US consumers have started to re-leverage once more.  Consumer credit has started growing at a pace that is faster than growth in retail sales. Question, however, is can this be sustained when the job data is much less optimistic. As data reveals, underlying the improved employment data is vast number of workers opting for part-time employment in the absence of full time jobs. Also, the number of discouraged workers is still very high, which ensures that the actual unemployment rate is rosier than it is in reality.
The old habit seems to have come back, even when the conditions are not conducive enough. But is this sustainable? Is the US economy just a few shocks away from getting back to recession?
 
 
Today's decision to hike FDI limits in various industries has been widely hailed by the industry as much needed reform measures.

It seems that reform has become a much abused term in India. Even a routine policy decision is being touted as reform, decibel level rises and people become excited.

There’s no doubting, of course, that the decisions to raise the FDI limits are positive. But are these game changers? Hardly. These decisions make for a good headline. But if one cuts through the clutter, one would understand the lack of substance.

Having dealt a potential body blow to India’s finances by introducing the Food Security Bill through ordinance route, this decision seems to be more of a ploy to divert the criticism and gain some brownie points in the process. Ironically, the day these measures were announced, Posco announced their pull-out of their USD 5 billion project in Karnataka.

Fact is, higher the fiscal deficit, higher will be the CAD and greater will be the headache in trying to finance the CAD. As a result, every inflow of non debt creating FDI will feel like water in parched land. To that extent these decisions make immense sense. But can these make material difference? Does not seem so.

Take the example of hiking FDI limit in multi brand retail. The decision to allow upto 49% of FDI through automatic route seems to suggest that this will lead to a stampede by potential investors. Unfortunately, after the sector was opened up to foreign investment in September last, the extent of control in the Indian operation was least, if at all, of an issue for the foreign retail biggies. The inherent foolish clauses in the then devised FDI policies in multi brand retail were of concern. Not surprisingly, there has not been even a single letter of interest, leave alone application over the last ten months. Unless these road blocks are effectively addressed, such cosmetic changes are hardly going to impact.

Come to think of it, hike in limits or approvals through automatic route would hardly matter for those global investors who have not yet entered India. This will only be of interest to those who are already in India and see the possibility of having more control on their Indian operations. To that extent, the decision to hike 100% for telecom would likely see inflows from the already entrenched companies who would want to consolidate their position. It is also imperative to have much easier rules for mergers and acquisitions to help in the consolidation process.

Even in case of defense industry, the decision to allow FDI above 26% through FIPB (non-automatic) route for those companies offering state-of-the-art technology may not meet with much success unless such companies are allowed majority stake in the Indian company. In fact, attracting high end technology into India would require much more than 26% ownership.

According to Ernst & Young, the suggested the new measures could attract up to $10bn of investment into India over the longer term. This figure in itself is an indication that these policies are not game changers.

Fact is, India is not a great place to do business. Not for nothing has FDI inflows been going downs. The need to the hour is for the government to showcase their concerted effort to remove the structural impediments holding back the economy. Only this can reverse the dipping business confidence and slowly set off a virtuous cycle of growth.

 
 
Rarely does one come across a government so unsure of itself yet itching to move and, in the process, botching up big time. Two recent developments drive home the point.

First, the decision to open up multi-brand retail trade to foreign investors. In an effort to forcibly showcase the fact that the government was not gripped by policy paralysis, they gave life to the policy that allowed majority share holding to foreign companies in retail trading in India. However, given their inability to think through (and at the same time appease the nay sayers) they put in such irrational conditionalities that none of the global majors evinced any interest in investment (even after nine months have passed since the trumpeted path breaking decision) save for seeking a few clarifications now and then. The government might have liked to believe that the attraction of the Indian economy is beyond doubt and the opening up of retail trade will lead to a stampede by the global biggies. On the contrary, however, there was a deafening silence – as the investors can only see a slowing economy mismanaged by a rudderless government.

As the government’s monumental inefficiency has resulted in historically highest level of CAD, financing of which is becoming extremely difficult with each passing day, the desperation to get FDI inflows to ease the pressure has now resulted in the government having to eat a humble pie. There is now thinking within the government that the restrictions need to be diluted to get the investments flowing.

Then the now-on now-off ordinance on food security bill. For the ruling UPA government, this is crucial to their dream of getting a shot at forming the third successive ruling government. However, with the budget session of the parliament being adjourned sine die with virtually no business being conducted save for passing the finance act, the government had been mulling the ordinance route to make food security bill a reality. However, given the muddled thinking within the government, they have announced promulgation of ordinance a multiple times only to chicken out later at the thought of facing major opposition. However, with the rising possibility of the opposition parties bringing in enough roadblocks to delay the implementation if the discussion takes place during the monsoon session of the parliament which is scheduled to kick start soon, the jittery government finally went ahead and got the ordinance done so that they have enough time to set the ball rolling before the election rolls in. This is another instance of reality winning over propriety, never mind the economic cost of such a move.

