Finally the congress decided to dump the railway minister and the law minister. Is it a case of too little too late? That’s what it seems. The congress could have done that when the parliament was in session. After the CBI reports, they could have taken the high moral ground of asking the ministers to resign till proven innocent. That way they could have stolen BJP’s thunder, thereby forcing them to relinquish their militant path. In turn, the BJP would have had no other option but to allow the parliament to function. The country would have been immensely benefitted as some important bills could have been passed.
Instead, what we witnessed was one of the most unproductive sessions of the parliament, which was finally adjourned sine die, two days before the scheduled close.
It is quite unfathomable why they chose to stick to their guns till the Supreme Court came out with scathing comments. And now that they have taken this action, how can the Prime Minister stay at the helm? His position becomes increasingly untenable as it is a clear admission of guilt. As a result, what we can see now is even more militant opposition which could result in further policy paralysis.
The curious ways of Indian politics.
India released its Industrial production data for March 2013 yesterday. A growth of 2.51% yoy (year-on-year) in industrial production provided some sense of comfort during a period, when myriad corruption cases and parliamentary deadlock ruled the headlines. The index, which contracted during six out of the first nine months of the year, managed to show expansion in all the three months of the last quarter of FY13. What is also heartening is that the capital goods sector is showing some sense of stability after having contracted during nine out of the first ten months.
Overall, industrial production grew by 1% yoy during the full year as compared to a growth of 2.9% yoy a year before. Within this, manufacturing grew by 1.2% yoy during the year as compared to 3% yoy growth recorded a year before.
However, while the performance of the index over the last three months does lend credence to the belief that the worst may be over for the economy, the sense of comfort vanishes as one takes a closer look at the data. For starters, the February Index was revised downward (though at the margin) from 0.57% yoy to 0.46% yoy. In fact, during six out of the past eleven months, the index was revised downward when we moved from preliminary to final data. More importantly, the quality of data continues to remain suspect. When one considers the disaggregated data at the two-digit level, a major distortion is visible in the category ‘wearing apparel; dressing and dyeing of fur’. The index value for this segment dropped to 68.4 in March 2012 from 154.2 in February 2012 and then jumped back to 124.2 by April 2012. Clearly, a major base effect came into play here during March 2013 as a result of which, production for this category jumped by 152.3% yoy in March, thereby pulling up the index considerably. In fact, despite having a weight of only 2.78% in the IP, this segment contributed as much as 2.9 points to the overall index on an annual basis, while the IIP in itself increased by only 4.7 points over the same period.
Like most other categories, manufacturing of this product also exhibits high degree of volatility. If we extrapolate the average growth rate in production of this segment for the first eleven months (April till February) to March, it would have grown by only 3.3% and not 153% as is the situation currently. Had that been the case, overall IP would have increased by only 0.99% yoy in March and not 2.51% yoy as the official data suggests.
As expected, the RBI, in its latest monetary policy announcement yesterday stuck to saner counsel and opted for a 25 bps cut in repo rate while there has been increasing clamour for a 50 bps cut. While some analysts felt slighted by the move, I enumerated here why a more dramatic action is less desirable. Thankfully, RBI remains vigilant to the dangers of faster easing. Slowing credit growth despite substantially low real rate (policy rate minus official inflation) has to do with deteriorating investment climate in the country and not because of absolute level of interest rate. Source: CEIC dataWhat is also important is that RBI believes that the economic recovery would be shallower than what the government officials believe. I mentioned here why the optimistic assumptions behind the growth estimate put forward by the PMEAC (6.4% growth in GEP for FY14 as against RBI’s expectation of 5.7%) fails to stand scrutiny. Clearly RBI is worried about slower growth but they rightly believe that the government should be able to walk the talk rather than only talk while expecting RBI to shoulder all the responsibility. Monetary policy is essentially a signaling mechanism and as I explained here that despite a 1.25% cut in repo rate, 1.5% cut is CRR and 1% cut is SLR since March 2012, lending rates have hardly budged clearly shows that the problem lie elsewhere. Clearly, the transmission mechanism has weakened. The only way this channel can be effective would be when the confidence on the economy is back. And, for this, the government has to act. Question is, given the political reality of a weak & corruption tainted government and advancing general election, can the government do anything meaningful? Don’t bet on that. India will be well served if indeed we have an early election and a fresh government takes guard sooner rather than later.
