‘Stay on hold’, says FT!

The Financial Times has an editorial advising the Bank of England to stay on hold at 0.5% and not shrink its balance sheet because Brexit uncertanties loom large, they argue. It is wrong on many counts.

Ten years after the crisis started, the FT is still advocating that the BoE stayed with 0.5%. Do the writers even sit back for a second in their chairs and reflect on what they wrote, before hitting the ‘Gut zum druck’ button?  Quite how the monetary policy connects to the travails or woes that the British economy might experience with Brexit is never explained because, in the opinion of the FT writers, it is axiomatic.

The UK economy would need different set of policy responses to deal with the economic shocks, if any, arising out of Brexit. In the meantime, the costs of ‘too loose for too long’ would keep piling up. In July 2012, the BoE published a paper on the distributional effects of asset purchases. Five years later, the consequences have gotten worse and not better.  If policymakers appear incompetent and make wrong decisions, we do not have to look too far to identify their source of inspiration.


City-States over Nation-States?

My friend Ram forwarded me the first of the four-part lecture by Lim Siong Guan for the Institute of Policy Studies – Nathan annual lecture series. The first lecture was titled, ‘Accidental Nation’. It is worth going through. The full lecture is available here. Mr. Lim mentions a paper by Sir John Glubb: ‘Fate of empires and search for survival’. The extracts he cited were interesting. The paper is available here. I am yet to read it. I hope this is the paper he referred to.

My wife found an interesting article in the ‘Comments’ section below the newspaper report that carried his speech highlights. That article suggests that the future belongs to City-States rather than nation-States. I don’t buy that. Not that I have done much research into it. Nor do I claim myself to be an expert in such matters. I am grateful to be educated.

From the article, I learnt about the unclaimed land between Croatia and Serbia and also about Patri Friedman, the grandson of Milton Friedman.

But, I do believe that modern nation-States would last longer than the ancient Roman Empire, perhaps.

Humans need anchor these days. They have come a long way from their nomadic hunter-gatherer days. Back then, there were no identity markers such as religions and groups. Now that we have them, it is difficult to go back to that ultimate ‘libertarian’ world.

Even those who enjoy the freedoms that cities afford but nation-States don’t – the highly educated foot-loose global citizens who feel at home in all global cities rather quickly – would ache for the protection and security that nation-States afford when technology and other threats make their livelihoods and lives that much less secure.

So, it is good to have competition for today’s Nation-States. But, I am not prepared to wager on their demise. Not soon.

TCA on leaders and leadership

TCA Srinivasa Raghavan has a well-written and hard-hitting article on leaders, ideology and leadership. Could be behind a paywall, though.

I have one minor question:

TCA writes that Vajpayee turned inwards in 2002:

This happened to Indira Gandhi in 1974; Rajiv Gandhi in 1987; Rao in 1993; and Mr Vajpayee in 2002.

I thought Vajpayee’s best years in office were between 2002 and 2004.

Also, I  am not inclined to agree that Manmohan Singh provided ‘good leadership in governance’, as he writes here:

The same thing was true of P V Narasimha Rao, Atal Bihari Vajpayee, and Manmohan Singh.None of them was a great leader in that they could not ensure political success on their own. But each provided good leadership in governance, which is where it counted most.

That contradicts what he wrote earlier about UPA 2 leaving the economy in shambles. In fact, the foundations of that were laid in UPA 1. The boom that India enjoyed between 2003 and 2008 had nothing to do with UPA 1. It was in spite of UPA. They just happened to be in power when the Indian economy happened to enjoy a boom, which was due to a combination of the lagged effects of the policy decisions of the previous NDA government, lean and hungry corporate sector with cleaner balance sheet in 2002 and the global economic boom.

On voter wisdom,

Yet, they were voted out, which speaks volumes for voter wisdom. You can see this phenomenon in many states as well.

This sentence coming after the sentence that included Manmohan Singh in the category of those who provided good leadership and governance is problematic. Voters were right to vote him out in 2014 and were wrong to re-elect him in 2009 because the boom the country enjoyed had nothing to with him, his governance or with his government.

On voter wisdom, in general, quite apart from India-specifc arguments, it is a bit like form and class. Form is fickle and class is permanent in cricket or in any other sport.

