Industrial Recovery through indigestion

There has been semi-serious and semi-funny news-stories on how the sale of antacids and digestive enzymes including PPI drugs (part of the five digit product code: 21002) had contributed to industrial production growth in India in November. The official press release of IIP for November 2017 is here.

For example, in November, the Index of Industrial Production (IIP) rose 8.4% y/y. Nearly 2% of was contributed by goods in the five digit categories 21001 to 21009. They have a combined weight of just under 5% in the IIP. In other words, nearly 25% of IIP growth in November came through the sale of products encompassing the five digit product codes 21001 to 21009. Interested readers can check out the document put out in March 2017 for the goods that are part of the five digit codes 21001 to 21009, when the revised IIP with a new base year was introduced.  But, the story of antacids and digestive enzymes is more interesting.

Digestive enzymes and antacids (incl. PPI drugs) are part of these products with a weight of 0.22% only. Yet, it has been punching way above its weight in recent months. ‘PPI’ stands for Proton-Pump Inhibitors.

If one went to the website of the Ministry of Statistics and Project Implementation and click on the link to IIP, one can download the last eight monthly press releases of the IIP from April 2017 to November 2017.

In the last eight months, this category has figured every month among the highest contributors to industrial production growth.  Here is the table:

Indigestion contribution to IIP growth

The figures in the second, third and fourth columns are taken from the monthly press releases of IIP. The fifth column is column (3)/column (4).

Well, demonetisation, introduction of GST, the Insolvency and Bankruptcy code, Real Estate Regulation Act, Benami Transactions Act, Introduction of Aadhaar and the insistence on linking Aadhaar to everything else and the rumours spread by mischief makers that the government was angling for depositors’ money in bank accounts could have all contributed to a lot of indigestion and hence the rise in the sale of antacids and digestive enzymes!

Or, it could be that political leaders – that of BJP included – might be suffering from a lot of indigestion because of frequent elections and the anxieties they generate.

Jokes apart, the overall two digit category, ’21’, stands for pharmaceutical products, medicinal chemicals and medicinal shampoos, etc. Its weight is 5% in the IIP.

6-month MA of annual growth in '21' of IIP

In general the annual growth in production of ’21’ – Manufacture of pharmaceuticals, medicinal chemical and botanical products – has picked up since the NDA came to office. It is not as if this big surge in production in pharmaceutical products is to meet exports. Export growth in the category, ‘Chemicals and Related Products’ was 3.0%, 1.4% and 2.4% for the fiscal years 2014-15, 2015-16 and 2016-17.

So, the bulk of the production of medicines is for internal consumption. That is bad news, in a way.  Indians need to pay attention to preventive health – hygiene, sanitation, eating out, eating late, eating fat and rich food, sweets, eating unhealthy food, kept in the open, near open drains with swarming flies, etc. The multiplier benefits of good health for the economy will be tremendous. Even if the product category ’21’ does not contribute to growth in IIP because of that, it will show up in other categories of IIP.

The government too, on its part, should become mindful of the almost unceasing stream of uncertainties and stress it can cause with its excessive zeal on tax revenue mobilisation, on change of rules and regulations midstream (solar industry is a case in point), etc. All these cause stress, indigestion and hence the rise in the sale of antacids and digestive enzymes!

Good health is linked to good governance, stable regulatory environment and ease of doing business.


Schumpeter and creative destruction

As we approach the end of the year, one is tiring of many things. Blogging is one of them. My friend Gulzar Natarajan alerted me to a couple of sentences in the article by Ricardo Hausmann on R&D in large corporations:

Joseph Schumpeter stumbled on to these two approaches at different points in his life. When he published The Theory Of Economic Development in 1911 at age 28, he emphasized that innovation came from the spirit of entrepreneurs in a process of creative destruction. By 1942, when a 59-year-old Schumpeter published the book Capitalism, Socialism, And Democracy, he realized that a lot of the innovation was coming from very large corporations that faced rather limited competition. [Link]

Public policy must be relentlessly focused on enabling firms to start reasonably ‘big’ and to be able to grow bigger. Subsistence entrepreneurship is romantic but will not move the economic growth needle much at all. It is disguised unemployment.

