Not a speech of isolationism

Two days ago, America’s Secretary of State Rex Tillerson made a very important speech. That it was delivered on the same day that China’s President Xi Jinping delivered his address to the 19th National People’s Congress is, may be, an interesting coincidence. May be not.

The full speech is here. ‘Trust but verify’ AND ‘Verify but trust’ have very different implications. Should India go for the latter with the US now or is it already doing  that? I think India should be inclined towards the second.

The word, ‘responsibly’ used in two different contexts:
 
“China, while rising alongside India, has done so less responsibly, at times undermining the international, rules-based order even as countries like India operate within a framework that protects other nations’ sovereignty.”
 
“It is indeed time to double down on a democratic partner that is still rising – and rising responsibly – for the next 100 years.”
 
On OBOR:
 
“We need to collaborate with India to ensure that the Indo-Pacific is increasingly a place of peace, stability, and growing prosperity – so that it does not become a region of disorder, conflict, and predatory economics.”
 
“We also must recognize that many Indo-Pacific nations have limited alternatives when it comes to infrastructure investment programs and financing schemes, which often fail to promote jobs or prosperity for the people they claim to help. It’s time to expand transparent, high-standard regional lending mechanisms – tools that will actually help nations instead of saddle them with mounting debt.”
 
Role in the Regional Architecture
 
“India and the United States should be in the business of equipping other countries to defend their sovereignty, build greater connectivity, and have a louder voice in a regional architecture that promotes their interests and develops their economies. This is a natural complement to India’s “Act East” policy.”
 
I doubt if any other Secretary of State has said this as forcefully as before:
 
“Security issues that concern India are concerns of the United States”
 
Does this speech sound like the speech of an administration that is isolating itself?
 
There is lot of ‘breast beating’ about the U.S. withdrawing and isolating itself. Not at all. Whether we agree or not, they have come to the conclusion that the architecture that they created post-WW II is no longer helping them advance  their goals but somebody else’s. Hence, they are walking away from it in order to weaken it. That is strategic withdrawal and not isolation.
 
Mind you, Reagan took the U.S. out of UNESCO before. I do not think Reagan enfeebled America. No, I am not saying that the outcome would be the same this time too. I have no idea and I avoid getting into the prediction business.
 
But, I think that the intent is not isolation but re-making, which may not be and is not to the liking of some. But, that is different from calling it ‘isolation’.
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Germany, Austria and Catalonia and other links

For the last few weeks, my posts have tended to concentrate on India. But, the world does not wait for me to blog about it!

The elections in Austria, coming on top of the rather weak mandate in Germany for mainstream parties and the mood and momentum for secession in Catalonia in Spain have dealt big blows to the facade of European stability and leadership in the world.

Noah Smith has a piece on the ‘inevitable’ takeover of global leadership by China. I demur but that requires a lengthier post. Do not miss the link to a useful and interesting recent paper inside his post.

This article in the Wall Street Journal explains why the clamour for Russian connections to the American Presidential elections appears to have slowly faded away.

Google did not let me circulate the following two articles to my mailing list:

The rise of road fatalities in the US and the use of smartphones [Link]

A new game by ‘Tencents’ to applaud the Chinese President [Link]

A new poll shows that Abe’s political party would win a super-majority in Japan’s polls. Hope it turns out to be correct.

(FT and Nikkei Asia Review links might be behind paywalls. Apologies)

DIY assignment: Off-balance sheet assets in China’s banking system

China’s Financial Stability Report for 2016 published in 2017 is now available in English. You can download it from here. It does not show up under the tab, ‘Financial Stability’. Under that tab, you can download the 2016 report which covers the year 2015.

In the 2017 report, go to the Chapter on Banking Sector (page 48 as per their page number; not as per the PDF file. As per the PDF, the page number is 64) and understand the figures of assets on and off-balance sheet in the China Banking Sector.

Do the same thing with the 2016 report. Go to page 53 of the document. That is page 69 of the PDF document. Find out the off-balance sheet asset size.

