Cannot learn, won’t learn

Robin Harding of FT wrote an article on why Japan should not withdraw its monetary policy stimulus and listed instances in which the Japanese economy went into recession when the stimulus was withdrawn ‘prematurely’. May be, true. But, if it is always the case that one has to increase the intensity of the treatment, when would one consider the possibility that the treatment was wrong, in the first place?

Is it possible to keep an economy on life support all the time? What are the costs of doing so? A reader had sent a good set of comments on the Harding column:

Japan’s central bank now owns bonds and shares equivalent to a full year of national economic output. Real interest rates have been negative for years, something not seen in 5,000 years of recorded debt history. The long-term effects of such monetary policies are quite simply unknown, but the asset bubble created by QE has been nothing short of obscene.

The results on Japan’s domestic economy have been, at best, unimpressive, and at worst, an absolute disaster for the country’s competitiveness. Why bother to adhere to good corporate governance principles if the government is going to prop up your stock price anyway? Or why bother to make money if you can borrow to pay back interests? Mr. Harding is actually calling for more of this madness. What has the world come to? The end of capitalism is in sight.

This comment correctly focus on many unintended consequences of policy decisions and actions.

The return of robber-barons?

I receive the NBER digest every month and the papers that the Digest features are almost always very interesting. In the October 2018 Digest, I came across this paper:

Are EU Markets More Competitive than Those in the U.S.? 

Since 2000, gross profit rates in the United States have risen and industry concentration has soared, but these trends are not found in the European Union.
Until the late 1990s, most U.S. markets were viewed as highly competitive relative to their international counterparts. Many European countries implemented U.S.-style free market regulatory models during this time period. 

In How EU Markets Became More Competitive Than U.S. Markets: A Study of Institutional Drift (NBER Working Paper No. 24700), Germán Gutiérrez and Thomas Philippon argue that over the last two decades, U.S. markets have gradually become less competitive, and that, because this trend was not echoed in Europe, European markets today are actually more competitive than those in the United States. In many cases, the EU markets exhibit lower levels of industry concentration and excess profitability, as well as fewer regulatory barriers to entry.

The researchers find that starting around 2000, gross profit rates in the United States began to increase while the labor share declined. These developments are much more muted in the EU. A similar trend is observed in measures of industry concentration.

The researchers explore whether industry composition drove the divergence in concentration. They consider whether the emergence of high-tech industries drove the broad increase in concentration observed in the United States. They discount that explanation, noting that “the rise in U.S. concentration since 2000 is pervasive across most sectors, just as the stability/decline in EU concentration is.” Industries that experienced significant increases in concentration in the United States, such as telecom and airlines, did not experience parallel changes in the EU.

In the airline industry, the researchers find, the “rise in U.S. concentration and profits closely aligns with a controversial merger wave that includes Delta-Northwest (2008), United-Continental (2010), Southwest-AirTran (2011) and American-US Airways (2014).”

They suggest that the divergence in market competitiveness between the U.S. and Europe is related to the powers granted to EU regulatory institutions at their inception. They note that both the European Central Bank and the Directorate-General for Competition were given more political independence than parallel institutions in the United States and thus have been able to pursue more aggressive antitrust enforcement in recent years. In the U.S. between 1996 and 2008, they write, the Federal Trade Commission “…essentially stopped enforcing mergers when the number of remaining competitors is 5 or more.” 

In all areas of antitrust the researchers find decreasing enforcement in the United States and increasing enforcement in the EU. The Directorate-General for Competition is more likely to pursue “abuse of dominance” cases than is the U.S. authority, and financial penalties in cartel cases tripled as a share of EU GDP between 2000 and 2016.

The decline in U.S. market competitiveness has had meaningful consequences for U.S. consumers, the researchers point out. Broadband internet prices in the U.S., for example, are significantly higher than in the EU, where the telecom industry is less concentrated. 

They buttress their case for the comparative lack of political independence of U.S. regulatory bodies by noting the higher levels of both lobbying and campaign contributions in the U.S. than in the EU. Political campaign contributions are 50 times higher in the U.S. than in the EU.

