European facts and views

The ouster of Turkey’s prime minister greatly decreases the probability that a controversial deal the EU struck with the Turks will reduce terrorism in that country.

Hungary’s parliament has voted to hold a referendum challenging the EU’s migrant redistribution quotas.

Italy has a constitutional referendum in September.

A Slovak border guard fired the first shot at a car of migrants crossing into his country on May 9

Germany announced that it would begin to rebuild its armed forces for the first time since the Cold War.

All these from this good piece by Danielle DiMartino Booth aptly titled, ‘Central Banks and the rise of extremism’.

But, this one is not new but still worth remembering and restating:

As The Credit Strategist’s Michael Lewitt recently noted, “Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to failure, yet that is not only what global central banks did during the crisis but long after markets stabilized (though the crisis never truly ended, just slowed). This was an epic policy failure that continues today. [Link]



The cunning alchemist

The header for this post refers to Mr. P. Chidambaram, the former Finance Minister. In this post, we will deal only with the ‘cunning’ part. The next one will deal with the alchemy part.

That one would be in response to his column on May 8 when he tried to create some audacious myths about how the economy performed under the UPA government. He was trying to UPA’s leaden performance into a golden era! That is a separate topic which needs to be constantly and repeatedly debunked, lest UPA’s lost decade is airbrushed out of India’s economic history.

As a famous Indian journalist put it to me in a private email correspondence (I did not seek his permission and hence not quoting names here), if 1991 reforms were about coming back from the brink, UPA’ ten years were about taking India back to the brink. That is a different topic for a different occasion.

In this post, we will deal with a brilliant act he did recently. For tactical brilliance, it scores high. He simply made a comment that perhaps, this government did not deserve Raghuram Rajan. His remarks were deliberately aimed at making sure that opinions on the other side (BJP and the Government) are hardened incrementally and to reduce, may be, even eliminate, whatever little chances there are, for his reappointment.

It is somewhat similar to what Mani Shankar Aiyar did in April when he twisted Dr. Rajan’s remarks on the Indian economy and got under the skin of some BJP leaders. So, because it was tried once and worked, Mr. Chidambaram is doing it again.

He might be hoping that, with better luck (for his party), a bad or just a new and inexperienced RBI Governor wary of Government’s reaction to his moves, a disappointing or indifferent (uneven spatial and longitudinal distribution of rains) monsoon and a Fed rate hike, emerging market turmoil, could make the third anniversary party for the NDA government a glum affair. He senses a small opening here and is prepared to do his part to ensure that it remains, for his party. That is good tactics, for him and for his party.

In any case, I just sense that entrenched egos rather than enlightened judgement are going to play a role in the reappointment of the RBI Governor in September. If I have to wager now, I would wager on a new RBI Governor in September.

Macro-economic stability has been just barely established after the turmoil of 2013 summer (July – Sept.) caused by gross economic mismanagement of UPA.

But, this government just finds that a landline/dynamite has landed on its lap. How it is going to get up without blowing itself up is a big challenge.

Either on his own volition or for other reasons, Swamy has engaged in a personal attack on a RBI Governor. It has not happened in recent times. Central Bank heads can be criticised and replaced but not through a vicious personal attack.

When the Executive complains of judicial over-reach and vigilance over-reach leading to decision-making paralysis, the Parivar lynch-mob has created a similar risk with respect to monetary policy.

So, if external environment turns adverse as described above and if the new Governor does not either act in a timely fashion or in a half-hearted fashion or both, currency can take a dive and so would bond prices (yields up). The hard-won macro-economic stability of two years would be lost in two weeks.

For now, it is only a risk scenario. Not a baseline scenario. But, the probability of this risk scenario has gone up appreciably in the last few weeks. It is widely and badly under-recognised not only in the government but outside too. I have been variously accused of overreacting and being emotional about the present RBI Governor! Oh, well.

I would rather risk condemnation now for being a Cassandra rather than join in the complacent celebratory mood now. I am with Andy Grove: Only the paranoid survive.

India had lost probably about two decades or a quarter century to bad economic mismanagement in the last 67 years up to 2014. I refer to the period between 1966 and 1980 and between 2004 and 2014.

It is not clear to me that there is an adequate grasp of the challenges of achieving sustained high growth with the above combination of factors – internal and external. May be, there is. At least, it is not evident in public space.