The on-balance sheet asset size comes at the beginning of the Chapter in each of the reports.

You can also get the nominal GDP of China from one of the earlier sections.

Now you are ready to do your math on China’s banking system assets and their ratio to GDP, etc. (on and off-balance sheet).

You will know why we have a ‘recovery’ in 2016.

This is what I was alluding to (without proof but with some intuition) in my MINT column which wondered whether the global recovery was statistical or real. Well, I should have asked if it was financial or real.

A report by Macquarie Research (not available in the public domain) released few days ago is cynical but also correct. It backs the perennial doomsday machine to continue because, without that, financial assets worth some USD400trn will be exposed for their hollowness as they are backed by real assets worth far less or nothing.

It is liquidity and leverage or nothing.

Andy Mukherjee’s India chessboard

The advantage of reading Andy Mukherjee’s Bloomberg Gadfly columns in a bunch is that one is able to form a string of pearls with them. The chronological distance gives some perspective.

Some of his recent pieces are:

Ratan Tata turns his holding co. private [Link]
Incredible tax demand on Docomo settlement money [Link]
Private sector Boards not firing their non-performing CEOs [Link]
Only achievement of GST being to deprive exporters of their working capital [Link]
Synergies-Dooray made a meal of the IBC [Link]

The chess board does not look very pretty. The King (Indian Economy) is increasingly besieged.

Working Capital for small businesses in India

For Small and Medium Enterprises (SME), a big issue is the availability of working capital and the cost of financing it. See the earlier blog post on the productivity of working capital.

SMEs that supply to big corporations are usually at their mercy for payment of invoices. If the buyer is monopsony, then the supplier’s bargaining position is even weaker. Nor can they afford to pursue legal remedies against recalcitrant corporate customers. Such remedies will be costly, protracted and may ruin the business too. ‘Factoring’ is the answer. SME suppliers discount their receivables and bills of exchange with banks who buy them (with or without recourse to the SME, in the event of non-payment) at a discount and then collect the proceeds from the corporate buyer.

The idea was included in the report of the Raghuram Rajan Committee on Financial Sector Reforms in 2008. Then, RBI appointed a working group which submitted its report in November 2009. RBI then issued a concept paper in 2014. Then, the draft guidelines were issued followed by final guidelines. Receivables Exchange of India (RXIL), India’s first Trade Receivables Discounting System (TReDS) started operating only in January 2017.

The time taken underscores the glacial pace at which crucial reforms that would lift the economy on to a higher growth path are pursued.

The world over, on providing working capital to small suppliers, things are moving much faster (ht: Gulzar).

Six months later, hurdles to the smooth of functioning of RXIL are emerging. Companies are wary of uploading invoices lest competitors come to know about their suppliers. Second, this is important, “since TReDS is a transparent system, they (companies) necessarily would have to settle the suppliers’ invoices within 45 days of acceptance of goods/services rendered.”

From a policymakers’ point of view, starting from the Panel Discussion on Agriculture and the posts on India’s informal, small and large factories, three interventions are becoming clearer:

(1) Risk mitigation in the form of a functioning crop insurance market with the Government bearing the premiums payable to cover not only yield, output but also realisation risks.

(2) Irrigation coverage – canals, inter-linking of rivers (long-term and huge capital commitment), rainwater harvesting (ongoing and needs top-level ownership like in the case of ‘Swachh Bharat’)

(3) For informal enterprises, financing via Mudra Loans but with performance caveats

(4) For small enterprises, working capital access – discounting, factoring, etc.

(5) For small and informal enterprises: revamp, re-design and re-energise the Skilling Initiative. Make contributions to Skilling CSR Compliant (if not already done). Tie it up with big corporations. I do not know if there is further work to be done on the Apprenticeship Act.  It has been passed. Have the rules been framed under the Act, been notified and circulated?

(5) For all: stable, reasonable tax regime that is non-vindictive and non-usurious in its administration. An immediate fallout of it is GST rationalisation of rate structures and further lowering of rates. Bet on economic activity and not on economic policing.