 
 
The UPA II concluded the 4th year of its existence last week and aimed to celebrate that with much fanfare as they prepare themselves for the forthcoming general assembly election in May 2014. Essentially it turned out to be a celebration by the congress with some allies giving it a miss while others did not attach as much importance to the milestone. The Congress, however, put up a brave and upbeat face buoyed by their victory in the recently held elections in the state of Karnataka where their principal opposition party, the BJP, has been decimated.

When it comes to performance appraisal, however, the only notable success of UPA II as compared to UPA I is that the Congress won more seats in the later combine. However, the UPA II returned the favour for the faith reposed on them by the electorate by being serially corrupt. No other government has been known to have been hit by so many corruption scandals as this. A list of some high profile cases brings forth the point.

The very fact that the Congress won in Karnataka should be attributed to anti incumbency factor or a vote against blatant corruption and nepotism within the rank and file of BJP, rather than a vote in favour of the Congress.

On the economic front, UPA II is essentially a story of economic mismanagement and their single biggest failure is their inability to tame inflation – which is the worst form of taxation on the poor. Between 2010 and 2012, the country experienced three continuous years of near 9 per cent inflation, something that is unheard of. While the average monthly inflation (annualized rate) during the 5 year UPA I tenure was 4.8 per cent, the average inflation during the four year UPA II tenure was high as 8.1 per cent (see table below).

Despite having the architects of 1991 reforms in the fray, this government has failed miserably in ushering in of the next generation reforms. India has far outlived the benefits of 1991 reforms. The economy now is in desperate need of reforms in policies connected to factors of production – land, labour and natural resources and, in all these, the government has failed to deliver. Be it land acquisition, labour reforms or for that matter coal block and 2G telecom spectrum allocation – the failure is evident. As a result, India’s stock in the world market has been on a perennial slide. What to talk of an equally big policy mistake – that of retrospective GAAR. While that is now being sought to be reversed, the damage has already been done. On the other hand, important measures that can provide a new lease of life to the faltering economy, be it the GST, DTC, Land acquisition bill, insurance sector reforms, new companies bill, enacting the NMP into law etc continue to be held in abeyance. In fact the Prime Minister has announced today that GST cannot be rolled out before the 2014 elections.

What is more glaring is that, even in cases where minor tinkering (here I am referring to executive decisions rather than legislative decisions) would have benefited the economy, the morally and politically weak government was in no position take these through to logical conclusion. The best example of this is the way in which FDI was finally allowed in multi-brand retail. As their ‘so-much-in-evidence’ moral bankruptcy weakened their political clout (and hence leading to policy paralysis), they framed a ‘please all’ (from the perspective of their political opponents and opposing allies) policy of FDI in multi-brand retail that was as draconian as it can get from the business perspective. Not surprisingly, the policy bombed as not a single global retailer has evinced interest in India, save for a few queries here and there.

Another legacy of UPA II would be that India’s financial position has been virtually decimated. While UPA I pushed the economy towards financial abyss (talk of 6th pay commission, farmers debt waiver, continuous and inexplicable rise in MSP and what not), UPA II only hastened the process. Under UPA I, official fiscal deficit number remained relatively under control since the government issued various bonds (oil bond, food bond, fertilizer bond), UPA II kept the legacy going by resorting to policy of delaying payment of subsidies to the next year and MSPs rose even further . Unfortunately, while innovative accounting helped to keep deficit under check during UPA I, it did not help during UPA II.

While one does agree that external factors are also to be blamed for poor performance, but that’s only a small part of the story. Most of the blame lies within. Take for example the sharply rising current account deficit. Blaming gold import is a convenient excuse. If the faulty policies of the government lead to debasement of the currency and elevated levels of inflation, it is but natural that gold will score over financial assets as far as savings is concerned. Agreed, economic problems in Europe and in the US did play a part in falling exports. But the inability of the government to untangle the problems faced by the mining sector also led to sharp fall in raw material exports. Similarly, rising oil imports when the economy is slowing and oil prices remaining relatively stable points to the fact that India’s power generation is in shambles. If industries (especially in the South) are forced to generate their own power just to remain in business as they are faced with increasing prospects of power cuts, it is not a surprise the demand for diesel will go up. Not surprisingly, industrial production suffered and economy faltered.

Overall, this government does not deserve a rating of more than 3 in a scale of 10.
 
 
Like murky politicians, the corporate world is also full of unscrupulous leaders. The two corporate honchos I am referring to are also owners of IPL teams of their respective home towns.