Now, on top of this, if macroeconomic instability occurs in the second half of the year, kiss growth goodbye for few more years, at least, if not longer.

The government finds itself in this spot rather unnecessarily when it should have been looking to consolidate and accelerate in the third year, with continuity of personnel in key positions, etc.

To my mind, a big self-goal on the part of the government is a probable scenario. We can argue on the probability.

Of course, will be happy to eat humble pie on that one.

Annual Survey of Industries 2013-14

Ministry of Statistics and Programme Implementation of the Government of India had released this report on April 27, 2016. I happened to see it a month later. Figure 3 in Section 3 of the report (page 35 in the PDF file, ‘Annual Survey of Industries 2013-14 – Summary Results of the Factory Sector’) provides a useful summary of the extent of activity in the Factory sector. The visual presentation of the chart could do with a lot of improvement, however.

India_Persons employed in Indian factories_2013-14

Persons employed in the Factory Sector contracted 3.6% in 2012-13. That is the year in which the Indian economy had recorded a growth rate of 5.6% according to CSO, revised higher from the earlier reports of 4%+ growth rates.

Just to refresh memories, the originally reported real GDP growth rates for 2012-13 and 2013-14 under the old series (base year 2004-05) were 4.5% and 4.7% respectively. See here.

The growth rate of 4.5% for 2012-13 got revised to 4.9% first and now it is 5.6%. For 2013-14, 4.7% got revised to 6.6% and stays there. These estimates for 2012-13 and 2013-14 fail the test of credibility and consistency with other high-frequent indicators of the economy.

Weekend reading links – 29.5.2016


Sukumar Ranganathan in MINT on the NDA government’s two years.

An important building block in the bad debt resolution in India

The world will have frequent El and La Nino in the years ahead

Sunil Jain’s column on the Modi government’s 2-year record

RBI’s Asset Quality Review reveals that nearly half of the stressed assets were not reported

WSJ article on their interview with PM Modi. The interview is here.

The Karnataka government resolved to skip the setting up of reclamation and rehabilitation (R & R) plans for land acquisitions below 100 acres.

Jaithirth Rao on the urgent and desperate need to roll back sugarcane cultivation in India

MINT in defence of Jawaharlal Nehru – a thoughtful edit


Jeffrey Sachs on the age of impunity (May 13, 2016)

Niall Ferguson conversation with ‘The Australian’

Ken Rogoff suggests that central banks in emerging economies diversify into gold

John Cassidy in ‘New Yorker’ summarises Raghuram Rajan’s reservations on helicopter money

How did the great enrichment happen? A very good essay by Prof. Deidre Mccloskey (ht: Prof. Mukul Asher)

A great article in ‘New Yorker’ on HSBC Private Bank in Geneva after a computer programmer stole data and sold it to governments in Europe.

The State or a State steals money from you – we are not talking taxes here.


SEC is investigating Alibaba group’s accounting practices

Lack of volatility in China’s currency makes it easier for the Fed to raise rates in June. Good comments from Steven Englander of Citi on China’s retracement of yuan policies.

Singapore Malls are facing shop closures. Orchard Road is not spared.

A ‘must-read’ article on China’s yuan (non) policy and as to how it emerged in recent months.

In China, you can sell and lease back cows with an agreement on culling.

James Kynge in the FT parses the latest Moody’s report on China. It isn’t a pretty picture.


Few convictions in Wall Street cases

How will US politics shape up in the coming decades – interesting even if not necessarily something one agrees with wholly.

It does not matter. We had our best week since March. We have the ‘fun’. No need for ‘da mentals’.

John Cassidy sums up the ‘qualities’ that await American voters in November

Cuba is living the American dream

Book Reviews

Lucy Kellaway reviews, in her inimitable style, ‘The Power Paradox’ by Dacher Keltner. She sounds right.

Ashok Desai reviews Vijay Joshi’s new book on what the government needs to do for the Indian economy.

Prof. Rishikesh Krishnan (Director of IIM, Indore) reviews a new book on China’s innovation titled, ‘China’s next strategic advantage’.