(6) Government to expend fiscal resources on bearing more labour payroll deductions for entrepreneurs (increase the salary cut-off limit for government reimbursement)

(7) Follow through on corporate tax rates reduction with elimination of ad-hoc exemptions

Without any trace of immodesty, I would venture to state that if the Indian Government could focus on these seven for the next eighteen months, it will have done a lot to relieve the economy of the strains and stresses it is facing now.

Productivity of Indian factories – small and big

Defining productivity is one of the hardest things on economics. A well-known economist-journalist reminded me of it when I used that word in an email and he asked me for my definition. It is hard. It is a bit like beauty and obscenity. You know it when you see it. Of course, it is not as hard as those concepts. In factories, labour productivity can be measured. But, capital productivity is somewhat more problematic and low productivity may not be entirely for internal reasons.

Suppose the construction of a factory begins in year 1 and some capital is committed. But, let us say, approvals take forever to come – environmental, legal, utility connections, etc.  Here, capital has been committed and invested but yet, there is no production to show. There is unproductive capital here. But, one cannot say that it is the fault of the enterprise or the entrepreneur.

Total Factor Productivity (TFP) is even more complex.  It is the residual. Output growth that cannot be explained by input growth is TFP.

Further, in the case of India, with services dominating the economy, it is even harder to get a grip on productivity. Measuring productivity in service sector could be problematic as there could be a conflict between the micro and macro on this. This is not the place to elaborate it but more on that on another occasion.

It took a laborious (for me) blog post to establish that units/factories covered by the Annual Survey of Industries are not ‘informal’. They are registered under the Factories Act, 1948 under Sections 2 (m) (i) and 2 (m) (ii). They are not covered in other surveys of unincorporated and unorganised enterprises by the NSSO, etc.

Therefore, productivity of the smaller factories – to be presented below – is not the same as productivity of informal manufacturing enterprises.

I prepared two Tables on productivity statistics for Annual Survey of Industries (ASI) – Factories. The latest ASI is for 2014-15 released in March 2017. The tables below are based on statistics presented in Statement 11-A (‘Principal Characteristics by the Size of Employment’ – Section 7, page no. S7-3).

Productivity statistics for Factories with 99 or less workers

Productivity statistics for Factories with 100 or more workers

The Tables are along expected lines.

(1) Capital productivity of smaller units is better because they deploy lesser capital. In a relatively capital scarce country, that is better. But, is it true that India is still as capital starved as it used to be, with capital flows being global and Indian savings rate being upwards of 30%? In fact, how much of the capital scarcity is because Governments capture a large portion of the national savings through the banking system?

(2) Labour productivity of larger units is much better because they employ fewer workers relative to the output or GVA they generate.

(3) What is interesting is that on capital productivity measures, smaller units are not decisively better off.  GVA/Invested Capital Ratio is the same for both small and big factories. Productivity of working capital is far better for larger factories. Of course, that tells us how big a constraint working capital is, for smaller enterprises. That will be my third post.

(4) Output/Wage Ratio (in Rupees) is better for smaller units. May be, because they do not pay well? But, GVA/Wage ratio is much better for larger factories.

(5) Similar is the story with respect to Emoluments.

(6) Overall output/input ratio is better for larger enterprises.

These two tables should help us design appropriate policy intervention. Some conclusions that emerge, in my view:

(1) India needs both large and small factories. In fact, small factories arise for the most part as part of the supply chain for larger factories.

(2) Working Capital Efficiency for smaller factories can and should be improved. The onus is on the Reserve Bank of India and on larger corporate customers

(3) Smaller units need labour skills and training

(4) Larger units need to improve their capital and labour productivity but not to beat their smaller counterparts in India but to compete globally. They must benchmark themselves globally.

(5) Clearly, the data do not make the case for the country to ignore the need to allow enterprises to grow big. There is no case for a ‘anti-big’ bias. In fact, if anything, ‘informal’/’unorganised’/’unincorporated’ enterprises may have even poorer productivity statistics than the small factories covered by the ASI.