Similarly, voter patterns in the short-run, election by election, may appear arbitrary. But, given two or three generations,  the patterns make sense.

Second, this is not a lacuna of democracy. It is ingrained in Sapiens. We had not come out of our hunter-gatherer days in many respects. Survival was uncertain. We had to live for short-term. Who knew if we would be alive tomorrow, let alone long-term?

Hence, we binge on sugary diets, etc., Our preferences for someone who promises short-term goodies is traced to that.

That is why we do poorly, on average, in investing too. We are not simply wired for long-term decision making.

As for the general thrust of the article,  TCA gets it right.

The truth about the Indian economy – 4/4

T. N. Ninan’s column on Sept. 8 in ‘Business Standard’ is worth a read. It is a wake-up call and I would say that it is too mild a wake-up call. Average real GDP growth in the last 7 years has been around 6.7% and in the previous years, it has been 8.4%. One simple explanation is that the global backdrop had changed from being favourable to unfavourable. Global backdrop matters.

That is a point that Ruchir Sharma had made in his comprehensive interview with CNBC-TV18 a while ago. Some extracts from his interview:

…. let us just say that India is growing somewhere in the ballpark of 5-7 percent, depending on what you believe are the right numbers. That for me, is a fair outcome because if you look at the world today, at the peak of the boom, in the middle of the last decade, there were more than 70 countries in the world which were growing at a pace of more than 5 percent….

…. just 28 odd countries have been growing at a pace of more than 5 percent this decade. There has been a compression everywhere. There is not a single region in the world, as I said which is growing at the same pace because one of the main ways to grow richer is to export your way to prosperity. And look at export growth. This is especially in an environment of de-globalisation. Export growth has fallen everywhere across the world.

Even India’s export growth, last decade during the boom years was 20-30 percent a year between 2003 and 2007. That export growth basically has flattened out this decade and it has happened in most places. So this is the era of de-globalisation, after the era of hyper globalisation that we got over the last 2-3 decades. And in this environment, if your export engine is down, it is very difficult to grow rapidly.”

That is fair. But, there are things that one can change and things one cannot. Are we doing enough with things that we can change? Or, even worse, are we compounding the problem?

Take the case of GST cess on luxury cars. The GST was supposed to make things simpler and not more complicated. It was supposed to help make the countrys’ tax system cess-free. Also, this frequent tinkering with tax rates is not healthy. This adds to the ‘Unease of doing business’.

With data for July on GST receipts available (even if provisional), there has been a credit of around Rupees 90,000 crores (900 billion or 15 billion USD, appx.) but there have been input credits claimed by GST payers for around 60,000 crores of Rupees (600 billion or 10 billion USD appx.) So, the government is scrutinising all those who claimed GST credit of more than one crore of rupees, according to the Economic Times. Interesting that this should appear in a Pakistani website too and look at the comments too by scrolling down.

Then, there is another story in ‘Economic Times’ that cash deposits made even before November 8 ‘Note ban’ announcement are being investigated. There is no end to this ‘cat and mouse’ story between taxpayers, tax dodger and tax collectors. While much of this might well be needed with a very low tax/GDP ratio, the fact remains that tax incidence in India is still high.

Tax rate percentage of commercial profits Note: Total tax rate (% of commercial profits). Source: World Bank, Doing Business Project (doingbusiness.org)

India’s overall tax incidence on the commercial sector is above 60% and quite high notwithstanding the fact that Brazil and China have a higher tax incidence. In China, corporate sector is predominantly state-owned and they get several other advantages from the State that offset this tax incidence.

India promised to bring down corporate taxes and eliminate exemptions. Announcement was made in the budget for 2015-16. A diluted follow through happened in 2016-17 budget which restricted the lower taxes to companies with paid-up capital of less than Rupees 50.0 lakhs (INR 5 million). There was no follow-through in 2017-18 budget. That is it. The government promised to reduce the cost of hiring labour by bearing payroll taxes. But, the threshold was set too low to make a difference to hiring, especially at a time when businesses face multiple uncertainties and are battling a heavy debt load.