Getting it straight

According to Bloomberg, US stocks had their best week since March. S&P 500 closed a shade below 2100. Gold is down more than 5% to 6% from its recent peaks, because, presumably the Federal Reserve is all set to hike the Federal funds rate to 0.5% in June. The US dollar is strong. Earnings were down for the fifth consecutive quarter in a row (S&P 500, as reported ‘bottom-up’ earnings).

S&P 500 Bottom-Up Earnings Per share_2011-16

Source: Standard & Poor’s

As of quarter ending March 2016, U.S. S&P 500 EPS (bottom-up) is at its lowest level since September 2011.

S&P Index rise since 2011


With EPS down over the five year period since 2011, the index went up by more than 80% in the same period!  One does not need a doctorate to guess the primary and the secondary causal factors. Just in case, will spill the beans. The Federal Reserve (primary) induced stock buybacks (secondary). There could be tertiary factors.

Some choice statistics on U.S. Corporate debt (text paraphrased)

  • Combining all of the corporate cash in the U.S. wouldn’t cover the $1.8 trillion of corporate debt that’s coming due in the next five years, according to a report by Moody’s Investors Service on Friday.
  • That’s because U.S. companies have been borrowing more quickly than they’ve built up the record $1.68 trillion of cash on their balance sheets. And more of that debt comes due sooner.
  • Cash flow from operations declined 0.2 percent to $1.54 trillion in the 12 months ended in December 2015, the first time the metric declined in Moody’s data going back to 2007.
  • In 2015, corporate debt outstanding went up by 17% and cash holding went up by 1.8% in the US
  • Debt/EBITDA ratio at 2.35x compared to a peak of 1.57x in 2007 [Link]

There is more:

According to S&P Global Ratings, debt outstanding increased 50x that of cash in 2015. Total debt rose by roughly $850 billion to $6.6 trillion last year, dwarfing the 1% cash growth ($17 billion). Removing the top 25 cash holders from the equation paints an even more concerning picture: total debt rose $730 billion in 2015, while cash declined by $40 billion.[Source]

None of this matters. Markets are efficient.

Policy statements from the PM

Some highlights (in my eyes) from the PM’s interview to Wall Street Journal:

  • My focus is to create a third sector, the personal sector. Essentially implying that a person doesn’t merely look for jobs in the market but actually becomes a provider of jobs. He becomes a job creator through entrepreneurship.
  • and if you look at the entire post-independence phase of the country, you will find that in terms of money volumes the maximum disinvestment has taken place in the last two years.
  • There are some states that don’t have industry but are primarily agricultural. They don’t need labor reform. Those states that have a substantial manufacturing sector, they need labor reform. And their state assemblies can adopt them. It is a joint subject of the states and the center, and if they send it to me, I will allow them.
  • I have said publicly that for us, the U.K. is the gateway to Europe and, in the situation that the world is in, a united Europe would be favorable.
  • There is no reason to change India’s non-alignment policy that is a legacy and has been in place.
  • In a developing economy, state enterprises do have a role in some sectors.  They have to be managed professionally and efficiently. We have given them operational freedom and brought in talent from the private sector as well to facilitate this.  The state need not do business in certain sectors.  We have a new policy on strategic disinvestment.  We are in the process of identification of entities for strategic sale.

Shekhar Gupta and T.N. Ninan have written their weekend columns today on the contents of this interview. Their assessments strike me as somewhat harsh. Some of PM’s answers – on labour law changes and on privatisation – are nuanced and not outright rejection of the ideas. It is far better to move incrementally on some sensitive areas than go for eye-grabbing headlines that make no further progress. After all, the government had come up with a labour code. It is not going to be easy to push that through India’s various stakeholders.

India is struggling to make progress with changes to factor markets, particularly in land and labour. There is no political consensus in the country on these reforms. In February, Railway workers had given a strike call. It appears to have fizzled out. But, their demands had included:

scrapping of the Bibek Debroy report on restructuring and the National Pension Scheme, no privatisation/outsourcing/contractorisation of governmental functions, no foreign direct investment in Railways and Defence, filling up of all vacant posts, regularisation of casual/contract workers, among others. [Link]

Important are measurables for policy initiatives, time-frame for deliverables and readiness to abandon or change course if policies do not deliver. It is especially critical for the first item on the list of highlights above.

On a separate note, the second anniversary would have been an ideal opportunity to have held a national news conference with local and national media in all languages and answered a wide range of questions, including critical and candid ones.