Demonetisation update 34: from the annual report of OCL India

India’s installed cement production capacity is 450 million metric tonnes (MMT) – second largest cement producer and consumer in the world. Actual production has grown from around 230 tonnes in 2012 to around 280 MMT in 2016-17. That is 21.7% growth in five years and it is 4% CAGR. In fact, in 2016-17, there was a slight decline from 284 MMT in 2015-16 to 280 MMT.

Given these, numbers – cement and tyre production in 2016-17, one can deduce that there has been a considerable growth slowdown.

Wrong message from Financial Conditions

Goldman Sachs has come up with its new revamped G-10 Financial Conditions Index (sorry, no link is possible). The biggest problem is that it is pro-cyclical. A bit like the Credit Rating Agencies whose ratings are the best when the asset valuations are the highest and hence the risk is at the highest.

If the strength in the bond market and in the stock market is very high  – lofty valuations and tight spreads (credit spreads) – then the risk of a correction and financial conditions becoming tighter is also the highest at these levels. Therefore, as asset prices keep rising, financial conditions going forward come under increasing risk.

Financial conditions are the most favourable for growth when they are extremely tight. In other words, they cannot get any worse. They can only keep getting better. That is why 2009 was the best to invest and was also heralding the recovery (no matter how tepid it was).

This is a bit counter-intuitive. But, it needs to be grasped. Mainstream institutions have not grasped them because their incentives are not aligned to grasping this truth. Their business models would collapse, if they did so, perhaps. I do not know.

Unjustified Indiaphoria

A friend sent me a message this morning on WhatsApp:

“Rupee at 63 handle, Sensex over 30k, nifty over 9300! Too good to last? Methinks not!”

My response:

“Sorry, Sir. I am afraid so. Economic fundamentals do not justify them. I will be happy to short them all, if I can.”

That response was given as someone who was the Chief Investment Officer of a Wealth Manager and one who is a natural contrarian (with all its attendant risks and pitfalls) when it comes to investing.

In other words and in the interests of brevity, I belong to the school that believes in buying when no one has a good word to say on the market and sell when everyone is a cheerleader for a market. India, more or less, belongs to the second category.

In fact, its fundamentals are not great too. Its economic growth rate is exaggerated. The current real GDP growth is close to 6% or slightly lower. I had a blog post on it yesterday. Corporate earnings are improving but gradually.  On that, this is what I heard from a stock broker six weeks ago:

Despite an improvement in the economy after the demonetisation shock, the earnings downgrade cycle has continued. In the past month, consensus Nifty EPS for FY18 has seen 6% downgrade and that for the wider BSE100 has seen 5% downgrade. Commodity sector companies have seen the highest upgrades whereas the large downgrades were concentrated in sectors such as banks, telecom, and consumer discretionary. Consensus estimates still imply doubling of profit growth (ex-PSU banks and metals) to 15% in FY18, which looks optimistic to us, given limited scope for margin expansion.

Leather industry hubs in Uttar Pradesh have recently come under a cloud. Someone should visit them and check out the fallout of the ‘Cow Protection’ movement. Hotels are beginning to feel the fallout of the alcohol ban. See this article in FT (could be behind a paywall).

Then, the government’s orders on stents are backfiring. Pharma companies are fighting back. The government order on price controls and its rediscovery of the price controls as a public policy tool is rather unfortunate. My column in MINT yesterday was largely built around this. The consequences are not so much unexpected as they are unintended.

Reliance Jio has placed the financial health of many of its competitors under a question mark and the Reserve Bank of India has warned the banks of the risk of exposure to the telecom sector. Usually, public warnings mean that the situation is no longer a risk but a reality. It has asked banks to set aside higher provisioning.

E-Commerce start-ups are seeing big erosion in valuation and investors are marking them down in their portfolios. Further, there are other stories that sap investor morale and sentiment. In general, Indian PE/VC investing is a bit like Hotel California. You can check out but cannot leave.