Being blessed with many armchair policy makers, it is not a surprise that India needs to occasionally bank on divine intervention to stay on track. One could actually hear an audible sigh of relief when the met department announced that India can expect normal monsoon this year. It is a different matter altogether that the same met department also did forecast a normal monsoon last year at around the same time.
Before I go to the real reason behind this piece, I think it is worthwhile to narrate an experience at a very early stage in my career. I had joined Dalal Street Investment Journal (my first job) a few months back. A few days after the budget, my colleague and I went to talk to the then Minister of State for Finance. To our sheer irritation and dismay we realized that he is not the least clued to anything finance and economics and only wanted to talk about POTA. With the time well wasted, we the exasperated lot came out of the room pondering over the unexpected turn of events.
But then, was it really unexpected when quite often we have wrong people handling wrong portfolio and making mess of things. We want to spend humongous sums of money to tackle hunger when the main problem facing the country is malnutrition. We want to show the world that literacy levels in India are improving (and dropout rates falling) while turning a blind eye to the quality. At a particular eureka moment a wise minister (and his coterie) decided to eliminate the concept of failing a student till the 8th standard. Result – poor quality of students getting even poorer. Repeated learning outcome surveys conducted by both the government and by independent education think-tanks have shown a consistent dip in reading and math levels coinciding with the introduction of the policy. While the industry laments employability of graduates in India, the situation will only get worse because a minister thought he had a revolutionary idea. This is another example of how clueless we Indians are about harnessing the dividend that a positive demography entails.
Our Prime Minister expressed anguish at the painfully slow progress at international climate talk. What he should realize is that at least things are moving. Back home, policy is virtually at a standstill. Debates and discussions continue endlessly till cocks come home to roost, but hardly any visible action. No wonder the economic problems fester.
Was reading this discussion paper on food subsidies by the Commission for Agricultural Costs and Prices (CACP). Good to see my views being echoed.
India’s current account deficit (CAD) for the third quarter of FY13 shoots up to 6.7% of GDP. As a result, the CAD for nine months (Apr-Dec) is at 5.4% of GDP. The high CAD for Q3 was caused by trade deficit being just shy of US$60 billion, the highest ever. With the trade deficit for the first two months of Q4 being close to US$35 billion, the trade deficit for the full quarter could be close to US$50 billion. While this will mean an improvement in CAD for Q4 as compared to Q3, the overall CAD for FY13 will still be above my initial expectation of 5% of GDP.
What is even dangerous is that this CAD is being financed mostly by portfolio inflows and not be FDI. Rise in CAD is inevitable since domestic savings have been falling faster than the fall of investment. With the government failing to ensure fiscal prudence (save for the lip service) and unable to put the inflation genie back in the bag, domestic savings have taken a big hit.
I have explained on a number of occasions earlier, India’s real fiscal deficit for FY13 will be north of 5.5% of GDP. As a result, India’s twin deficit for the year will tot up to 10.5% of GDP. In fact, closer to 11% -higher than what it was last year.
Being helpless in tackling the problems facing the economy and unable to attract adequate FDI (by failing to meaningfully walk the talk), the government is taking every possible steps to attract portfolio flows to help finance the CAD. This, however, is the least desirable solution. Given the current state of the economy, even the relative attractiveness of the Indian economy remains questionable, atleast till the elections. Till then, if the situation does not improve for India and, even worse, if the European situation worsens (which is quite likely given the potential ramification of the Cyprus decision) the FIIs can exit India in large numbers. In such a situation, forex reserves will dwindle, the rupee will depreciate and inflation would remain elevated. A pretty scary situation, to say the least.
Unfortunately for India, the biggest policy driver is hope. The policy makers prefer to do nothing but hope that things will improve. Since September last, we have seen a plethora of announcements but hardly anything coming to fruition. The very fact the India is as yet unable to attract even a single investment commitment after FDI is multi-brand retail was liberalized, speaks volumes of how our policy and policy makers continue to fail India.