Source:The NBER Digest, October 2018

It is often assumed that a capitalist economy is a competitive economy. But, it need not be. Is Capitalism synonymous with competition? In theory, it is. In practice, it is not. The guy with the most market capitalisation wins? Is that capitalism?

Sarah O’ Connor’s piece in FT on how big companies are pushing governments around confirms why market concentration rises. Governments are doing the bidding of companies and not that of real markets. Pro-business is not pro-market. Pro-business is anti-competition and ani-consumer. Even anti-society.

‘The Economist’ now suggests or describes how labour unions are regrouping using technology to re-establish themselves or how technology is allowing workers to regroup themselves. Technological developments might have led to the erosion in their power base. Funny that ‘The Economist’ does not include globalisation and the offshoring of jobs as one of the things that led to the erosion of the powers of labour unions. In any case, it is good for capitalism too that labour unions are coming back.

May be, this is what is needed for the rising tide of market concentration in America to be reversed.

Recent China links

From the story in FT on how fracking in China is leading to polluted water:

Earlier this year, a resident was detained and was still living under de facto house arrest because of his involvement in collecting evidence of pollution and sending water samples to Beijing, according to township residents.

From the story in New York Times on the internet conference in China:

The company has also started working with the authorities in Xinjiang, Mr. Wang said. The goal? To have a database of the irises of all Xinjiang residents within two years, he said.

Chinese banks don’t quite lend to private companies but things must be getting dire and difficult for the economy:

China aims to boost large banks’ loans to private companies to at least one-third of new corporate lending [Link]

Wow! Xi Jinping calls for a level playing field for the private sector! [Link]

‘Game of Chickens’ in the South China Sea:

The American concerns about Beijing’s naval modernization are reflected in a fictional account titled “How We Lost the Great Pacific War,” written by the director of intelligence and information operations of the Pacific Fleet, Dale C. Rielage, and published in a Navy journal.

The article portrays a possibly dark outcome for the American Navy in the Pacific.

Written in the form of a military dispatch from the year 2025, the author laments how the Navy had to “cannibalize aircraft, parts and people” and wonders if it will be able to “claw” its way back in the Western Pacific.

At the heart of this bleak prognosis is an assumption that the United States did not act aggressively enough in challenging China when it still could.

The article describes how an admiral, at the start of his term as chief of naval operations, saw that the Americans’ margin of victory in high-end naval combat had become razor thin — and would continue shrinking. “At the time, he assessed that the margin, though thin, remained ‘decisive.’ In the years following, however, the margin shifted imperceptibly to favor the other side.”

The article never names “the other side,” but makes clear: it is China. [Link]

Peter Nevarro warns Wall Street not to interfere in China-USA trade matters. Quite:

“The game that China has played — and they played people in the Bush administration like a violin — is to do the tap dance of economic dialogue,” Navarro said. “That’s all they want to do. They want to get us to the bargaining table, sound reasonable and talk their way while they keep having their way with us.” [Link]

Then, this incredible story in FT on how China is minding its financial stability risks and that the United States is not! To me, these two lines take the cake:

To counter the economic drag that trade war-related fears were creating, China has loosened its monetary policy in recent months. Its earlier belt-tightening gave it some wriggle room to do so. [Link]

India’s good luck

On September 21, I listened to an oil market expert make a rather convincing case for why the price of oil could rise up to USD100 per barrel. But, the opposite has happened. Brent crude oil price has dropped from a peak of around USD78 to USD66 now. It is good news for India. 

The rupee depreciation risk is considerably reduced. Of course, there is political risk, especially if the elections to State assemblies come up with adverse results for the BJP. 

In this connection, I thought that the comment made by the Chief Economist of the State Bank of India after the latest inflation reading substantially undershot expectations was an interesting one:

The other point of big concern is now uncertainty surrounding the CPI forecast made by MPC. It is interesting to see what forecasting technique the MPC members adhere to. Generating forecasts under (and often unstated) assumptions about exogenous variables such as oil prices, government spending, and global growth will throw up illusory or elusive results. Under such circumstances, it may be better for the MPC to work with short-term forecasts for next three to six months as macro-variables like oil prices are now almost difficult to predict. Remember the oil price crash in FY15 that had resulted in inflation undershooting RBI projection by more than 300 bps in December 2014 (currently it now close to 100 basis points!)