Bloomberg Quint organised a conversation between three Mumbai-based economy watchers. A summary is available here. There are no ‘ready-to-be-implemented’ answers from them. Deploying some confusing metaphors, Neelkanth Mishra says that a fog has descended on the house under construction that the Indian economy is. He calls for monetary and fiscal stimulus. Easier said than done. Monetary stimulus is unlikely to be effective nor is it likely to be forthcoming, given that inflation has begun to pick up and current account deficit, even with the economy as weak as it is, is 2.4% of GDP. It is not their fault.

The law of human endeavour is that it is easier to screw up than to spruce up. Governments are not exempt from that law.

Much of the slowdown might be due to factors beyond the control of the government. Global slowdown is one. Commercial and industrial loans that turned bad now had their origins in the aftermath of the global crisis of 2008. But, it is the mess that UPA created that gave the opportunity for BJP to come to office. Hence, throwing up hands and pointing the finger at UPA do not help.

This government has made at least three mistakes, if not more:

The single big mistake that this government made – even at the risk of oversimplifying – is to have accepted the fake fiscal deficit number of 4.5% given by the outgoing UPA II administration and reduce fiscal deficit to 4.1% and further lower from there. The oil windfall went towards legitimising UPA’s bogus fiscal arithmetic.  That is what the mid-year economic appraisal of 2014-15 said:

The deficit target represented strongly pro-cyclical fiscal policy-consolidation when growth was below potential-which is ambitious at the best of times and also unusual amongst the major economies today.

Was there an application of mind on the path of fiscal consolidation?

Having done that, it beats me as to how they expected growth to revive – just because they were in office – and take care of the NPA problem. Second mistake was to wear that jacket because it led to the third. The third mistake was to buckle under the ‘Suit boot ki Sarkar’ jibe and turn anti-business.

A slower and gentler glide path to fiscal consolidation would have given the government resources to recapitalise banks that deserved recapitalisation, merge and jettison the rest. Government bond yields might have declined more slowly but the bond market would have been happier with intent and direction of progress, if not magnitude of fiscal consolidation. The boost to the economy thanks to the multiplier effect coming from a well-functioning credit market than the boost (if any) that the economy got from lower government bond yield in a dysfunctional credit market.

Direct tax system needs reforms – lower rates and fewer exemptions. The indirect tax reform – GST – has started off with some needless (inevitable in the views of some) complexity.

Further, some of its well-intentioned and sound initiatives have been thwarted by bureaucratic risk-aversion. Whether it is something as simple as ‘visa on arrival’ or something as important as crop insurance and liberalisation of inland waterways for foreign-owned ships, bureaucracy vastly diluted the government’s intent.

The IIM Bill is yet to become law. Only the Lok Sabha has passed it. The initiative to declare 20 educational institutions as world-class institutions and grant them full autonomy is stillborn. The unified labour code has not left the Labour Ministry. Companies do not have a unique identification number – talked about for quite some time.

In a detailed column for Bloomberg Quint, Shankkar Aiyar suggests going back to the BJP Manifesto for 2014-15 to ‘recalibrate the bearings.’ That is a good suggestion.

I would add the following:

(1) Someone must pick up the courage to tell the PM that there is a serious problem with the economy. He must be made to understand that a series of moves by the government, judiciary and RBI combined have made the business environment more uncertain.

PM should address the nation on the economy without necessarily stating that the government had messed up but acknowledging the issues short-term while long-term is looking good because of serious structural reforms, etc. He should acknowledge corporate sector woes in the face of all the so-called structural reforms. He should admit that, under his government, the ‘unease of doing business’ has grown.

Regardless of what one thinks of President Donald Trump, he is doing the right thing here:

President Donald Trump plans an aggressive travel schedule, taking him to as many as 13 states over the next seven weeks, to sell the idea of a tax overhaul as the administration tries to avoid repeating the communications failures of its attempt to repeal Obamacare. [Link]

If the leader believed in something, he has to champion it till the last step. It is not enough to contribute soundbytes and catchy headlines and stop with that.

(2) Stop making the situation worse. Stop hurting by making negative comments: BJP President asking businesses to stop ‘wailing’ or the Minister for Transportation threatening to ‘bulldoze’ auto manufacturers are things that should stop. It should not be a surprise that antacids are driving India’s Industrial Production growth.

(3) End obsession with revenue neutrality. It is easy to achieve it on paper but it is dumb. One needs economic activity to achieve it in reality. Cess on luxury cars is badly timed and amounts to changing rules midway through the game.

