Investment slowdown and demonetisation

The analysis in this piece and the attribution, in particular, are deeply problematic. This attributes the abrupt slowdown in India’s private corporate sector investments in 2016-17 to demonetisation that happened on 8th November 2016.

There was demonetisation and it would have had an impact on the informal sector and it is supposed to have diverted transactions to the formal sector. There was ‘Asset Quality Review’ of banks’ assets going on. Demonetisation was announced without any fore-warning on Nov. 8. So, it was not as though firms were downsizing investments due to the anticipated demonetisation. Firms were doing it anyway – because of excess leverage and, may be, even tax uncertainties. Investment decisions are taken and implemented over a few years. It will be felt over time and not instantaneously.

Second, one did not have to be too conspiratorial about it. RBI Monthly Bulletin (March 2019) has enough reliable information on the ‘on-the-ground’ investment slowdown. Usually, this comes out in the September monthly bulletin. This time, it too took time and RBI brought it out in March 2019.

There has been a steady decline in the capital expenditure commitments of the corporate sector since 2011. Expenditure incurred in 2016-17 would have been committed much earlier. There was a ‘cliff-dive’ in 2017-18, as per RBI numbers. But, these are subject to revision.

There was an ongoing investment slowdown and demonetisation may or may not have compounded it. We will not know sure for a long time, if at all. But, to leap to conclusions – without taking into account normal economic relationships and lead-lag patterns – is to stake one’s own intellectual credibility to puncture the government’s credibility. Not necessary.

Bangladesh learns a public policy lesson

In a WhatsApp group, I shared the following ‘golden rules’ or principles of public policymaking:

(1) With economic policy prescriptions, be aware of the law of unintended consequences
(2) A corollary of that and independently too, the road to hell is paved with good intentions.
(3) To a degree, both (1) and (2) above are because relationships between economic variables and between policy action and outcomes are non-linear and/or asymmetric.
(4) An example of the asymmetry is that it is far easier to hurt with government interventions than to help the economy.

In view of the above four, economists-experts, non-economics experts and policy advisors have much to be careful about and humble about.

Here is an example from Bangladesh.

Cyclical Overlay on Structural

The words, ‘cyclical’ and ‘structural’ have been massively overused in the last month or so in India. Some recent analyses are here (Shankkar Aiyar), here (Niranjan), here (Neelkanth) and here (Ashima Goyal +1).

Dr. Arvind Panagariya bats against sops to specific sectors. I would agree with him. In fact, there is far too little critical commentary on the private corporate sector’s contributions to their own misery. Barring a few exceptions (I hope), how rigorous are they in their growth and demand projections? Do they have scenario planning and do they subject their financial and demand projections to stress tests? What buffers they provide for themselves?

That is why this piece by Sundeep Khanna is important. How much have they brought this upon themselves?

Collectively, with lack of rigour and with malfeasance (an example) abound, the Indian private sector is very much a source of the problem.

Shankkar Aiyar tries to provide specific answers, as he usually does. That is a good thing. Niranjan bats for further monetary policy responses. I am sceptical. 135 basis points of rate cuts and counting.

Neelkanth, as his wont, sees the glass as half-full although the account of his presentation by the CFA Society leaves room for both interpretations – cyclical slowdown or a structural growth challenge.

The column by Ashima Goyal and her co-author gives the impression that Arvind Subramanian’s work has contributed to the growth slowdown although, I am sure, that is not their intention.

My joint work with Gulzar Natarajan, ‘Can India grow?’ makes the case for India’s structural growth problem. Rather convincingly, in my view. It is manifesting itself, post-2008 crisis. The 8% growth numbers for 2016-17 and for 2017-18 are not credible. The post-crisis recovery seen up to 2011 was based on unsustainable fiscal and monetary stimulus. We paid the price in 2013 and are still continuing to pay the price in terms of non-performing assets in the banking system. I had mentioned this on numerous occasions.

India’s growth spurt between 2003 and 2008 was due to an extraordinary combination of global factors, an investment boom by a de-leveraged and lean corporate sector turbocharged by global capital inflows and the consequent domestic credit boom, partly as India sought to mute the exchange rate impact of the wall of capital descending on India.

In general, post-1979, India had grown faster but not for too long, at a stretch. It is a highly fragmented economy – in many sectors (services and manufacturing) – incapable of achieving scale (due to regulatory disincentives against scale and perverse incentives that encourage staying small) and hence sustaining high growth for long without displaying all classic overheating symptoms.