Source: SBI Ecowrap, Nov. 12, 2018

The many errors of C.P. Chandrasekhar and Jayati Ghosh

This morning, I went through the article by C.P. Chandrasekhar and Jayati Ghosh in ‘BusinessLine’. They make many erroneous claims in the article.

(1) They point out that India’s wealth Gini coefficient was 85.4% as per the Credit Suisse Global Wealth Report, 2018 released in October. That is true. They forget to point out that Sweden’s was higher at 86.5%!  Sweden’s was at 83.4 last year while India’s was at 83.0! Pakistan’s Gini coefficient for wealth was a shockingly low 52.6% last year and 65.0% this year. That would be clearly unexpected and one needs to look at data issues.

(2) They write:

The top decile increased its share of estimated wealth from 70 per cent in 2000 to nearly 82 per cent in 2016, and since then its share has fallen only marginally to 77.4 per cent in 2018

I am not sure Credit Suisse Wealth Report published data on the wealth share of the top 10% for the year 2000. I could not find it. Does not mean that they are wrong but their source could be different.

Credit Suisse data tell me that the share of wealth of the top 10% was 68.8% in 2010; it rose to 74.0% by 2014, it had risen to 80.7% by 2016 and had declined to 73.3% by 2017 (Effect of demonetisation?). This year had it jumped to 77.4% (data as of mid-2018, according to Credit Suisse).

(3) They take similar liberties with the data on the wealth share of the top 1%. They write:

Meanwhile the trend in the share of the top 1 percentile is even more shocking: from 39 per cent to as much as 58.4 per cent in 2016, going down since then (largely because of changes in stock market valuations etc.) to around 52 per cent.

It went from 40.3% in 2010 to 49.0% by 2014, had increased to 58.4% in 2016 (that part is true) but had dropped to 45.1% by 2017 (again, demonetisation effect?). It had gone back above 50% (to 51.5%) as of 2018 report.

Data for specific years will be influenced by the exchange rate of the Indian rupee vs. US dollar and by the performance of the stock market. Overall, the rising trend in the wealth share of top 1%, 5% and 10% is clearly established. But, cherrypicking the data to depict the present government in bad light is not rigorous research.

(4) Coming to income-tax matters, they write:

As it is, only around 1.7 per cent of the Indian population pay income tax.

I am dumbfounded.  Number of taxpayers is 74,127,250 as per the latest time-series data produced by the Income-Tax department. India’s population is around 134 crores. This number is 7.4 crores. Do the math! That is 5.5%. Further, the number 1.7% ignores the fact that nearly half the population that lives in rural India and relies on agricultural income, which is exempt from tax.

(5) They write:

The inability to tax high net worth individuals — or to collect corporation tax from profitable companies as expected — in turn means that the government has turned to relying more and more on indirect taxation.

That is not quite true. The direct tax/GDP ratio reached a peak of 6.3% in 2007-08 and it dropped to a low of 5.48% in 2011-12 (the lowest in recent time was 5.47% in 2015-16) but in the last two years, it has climbed nicely to 5.98%. See table 1.4 here.

(6) They write:

The share of direct taxes in total tax revenues has fallen from 38 per cent in 2009-10 (under the currently much-maligned UPA government) to only 32 per cent in 2017-18.

The share of direct taxes in total tax revenue was as high as 60.78% in 2009-10 and it dropped to 49.65% in 2016-17. It had since risen to 52.29% in 2017-18. Both numbers appear way off the mark. See table 1.3 here.

Now, let us ask why the UPA was ‘much maligned’?

(a) Annual percentage change in the official consumer price index (commonly but mistakenly referred to as ‘inflation) was in double digits for five years from 2009-10 to 2013-14.

(b) Fiscal deficit ratio shot up and so did the current account deficit;

(c) The external value of the Indian currency plunged big time in 2012-13 and in 2013-14

(d) The big farm loan waiver announced in December 2007 permanently damaged loan repayment culture and the fiscal balance. It has evidently not helped farmers. It has merely spawned many more loan waivers.

