India budget = ‘budget’ consolidation

Consolidation is offered in the budget like budget airlines offer amenities. Only the bare-minimum required. My comment in MINT on the budget written within a couple of hours of the budget document being uploaded, focused on the underlying assumptions. They turn out to be too optimistic. First of all, in a long time, it was not easy to access the documents. The site kept breaking down. NIC should have been better prepared for a heavy traffic at the FinMin website.

Medium-Term Fiscal Policy Statement was interesting for two reasons: The government blames the global slowdown and the RBI for India’s growth slowdown. No other factor played a role.

Second, in paragraph 22, it says that revenue targets need to be as ambitious as they have to be realistic so that the government could avoid more than the required expenditure compression. Revealing. The reluctance or the fear of doing too much of expenditure compression is a rather fascinating insight into the feudal political economy of India’s system of patronage through and for preservation of political power.

Over the last decade, government revenues might have grown in nominal terms by just under 3 times. Revenue expenditure has grown by more than 5 times. Yet, the government is reluctant to do more than the required expenditure compression.

Two very good comments on the budget, released before the budget was presented yesterday, were by R. Jagannathan of FirstPost. One was his article on the budget speech of Mr. Chidambaram in February 2008. According to RJ, that budget was the first firing shot in rampant fiscal profligacy that Mr. Mukherjee enthusiastically carried forward well into the new decade. The second by him was a speech that Chidambaram would not make on Feb. 28. Of course, he did not make that speech.

Ajit Ranade wanted the Finance Minister to state all his assumptions, particularly on economic growth, upfront. That did not happen. It remains tucked away in the footnote in ‘Budget at a Glance’.

Arvind Subramanian wrote a pithy comment in the Peterson Institute blog.

India’s macro challenges are now back on the frontburner. All the so-called reforms since September 2012 – TGS was never impressed with them as there was more hype and less substance to them – have finally culminated in another  me-too budget from the UPA.

Reading links

Jonathan Weil’s article on the Obama nominee to head the SEC syncs. rather well with that of the article in Dealbook on  revolving doors in Washington D.C. Far from being a mechanism for cross-fertilisation of ideas and productivity between the private and public sectors, it has become the fountainhead for corruption.

If international accounting standards are applied, US banks are bigger than what they really are. Well, Frank Partnoy was on to something.

I really have a hard time trying to figure out the Singapore situation and what needs to be done or can be done about it. I am not convinced that the government is doing the right thing nor am I persuaded that it is courting disaster. I need to invest more time.

The Italian election outcome is a reminder of how hard it has become (if not impossible already) to design and implement rational, long-term oriented public policy measures. The public is not ready to accept them. Sorry, no pain. They want the ‘Banga, banga’ party to keep rolling. No different from Indian voters’ fascination with loan waivers, free sewing, washing machines and laptops. To hell with the future of our own children. Check out this link if all this has not made you sober already, about the Eurozone prospects and the potential spillover on the rest of the world.

The ruled and the rulers are holding hands on their way to disaster. If the inevitable collides with the impregnable, what is the outcome?

R. Jagannathan serves up a hard-hitting, no punches pulled reminder of what India’s current Finance Minister wrought in his last innings as FM in 2008. India’s fiscal budget for 2013-14 is due to be presented on Thursday.

Bernanke and bubbles

Bloomberg reports that Ben Bernanke is unconcerned about the monetary policy of the Fed spawning asset bubbles. Of course. At least, in public, that is what he would say. There is a good chance that that is his belief too. He had said the same thing about the housing market some years ago. Check out this Buttonwood blog post in ‘The Economist’ to find out what he said in 2005 about a nation-wide housing bubble and bust. Needless to add, this blog has a different view and that was articulated in today’s MINT column.

Bernanke should pay heed to – if he wishes to, that is – the exceptionally low level of VIX, the return of retail investors to equity mutual funds (they come in at the fag end of the market rallies), yields and spreads on junk bonds, etc.

