshore centres in India coming across as fast and loose with rules, or lax and plaint. But, as I said earlier, this is just a coincidence, random speculation and there’s nothing to prove the claim.

4. It could also be a fall-out of USA vs Britain. According to The Economist, British politicians are “...accusing US regulators of pursuing an anti-London agenda following recent investigations into HSBC and Barclays.” Read The Economist story here.

5. Finally, the root of the problem is the dollar’s status as reserve currency. As long as that is reality, dollar transaction will need to get cleared in New York and thus will come under the regulatory glare of the US authorities. Iran had once proposed that it wanted to shift its international payments system to the euro. But, given the state of the euro and widespread apprehensions of its imminent collapse, the dollar remains the default reserve currency. Time for the yuan to stand up?

Blind-Sided By A Rate Cut

In the frenzied build-up to the Reserve Bank's mid-quarter policy review on July 31 and the drumming up of expectations about a rate cut, everybody took their eyes off the other niggling problem looming in the distance -- slowing down deposits growth.

As a result, while the Reserve Bank governor's policy statement on July 31 contained some nuanced messages -- in keeping with the hallowed tradition of subtle, implicit messaging from the central bank -- most of the public read the message only literally.

So next day, predictably, everybody voiced their disappointment at the absence of a rate cut and expressed their surprise at the SLR cut. This was my piece in next day's ET (read here) highlighting some of the cues in the policy document.

But, two days after the policy, this article by Sugata Ghosh (read here) in ET really spelt out the problem, at which I had only hinted and which the Reserve Bank governor tackled without triggering off any alarm bells.

It may be instructive for market participants to get over their obsession with interest rate cuts and try to see the big picture once in a while. In the absence of any credible policy action, a rate cut seems to have become the default solution. The bitter truth is that there are no magic bullets left for the country's economic problems.

You Say Off-shoring, I Say Outsourcing

Both the Indian economy and the India Inc brand name owe a lot to "outsourcing" as the key to their global recognition and success stories. But, as the recent HSBC scandal demonstrates, the magic of Indian outsourcing seems to be fading away faster than you can say N R Narayana Murthy! What's happening?

The key to the outsourcing trend lies in some of India's strengths built during the 1960s and 1970s -- solid engineering institutions and a knowledge of English. Many global corporations, starting with General Electric and Texas Instruments, realised that some of their grunt work could be outsourced to India. They could use the vast reservoir of Indian engineers to do in India some of the quotidian work they were doing in USA. The prime motivation: saving costs.

This then caught the popular imagination as telecom infrastructure improved during the 90s and made communications -- both data and voice -- cheaper and better. Companies rushed to set up outsourcing centres in India -- shops that basically made sales calls to customers across the English-speaking world, to tackling after sales service issues, to even writing software code.

Another word was added to the business lexicon: "off-shoring". Global companies started spreading their work around the globe, basically to take advantage of cheaper skilled labour pools elsewhere. This also included another phenomenon: transfer pricing, which basically incorporated strategies at the global HQ level of reaping tax advantages by incurring costs in high tax geographies and shifting profits to low tax regimes.

But, since the basic premise behind the entire exercise was cutting costs, there were incentives for inventive managers to keep doing the same thing at lower costs. And, then came the financial crisis. With profits plunging to subterranean depths, companies starting sacrificing well-established risk measures and processes to gain that extra bit of business.

The same applies to banks which had "off-shored" their operations, compliance and risk processes to overseas locations. Ideally, the off-shore location, far removed (geographically, at least) from the business origination centres, were supposed to be neutral and free from any influence. In reality, there's hell to pay if managers in these off-shore centres said "no" to 2-3 consecutive proposals, even if the proposals did not meet the risk matrix guidelines. The pressure to get business is so intense and so acute that anybody saying "no", irrespective of the provenance of the funds, is viewed as an enemy of the institution.