(e) Multitudinous corruption scandals

(f) Lastly and the most important, in line with the theme of the article by C.P. Chandrasekhar and Jayati Ghosh,

(i) the median wealth of Indians dropped to USD1016 in 2014 from USD1217 in 2010. It had since gone up to USD1289 as of mid-2018.

(ii) The wealth of the top 1% of Indians rose at a Compounded Annual Growth Rate (CAGR) of 6.77% from 2010 to 2014 while that of the bottom 90% shrank at a rate of 2.85% CAGR in the same period. From 2014 to mid-2018, the wealth of the top 1% has grown at a CAGR of 8.48% while that of the bottom 90% has grown at a rate of 3.45%

As I had said earlier in this post, there is clearly a worsening trend of inequality in India both with respect to income and wealth. But, I do clearly believe that the ‘much-maligned’ demonetisation, the introduction of GST and that of the Insolvency and Bankruptcy Code contain, in them, the seeds of change and reversal of the trend of worsening inequality over time.

Quality of public debate and public policy depend on rigorous analysis and reliable data.

Anthology of recent good developments

Happy Deepavali to all!

While much attention is focused on the ongoing saga of RBI vs. Government of India (my MINT column today too is part of that focus, I admit), the Sardar Vallabhai Patel ‘Statue of Unity’, one needs to focus on substantive developments too. I have done that in my MINT column today.

The data on direct taxes released by the Income Tax Department last week provides cause for cheer. One can see their press release here and the data table here. The press release is full of interesting and important information.

Just a sample:

While 88,649 taxpayers disclosed income above Rs. 1 crore in AY 2014-15, the figure was 1,40,139 for AY 2017-18 (growth of about 60%). Similarly, the number of individual taxpayers disclosing income above Rs. 1 crore increased during the period under reference from 48,416 to 81,344, which translates into a growth of 68%. [Link]

Indeed, the data help to recalibrate the costs and benefits of demonetisation exercise, if one were open-minded to recalibrate. Let us admit that the short-term costs fell disproportionately on rural India and especially those who relied on informal employment and cash payments for wages, etc.

But, at the same time, it cannot be denied that the rising tax buoyancy, rising share of direct taxes in the total tax collection, the jump in the number of taxpayers, in the number of those having an income of more than INR10.0 million (one crore of rupees) paying taxes, etc., mean more money available for development expenditure not just in one year, but year after year. That would help the poor and the marginalised. How does one square one’s trial balance that only shows costs now?

Second the Prime Minister’s twelve-point announcement for micro, small and medium enterprises (MSME) has one important nugget. His point no. 3 was this:

3. Cash flow certainty

It is now mandatory for companies with a turnover of more than Rs 500 crore to join Trade Receivables e- Discounting System (TReDS) so that MSME do not face trouble in cash flow, PM Modi said. [Link]

This is probably the most important of the twelve points the PM had announced for MSME. In fact, it may well obviate the need for flow of directed bank credit to MSME. Point numbers 9 and 10 are also highly laudable. Those are the things that would make India go up in the ‘Ease of Doing Business’ rankings in which it had climbed to 77 on the back of improvement in the ease of securing construction permits. That is the impression I have.

It is a happy coincidence that in the panel discussion on ‘Inclusive growth and prosperous India’ at the India Ideas Conclave in Delhi on Oct. 27, I had mentioned the importance of getting corporate buyers on the TReDS system as access to working capital was a big issue for MSME.

Earlier, on Oct. 26, I had received the B.R. Shenoy award for ‘Outstanding Economist’ announced by Swarajya. You can see the announcement here.

This morning, the BusinessLine reported the following good news on digital banking transactions:

As per data available with the RBI and National Payments Corporation of India (NPCI), the increase in digital payments has been profound in popular channels such as National Electronic Fund Transfer (NEFT) and mobile banking between September 2016 and September 2018.

The value of NEFT transactions had gone up from 988,000 crore in September 2016 (just two months before demonetisation) to 14,182,000 crore in September 2017, and to 18,015,000 crore in September 2018.