Free Exchange and Spillovers

In my previous post on Adam Posen’s article in FT,  I had referred to his characterisation of my remarks in a discussion where we were both panelists as ‘non-sense’.  I am quite tempted to stick that label on to this piece in ‘Free Exchange’ blog in ‘The Economist’.

I have to remind myself that this blog should be about issues and not about persons or labels. Therefore, to put it rather charitably, the articles sets up strawmen and knocks them down to argue in favour of open-ended, free-for-all currency debasement by all countries simultaneously so that all can benefit from a cheap currency. Am I exaggerating or representing the article accurately? I think the latter.

It draws inspiration from how all countries benefited by coming off the Gold Standard simultaneously and almost none was benefiting at the expense of the other. Hello?

If the author had visited the ‘Maddison Project Database’, he could have downloaded the Excel file on per capita income of countries from centuries ago and verified for himself the massive drop in per capita incomes in the US, in Japan, in the UK and in Germany, etc. for four years from 1929 to 1932. The drop in the industrial production in the US was more than 50% (peak to trough in the early 1930s) and the unemployment rate went up to over 25%. That was real global pain for all economies. The World War I must have destroyed a lot of infrastructure and capital assets on the ground. Then, in the 1920s, at least in the first half, Germany suffered from hyperinflation.  The number of countries stimulating simultaneously were a lot less than now.

Here, we are now four years after the crisis when output had crossed the pre-crisis peaks in several emerging market countries. They do not need stimulus. They need to tighten policies. Even in OECD countries, the case is unclear. Germany perhaps does not need the ‘benefits’ of QE. The benefits of monetary reflation in the ageing Japan are hard to estimate and predict. Then, there are the signalling effects of easy money and cheap currencies. They have moral hazard written all over them.

Importantly, four years after the crisis occurred, if countries need to stimulate more, isn’t it an obvious first question to ask if the policy responses were not perhaps the most appropriate ones, to begin with? Especially after unprecedented fiscal stimuluses, rate cuts and money printing, when this is all that they have got to show for those efforts, surely it is a fair question to ask if the medicine was the right one to begin with. See chart no. 7 in the above link

When big economies stimulate simultaneously and capital goes in search of yields (unmindful of risk), there is the risk of asset bubbles in under-developed (in the institutional sense) economies where the political economy incentives to tackle asset bubbles do not exist. You might say that that is not the problem of OECD nations. But, the spillover effects will come back to hurt OECD nations. These countries, in anger, might impose capital controls and OECD countries need foreign savings to fund their fiscal deficits, incurred to bail out banks mostly.

Further, as Martin Feldstein famously argued in his ‘Foreign Affairs’ piece in March/April 1998, countries have the right to choose the pace, timing and sequencing of their own structural reforms – political and economic. Synchronised and simultaneous monetary easing and currency debasement in developed nations come in the way of that.

The blogger goes all the way back to the 1930s to buttress his case for ‘Positive sum currency wars’. He conveniently ignores the experiences of 2002-07 when the US Federal Reserve inspired monetary easing spawned loose credit conditions globally and the result was the crisis of 2008. I cannot quite see any positive sums there.

Sample these observations in the piece:

The analogy for today is that countries whose currencies are rising because of easier foreign monetary policy should ease monetary policy as well, assuming they, too, suffer from weak demand and low inflation.

The fact that global stock markets have been chasing the Nikkei higher as Mr Abe’s programme is put in place suggests investors believe this is virtuous, not vicious, cycle.

This also implies that the euro zone ought to respond with easier monetary policy which would both neutralize upward pressure on the euro and combat recession in the euro zone

There was no climate change then (in the 1930s) and there was no financialisation of the commodities markets then. He should read the Bank of Japan working paper on commodities published in 2009 on what loose monetary policy globally had done to the prices of commodities.

Even if all countries devalued their currencies against gold then, it still might not have resulted in ‘beggar-thy-neighbour’ outcomes because, perhaps, the private sector leverage then was too low. The world had gorged on debt for three decades now. There is indigestion of debt. How can more food help to relieve indigestion? Easy money and global currency debasement can only spur inflation and not growth, if not now, but in a few years.