(4) Remove not just redundant laws but also other laws that are stifling. Removing dead and outdated and (inactive) laws is mostly symbolic.

(5) Take a hard look at the construction sector woes.​ Most important unskilled labour employer after agriculture. Get States to increase FSI and boost construction activity.

There is no guarantee that these would deliver the economy out of its present doldrums. None of us have a magic wand. But, all of us owe it to ourselves and to the country to do what we can. What is beyond our control is, in anyway, beyond us.

The government should do what it has to and stop doing or talking what hurts the economy and the country.

In a recent weekly column for MINT, I wrote:

The previous NDA government fell on the sword of “India shining”. Achche Din might prove to be this government’s Damocles sword if it does not wake up to its failure to add to its rather meagre economic successes such as the PMJDY.

If they don’t wake up, it would be bad for India because the alternatives are worse. In the time since they were forced out of office, they have learnt nothing and forgotten nothing.

The truth about the Indian economy – 3/4

ne of the good news that came India’s way in recent times (I am not talking about the temporary end to the Doklam standoff) is the Supreme Court judgement in the case between ICICI Bank and Innoventive. Anirudha shared the link to the story in Bloomberg Quint and Niranjan pointed to a MINT Edit on the same.  The Supreme Court has batted for the rights of the creditors and took away the petitioner’s recourse to placing a State government Act above that of the Insolvency and Bankruptcy Act. So far, so good. Well, it could be big. Andy Mukherjee calls it a tiny victory but a big shift for India.

He has two questions. One is whether this would embolden the creditors to go after big lenders. The second is if borrowers would be able to escape with the kind of damage that one of the borrowers brought before the Insolvency and Bankrupty tribunal was able to get away with  – paying 6 paise on every rupee of debt. That is some haircut.  Quartz has covered the story well. If this is repeated, the recapitalisation bill for Indian banks would be simply unaffordable. India will be in a full-blown banking and economic crisis. However, Andy Mukherjee notes that an appeal has been filed against this resolution.

While the Supreme Court handed a victory to creditors in the case between the ICICI Bank and Innoventive, it has stayed the insolvency case against Jaypee Infratech as home buyers want to be treated as creditors.

As one of the experts who commented on the story for MINT says, prospective homeowners have paid a purchase consideration. Whether they become unsecured creditors and be part of the bankruptcy procedure is to be decided now. They would rank below other lenders in that case, as ‘unsecured creditor’. Perhaps, they need to be covered by regulations governing transactions between citizens and regulated entities in the real estate sector.

So, these are early days as to whether India’s recent Insolvency and Bankruptcy Regime would help its bankers-creditors or hurt them. This is what I wrote in MINT two weeks ago:

No doubt the government has passed the bankruptcy legislation and empowered the central bank to direct the banks under its supervision to invoke its provision to recover their dues. But the big challenge that banks face is the share of bad assets in the overall loan portfolio, and it has shown no sign of peaking yet. Credit Suisse estimates that total stressed loans in Indian banking (recognized and unrecognized bad debts together) constituted 17.75% of total bank loans as of March 2017. It was 16.9% as of March 2016. The reason that the NPA problem has not peaked is the absence of economic dynamism in the country. Economic dynamism will remain elusive unless long-term capital investments are made by industry. Domestic capital formation remains elusive because there is too much uncertainty in the air. [Link]

Why is there too much uncertainty in the air? That would be the final instalment in this series?

The truth about the Indian economy – 2A/4

I had to change plans and include an Amendment or Appendix or Annexure to the second part because I had received quite a bit of ‘feedback’ to my part 2. Quite why, I am still trying to figure out because the post did not endorse Piketty’s policy prescriptions and it noted with sarcasm that India did a far better job of distributing its poverty than of its prosperity and three, it accused the present government of giving India the worst of both worlds – neither growth nor healthy re-distribution. So, quite why the so-called ‘Economic Right’ had to be riled by the post is beyond me.

Let me clarify or reiterate one more time:


(1) I have no axe to grind and nor am I enamoured of inequality as a problem to be treated, in and of itself.

(2) I hold no brief for Piketty’s explicit or implicit policy recommendations or predilections. His bias for explicitly re-distributive policies does show through in the paper even though he does reiterate that it was purely a data exploration paper.