We don't know what happened in HSBC exactly. The bank had an off-shore compliance centre in India to ensure that funds flow met the rules regarding anti-money laundering and terrorist funding. But, what we do know is that  a probe by the US Senate's Permanent Sub-Committee on Investigations found that the Indian compliance office was inadequately staffed, their quality of work was deficient and their monitoring procedures in internal control systems was weak (read full story here and here).

This is not the first time that India off-shore centres have been pulled up for the reasons cited above. In the mad rush to cut costs and stay competitive, many companies are sacrificing critical business processes, making compromises with sacrosanct quality standards. But, the worst culprit seems to be the practice of hiring sub-standard staff, shoring up revenues by skimping on training and telecom facilities and pushing employees to go beyond their call of duty to bring in revenues. This then creates a fertile breeding ground for suspect motives and dodgy ethics.

You can teach all the ehtics you want in B-schools (which, by the way, is another story for another day) but at the end of the day you would need an organisational culture --starting from the Board of Directors to the CEO to even the HR guys -- to implement it. Are we expecting too much from the modern-day corporation?

Turkish Coffee -I

My Istanbul flight timings made sure Monday Mocha gave way to Turkish Coffee on Tuesday. So here are some initial impressions from the land of doner kebaps and koftes.

First, all compliments to the new management at the Mumbai International airport. No more sweaty queues to get into the airport terminal or to get the luggage screened. Smiles all around, courtesies extended and no more desperate crowding. Probably it’s because the air-conditioning was working. But, on a more serious note, the change now makes the flying out of Mumbai a pleasurable exercise.

And then to Istanbul. Somewhere I had been expecting a bleak city, with emotions ruling between the grey and the black, the burden of history weighing heavy on the ordinary Istanbullus’ shoulders. Maybe that’s what happens when you try to see the world through the eyes of Orhan Pamuk. According to him, there is a common leitmotif running through the city’s intricately intertwined genetic lattice – melancholy, or huzun, as a predominant cultural identity. But, on the surface, that somehow seems absent. The city looks bright and colourful, with the people eager to succeed, though the strains of balancing the plethora of competing cultural strands that make up modern-day Istanbul do break through the surface sometimes. But then, this is just a superficial impression gained from spending just one day in this great city. More later. Some pictures too coming up soon.

Inflation Still Stands Between RBI & A Rate Cut

Dark clouds of the metaphorical variety have invaded the Indian airspace at a time when the Indian economy is desperately praying for the real thing. The monsoon deficit, which seems to be aggravating with every passing day, is now well on course to affecting crop sowing and causing a shortfall in agricultural production (read about it here and here). There are other portentous clouds on the horizon too.

Industrial production is limping along: the May numbers show a growth of slightly over 2%. But, mass-scale scepticism underlines this number because the April growth numbers have now been revised down to (-)0.9%. This is ominous: this means that industry produced less (in absolute numbers) in April this year than it did in April last year.



Courtesy: Reuters

Inflation seems out of control, though there is one proverbial lining here. The wholesale price index surged up by 7.25% in June 2012 over June 2011. While this is below the 7.55% rise in May, and also considerably below the Street consensus call of over 7.6%, it’s still way above the Reserve Bank’s comfort zone. Bad news continues to emerge from data revisions – inflation data for April has now been revised upwards to 7.5% from 7.23% announced initially. Consumer inflation for May 2012 remains highly elevated at 10.36%. But, there is still a glimmer of good news in all this: given data volatility and unreliability, RBI tracks core inflation data (or non-food manufacturing inflation) which is currently steady around 5%.


In the midst of all this, the Reserve Bank of India is expected to meet on July 31 to conduct its mid-quarter review of monetary policy. The markets don’t know what to expect: a majority wants rates to be cut, because it associates the slowdown directly with rate hikes in the past. Therefore, it holds to logic (in their minds, at least) that rate cuts will lead to a growth uptick. In addition, many central banks around the world -- China, Europe, Taiwan, South Korea and Brazil -- have cut rates recently and the RBI Governor will be under pressure to emulate them. However, most economists and analysts feel that it might be a bit premature to take the shears to interest rates.