Since when liquidity driven stock market became the barometer of sound macro policy? Was the stock market right before October 1987, March 2000 and October 2007?

The proponents of Keynesian stimuluses – fiscal and monetary – conveniently forget one thing.  Keynes was intellectually consistent. He advocated policy stimulus in response to economic contractions but he also advocated  capital controls. His followers are, unfortunately, neither intellectual nor consistent. Those who cherry pick on his legacy  come up with muddled thinking.

Posen on Osborne

I had the opportunity to be in the same panel as Adam Posen, Dambisa Moyo in Seoul last week. The session was moderated by Dani Rodrik. The session was supposed to be on the Global Outlook for 2013. Of course, the discussants touched up on that only tangentially. Mr. Posen called my comments on the spillover effects of OECD loose monetary policies as non-sense. I stood my ground. I think Dani Rodrik had a sneaking sympathy for my views. It is a different matter that Mr. Posen would not have explicitly used that word, ‘nonsense’ had  the comments come from a non non-entity like me. We will not go into that.

During his stint at the Monetary Policy Committee of the Bank of England and in his writings, he has given the impression of being in favour of fiscal stimulus (less austerity, at least) and monetary easing (QE, et al). I have had my reservations and continue to have them.

Intervention does not always have to be economic to revive animal spirits. Inspiring leadership is an intervention. Economic interventions, when they are made, can be selective and must go hand in hand with structural reforms, accountability for past errors, etc.

I am glad that Posen makes some of those points in this article in FT. I wonder if he paused to think as to how much QE has stymied or come in the way of the very ‘targeting special interests’ that he advocates in the article.

He talks about taking bad loans off the books of banks, shrinking their assets, re-capitalising them and then change the management, etc. Of course, he does not explicitly mention the last item.

That is for lenders. What about borrowers? Mr. Posen mentions their behaviour too as one of the causes of the debt crisis. Will low interest rates induce them to reduce their debt load? Do they feel sufficient pain to make a change to their habits of borrowing, spending and ‘living for the day’ (that is the correct philosophical attitude, in terms of our attitudes and responses to the experiences that cross our path but not in a material sense)? Therefore, is QE the right response to   bringing about the desired change on the part of borrowers? Should policymakers cleverly include some other bitter medicine with the QE sweetener? Have the ‘interventionists’ thought of that?

Lot of (intellectual) hard work is needed to respond to a situation that developed before 2008. It has taken three decades to arrive there. Solutions are not facile. Neither indiscriminate and open-ended stimulus nor ideologically (scorched earth) motivated austerity are the answers. Answers have to be a lot more nuanced.

I have to say that this article is a step in the right direction even though the distance to be covered by the author remains vast.

Reversing India

The UPA has succeeded in putting India back, perhaps irreversibly and irrevocably. Ok, I may be exaggerating and I hope so. But, the evidence is palpable. The improvement in the Indian savings rate is rewound all the way back to 2003-04 (if not earlier). For the year ending 2011-12, it was barely above 30.0% of GDP. For the year ending March 2013, it will be around 27.0%. The Incremental Capital-Output Ratio has risen to either 5 or 7, depending on your methodology. It used to be thought of as lying between 3.5 to 4.0. India was considered more capital efficient than China. While that was arguable, the deterioration is not. With the domestic savings rate and the ICOR, the sustainable growth rate is around 5.4%. If one adds the recourse to foreign savings (a big IF) of around 3.0%, the achievable growth rate is about 6.0%. India is currently not growing below this sustainable output. Hence, inflation pressures are unlikely to abate. This is the growth rate that the country can sustain. This is the growth rate of the 1980s.

The ‘Economist’ cites Raghuram Rajan in stating that no accounting gimmicks would be deployed in projecting a fiscal deficit of 5.1% of GDP for 2012-13 and a lower one for 2013-14. However, an international broker based out of India published a report recently in which deferment of under-recoveries (monies due to oil-marketing companies which are government owned themselves) and deferment of food and fertiliser subsidies would contribute to around 70 basis of improvement in the fiscal deficit. Add them back, one will get 6.0% of GDP.

