Mounting tail risks for India

On the night of the monetary policy meeting, the Reserve Bank of India released its quarterly outlook surveys conducted in the first quarter (or in March). Actually, they do not present a very good picture. Among businesses (1565 manufacturing companies), production expectations, export orders for first quarter have slipped from the previous quarter. Inventory of finished goods is perceived to be higher than in the last quarter. On availability of finance,  outlook for financing from internal accruals has been steadily declining. The net response was 20.6 (increase – decrease) four quarters ago and now it is down to 18.1.

On the Consumer Confidence outlook survey, the responses are conflicting. Spending intentions are sharply higher. But, the outlook for income and employment have worsened sharply too and prices are expected to be higher than before. Hope clashing with reality, resulting in denial? The survey is based on 5400 respondents from six metros.

On the inflation expectations survey of households,  there is broadly no change but perhaps a statistically insignificant deterioration in inflation expectations is seen. In general, in India, prices are not expected to decline, once they go up. Says a lot about Indian labour productivity and attitudes of Indian businesses. The downward stickiness in prices is India is, perhaps, of a much higher magnitude. In every product category, the percentage of respondents who expect prices to increase is vastly higher than those who expect prices to decline. The percentage of those who expect that the rate of increase would even accelerate slightly has gone up in the last round, reversing the declining trend of the last few quarters. Not a good sign. The percentage of those who expect the cost of services to rise has gone up quite a bit – both in the 3 and 12 month horizon. The expectation that house prices would keep rising in India remains intact. The inflation outlook survey is conducted among  5000 households in 16 cities.

You combine the expectations on income and employment from the Consumer Confidence Survey with the survey on inflation expectations, Indian households are struggling. If these expectations materialise, household savings rates will not rise. It may even decline.

Corporate savings rates are not about to pick up any time soon. Their outlook for availability of finance from internal accruals has been declining. Mentioned above. Hence, India’s national savings rate is stuck in low gear. Not great news for a government that is looking to ramp up investment spending.

In short, there are serious hurdles to a meaningful revival in economic growth. Inflation expectations are hard to dislodge. So, given an inflation targeting mandate, what should RBI do? Sometimes, people should be careful about what they wish for, lest they get it! That applies to this new inflation targeting framework in India!

Yesterday, Jeffries released a rather interesting (or, disturbing?) brief research note. The note was based on their meetings with several bureaucrats in Delhi the previous week:

Our key takeaway from meetings last week is that the government is over-dependent on the Prime Minister. PM’s personal involvement is deemed critical for every decision and implementation. This has put considerable strain on the PM’s time and, to a certain extent, negated everybody else’s ability to decide. The centralization of authority and the urge to get things done quickly is discouraging proper discussions. Bureaucrats are possibly not providing their honest opinions on various decisions. Many feel that the counsel of experienced bureaucrats and senior cabinet ministers is not sought much, resulting in flaws that would otherwise been avoided.

The general sense is that the BJP will be unable to win the Bihar elections due later this year, critical to both effective policy making (more seats in upper house) and to keep the power structure within the BJP intact.

Almost all the bureaucrats seem worried about the state of the public sector banks and disappointed that the government isn’t showing the urgency required to rectify the issue (we didn’t meet the finance ministry to hear their version). This seems to be the biggest hurdle to any hopes of revival.

The failure to come to grips with the state of health of public sector banks is baffling since many of government’s budget initiatives are based on layers of credit, refinancing, etc. If the credit mechanism remains broke, all those projections will be unmet.

India’s tail risks are mounting. It won’t be long before they become base-case scenarios. India must be hoping to get a decent monsoon, to see the Fed backing off from rate hikes and to see the oil  price drift lower from here, again. A weak and weakening US economy, US agreement with Iran and a good monsoon are necessary conditions for the Indian story to continue to remain valid. Lots more is required too.

A good friend put it rather well over the weekend – the Indian society is not as divided as is made out to be and the Indian economy is nowhere near as strong as is made out to be. Well said. Hubris must be kept at bay, if India has to move forward. Signs are not encouraging.

The RBI surveys can be accessed here.


2 thoughts on “Mounting tail risks for India

  1. I think that as you had pointed out last week in your detailed column on the achievements of this government, there is a lot they have done in the time that they have been around. The mess they inherited was beyond comprehension. It is like building a cricket team, we now have moved from the Azhar/Ali Irani match fixing era to the Ganguly/Wright era.

    Voters voted for the NDA because they were tired of the corruption, the lack of development and were unwilling to be supplicants.

    The point of liberalisation (which is another way of saying “ease of doing business”) should be to provide equal opportunities to those who are not incumbents. Many incumbents are encumbered by history, debt and a settled way of doing things (including using their range of contacts to keep competition out). This can prevent them from performing at their best. Past baggage can be a heavy burden.

    So if two years from today there is a whole bunch of new entrepreneurs creating new businesses and in a range of industries and regions, that would be some achievement for this government.


  2. Few days back we, the members of CII, had an interaction with one of the Union Finance Ministry Secretaries reg. some of the tax issues,tax administration etc.The mood among the CII group ranged from desperation to anger that ground realities have not changed for many of the industries despite the new govt. in place for almost 11 months now.

    However, generally the group also felt in private discussions that political influence on PSU banks especially with ref. to ” directed” Loans to vested interests have stopped and infrastructure problems esp.. in power and coal are being sorted out on war footing to bring down NPAs and so the performance of the PSU banks will certainly improve in the months to come.

    But patience is running out with Modi despite industry leaders acknowledging that India is a big and difficult country


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