The shenanigans of the king of good times have, by now, become folklore. Yet he can always spring a surprise. The latest act to revoke the various power of attorneys (PoA) given to various trusteeship (to safeguard the interest of lenders in case of a default by a borrower) takes the cake in terms of audacity. The UB Group canceled the PoA given in favour of IDBI Trusteeship Services on United Spirits' pledged shares. This means anyone buying UB Group's pledged shares of United Spirits (USL) will be facing legal action from the former. Two other UB Group companies, Kingfisher Finvest and UBHL, have also cancelled the PoA for nearly 6 crore shares worth about Rs 30 crore of the now defunct Kingfisher Airlines (KAL). The UB Group had pledged these shares with the banks to avail of Rs 7,000 crore of loans, on which it later defaulted as its airline collapsed. This action of his is downright illegal.

The other corporate honcho is the owner of a South India based cement company who also heads India’s richest sporting body, the BCCI. The moment he became the chief of BCCI, he changed the rule books so that he can also be an owner of an IPL team – which otherwise would be been a clear violation of the existing rules and then made his son-in-law the chief of his own IPL team. Now that his son-in-law has been embroiled in the spot fixing scandal, the days of his unscrupulous ways may just be numbered. The fact that he does not care for the rule books and plays favourite at the cost of the national team is for all to see.

Here’s hoping that these egotistic maniacs actually end up in paying price for their deeds. If not, that would be a sad commentary of our state of affairs.

 
 
The Indian government is at it again. More specifically, I am talking about the finance minister. The innovative ways he can design to keep fiscal deficit under check is simply mind-boggling. The end result is always shifting of burden away from government finance.

His first experimentation had to do with issuance of bonds on various items – oil, food and fertilizer. The express reason for issuance of the bonds were to not use any cash to make good the under recoveries of the affected companies. These companies were issued bonds of various maturities in lieu of subsidies payable to them. During the period when this charade was played out, the government was able to show lower deficit as compared to what it should have been. However, these will come back to haunt government finances when these bonds mature as this has to be finally paid out of government revenue. As they, there’s no free lunch.

Having learnt the pitfalls of this strategy, the clever again finance minister devised a new strategy of making the oil companies take a hit by partially absorbing the loss they made by selling oil products (at government’s behest) at less than the cost price and the share of their burden increased progressively over the years to touch 40% of the total under recoveries.

Unfortunately, even that did not help bring the finances in order, given the rising pressure of populism on limited financial resources. The government has now started to borrow from the future to make good its contribution to the total oil subsidy. For the second year in a row, the government decided not to pay a significant amount of oil subsidy (I am talking of only their share) during the year and spill it over to the next year. During the last financial year, the government paid only 55000 crore rupees out of its total contribution of 100,000 crore rupees (total under recovery for the year being 161,000 crore rupees). The remaining 45000 crore rupees will be paid this year. There’s of course the small mater of the oil companies now being able to use the comfort letter thus issued and finalize the books of accounts for the financial year 2012-13 and show profit, as otherwise their balance sheet would have ended up with big blotch of red.

But even this is not the end of the story. For the current financial year, the government had budgeted 65000 crore rupees for oil subsidy. After paying our 45000 crores (as decided now), they would be left with only 20000 crores. Now, with election looming, the government cannot afford to spend more on oil subsidy when the need of the hour is to use as much financial resource as possible to buy votes by increasingly focusing on populist schemes. Remember food security bill is going to hit us soon. So, the next logical step is to increase the subsidy burden on the oil companies even further. For the current year, the government estimates that the total oil subsidy will be 80000 crores. With a mere 20000 crores being available, they want to shift the majority of the burden to the oil companies. Hence the current thinking of the finance minister is that, the oil companies should absorb the remaining 60000 crores i.e. the same amount they absorbed in the previous financial year. This would mean that the oil companies would now absorb as much as 75% of the total oil subsidy burden. How blatant can this be?

But hang on. The finance minister is still not done. Election still needs to be managed. Having failed miserably in controlling inflation, the government now wants to provide the feel good factor to the electorate before the elections are on us. An important way of achieving this would be by way of reducing petrol and diesel price. So what do we have now? In order to reduce the price of petrol and diesel, the government wants to move the domestic pricing norm from export parity to import parity.

Currently, oil companies are compensated for losses depending on trade parity – the ratio of imports to exports, which is 80:20. This means their losses are calculated to the extent of 80 percent on the basis of the prices of imported crude and petro-products, and 20 percent on the basis of domestic output.

The finance minister wants to shift to export parity pricing, since oil companies will then be compensated for losses based on the prices at which they export petro-products – which are lower, since import prices include freight, port and transportation charges. With this sleight of hand, the domestic price of motor fuel would come down while the burden on the oil companies would increase even further, as their business dynamics do not change in any way.

The burdened oil companies are getting increasingly leveraged while at the same time are having less and less of surplus to be able to invest in the future – an imperative for surviving in this investment intensive industry. As they say, there’s no free lunch. But that’s for later. For the time being lets count the wounds.

 
 
Part of my conversation with Surojit is reflected in his article in Times of India today:


http://timesofindia.indiatimes.com/india/Growth-falters-as-UPA-completes-4-years-in-office/articleshow/20218034.cms
 
 
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.
Picture


Source: CEIC data

What 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.