Bottomline – be prepared for the worst, at least till the elections are over. And, hope for the best, post that.
All this time we were witnessing increasing austerity fatigue in Europe. The result of the recent Italian election lend further credence to this belief. The fatigue that was (not surprisingly) first visible in Greece also spread to Spain and France. As the crack between disciplinarian Germany and the recipient nations (including the potential recipients) widened, comes the news the right-wing populists of Hungary passed a controversial constitutional amendment (with overwhelming majority of 265-11) which threatens the democratic values of the nation. As the Hungarian lawmakers threaten to transform the nation into an authoritarian state, it will strike at the very heart of EU thereby putting to danger the very concept of the union. Did someone say that the tail risks have vanished?
A piece of data that did not get adequate noticed as it otherwise should have been is India's Q3 FY13 GDP, which was released on the day of the budget.
After boldly proclaiming that the advance estimate of India’s 2012-13 GDP by the central statistical organization (CSO) was biased on the downside as it failed to factor in the economic turnaround that the government (not others) could see with their tinted glass, the economic survey released yesterday indicated that the government was reconciled to the idea that they were actually wrong (or CSO right). While they have finally accepted that the idea that India’s income side GDP (or GDP at factor cost) for 2012-13 will grow at 5% annual rate, the estimate of Q3 2012-13 GDP released Thursday by CSO pegs the growth at 4.5%annual rate, which is the lowest in a decade. This brings forth the possibility that the final growth may even be less than 5%. The data released a few hours after India’s union budget was presented in the parliament, clearly shows that the worse may yet to be behind us.
The agriculture growth rate eased off to 1.1 percent the lowest since 4th quarter of 2009, while the mining sector contracted again (at -1.4%annual rate).The slower growth in the quarter was largely due to the fact that the service sector grew at is slowest pace (6% annual rate) since the 1st quarter of 2001 and the seventh straight quarter of falling growth. Withinthis, while financing continues to be the best performer (a growth of 7.9%annual rate), the squeeze in government spending (read austerity measure, if you please, as the government is desperately trying to stick to the much avowed fiscal consolidation roadmap of theirs) was finally evident as community and social sector spending grew by only 5.4%. With the government on an austerity drive now, further squeeze is expected in the final quarter of 2012-13, which can drag down the overall growth rate to even less than 5%. As per the budget document, the government plans to cut its overall expenditure by 4% to 14.31 trillion rupees from what was initially budgeted (14.91 trillion rupees).
Interestingly, India’s GDP on the expenditure side (or GDP at market price) actually showed a higher growth during the quarter ending December at 4.1% annual rate as compared to a mere 2.7% annual rate growth recorded during the previous quarter. The higher growth is led by private domestic demand growing by 4.6%, though it is still half the growth rate recorded during the same period in the previous year (9.2%). It is also important to note that with the previous quarters number having undergone revision, private domestic demand for the previous two quarters (quarter ending June and September) turned out to be more anaemic than was assumed earlier with the revised growth rates coming in at 1.99% and 2.01% respectively as against the initial estimate of 3.98% and 3.68% respectively.
Government expenditure however slowed down to a trickle as it grew by a mere Not surprisingly, however, government demand grew by a mere 1.9% annual rate, as austerity measures kicked in. Even the previous two quarters government expenditure growth rate was revised down from 9.03% and 8.63% to 8.27% and 8% respectively. Overall, the expenditure side GDP growth rates for the previous two quarters were also revised downward. Surprisingly, despite revisions of the income side GDP data for the earlier quarters, there’s been no change in the growth rates. This continues to raise doubt about the quality of data collected and disseminated by the government.
Given that India’s GDP growth rate has tumbled, I expect the RBI to continue with its easing move.However, I would stick to the view that the rate cut during the remainder of the year will be 0.75% and not more, since the budget does not give the confidence that the fiscal deficit can actually be contained within the target given that certain assumptions are quite optimistic and not grounded in reality.
But more of that later.