So, how will Duvvuri Subbarao chose to act? While it is a mug’s game trying to predict RBI’s actions (and many a well-known face has ended up with egg on it), this blog will rise above the humdrum and deign to advise the central bank.

This blog feels that the Reserve Bank should hold interest rates at the moment. Although this same blog had argued for a rate cut in February, it is arguing against it now. There are two key reasons. One is, of course, the singular impact that such rate signalling can have on sentiments, which at that point of time sorely needed some encouragement from the authorities. But, the more important reason is the way the opportunity to climb out of the slowdown hole has been squandered. There is no visible action on a number of fronts – either on expenditure management or on implementing major policy reforms. If the rate cut then had been combined with some policy actions from the centre (as was expected then), the situation could have been ripe for another rate cut now.

There are other compelling reasons to press for a pause now. Lower agri production is likely to result in higher food prices, especially for pulses, vegetables and fruits. Simultaneously, it is also expected to translate into lower rural incomes. This will mean lower demand for a broad spectrum of goods and services (think Hero Honda motorcycles or cement for rural housing). On a macro level, this means continuing with a period of slow industrial production. On top of all this, with inflation and inflationary expectations continuing to remain high, with global volatility continuing to put pressure on capital flows and the rupee (thereby creating another distinct source of inflation for the economy), and with the government yet to put its money where its mouth is, it probably makes no sense to cut rates now.

However, the central bank is under tremendous pressure. If it decides to cut rates at all, core inflation at 5% could be a strong reason. It is worth the wait to see how the policy shapes up and trying to figure out what has influenced the eventual outcome.

IIT Entrance Exams: Through The Wrong End of the Telescope!

Courtesy: Wikipedia

Education minister Kapil Sibal’s plans to revamp the system of entrance examination to the IITs has stirred up a fair bit of criticism, debate and an unfortunate display of emotions. It is quite possible that minister Sibal might just be barking up the wrong tree. But, even if you grant that, it is also true that the armies of the aggrieved are possibly looking down the wrong end of the telescope.

Minister Sibal has proposed that marks/grades obtained at the entrance exams should not be the only qualifying criterion for students aspiring admission into IITs. The Institutes should also take into account school performance, because while a particular student might have shown consistently good academic results in school, she could just be having a bad time on the day of the entrance exam.

Fair enough. But, that invites its own set of problems. A bulk of India’s school-going students attend institutions which report to their respective state education boards and the grading pattern, thereby, differs vastly across states. While some state boards are lenient with grading, some are exceedingly tight-fisted. This writer should know: the West Bengal state education board mistakenly believes (or, used to believe) that low marking was a virtuous sign of quality education. Therefore, there is a felt need to regularise grades across states.

The ostensible reason behind minister Sibal's exercise is to stem the growing informal industry of coaching classes, which help students focus – through boot camps – exclusively on cracking the entrance exam. This, it’s felt, is diluting the quality of students entering IITs and, thereby, the quality of engineers entering the job market.

This whole process has stirred up a hornet’s nest. The IIT faculty and alumni have voiced their outrage: they feel that the new system will not only harm the IIT cache but also spawn a new breed of coaching classes that will focus on fetching superlative grades at the school level. IIT alumni members are all influential members of society and therefore this has triggered off a different kind of power politics.

It is true that Kapil Sibal might need to revisit his proposal because if the quality of students is an issue, then the rot starts at the school level, especially the government schools. There is an article written by Ravish Tiwari on this in The Indian Express (read it here). Also, will incorporating the school-leaving academic records stem the rot in the system? Unlikely. In fact, it runs the danger of even breeding an entirely new breed of elitists, who will be selected by IITs for reasons that might be only borderline meritorious but sneakingly subjective. But, undoubtedly, something needs to be done.