This structural growth problem has been with us and is still with us. We have not arrived. What is currently happening is a cyclical slowdown that has been overlaid on the structural growth constraint. The proximate cause has been the problem in the Non-Banking Financial Corporate Sector coupled with corporate malfeasance. But, this is a serious problem and it cannot be wished away as though it would self-correct. Structural constraints would impede a cyclical recovery because the current cyclical factors would worsen structural constraints. They can now mutually reinforce each other.

Bold policy leadership is needed to break the vicious circle and the leadership has to be both substantive and symbolic. Optics too matter.

The NDA government has not contributed to the structural growth challenge. If anything, it can be argued that some of its policy decisions – PMJDY, JAM, IBC and RERA – could be seen as boosting structural growth prospects. But, by when – no one knows.

However, it has exacerated the cyclical growth slowdown with the following:

  • Demonetisation: short-term growth negative with potential for long-term gains (perhaps, too long-term)
  • GST: rates inhibit economic activity
  • Tax collection: much has been said and written here and elsewhere.
  • This has been informed a moralistic streak in policymaking which is not credible since it is selective. Both of these two – pursuit of tax revenues and excessive morality in public policy have compounded investment uncertainty already in train due to deleveraging.
  • Excessive fiscal consolidation in the earlier years of 2014-16 because of the fetters imposed by perceive pressure on credit rating, if fiscal targets are missed. UPA handed down a high fiscal deficit target than the official estimate in 2014. NDA II had done the same to NDA III in 2019.

This column I had written in 2017 still remains relevant. See here and here too. India needs Yanis Varoufakis’ pragmatism as Greek Finance Minister despite his strong Marxist leanings.

Naushad Forbes calls for a presumption of honesty on the part of the government, with respect to the private sector. Tough given the track record but the government has no choice. It now has the information and tools to zero in on the recalcitrant rather than pursue blanket strategies.

The answers to India’s growth stasis have to be structural and powers to do so reside with the state governments. The Union Government can take the intellectual lead. Shankkar Aiyar has some answers and I had provided some here and here. Gulzar and Somanathan provide some detailed prescriptions for vertical urban growth here.

A good friend of mine worried that the government appears clueless. Frankly, many experts are not clue-full either. Most pieces I read are mighty impressive on the diagnosis but woefully short on implementable ideas. These are not easy problems to solve. Many low-hanging policies and recommendations have already been plucked.

Traditional monetary policy tool has been applied. Many reasons why it is not gaining traction. Therefore, it is good to retain some firepower for the global economic, financial and political meltdown that looks highly plausible in 2019-20.

Negative yields

Dreihaus Capital has tweeted that excluding America, nearly 45% of the global bond market is trading in negative yields.

Michael Lebowitz has a wonderful piece in ‘’ and unfortunately or mysteriously or both, it is not available there. It is available via Zerohedge.

This explanation of negative yields, in particular, is brilliant:

It implies that the future is more certain than the present – that the unknown is more certain than the known!

Enjoy reading it as much as I did.

In the meantime, President Trump tweeted exactly the opposite of what Michael Lebowitz is trying to convey:

The Economy is doing really well. The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries? Be early (for a change), not late. Let America win big, rather than just win! [Link]

and this:

Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home! [Link]

Desperate for re-election, he is forgetting all that he said before getting elected for the first time in 2016. Negative interest rates all along the German bund yield curve is a sign of sickness and not health. European banks are hurting from negative yields.

The European Central Bank, originally modelled after the German Bundesbank, had become absolutely reckless and it believes that it has saved the single currency. Perhaps, it did, temporarily only to make the problem re-appear much later. It is inevitable.

The fact that the German economy is contracting in less than a year after enjoying a weak Euro for years and ultra-low interest rates says a lot about the non-efficacy of ultra-low and negative interest rates.

Through his constant haranguing of the Federal Reserve, he is staking a lot more than his re-election. More on that on another occasion.

Finally, it is impossible not to feel disappointed with the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) for its kid-glove treatment of the Fund on its advice during the post-crisis years with unconventional monetary policy. It was not even a rap on the knuckles. The costs of UMP have far exceeded the short-term benefits and the costs continue to mount. The Fund cheer-led it. IEO has nothing to say on the consequences – political, social and economic – of UMP. Egregious pricing of junk bonds (negative yields!) and tech. unicorns and some of them being able to get away with accounting and other practices weirder than the ones that prevailed in the dotcom mania years of 1996-2000 are also traceable to ultra-cheap money.

IMF warns today about the consequences of real estate bubbles and leveraged loans. But, UMP is directly responsible for both. IMF endorsed and encouraged. It discouraged the Federal Reserve from raising rates even gingerly in 2015 and in 2016. IEO has neither done evaluation nor is it independent.

For a true independent evaluation, read ‘The Rise of Finance’. Available here.