Overall, bank credit growth to industry is contracting. Non-performing loans are holding back credit growth and the revival of capital formation in the country. This story is not an exaggeration. The extradition order on Vijay Mallya is a sideshow. Non-banking sources of finance are picking up market share, surely. But, they cannot be accessed by smaller firms. Not surprisingly, this article mentions that the International Monetary Fund, in its latest World Economic Outlook (April 2017), does not expect a big jump in India’s investment share of GDP.

Government’s tax and black money collection drives – laudable though they are as to purpose but condemnable as to process – are unlikely to help investment sentiment.

Notwithstanding (or, because of?) the Bharatiya Janata Party (BJP)’s political successes in elections including in Delhi, there is actually economic malaise in the country.

Financial markets and asset prices are largely a sideshow, supported by an equally unjustifiable and myopic global market sentiment. That is a separate story, however.

On robotic conclusions on robots

Following up on my earlier post on Branko Milanvoic’ blog post, I ran into the blog site called ‘Bank Underground’. It is a platform for Bank of England economists, analysts, et al, to post their comments on various issues that may or may not agree with the official policy of the Bank of England. Very good platform, in that sense.

I came across this somewhat optimistic post on the impact of robotisation. This one line, of course, does not do justice to the post which is, on the whole, quite thoughtful. It has many links. I clicked on one of them that took me to a FT Alphaville post of November 2015. In turn, it led me to a speech (‘Labour’s share) by Andrew Haldane in November 2015 and a piece by Martin Wolf in Feb. 2014. I read the latter and have downloaded the former.

Martin Wolf’s piece itself has many links. His final point is well made:

Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we must change them. [Link]

But, that is true of a lot of things. Most prominent is money, for example. Or, may be, fast cars. They cannot kill or destroy character or whatever, on their own. It is supposedly up to us. But, that also assumes a lot of things about human abilities at self-control that years of research have shown us to be incapable of.

In his famous TED talk, Dan Ariely reminds us that we do not know our own priorities and that, when the decision becomes a trifle complex, we fall back on the default options chosen for us. That is what gave rise to the whole concept of ‘nudge’. But, ‘nudge’ can be both argued for and against.

At some level, ‘nudge’ is playing God. It assumes that people do not know their preferences correctly. But, that includes the people and authorities nudging too! Second, it can be, with some justification, deemed elitist and even manipulative. All, supposedly, for good reasons and for good causes. What if they are used for wrong ends?

So, giving us tools that we do not know how to handle is not a good thing. Therefore, some tools are better off being inside the tool box.

That reminded me of the quote attributed to Christopher Hitchens:

Everyone has a book inside them, which is exactly where it should, I think, in most cases, remain. [Link – btw, the link explores how the deceased writer Christopher Hitchens came to be associated with this pithy and witty observation]

I had left a comment on the Bank Underground website under the post on Robot Macroeconomics:

Just three minor points worth thinking about or keeping in mind:

(1) We do not know if jobs would really be lost or not. Assuming they are not, is it also possible to state that robotics would not come in the way of creation of jobs? In other words, what would be the counterfactual in terms of job creation but for robotics? Can we even guess that?

(2) In the developed world, robots could firm up resistance against immigration from developing economies that have a surplus of labour.

(3) It could also lead, through trade, to job losses in the developing world if robots enable developed world to regain competitiveness and they use their muscle to prise open markets for various goods and services in the developing world. The employment hit to developing economies will arise not only from lost export possibilities but also from having to compete with cheap imports, enabled by robots.

Lawrence Mishel’s blog post in the Economics Policy Institute (ht: Martin Wolf’s article) is hard hitting and rigorously argued. He rejects the argument that technology is responsible for inequality and instead points the finger at compensation in the financial sector and executive pay:

…. rising executive pay and the expansion of, and better pay in, the financial sector can account for two-thirds of increased incomes at the top. If superstar actors, musicians, and others were driving growth at the top we wouldn’t see the close association of top incomes with the trajectory of the stock market, especially during the last two crashes….