(3) Addressing crony capitalism is desirable in itself.

(4) There is no danger of this government being captured by Piketty because it has already been taken hostage by one line uttered by an Opposition politician.

(5) My own policy recommendation in the end is to make an omnibus case for administrative and governance reforms and accountability. There can be no disagreement over it, regardless of whether one believed in inequality as a problem in India or not.

Regardless of Piketty’s agenda, the issue merits a debate and then acceptance as serious or rejection as undeserving.

Credit Suisse which, probably, is happier to see wealth accrual in developing economies, has been putting out its own independent research every year (‘Annual Wealth Report’) and they have data on wealth distribution that align with Piketty’s data on income distribution. Credit Suisse would, if anything should be expected to be on the opposite side of Piketty.

While the inclination to oppose the man is understandable, it is not reasonable to oppose his matter if they are data based and if the data are made available, as he has. One can tweak it and show how sensitive his conclusions are to the assumptions one makes on the source of data (survey vs. fiscal) and to the demographic profile.

Also, in our earnestness to dismiss Piketty, we are also unwittingly dismissing the contribution that UPA’s ‘crony capitalism’ might have made to the issue of inequality.

It is actually inequality of opportunity for the scarce resources such as seats in colleges and beds in hospitals are bought with money while public institutions that are aimed at providing them for the ‘middle and bottom deciles’ are failing to do so.

That is where the interview of Devesh Kapur that I had linked in the blog post (Part 2) has salience.

The Asian Development Bank (ADB) brought out a volume in 2009 (“INDIA 2039: An affluent society in one generation’). It was written by the Centennial Group for ADB, including by my friend Manu Baskaran who is as far removed from Piketty as anyone can be, and the report had the following chart on page 35:

Indian Oligarch ratio

Second, recent work by Praveen Chakravarty and Vivek Dehejia – incidentally even the aforesaid report mentions it as far back as in 2009 – has comprehensively documented the spatial inequality in the country.

It is one thing to oppose Piketty’s agenda and it is another thing to dismiss the issue. Even worse is to be pursuing policies, as this government is doing, that are worsening the problem, in the guise of addressing it. ‘Growing the pie’ is important before distributing it. This government is not doing it.

Further, inequality need not be an explicit policy target. But, egregious inequality (not just in those dimensions that Piketty reports them) will be and is a problem.

The truth about the Indian economy – 2/4

On Tuesday morning, 12/9, I woke up to see two pieces in MINT dealing with the new paper by Thomas Piketty and Lucas Chancel on inequality in India. Manas Chakravarty and James Crabtree had written the articles. Interestingly, I learnt from an email sent by James Crabtree that his forthcoming book on India has also been titled, ‘Billionaire Raj’. Unbeknownst to him, Piketty and Chancel have also chosen to name their piece, ‘Indian income inequality, 1922-2014: From British Raj to Billionaire Raj?’. Manas helpfully provided a link to the original paper.

Manas contents himself with summarising the original paper. The paper looks at India’s income trends from 1922 to 2014.  Yes, the data stops with 2014 before NDA came to office. But, you would not guess that from reading James Crabtree’s article. Somewhat unsurprisingly and yet disappointingly, the sub-title of his article is ‘The massive inequality in the country gives the lie to Narendra Modi’s rhetoric—and poses several economic threats’. May be, he did not write it but MINT editors did.

I did not quite get it since the data ended in 2014. For all the rhetoric of poverty and ‘reforms with human face’ it is clear that inequality trends had worsened in India in the years between 2004 and 2014 – the UPA I and II era. Look at any of the charts in Appendix 13 (1 to 4), 14 and 15. Also, take a look at Figure 6 in page 20. Reproduced below. Figure 9 in page 23 is equally dramatic but not reproduced here.

Top 1 percent income share in India

You will get what I say. Inequality trends accelerated under UPA (I & II). That is par for the course in India. Policy discourse/rhetoric is one thing and policy effect is another. Reading James Crabtree’s piece would not give you the impression that the problem became big in the UPA era. That said, UPA’s failure – it not only failed to stem but it also actually witnessed an acceleration in inequality – holds lessons for the current NDA government. Lessons which it has shown no sign of learning from, however.