T. N. Ninan writes a ‘score-card’ for nine years of UPA in today’s Business Standard:

if one takes all the vital signs of the economy — growth, inflation, trade deficit and fiscal deficit — the picture now is worse than what the Singh government started with.

Yet, incredibly, he credits the government headed by Dr. Manmohan Singh with the high growth rate that the economy experienced simply because his first term happened to coincide with that:

The big achievement of the Singh government is of course rapid economic growth, something for which the prime minister will be remembered.

Globally, there was a boom in that period (2004-08) and it turned out to be unsustainable. So was the case with India. The growth performance was due to the measures taken in the previous NDA regime:

the Vajpayee government had a better record on tax policy too, because it rationalised indirect tax rates, introduced the value added tax and enacted the fiscal responsibility law;

The economic growth record of the Vajpayee government was not so stellar because it took office in the shadow of the Asian crisis, faced economic sanctions for the nuclear test, had to contend with the collapse of the technology boom in the year 2000, the fallout of the U.S. recession in 2001 and 9/11 destruction in New York and its fallout and a series of poor monsoons. Ninan mentions several of them but leaves out the collapse of the tech. bubble and 9/11.

The UPA government between 2004 and 2009 had nothing to do with the growth boom experienced in that period. It merely happened to be in office when India experienced the growth boom. To its ‘credit’, it exploited it to put in place fiscal schemes that are now hard to reverse. It did nothing to secure the economy’s foundations during the boom period. The government milked the economy in the growth years dry. There is nothing left in the cupboard.

Here is a sample from Ninan’s article on how, whatever good that happened in the economy, happened despite the government and not because of it:

The difference with 1991 (and the reason why we are not in a crisis) is that India has close to $300 billion in foreign exchange reserves, for which thank Y V Reddy’s stewardship of the Reserve Bank of India. In four years to March 2008, he nearly trebled the reserves to $310 billion, often acting in the teeth of opposition from the finance minister. Since then, the currency policy has changed, the reserves have slipped and the trade deficit has soared. Back in 2004, the numbers for India’s forex reserves and foreign debt were not very far apart. Now, debt is about $80 billion more than the reserves.

Hence, I am at a loss to understand the reason for Mr. Ninan crediting the UPA government with the ‘achievement’ of ‘rapid economic growth’.

On corruption, this blog does not have to catalogue them. India is back in the 1970s. Here is what this government has done to the once-booming telecom industry, according to an edit in ‘Business Standard’:

Flip-flops and repeated post-facto policy changes have already vitiated what used to be the world’s fastest-growing market. The proposed changes in BWA terms could be yet another adverse development.

It is not yet clear if India has a political party or a leader that is prepared to accept the worst and is capable of starting and conducting the repair work from there, competently.

Lounge reads at Incheon

Returning to Singapore after participating in a panel discussion with Dani Rodrik, Adam Posen and Dambisa Moyo at Seoul on the 20th, as part of the third MBIN Forum. Lively exchange with Adam Posen on US monetary policies causing easier policies and bubbles all over the world. He was riled. I was not displeased. More on that later.

Now, about to board the flight to Singapore.

Quick reads: a very lucid piece by Andy Xie on China’s Fixed Asset Investment boom (70% of nominal GDP!) and the need to abandon pursuit of growth at any cost. Could not bang the table enough on that. Obsession with restoring the 1982-2007 growth boom is going to land us all in a lot of grief. Worth reading.

Bloomberg has a lengthy piece on the warning by the Reserve Bank of New Zealand to intervene in the currency market. Currency wars? Of course, not. G-20 did not want it, you see.

Reuters’ story on the Italian elections – due this weekend – is a good snapshot of the mess that the country’s economics and politics really are.

Markets selling down gold heavily, amidst all this. Talk of an insane world. It is here.

Currency debasement is fair game…

… as long it is not explicitly stated as such and pursued as such, by targeting foreign bonds. So, said the G-20. That is why it did not name Japan but left things at that. I had dealt with it in my MINT column on Tuesday. Been busy with family functions in Chennai and Madurai (niece’ engagement and son’s thread ceremony) after the teaching stint at IIM, Bengaluru. Now, have to get back to watching the financial zoo again.