‘Accidental India’ – a book review

In recent months, I have read four books on India. In terms of depth,
Shankkar Aiyar’s ‘Accidental India’ stands tall.

It is a great read on how post-Independence India made policies. The first Bombay Plan and the Industrial Policy Resolutions were all greatly insightful to me.

Even though the book was about how good policy decisions and successes happen in India accidentally, it also turns out to be an inspirational book.

In a way, some of the folks who did noble work for the country – CS, Lal Bahadur Sastri, Varghese Kurien, John Mathai, L.P. Singh, the Home Secretary who visited the dairy plant in Gujarat, Mr. Tribhuvan Das Patel who was an admirable foil for Mr. Kurien, are all  inspirational figures.

John Mathai refusing to help his nephew sidestep his commitment to the government is no accident. That reflects his values.

Same thing goes for Vishnu Sahay, the agricultural secretary, who remembered the conversation he had with Kurien and nominated him for training programme in NZ and Australia. That was no accident.

Tribhuvandas Patel’s presence might be an accident. But, his knack for spotting Kurien, giving him an opportunity and then working with him admirably was not an accident.

The Home Secretary’s visit to Anand was an accident. But, Shri. L.P. Singh’s actions to prove that nothing useful happens in Delhi was no accident.

In some respects, they keep our hopes alive for the country. I am sure that there are folks like them still around.  In my view, perhaps, the problem with India is that we do not have such people in sufficient numbers and hence, these things happen relatively sporadically and, good initiatives take far too long simply because there are not enough good men (or, women) to push things along faster. The commitment is missing.

Interesting to note that Rajiv Gandhi inherited a good economy and left it in a mess. He set a precedent for Dr. Manmohan Singh.

To two Finance Ministers will go the honour of announcing farm loan waivers – Madhu Dandavate, a Socialist and P. Chidambaram, a smart Congressman.

When I read about the meeting that the former PM Chandrasekhar held in November 1990, I was reminded of the meeting that the current Prime Minister hosted at his residence in 7 Race Course Road on September 8, 2015. India’s corporate sector is a large part of the problem.

“Disrupting a system they had specialised in working around was not something they wanted. … When Chandrasekhar asked the assembled businessmen for solutions to the crisis, it was not change but survival that influenced their responses”

Except for a few, India’s businesses continue to be part of the problem of India’s mediocre economic performance.

It is a sign of Shankkar Aiyar’s objectivity that he credits Mrs. Indira Gandhi with creating the opening with the United States in 1981 that paved the way for the software and IT revolution that India went through.

Also, he credits Rajiv Gandhi with initiating creative disruption in the country. Both are good points, well made and worth remembering.

At the same time, it is fascinating to note that the Congress Party under Rajiv Gandhi pulled down the Chandrasekhar Government because he was turning out to be an uncomfortably successful Prime Minister.

Even as Mr. Chandrasekhar was all set to dismantle the ‘license-permit raj’ of the Congress in 1991 as PM, he had played no small role in the nationalisation of Indian banking industry in the Sixties from which India is still hurting. Of course, it is not that the private sector bankers were covering themselves with glory, based on what Shankkar had written.

How fascinating are human beings. If only the spiritual evolution quotient were a bit higher and the ego content a bit lower, could India have become a developed country by now?

I hear you loud and clear that it was not the Congress or the PM Manmohan Singh that brought India back from the brink in 1991. But, doubtless, they took India back to the brink from 2004 to 2014.

This book is a story of India hanging in and hanging together because of a few  individuals but let down by several, from realising its potential.

A fascinating book, rich content and beautifully narrated.

Does the Government deserve this?

On a day (26th May) when the PM’s interview was published in WSJ, Mr. Swamy released another letter written to the PM on RR to the public. He threatens more.

One of the persons responsible (the proportion does not matter) for the achievement of macro-economic stability under this government is being publicly humiliated. He happens to head India’s highly respected institution. Perhaps, the glory could have been shared in a better way between the government and the RBI, than in this fashion.

Some people I wrote to, suggest that there is some method behind the madness.

I am unable to remain so sanguine. I am surprised at their relative calm and my sense of distinct unease at this development.

Whatever guesses I can make as to Dr. Swamy’s motivations (batting for corporations and public sector banks hurt by NPA pressure, expressing the government’s intent that the governor leaves, personal animus), none of them are edifying. In fact, they give rise to (very) troubling follow-up questions.