Don’t mistake me please. I am not trying to rake up any political hot potato here. I am simply trying to take a peek at the Italian economic past to understand what might be in store for India.
The inconclusive Italian general election has brought to an end the uneasy calm that was prevailing in the global economy, snug in the belief that with the immediate tail risk being taken care of, the global economy would likely to do better this year than last.
In fact, the election result (potential second round of election looming large as Italy is being deemed ungovernable in certain quarters) reverberated throughout the world with its diverse impact on various assets classes. The Stoxx Europe 600 index and Italy’s FTSE MIB index dropped post the announcement of the results. Italian markets were further rattled by a weak government debt sale. The Treasury sold 8.75 billion euros ($11.5 billion) of six-month bills at higher borrowing costs (produced an average yield of 1.24% versus 0.73% in a late-January sale) and lower demand than at the late-January sale. According to Market Watch, post the announcement of the result, Italian government bonds sold off sharply in the secondary market, with the yield on Italy's 10-year bond rising by 0.28 percentage point at 4.73%. Elsewhere, the VIX (a measure of volatility and fear) rose sharply. Even the US stock market had its worst day since November while the Japanese stock market tanked. So did the Indian stock market. Clearly the mood of the global investors turned for the worse against risky assets.
On the other hand, the safe haven phenomenon was again back to the fore. Swiss Frank rose, as did Japanese Yen. In fact the Japanese stock market, which was gaining of late as investors banked on a weaker Yen pushing up Japanese exports, started to slide as Yen moved up.
The result of the Italian election is a clear indication that austerity fatigue has set in in Europe. The European voters have started to reject the policy that Germany and the ECB are trying to impose on the weak Eurozone countries. This is not just happening in Italy but other countries may well follow suit.
However it’s important to understand why things came to pass in the first place. The Italian economy has, for long, been facing structural constraints, the most debilitating of which is falling productivity and high labour cost. Prior to being part of the Euro Zone, Italy preferred to play the depreciation game with regard to their currency (i.e. Lira) to keep their competitiveness going rather than taking steps to correct the anomaly. Post their joining Euro (which resulted in them losing their monetary independence), they lost the most potent weapon and gradually fell by wayside. With high incidence of corruption resulting in humungous loss of revenue, the country kept on piling up the debt to keep their social spending going till water went over their head, that is. Hence, austerity and even potential bailout.
Sounds familiar? Think of India. Sure India is not there yet. India has a much better demography than Italy. India’s debt to GDP ratio is manageable. India is still growing ok and likely to grow better. But let’s not lose our sight from the potential danger. Politics driven social sector spending has created havoc with government finances. Although the pinch is not yet being felt, India is already courting trouble. Inept policy making continues to create structural impediments. Unlike some of its Asian peers, India does not have any further fiscal space left to stimulate the flagging economy. The structural impediments have resulted in persistently high inflation that has also ensured that India lacks monetary space. Now, we are getting into a situation of fiscal drag, or austerity measure if you please. With climbing deficit threatening to throw government finances out of gear, the finance minister (after having resorted to dubious means of accounting jugglery) was left with no other option but to cut expenses (after non-payment of oil subsidies failed to dent the burgeoning deficit). The austerity measure will impact India’s growth in the short-term.
What is even more worrying is that, as politics continue to rule the roost, the finance minister, in his effort to trim the expenses, is actually cutting down on the muscles (read capital expenditure) more than the flab (read wasteful social sector spending). Thus, not only will the growth be affected in the short-term, even the long-term growth potential will be hampered.
This desperate measure of resorting to austerity clearly shows India’s lack of foresight. India never bothered to right the wrongs when the going was good (read recording real growth rate of 9% plus) and hence forced to take restraining actions when the going became bad. This incapable policy making does not augur well for India. As mentioned earlier, India is not in as dire a strait as Italy and will possibly not be there for some more years to come, but unless they come out of this ineptitude and think of the economy (and the people) for a change, the potential dark days may not be very far ahead. But again given India’s penchant for reacting only during a crisis, do not bank too much on better sense to prevail, though short spurts of sensible decision-making would still be visible.