Breaking the hiatus: RBI, Michael Pence

I had joined the IFMR Business School as its Dean, as of October 4.  It is located at Sri City in Andhra Pradesh. I arrived at Sri City campus on October 1 and the last week has been a blur. But, blogging is a refuge. I think I had mentioned it once before.

You can watch the interview I gave to ET NOW Television on RBI monetary policy decision on Friday. I was part of a panel. I did not fault their rate decision on Friday. It was a fine call. They took their chances. The stock market appeared not to like it. But, it has fallen the day before too. In any case, it was so rich in valuation that it deserved to fall. Establishing causation for such short-term action when the market was anyway overvalued is problematic. Did the market expect RBI to cut rates or raise rates?

But, I felt that they should have offered more substantive comments on the IL&FS, if not on Friday, but on another occasion.

Before the interview, I managed to go through the monetary policy report and the press statement in the long car ride from Chennai city to Navalur in Kancheepuram District (OMR).

Michael Pence’s speech on China requires careful reading. I had not done so yet. It is an  important and calculated escalation.

We can do without headlines of this nature. The Federal Reserve Chairman does not exist to serve the stock market investors.

 

Is India creating jobs?

The controversy over how many formal sector jobs does India crate in a year will never die down or will never be allowed to die down because it is a useful political football. It is up to the rest of us to sift the facts from polemics.

In October 2017, Mahesh Nandurkar of CLSA wrote a good piece on corroborating the jobs number by analysing the job creation by the 900 Indian companies that CLSA tracks. The numbers were healthy and lent credence – at least partially – to official claims.

In April, the Employee Provident Funds Organisation began releasing monthly data on EPFO joiners and leavers, etc. In May 2018, Mahesh wrote this piece in ‘Business Standard’. He writes:

If one reasonably extrapolates the latest available i.e. 2012 NSSO data, India’s total working population would be 500 million; of which 220 million is farm sector and 280 million is non-farm. Of the non-farm population, 70 million is formal and the rest is informal. Assuming similar proportions, of the 10-11 million new jobs needed per year, the number of formal jobs needed would be about 2-3 million/year.

Interestingly, he lists the job-creation incentives that various State governments have provided. Actually, that is sensible. A.K. Bhattacharya had, recently, listed state governments’ reform measures on land and labour.

Recently, several Indian state governments, such as Jharkhand, Gujarat, Andhra Pradesh, Karnataka and Madhya Pradesh have announced significant employment-linked incentives for garment manufacturers, considering labour intensity associated with the segment. These states offer employee cost assistance, covering up to 75 per cent of labour costs for a garment unit for as long as seven years. Jharkhand government, for example, has introduced a policy to give wage compensation of Rs 7,000/month (vs minimum wage of about Rs 8,500/month) for a period of seven years for every new person employed by a garment firm. Besides, there is a one-time support of Rs 13,000/ person as cost of training an employee that is granted. Similarly, the Gujarat government has introduced a policy for garment firms whereby the state government would provide up to 50 per cent of wages for a period of five years as payroll assistance.

He says that these schemes would have had the effect of formalising informal jobs and, in that sense, they are not new jobs. Pulak Ghosh and Soumya Kanti-Ghosh had addressed this partially by omitting all new EPFO joiners above the age of 26, in their study. May be, that is not enough and that divining job creation from EPFO records might still overstate true job creation. So, Mahesh says that one has to wait for at least two more years before EPFO data become a reasonably stable and reliable source for new job creation.

We must remember that Ghosh and Ghosh have also excluded EPFO joiners based on amnesty schemes and have excluded all those who had a single break in contribution in the data. Yet, as Mahesh says, State governments’ special job creation incentives might be one-off or non-continuous sources of job creation. To that extent, EPFO data might overstate true job creation.

That said, he says he would end with his favourite anecdote. It is an important one:

Currently in India, about 22 million new cars and two wheelers are sold every year. About 40 per cent of these sales are replacement demand. After removing the replacement demand, about 13 million first time car/two wheeler buyers are entering the market. If employment creation is such a big issue, where are these 13 million people coming from?

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by promarket.org, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

Finance-neutral potential growth

There is a very interesting MINT Street Memo from the Reserve Bank of India which tries to estimate the ‘Finance-Neutral’ or ‘Credit-Neutral’ output gap whereas conventional analysis uses ‘Inflation’ as the basis to estimate the output gap or, by implication, potential growth.

Like the ‘Non-Accelerating Inflation Rate of Unemployment’ (NAIRU), this one is the Non-Exuberant Asset Prices Rate of Growth (NEAPRG) or Non-Excessive Credit Offtake Rate of Growth (NECROG). According to the authors, it is 7% in India. India’s economy has closed the output gap two or three quarters ago and the output gap may even be positive, according to the authors. On this basis, the Reserve Bank of India may be justified in raising the policy rate at its next meeting! Not that they are short of reasons for doing so.

Indirectly, this underscores the point that Gulzar Natarajan and I made in our book, ‘Can India grow?’ that India’s sustainable growth rate is far lower than most of us would like to believe.

When I shared the details of this Mint Street Memo with my friend Srinivas Thiruvadanthai, he said that the ‘Balance of Payments’ or ‘Current-Account Neutral’ potential growth could be closer to 6% in India! Sobering.

The Mint Street Memo No. 14 can be accessed here.

India’s ‘perfect’ financial storm

Andy Mukherjee has been tracking IL&FS zealously and professionally. That the news of their financial distress broke out as the world was ‘celebrating’ the tenth anniversary of the collapse of Lehman Brothers is indeed a rather remarkably unfortunate coincidence.

Andy Mukherjee’s columns on their travails can be read here, here and here.