Reserve Bank of India may not need a tenured professor from Chicago (sacrificing his annual income of likely around USD1.0 million or more – between salary, speaking fees, etc.,) with a MIT doctorate, graduate degree from IIM and Bachelor’s from IIT.

It needs people with integrity, competence and independent minds.

I cannot imagine how the last one week of theatre has helped that cause. In the final analysis, it is not about the present RBI Governor. He is capable of taking good care of himself. He would not have come this far without being shrewd and smart, besides being academically brilliant. It is up to him to draw whatever lessons he wishes to draw, from the ongoing sordid episode.

Ones who should worry more are the Government of India and the next Governor, if Rajan is not reappointed.

Inflation will be rising in the second half of the year. That is a simple, statistical base effect with crude oil having doubled from the low of USD26 in February. WPI will be at 5% and CPI will be back at 7% to 8%. Suppose RR is gone, the new name will have to establish his credibility with financial markets. He/she has to push rates higher. But, he/she will be mortally scared of Swami, Gurumurthy and the government. Otherwise, rupee will decline and so will bonds (bond yields will rise). He will be damned (by Swami and gang) if he raised interest rates and damned if he didn’t (by markets).

If, after this, RR was reappointed and he stayed on, I am not sure if he would be as motivated and what kind of relationship would exist between him and the government. I think the relationship has been very badly damaged. Of course, I could be very wrong here. Even if there were no bitterness, would his degrees of freedom be the same in his second term, after this episode?

At a personal level, in my view, I think he (RR) is better off leaving now. Chicago would welcome him back with both hands, given his views on Fed monetary policy, QE, Helicopter money, etc.

My personal view remains that Swamy has pushed the Government of India into a ditch. If it reappointed RR, Swamy would be upset and relationship between RR (RBI) and the government would never be the same. If it did not reappoint him and inflation flared up (as it would), it has to be prepared for considerable volatility in rupee and bond yields, under a new RBI Governor, especially if the Federal Reserve too was embarked on raising rates.

At the end of the two years, when things are beginning to go well for the government, this government need not have allowed its own party member to inflict upon it, this potentially destabilising situation.

I think the damage to the institution of RBI and the office of the Governor is high. This damage is underappreciated. Perhaps, I am reading too much into the situation. I will be relieved to hear that it is so.

I had covered most of this ground in my MINT column on Tuesday. But, I wanted to add the likely inflation trajectory and the possibility of a stress situation for the government and the RBI on account of that, in the context of rising Federal funds rate, in the second half.

As for the certitude with which many are writing that India’s interest rates are the cause of slow growth, etc., I have said it so many times that it is not the whole story. Not even an important part of it.

Pratap Bhanu Mehta who was in Singapore for a panel discussion on the NDA government’s second anniversary on Thursday drew my attention to the piece by Prem Shankar Jha here. Mr. Jha excoriates RBI and the Governor for their monetary policy. This paragraph caught my attention:

One guideline is provided by the economic recovery that was engineered by the Vajpayee government between 1998 and 2003. During this period, the nominal prime lending rate was brought down from 16.5 to 10.5 percent, but inflation ranged from five to six percent. Thus, the real rate of interest was halved to five percent. Today the Prime lending rate is 9.7 percent, but with inflation by its most comprehensive measure, the GDP deflator, at zero, this is also the real rate of interest. [Link]

I can help him with the numbers. I rely on World Bank Meta data for India (annual). India’s prime lending rate came down from 13.5% to 11.0% in that period. He can verify it here from the website of the State Bank of India. But, at the same time, the GDP deflator came down from 8.0% down to 3.7%. In other words, the real interest rate actually went up! No wonder, Indian corporate sector cut down its debt and became ‘lean and mean’ machines ready to take advantage of the global and Indian booms that unfolded from 2003.

In theory, all else being equal, low interest rates are supposed to result in higher investment spending. All else are not equal. There is balance sheet stress in Indian firms. Their loans that have turned bad are not just the result of bad business projections. One does not need to say more.

As for boosting personal spending, this is what I wrote in MINT:

In a balance sheet-constrained environment, there is enough empirical evidence from around the world that lower interest rates do not achieve the intended positive result—higher investment spending. Instead, it results in higher consumption spending, lower savings and unsustainable asset price booms. India can ill afford all three.