Even the IIT faculty and alumni need to introspect. The Express article mentions that the faculty and administration did indeed start debating the quality of students they were taking in every year. How do you change that? One unavoidable option is to overhaul the entrance exam. For instance, should the entrance exams include a separate paper on English? Also, if the quality of engineers graduating is a concern, then the faculty should also take equal responsibility. These students spend four very critical, and impressionable, years of their life in an IIT campus. It is therefore up to the faculty to re-engineer (sorry, that was an unintended) the syllabus, the mix of courses and the pedagogy.

Now, for the other end of the telescope. One reason for the mad rush to get into IITs is the assurance of a pot of gold at the end of the rainbow. And, here the pot of gold are the IIMs, or the Indian Institutes of Management. These premier institutes also have a common entrance exam that is contentious. The structure of the exam shows that it’s weighted towards engineering students – or, it helps you score marks if you are an engineer. Also, given the tag of premier management institutes, students graduating here have a shot at the best jobs – make that the best-paying jobs – in the employment market. Therefore, the rush to get into IIT since admission in this hallowed institution is a guarantee of sorts. It definitely smoothens the path into IIM. Or, so is the perception.

It is this end of the telescope that Kapil Sibal and all education experts need to be tackling. Because the end is justifying the means.

Spooked: The BIS Annual Report 2011-12

The Bank for International Settlements, or BIS, the central bank of all central banks, has come out with its annual report (read here) for 2011-12 (BIS follows a April-March year).

The report contains some general observations, many of which are applicable to India. Sample some of the paragraphs:

1. The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems. Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed...any positive effects of such central bank efforts may be shrinking, whereas the negative side effects may be growing.

Although this is with reference to the western economies with nominal interest rates ruling near zero and central bank balance sheets expanding, this paragraph could even apply to India. And, even though RBI has reeled its loose monetary policy back, on getting early warning signals of inflation and inflationary expectations during October-December 2009 (though some economists did blame RBI for delayed action), we do see the government failing to make the difficults adjustments or take the tough calls. Instead, they are relying on RBI to provide all the stimulus to the system and deliver growth.

So, here is the prognosis from BIS: central banks face the risk that, once the time comes to tighten monetary policy, the sheer size and scale of their unconventional measures will prevent a timely exit from monetary stimulus, thereby jeopardising price stability. The result would be a decisive loss of central bank credibility and possibly even independence. The last part is the scary bit.

2. Here is another relevant, though somewhat chilling, paragraph: Measures of debt service cost also suggest that high debt levels could be a problem. The fraction of GDP that households and firms in Brazil, China, India and Turkey are allocating to debt service stands at its highest level since the late 1990s, or close to it. Debt tends to accumulate on private sector balance sheets when interest rates are low. When rates eventually rise, higher debt service costs can trigger a painful deleveraging.

With the economy and industrial growth slowing down, commercial banks have been hit on two fronts: a deceleration in the build-up of commercial assets as well as retail lending slowing down. This means ;lower earnings and reduced bottomlines. However, banks are increasingly staring down the barrel of another risk: defaults. If that comes to pass, since high debt servicing becomes untenable in a low growth environment, bank balance sheets will be drenched in red ink.

For an interesting and different view of private sector debt, read former journalist and banker Haseeb Drabu's weekly column today (available here).

3. While the growth of banks from advanced economies has slowed, banks headquartered in emerging markets have been gaining in importance. Reporting steadily rising common equity, the average emerging market bank in a sample of large institutions worldwide is on a par with its US counterpart in terms of loan volumes; it has also substantially increased its securities investments. Chinese and Indian banks in particular expanded their balance sheets by roughly 75% between 2008 and 2011.

Only one point here: Remember this balance sheet growth took place during a period of economic stimulus which focused on consumption and not on capacity creation or expansion.With growth slowing down as expected, and rates continuing to remain high, this could force some banks to shrink their balance sheet sizes. We are seeing that happen already.