Andy’s piece on RBI’s five messages – including one message to itself – is an interesting piece. IL&FS’ distress again reflects poorly on RBI’s regulation because they are regulated by the central bank:

All of India’s finance industry ought now to feel the RBI’s regulatory heat, including Infrastructure Leasing & Financial Services Ltd. and its empire of 169 subsidiaries, associates and joint ventures. The IL&FS Group is systemically important, though it doesn’t take public deposits. Now that the infrastructure lender is defaulting on debt, it’s become painfully clear that the RBI hasn’t done enough to rein in that institution’s freewheeling ways. [Link]

However, his column was about the non-extension of the tenure of Rana Kapoor, YES Bank Chairman & Managing Director by RBI.

While many have applauded the RBI decision on YES Bank C&MD’s tenure being cut short, some have still questioned RBI’s terse communication on the matter, without explaining the decision. See Amol Agrawal’s blog post on that.

Back to IL&FS. Shankkar Aiyar wrote that fear has no bottom. Well, fear has. The worst that value can go to is zero. It is that exuberance has no ceiling! On Friday, 21st September, for a while, it did appear that fear had no bottom in Indian stocks. Intra-day drop was nearly 1500 points. Heavy buying by institutions stemmed the rot but that is no often good news. Indeed, the pressure is bottled up to be released later. On Monday, the Sensex Index shed 546 points (1.46%).

The shareholding of IL&FS should make us all worry about LIC. They have bailed out disinvestment from ONGC; IDBI Bank and they are now neck-deep at IL&FS. Who will shore up IL&FS Equity Capital? What is the true portfolio value at LIC?

ILFS shareholding

This is the source for the above chart. This story captures the importance of IL&FS to the Indian debt market.

Is the IL&FS situation a wake-up call for the Insurance Regulator? But, LIC is 100% government-owned. So, effectively, it is Government of India’s fiscal risk. To the extent that IMF re-calculates projected budget deficit for China to take into account the contingent liabilities of the Central Government in China, shouldn’t it be doing the same for the Indian government’s contingent fiscal liabilities? Of course, the topic of China, IMF and its Article IV report is the subject of a separate blog post. I am digressing.

Finally, I met Saurabh Mukherjea (ex-Ambit Capital) in August when we both were speakers at a conference in Coimbatore. We spoke that night by phone on the vulnerabilities of India’s shadow banks since they had become both aggressive lenders and borrowers in the wake of the torpor of public sector banks. He did warn me then India’s NBFC would be the next domino. He was prescient. Again, on September 8, he had written this post about India’s exposed financial system and it was published by moneycontrol on September 23.

The oil price dynamics

I was in Dubai on Sept. 20-21, not to watch the Asia cup in the Dubai cauldron (temperature was reaching 41 degrees when I landed on the afternoon of the 20th) to give a speech at the Treasury and Money Managers’ offsite of the Aditya Birla Group. I listened to some excellent presentations by Mr. Bahram Vakil on the Insolvency and Bankruptcy Code, by Ms. Amrita Sen of ‘Energy Aspects’ on the oil price dynamics and by Rajdeep Sardesai on the 2019 elections.

The oil price supply situation remains tight. Saudi Arabia is not pumping as much as they claim that they could. It is only about 10.5 million barrels per day. They claim to have the ability to pump out 12 million barrels per day. But, they are not. There is a risk that oil price could temporarily spike to the three-figure mark in the fourth quarter.

While electric vehicles are only making slow progress, the oil industry has not invested much in exploration or in distribution. At the same time, demand had almost touched 100 million barrels of crude oil per day in 2017 – some eight years ahead of earlier projections. Here is the latest IEA report that backs this up. Third and fourth quarter demand in 2018 is quite high, topping 100 mbpd in the fourth quarter.

With the American administration serious about its sanctions on Iran, there is the potential for a 2 mbpd shortfall in the fourth quarter. See Bloomberg story here.

This does not sound like good news for India.

Employment creation in India

Apparently, Surjit Bhalla and his co-author (Tirthatanmoy Das) have put up a paper on the website of the Economic Advisory Council of the Government of India on job creation in India in 2017. They estimate it to be 22 million jobs. That seems to be on the high side. Commentators have their knives out to attack the estimates. The protagonists and the antagonists are politically motivated. I am yet to read their paper. But, I have seen two critiques. One by Professor R. Nagaraj and the other in Hindustan Times which was supposedly second of a five-part serial on Indian labour market.

Professor Nagaraj analyses the claims of Bhalla and Das in four dimensions. The third dimension is that of generating formal employment estimates from the data provided by the Employee Provident Funds Organisation (EPFO). Prof. Nagaraj’ critique is stale and wrong because of the work of Pulak Ghosh and Soumya Kanti Ghosh had taken them into consideration in coming up with their conservative estimates of formal job creation from EPFO data. They have excluded EPFO enrolment through amnesty. They have excluded those who were above 25 years of age. They have dropped those where even one contribution was missed. I have written about their work here and here. That Prof. Nagaraj rehashes the same critique is a reflection of both sloppiness and bias.

Key sentences in this piece tell me that the authors are offering opinion and not analysis. Pulak Ghosh & Soumya Kanti Ghosh’ estimates based on EPFO were conservative and passed the test of rigour. These authors, when discussing their work, say that Ghosh & Ghosh were criticised. They leave it at that. Criticised by whom? For what? and how rigorously? Were the criticisms correct and reasonable?

That throwaway line dilutes the seriousness with which one should take the entire piece although one cannot and does not rule out political and, otherwise,upward bias in the work of Bhalla +1.

The first part is here (can be safely skipped) and the third part is by Manish Sabharwal. Those who have not read Manish’s articles on Indian labour market before can find them all neatly recapitulated in that piece.