The state (or, the UT) of Kashmir

After writing a blog post here and one in ‘’, I have refrained from commenting on the issue. It was too emotional for many and it remains so for many. On both sides. Mature heads are handling it or so, I hope. The situation calls for sensitivity and restraint and not triumphalism. Chithra Subramaniam’s piece in Mint was a good one.

I had liked TCA Srinivasa Raghavan’s pieces on this topic. See here and here.

His most recent piece is written crisply and rather effectively.

The fundamentalism of the ‘Liberals’ citing the inviolability of the original Constitution is neatly and brutally exposed.

The last line citing Sam Pitroda is the ‘ pièce de résistance  ‘ or ‘coup de grace’. Or, was it the real final blow?

The wonder, as Prime Minister Narendra Modi pointed out during his Independence Day speech, is that this troublesome provision was allowed to germinate and bloom to such an extent that a mere four million Muslims of a small valley — 80 miles by 40 miles — were able to hold not just the remaining 1,300 million Indians but also the superpowers to ransom by cunningly feeding the appetite of the Pakistan military.

Shekhar Gupta’s two recent pieces on the matter too are well worth reading. See them here and here.

[Apologies that these links are from the ‘Business Standard’. They could be behind paywall].

This conclusion of Shekhar Gupta’s article published on 17th August is worth noting:

The Right-Nationalists are missing nuance when they say just 10 districts of the Valley can’t speak for all of the state. Because these represent the state’s majority. The liberal argument is more flawed. If the majority view of Valley Muslims then subsumes the sizeable minorities of the state, what do we do for the view of the rest, about 99.5 per cent of India? Can you have the democratic logic of majority work in one place and not in the other?

Christine Fair wants to avoid being identified as a sympathiser of the BJP Government and strains too much to achieve that. But, her piece is good for it exposes Pakistan’s games rather well for her audience (ht: Puthan Ramesh).

In the final analysis, that the move by the NDA government is an international and geopolitical coup is beyond question. Pakistan’s hyperventilation is incontrovertible proof of that. But, whether it turns out to be an internal success in terms of achieving internal integration and economic progress will be the litmus test of the success of the daring and necessary political manoeuvre. Read Admiral Arjun Subramanian channelising Lt.Gen. Nanavatty here. (ht: Rohit Rajendran). For me, the important comment in that article is this:

Nanavatty and his team submitted the strategy document to Army headquarters, and later sent copies of it to many senior government functionaries like then-Home Minister L.K. Advani, Home Secretary N.N. Vohra, and Foreign Minister Jaswant Singh. Except for Jaswant Singh, who took time off to discuss the strategy document with Nanavatty, there was little interest in other quarters. 

But, even that would and could be complicated by the external environment – the moves and actions of nations across the border on the Northeast and Northwest of India.

Syed Akbaruddin’s interview to the media after the ‘closed door’ meeting of the United Nations Security Council is good to watch. The short report in Mint is useful to know about the stance of Britain. One country that remains deluded big time?

Export of services

T. N. Ninan makes the point that export of services might exceed the export of manufacturing from India. It is indeed extraordinary.

A good piece, overall. Especially the last paragraph on the implications that a rising share of export of services has for the currency. The failure to raise the manufacturing share of exports or that of GDP is not the failure of the ‘Make in India’ programme. It could have been more accurately stated as, “in spite of the ‘Make in India’ programme”.

More than physical infrastructure – which applies to ease of living and ease of doing business – manufacturing efficiency (critical for exports) is hobbled by rules, regulations and their extortionist implementation. These ensure that scale is never created and manufacturing remains fragmented.

This is a state-level issue. The PM must call for a conclave of BJP-Ruled CMs over a weekend and emerge with a ten-point reform agenda that enable small businesses to grow out of their small sizes.

For small businesses to grow bigger, small minds have to become broader and bigger, first.

Should S&P bring back ‘core earnings’?

This chart shows how S&P 500 Companies’ Operating Earnings has now reached a high share of the overall National Income measure of corporate profits. The last time it did so was in 1999-2000!


I remember that, in 1999-2000, Standard & Poor’s had introduced a concept called ‘core earnings’ because companies had begun to state whatever they wished under ‘Operating Earnings’. Perhaps, it is time to bring it back.

In another sign of market craziness, the 5-year Greek bond yield (1.27%) is lower than the 5-year US Government bond yield (1.5%). Does the prospect of Euro appreciation over US dollar dominate the credit risk of Greece (in comparison to the USA) or is it that the market is very confident of the European Central Bank and the European Commission rescuing Greece in the light of any default risk? Both stretch credulity, in my view. (ht: tweet by David Rosenberg).