4. Countries such as Russia or India could experience considerable headwinds if growth slows as expected in their trading partners (Ukraine and Turkey for Russia, Middle East markets for India) during 2011–15. These headwinds could also be significant for most European countries, which trade heavily with each other and where growth forecasts have been sharply cut back.

So much bally-hoo was generated after June-July 2011 by the former Commerce Secretary about India diversifying its export markets, as well as its basket of export goods. Suddenly, we don't hear so much noise about it at all.

Sir, Your Talk Time's Over...

Prime Minister Manmohan Singh, on June 6, announced a long list of projects that, when completed, can be expected to rejuvenate the economy's mojo. The markets -- already enthused by Reserve Bank deputy governor Subir Gokarn’s statement on rate cuts -- took heart from PM’s statements. In an economy devoid of any feel-good news and wracked by a steady stream of depressing developments (low GDP growth, a resurgent inflation rate, depreciating rupee, corruption, policy inaction), these two events were welcomed quite like the delayed monsoon clouds.

But it is primarily the PM’s statement that provides some hope to many beleaguered market operators. In short, the PM has proposed investments of over Rs 100,000 crore in various infrastructure projects across various sectors – such as, roads, power generation, coal, ports, aviation and railways. Read the full press release here and here.

The plan sounds grand and has all the right ingredients to lift the economy out of its current slough.

But -- and sorry to sound like a wet blanket -- market operators seem to be in for a big disappointment. What’s wrong with what has been announced? Technically, nothing. The economy needs large doses of investment at this juncture to pull it out of the morass and the recent declaration seems to fit the bill. But, such announcements have been made even in the past. Like earlier occasions, this time too, the government has trotted out only a large string of impressive numbers, but has failed to mention a couple of crucial facts.

Point One: Who, in the name of blazing heavens, has this kind of money today to invest in infrastructure projects? The government is already highly leveraged and is liable to get tripped by the market if it tries to borrow over and above its budgeted expenditure. The only way it can free up some cash is by cutting down on some items of non-plan expenditure, such as wasteful subsidies. But, as everybody knows, that is still a long shot. Even the private sector is hamstrung, with profits falling for FY12 and the continuing slowdown spooking all investment plans.

The only option left is overseas funding. But, the government needs to use the broom vigorously to clean up multiple acts before a single cent rolls in. For instance, there needs to be a serious rethink on external debt ceilings if the private sector is expected to pitch in with funds and expertise. Second, the government might need to use innovative structures to fund such projects without impacting the overall deficit numbers. (One can read ICICI Bank chairman K V Kamath’s interview for some ideas).

Point Two: Time to repeat the point that was made earlier. Such announcements have been often made in the past but without any follow-up on the achievements. In this case too, there seems to be no clues on how the government proposes to achieve these targets.

There are numerous reasons for the proverbial slip. For one, ministers handling the infrastructure portfolios are not schoolchildren in thrall to the headmaster or employees beholden to an autocratic boss. So, it really doesn’t matter whether they perform or not. These ministers are where they are because of other reasons. They have been elected to power and are holding a particular economic portfolio at the behest of the party chief and not the PM. Or, they are in the cabinet because they are part of the ruling coalition and helped UPA-II to stay on in power. Look at the empirical stuff: barring the ones facing criminal proceedings, not a single minister has been penalised for poor performance. Some have been merely shuffled off from one “lucrative” ministry to another.

Also, as has been seen on numerous occasions in the past, large projects are usually dogged by several problems: clearances, approvals, financial closure, regulatory hurdles. Add to that another malaise affecting most projects in India: the pay-off syndrome. Most large projects in India need to make pay-offs at multiple levels – at the central level, at the state and at the local municipality level. This adds to costs and, in many cases, renders the projects unviable. Inability to pay at any one level can delay the project irretrievably.

Do we have any word from the PM on how he’s going to block these malpractices? Nope. Any clues on how he proposes to give that all-important push to the projects? An investment tracking system has been set up (read here). Will that be that enough? As the cliché goes, only time will tell.