James Crabtree’s concluding lines are not too far off the mark, however, even though the NDA government is not providing much hope for crony capitalists as the previous government did:

Beyond this a far more radical agenda is needed, to improve basic social services at the bottom, while using competition policy and regulation to stamp out crony capitalism and entrenched corporate power at the top.

For all of his talk of fairness, Modi is doing little of this. If he does not change course, the Billionaire Raj is only going to grow stronger. [Link]

Piketty and Chancel write:

Under Prime Minister Jawaharlal Nehru (in power from 1947 to 1964), India was a statist, centrally directed and regulated economy. Transport, agriculture and construction sectors were owned and administered by the Central Government, commodity prices were regulated and the country had important trade barriers. Nehru’s followers, including Indira Gandhi’s (1966-77 and 1980-1984) prolonged these policies and implemented a highly progressive tax system. In the early 1970s, the top marginal income tax rate reached record high levels (up to 97.5%).

It is difficult to call a top marginal tax rate of 97.5% progressive in many ways, except if one believed in an usurious State.

Once India’s so-called liberalisation started, it did boost average incomes:

Real per adult national income growth, which has more sense from the point of view of individual incomes than commonly used GDP, significantly increased after the reforms. It was 0.7% in the 1970s, 2.5% in the 1980s, 2.0% in the 1990s and 4.4% since 2000 (Figure 1). However, little is known on the distributional characteristics of post-2000 growth.

When national incomes accelerate, top income earners see their incomes rise faster (see their Figure 11 in page 245). But, India is an outlier:

Unequal growth dynamics over the period are not specific to India. Income growth rises the higher up the income distribution one proceeds in China, in the USA and in France as well. India’s dynamics are, however, striking: it is the country with the highest gap between the growth of the top 1% and growth of the full population. It is also interesting to note that bottom 50% of earners grew three times more slowly in China than in India, the middle 40% six times more slowly than their Chinese counterparts, but that the incomes of those at the very top of the Indian have grown at a faster pace than in China.

Looking at figures 12 and 16, it is clear that India did a far better job of distributing its poverty between 1951 and 1980 than it has done distributing its prosperity between 1980 and 2014 (Pages 26 and 29 respectively). At 49%, the middle 40% had a much better share of total income growth in the period between 1951 and 1980 than it had in the period between 1980 and 2014 (23%).

At one level, this should not be surprising. The annual Credit Suisse Wealth report (forget which year – 2015 or 2016) had mentioned that India had extreme wealth inequality. Then, this news report in ‘Business Standard’ in July this year mentioned that the ratio of executive compensation to median worker pay was 1200 times dwarfing the 276 times in America!

What the present NDA government is doing is somewhat similar to the equality that India had achieved before 1980. Everyone was relatively poorer. No one was extremely rich or very very few. This government has so far managed to steer clear of crony capitalism, as far as we know and at least not in a big way. On paper, it is going after big defaulters on public sector bank loans. Even as it hurts (assuming it is true) the big guys, the sad truth is that it may be hurting the small guys more!

The current NDA government has not been able to boost incomes at the lower income strata. If anything, its well-intentioned (or so we believe or that they would like us to believe) policy measures such as the Note-Ban exercise of 8th November  2016 and its implementation of a nation-wide Goods and Services Tax seem to be hurting the rural poor and small businesses more than it is hurting the richer and larger businesses and urban dwellers. In that sense, paradoxically, this government too might be contributing to worsening inequality. It is trying to make up for it with harsh rhetoric directed at the rich and big corporations and tax investigations. In other words, India might be having the worst of both worlds.

The world over, growth vs. distribution trade-off challenge is a real one. One needs to grow the pie to divide it among many. But, growth would see inequality rise as those who are in the centre/core benefit from opportunities that growth throws up before those opportunities percolate to those in the periphery and poor. The big re-distributor is the government with special schemes and subsidies for access to education and health for the poor and low income classes.

This is where India may be failing big. In other words, more than economic policy reforms or more redistribution, India’s challenge in confronting its stark inequality lies in governance reforms and greater accountability in government – both at the Ministerial and at the bureaucratic level. For example, read this interview by Professor Devesh Kapur in THE HINDU in July and weep.

Who will bell the cat?

It needs a politician who is prepared to be in office just for a term or even less but is clear about what he or she needs to do and is determined to do them.