Further, as I wrote earlier, in the second half, inflation rates are set to rise. India’s real rate of interest, which is not too high, will go negative. Let us see what happens to bank deposits then. If India’s household savings rates go down, current account deficit would rise rapidly.

India’s growth and inflation problems lie far away from the RBI. Read this particular paragraph from Sajjid Chinoy’s article in the ‘Financial Express’:

We still need to put this growth acceleration in context. Was it driven by global factors? Let’s first sum up all the factors beyond the government’s control. On the one hand, oil prices collapsed creating a large positive terms-of-trade shock that boosted growth. On the other hand, the government had to contend with two successive droughts and an export contraction, with real exports growth declining from about 8% in FY14 to an average of minus 2.6% in its first two years. So how does all this add up?

Our estimate is that oil boosted growth on average by about 100bps; the droughts shaved off about 50bps, and weak export growth, driven by slowing global growth, were a very large drag, shaving off almost 150bps. All told, then, factors beyond the government’s control, did more harm than good, with the net effect being a drag of about 100bps, on average, compared to FY14. Despite that, however, the fact that growth has accelerated—notwithstanding the caveats—appears even more impressive.

This outcome perhaps reflects the fact that implementation bottlenecks in the non-commodity sectors on the ground seem to be gradually abating, monetary conditions have eased, capital expenditure picked up in FY15, FDI has picked up sharply, and the disinflation has boosted household purchasing power and consumption. [Link]

After the dreadful mismanagement of the economy by the UPA, the macro-economic stability that has been achieved in the last two years is commendable. Both the government and the RBI have contributed to it in equal measure. It is indeed tragic that Mr. Swamy’s antics is putting that at risk. At its second anniversary, the government does not deserve to be in this place.

Helicopter money

Good to see Mr. Adair Turner beginning to harbour some misgivings on helicopter money. To that extent, one must credit Raghuram Rajan with some success for having induced Mr. Turner to look at the behavioural and psychological elements that come into play in the central bank induced fiscal policy or simple credit to people’s accounts directly. There is ample scope for unintended consequences.

When Mr. Turner posed the question, “can we design a regime that will guard against future excess, and that households, com­panies and financial markets believe will do so?”, he must have figured out the answer himself because the evidence is staring us all in our faces.

John Cassidy in “New Yorker” has a good summary of Raghuram Rajan’s views espoused in a lecture at the London School of Economics.

what does NITI Aayog do?

Many ask this question. So has Yours truly. They (and I) would have done well to read this blog post by Prof. Bibek Debroy from November 2015.

Some extracts:

A large part of Niti’s mandate is the evaluation of public expenditure schemes, the examination of delivery and the linking of these schemes with tangible improvements in outcomes, difficult though this may be for social sectors, especially health.

This is also true of Niti’s function as a repository of best practices in States. Several States have done interesting things in delivery, worthy of dissemination and replication. From next year, Niti will take stock of these.

t will also take stock of data, which will give an idea of base-line indicators, on the basis of which, outcome improvements can be measured. We have already chosen a set of around 50 indicators, clustered under heads like education (school), health, roads, water, electricity and mobile penetration.

We are building this district upwards, though as a terminal goal, there is an intention to take this down to blocks, if not villages.

Niti is also a think tank, though different people mean different things when they use this expression. It is not a think tank that dabbles in the abstract and the esoteric. It is interested in policy and suggesting better policy options, with networking with other such organization, including those that are outside government. But for this, Niti has to acquire some in-house expertise.

Part of the think tank role is when issues are referred to you by government. That has started to occur, but will necessarily be in the private domain, not made public. The remaining part of the think tank role is when Niti picks up issues, suo motu, through a series of Working Papers. That’s going to happen as soon as we have people and in-house expertise.

There are two verticals within Niti, so to speak. One is the link with States, much more active than with the former Planning Commission. That’s called the Team India initiative. The other is the think tank role, called the Knowledge Hub initiative.

In publishing these extracts, I have probably re-posted his entire blog post with the only difference being that I had broken it up into specific points that can be measured or used as benchmarks for evaluation of NITI Aayog at the end of 206-17. Professor thinks that 2016-17 would be the real first year of operations.