The value of mobile banking transactions, too, shot up from 2,700 crore in September 2015 to 104,300 crore in 2016, and to 186,200 crore in 2017. [Link]

Why did RBI make the dispute public?

I had written my MINT column on the speech by Viral Acharya on Saturday in Mumbai wherein he had teased, taunted and dared the government to undermine RBI independence, warning that the financial market dogs would ferociously leap on it, if it dared to do so. It was way over the top. Plus, independence is not just about independence from the political executive but also from financial market interests. Most global central banks are captured by finance.

Someone formerly associate with RBI liked the last line of my column but said that the RBI might have been pushed into a corner. I still think that a public fight does both of them no good and that country is the loser. Therefore, the country is the loser. Someone has to be wiser and  more mature and rise above their egos and turf issues and patiently whittle down the resistance.

But, that said, the government has made tactical errors. It has failed to realise that it simply cannot emerge the winner in a public battle with the central bank. That is probably the reason why Viral Acharya took it public, at the behest of the Governor, perhaps.

The optics are simply not in favour of the government. It will be seen always as a bully, abusing its powers, for its short-term political gains, riding roughshod over innocent professionals, with no political axe to grind, quietly performing national service and taking care of the country’s long-term interests. It is an unequal battle and public sentiment will seldom be on the side of the bully.

OF course, it is more so in the case of the suited-booted folks who would always come down on the side of ‘people like ’em’. There again, the government will lose in the battle for the affection of the so-called ‘opinion-makers’.

The Congress Party had internalised it very well. They were sophisticated. Their pressures were silent and subterranean. Remember what Rakesh Mohan wrote in ‘Business Standard’. I had blogged on it. He said that the number of government nominees on the Board was increased in 2012 when Department of Economic Affairs was split and the Department of Financial Services was created. It did not have a discussion in Parliament. I mention it in the MINT column too.

Then, there are substantive issues. By no stretch of imagination can it be said that there is no bad debt problem in India and that it is the concoction of RBI by its reckless application of Basel norms.  It won’t fly anywhere. The evidence is overwhelmingly against such an outrageous claim.

Second, if the government claims that it is the world’s fastest growing large economy, why is it worried about liquidity tightness?

Third, the government should actually be working with RBI quietly and even claiming that it is sacrificing short-term political gains for the long-term by pushing for the culture of bad, reckless and ill-judged lending by public sector banks, to end. Thus, it should back ‘prompt corrective action’ and make a virtue out of it.

This is what I said in my BloombergQuint interview and they had misrepresented it in the headline but got the bullet points mostly right:

Government Can Use RBI As A Shield, Says V Anantha Nageswaran

The government is using the central bank as a shield to get reforms in place,

(I said: the government should use RBI as a shield – fire from behind them, sort of, and use it as a bulwark to make the long-term case) instead of using it as a bulwark to make the case for long-term priorities, said V Anantha Nageswaran, the dean of IFMR Business School (Krea University).

  • Pressure on the RBI must be very high for Viral Acharya to have made the speech
  • Benefit of doubt will always go to central bankers, and not to political leaders
  • There’s a way to guide the central bank with finesse, without creating a crisis
  • The real issue with RBI’s reserves
  • The government wants comfort on fiscal deficit, RBI wants to maintain sufficient reserves
  • Government should be using the RBI as a bulwark to make the case for long-term priorities
  • In fact, the government can use RBI as a shield, to get reforms done
  • There are issues to reflect on from the RBI’s point of view
  • Obvious that both sides should react with more maturity [Link]

Fourth, regardless of whether the RBI has excess reserves, it cannot be returned to the government through a public dispute and through fractious Board meetings. Softly, softly has to be the approach. Having battering rams in the Board won’t help but hurt the image, hurt the currency and hurt the bond price, handing a defeat to the government in more ways than one.

All this being said, I liked the pieces by Mythili Bhusnurmath, by Saugata Ghosh and T.T. Rammohan on the ongoing dispute.

But, I think I have understood why RBI brought the issue to the public, no matter how bad it is for the national image. The government cannot win in a public battle because a public battle is a perception battle. The government has to show finesse and sophistication. But, those are two more of the deficits of this government – along with talent – and, come to think of it, they could be India’s deficits too.