… On their specific claim about executive pay it is true that such pay grew as firm size grew in the last two decades but it is also true that firm size grew for many decades before that without any escalation of executive pay. [Link]

His detailed work that proves these points can be found here. Regular readers of this blog would know that I am very sympathetic to these points of view. Technological change may not be the direct cause of it but capitalists might find that a handy instrument to beat the workes with, heightening their sense of insecurity and curtailing their own wage demands. Agree that correlation is not causation but an adjunct role for technology may be appropriate.

I was quite tickled to read this observation by Martin Wolf that Lawrence Mishel rejects that technology changes caused wage inequality. I had read this morning an interesting article (ht: TCA Srinivasa Raghavan) as to how Ronald Fisher, the father of modern statistics, could not accept that smoking caused cancer. Randomized experiment was not possible in establishing causation from smoking to cancer. Hence, he could not accept that smoking caused cancer. Establishing causality in many social phenomenon is very hard. Too many other factors at play and very few of them can be controlled or allowed to remain unchanged. More often than not, temporal sequence passes off for causality.

Suffice to say that this topic is going to become very important in the coming years and hence, we need to keep reading and keep expanding of our knowledge of past experiences, patterns, etc., on the introduction of technology and the impact – both general and relative – on workers, wages and on the society. Facile conclusions and generalisations need to be avoided. More than a touch of humility is needed – to avoid arriving at conclusions but to keep minds open for understanding the phenomenon and to abandon one’s policies when evidence and trends change.

If past were the (only) prologue for the future, there would be no need for intelligence.

An interesting postscript to conclude this long blog post:

The legend of how a union leader told an official in a car manufacturing company who was proudly showing off his new robots to the workers’ leader that robots would not buy the cars that his company was making, has been retold many times with everyone adding their own bells and whistles. This link gives the full monty behind that legend. It is authentic but happened more than six decades ago. There was one real character involved – Walter Reuther – leader of the automobile workers’ union. But, his counterpart in the conversation was not Henry Ford II.



On Milanovic on robotics

Branko Milanovic has a blog post on robotics. He calls these three fallacies:
  • Labour displacement by robots – more short-term
  • Ability to predict our needs – they may expand making labour and robots co-exist
  • Limits to raw materials.
But, are they unreasonable, based on the trends in the last three decades?:
(1) Jobs may not be lost; what about jobs creation foregone? Wage growth? Is the trend of last thirty years not a warning of the consequences of capital displacing labour. If there is more of it, then is it wrong to fear consequences of robots on employment and/or wages?
Don’t these have social consequences as well?
(2) Is he confusing between needs and wants? Have our needs changed much? May be, our wants have? May be, marketing has created many wants which did not exist before and made us believe that they are needs. Has Milanovic read the ‘Joyless society’? The boredom of prosperity and affluence could become even more oppressive.
(3) Limits to raw materials – if we expand raw materials to include clean air, water, lakes and rivers, flora and fauna – our growth model has shown that it pushes against these limits sooner than we expect or reckon with. We are already feeling the impact. What if robotics pushes growth limits even further? What kind of growth would it create? Will we allow creative destruction to play a role? Or, will there be a greater demand for protecting those businesses displaced and threatened by the arrival of robotics? Then, what happens to productivity, economic growth and innovation in the overall economy?
(4) Lastly, will robotics help alleviate or complicate human psychological and behavioural limitations? Groupthink, herd mentality, elitism, cognitive dissonance have been amply on display in the response to the crisis of 2008 and in the US Presidential elections. Robotics or any technology can do nothing to help these. If anything, they can complicate them further.
(5) Humans do not understand risks that well. We neither anticipate them nor are we capable of assessing their magnitude and impact where we correctly anticipate them. Faced with unknowns, it is good to be on guard rather than be complacent. If the fears turn out to be misplaced, then adjusting to a positive surprise is a lot easier than the other way around.