This piece by Tim Price is well worth a read. IF you cannot read the whole thing, here is the paragraph you should focus on:

“What really broke Germany was the constant taking of the soft political option in respect of money. The take-off point therefore was not a financial but a moral one; and the political excuse was despicable, for no imaginable political circumstances could have been more unsuited to the imposition of a new financial order than those pertaining in November 1923, when inflation was no longer an option. The Rentenmark was itself hardly more than an expedient then, and could scarcely have been introduced successfully had not the mark lost its entire meaning. Stability came only when the abyss had been plumbed, when the credible mark could fall no more, when everything that four years of financial cowardice, wrong-headedness and mismanagement had been fashioned to avoid had in fact taken place, when the inconceivable had ineluctably arrived.

The above paragraph is from Adam Ferguson’s ‘When Money Dies’. The emphasis in the last three lines is mine.

Jeremy Grantham’s news letter for 4Q2012 is long-winded but makes the point for investors in the end:

When one combines the apparent determination and influence of those who do the bullying with the career risk and short-termism of the bullied and the desire of the general public to believe unbelievable good news, these overpricings can go much further and the Fed can win another round or two. That’s the problem. A clue to timing would be when we begin to hear more passionate new era arguments: profit margins will always be higher; growth will snap back to 3% for the developed world; and new ones I can’t think of … maybe “when the discount rate is this low the Dow should sell at, perhaps, 36,000.” In the meantime, prudent managers should be increasingly careful. Same ole, same ole [Link]

Banking and other reading links

Deutsche Bank improves ratios not through disposal of assets but through models.

Two excerpts from the forthcoming book by Prof. Anat Admati and Hellwig.

Link to PBS Frontline documentary titled, ‘Untouchables’. I am yet to view it. It is based on the speech by Lanny Breuer, the Assistant Attorney General for the Criminal Division of the U.S. Department of Justice. He is leaving his post on March 1st though. In a recent speech, he basically said that some bankers are too big to jail. I am yet to view the speech. More after viewing it. Apparently, he endorsed a reality that some are more equal than others.

Instead of castigating him for saying so, I wonder if he needed to be praised for opening the can of worms and possibly leading us to a less unequal world, in the eyes of the law?

Matt Taibbi with Bill Moyers on ‘too big to jail’. (ht: Ritholtz). Simon Johnson on ‘Too big to jail’.

Nominal GDP (NGDP) targeting is a fad. I have to write in detail on that. It seems to be a case of academics picking it up just because it fell the most during the crisis and hence justified more monetary stimulus that some of these academics believe, would have solved the problem. Ridiculous. It is nothing but a target for higher inflation rate in disguise – one that justifies excess monetary stimulus for an inordinately long time.

Here is ‘Free Exchange’ blog arguing against NGDP targeting in November 2011. Here is ‘Free Exchange’ blog arguing in favour of it just because the incoming Bank of England Governor seems to favour it. To be fair to Mark Carney, I have not read his remarks yet. So, not commenting on it now.

Lucy Kellaway writes some stuff on the lives of financial market traders-gamblers. Perhaps, it is behind a subscription firewall.

Michael Lewis reviews Greg Smith’s book on his alma mater, Goldman Sachs, in his own inimitable style.

It is not sub-prime mortgage loans now. It is the turn of risky sub-prime student loans.

It might be a bit old and I do not think I have mentioned it in my blog but I think that this article by Frank Partnoy on ‘What’s inside American banks?’ is a MUST-READ. I have read this one.

Diesel doldrums – links

Been travelling and attending family functions leaving little time for the usual routine that one does, when on ground at the base in Singapore. Hence, confining myself to reading links for now. Again, not that it matters to most.

State transport corporations’ buses buy diesel from retail pumps. Last evening, in Madurai, our driver was hastily filling up his diesel tank in a retail outlet since buses queue up in the morning. Dual pricing for a generic commodity creates more problems than it solves? See this link and this link too.