So, finally, how do we approach such announcements? I’d say hold the celebrations.

Petrol On Fire

In all fairness, the government shouldn't be blamed for policy paralysis. They have acted with such alacrity. Petrol prices were hiked by Rs 7.5 per litre as soon as Parliament went into recess. So, no shouting brigades, no loud thumping of desks, no rushing into the well of the House, no hectoring or haranguing, and no "pliss-pliss". Good only, no?

Actually, the petrol price increase raises two other issues. One, we can expect to finally see the extent of the increase pared down by Rs 2-3 per litre. The protests from allies has already started acquiring a high decibel level. By Wednesday evening, both Mamata Banerjee and Karunanidhi had voiced their displeasure over the increase. SP's Mulayam Singh Yadav, who is being courted assiduously by Congress as a counter-weight to Didi, also expressed his opposition to the price hike. Ditto for RJD's Laloo Prasad Yadav. So, once all these protests reach a crescendo, and acquire some kind of a shrill heft, we might expect to see the Congress top brass relenting and "rolling back" the hike partially. My bet? By Rs 2-3 per litre.

Even The Economic Times is betting that the price rise might finally be tempered somewhat (read here), though for a different reason. Their take: oil prices in the Singapore bulk market have been cooling off a bit.

But, ironically, BJP and CPI(M) have been misleading the public from every forum. By the way, isn't it strange how the right and left get into bed conveniently when they want to squeeze out the centre? Their beef: petrol price hike has a cascading effect and is likely to have a spiralling impact on inflation. That's a load of nonsense. Here's why. Petrol has a negligible weightage (1.09%) in the wholesale price index and its ability, therefore, to bump up headline inflation remains marginal. Also, bulk goods movement --such as essential commodities -- are moved by modes of transport that use diesel as fuel (think trucks) and not petrol.

Are there any reasons to protest against the petrol price increase? Of course, shiploads of reasons to crib about the price rise, but certainly not on account of its impact on headline inflation. The current hike comes on top of the existing inflationary pressures weighing down the middle class. And, this current episode of high inflation and inflationary expectations has its roots in the survival strategy crafted by the government in the aftermath of the 2008 global financial freeze, but let it stay on for far too long. In short, this lifeline to the economy should have been withdrawn much earlier. Plus, of course, the government has been loath to either cut down on wasteful subsidies, or re-align its expenditure strategy which is actually ending up further fuelling inflation. And, let's not even get started on this business about governance deficit. So, of course there's plenty to cry about, but not because a petrol price increase will lead to inflationary pressures as the voices from the right and left are asserting.

The government should have increased prices of diesel along with petrol prices if it really wanted to bring down the current account deficit and stabilise the rupee value. A diesel price hike might certainly be seen as inflationary, but at least these high prices would've curbed demand for the commodity. In return, it might have squeezed the import bill a bit, checked the runaway current account deficit and pulled up the falling rupee.

It is well known that fuel prices needed to be increased, and even the Reserve Bank governor's statements have alluded to the fact about how domestic fuel prices lagging international prices does lead to a build-up of inflationary expectations.

But, guess why diesel prices cannot be increased immediately, though news reports suggest the government will be meeting tomorrow to consider the possibility? The answer: it's summer in this part of the world and, with kharif sowing to begin soon (in the next 30-45 days), pols can't afford to get farmers cross about high diesel prices. In many parts of the country, farmers will need to run their pumps at full tilt, even though we've been told to expect a normal monsoon.

If there was any reason to carp, the grouse should have been why the government didn't spend on improving irrigation infrastructure in the 60 years since Independence. And guess what MPs and MLAs are mostly concerned about? Getting a red beacon on their cars!

In India, Ides of March Yield Record FDI Inflows

Much brouhaha has ensued over the March FDI numbers. It's come in at over $8 billion, compared to slightly over $1 billion during March 2011. This is supposed to be the highest FDI received in a single month and is a record of sorts. This data release -- a news break from NDTV (read it here) -- has also generated discussions, heated arguments and raised eyebrows.

The first reaction is one of  scepticism. Given the frequent revisions in government data (and the wide swings between the provisional and actual data releases), such cynicism is to be expected. However, it must be said that there is very little room for FDI data to gyrate wildly since the ticket size of each transation tends to be larger and the numbers are captured through a central tracking authority.

The second reaction is: if the inflows truly were over $8billion, then have we all been over-reacting over the past few months? Was the commentariat hasty in criticising this government's so-called "policy paralysis"?Did the FIIs and the global fund managers retreat too soon?

Well, the truth will out once the official numbers are released. But, in the meantime, it seems that there could be two reasons for this sudden bulge in the numbers this year.

One, it seems BP's investment of $7.2 billion in Reliance Industries was staggered over the course of 2011-12 and the final instalment of the investment could well have trickled in during March 2012.

Two, many FDI commitments, especially those related to long-gestation infrastructure projects, are staggered over the duration of the projects. Inflows, linked to project milestones, are therefore spread over many years. It could well be -- and this is just a speculation -- that some of FDI committed for infrastructure projects in earlier years and now flowing into the country this year.

There is another, rather unkind view of this favourable data leak, especially when Parliament is in session and the Government is on the back-foot over GAAR.

Whatever it is, an explanation will certainly be welcome.

Sensible Pension Plan

Wrote this piece for ET (read here) on pension reforms. Found it strange that the man who had introduced defined contribution to the country -- Yaswant Sinha -- should today push for a roll-back to the old system of guaranteed returns and defined benefits.

Propagating An Interest Rate Cut (Yet Once Again...!!)

Wrote this piece (click here) for FirstPost on why the RBI should start cutting interest rates immediately instead of waiting for inflation and inflationary expectations to subside. Someone commented that it might be better to wait for inflation to disappear before taking the shears to interest rates. Most other economists have also been echoing the same sentiment: it's better to first squeeze out inflation from the system (albeit with the help of only monetary policy) before easing the tight monetary system.

My only take is: a large component of inflation in India arises due to supply side issues. These have been lingering for decades and no solution seems to be forthcoming. I don't expect the Government to sort these out in a hurry. Given the fact that these structural deficiences are likely to be with us for some more time, we are left with only two choices.

One of them was articulated by RBI Governor D Subbarao in an interview to Wall Street Journal (read here). According to him, the non-inflationary rate of growth for India is around 7% -- in other words, any rate of growth beyond the 7% might get the engine to overheat and cause inflationary smoke to billow from below your bonnet. Somewhat like what has happened in the past 24 months or so. If as an economy, we are content with a 7% GDP growth rate (which, by the way, if infinitely superior than most other countries), then the current economic prescription seems just right.

However, as many studies have repeatedly shown, India needs to grow by at least 8-9% every year, for some more years, to sort out one of its endemic problems -- poverty. And, to grow at that rate, the economy needs a much higher level of investment. There are many reasons why investment growth has slowed in the current context -- scams, bureaucrats getting ultra-cautious, approvals not forthcoming, governance lapses stemming from the country's top-most office, uncertainty over the policy environment, and, high interest rates. While the government is trying to re-set the investment climate by making the right noises about policy and project approvals, these will have to viewed by industry as sustainable in the long-term before they start committing their cash all over again.

In the meantime, interest rate hikes by the RBI have had a greater demonstration effect. Since interest rates are far more visible and tangible, they have earned a disproportionately larger share of the blame for the economic slowdown. Therefore, if the RBI cuts interest rates now -- even if it's by only 25 bps -- it has enormous demonstration effect and has the potential to kickstart the revival process.

This is not to say that the inflation problem is trifle. But there is a limit to which monetary policy can sort out inflationary pressures arising out of government profligacy and neglect.