Salvator Mundi and stock market bubbles

Before Leonardo da Vinci’s painting, ‘Salvator Mundi’ went up for sale, this is what the New York Times wrote:

This is your chance to buy a genuine Leonardo da Vinci painting. The last da Vinci painting in private hands, “Salvator Mundi” (Saviour of the World), is expected to fetch $100m at a Christies’ auction in New York. Sotheby’s sold the painting, unaware of its true provenance, in 1958 for £45. In 2011, the work was confirmed as a genuine Leonardo and unveiled publicly — the first discovery of a painting by the artist since 1909.  [Link]

Eventually, an unknown buyer paid USD450 million for it. This comes days after Christie’s sold some impressionist art works for USD479 million. [Link]

In the meantime, Greenlight’s David Einhorn thinks that most of the problems that caused or were raised by the crisis of 2008 have not been resolved. He is right.

Conor Sen, writes for Bloomberg that the big five technology companies could destroy the tech. ecosystem. He too is likely right.

On Monday evening, Venezuela missed a deadline to make an interest payment on its bonds and thus officially defaulted.

India’s Reliance Communications missed an interest payment to China Development Bank and thus has ended up in default. RCom’s Anil Ambani has managed to do what the Indian governments in the past could not do:  hurt China’s interests! Aircel may have defaulted too.

Ajit Ranade’s piece on coal shortages in power companies confirms that India is leader nonpareil in sub-optimal functioning and turning simplicity into complexity.

India’s DMart is more expensively valued than Walmart. Indian IPOs in general are too richly praised to be sustainably rewarding to investors. [Link]

Rakesh Jhunjhunwala says that there is lot of froth in Indian IPO market. He thinks that the Indian stock market may experience a sharp, swift correction and seems to be bearish on the rupee to boot, for 2018 although he presents it differently. [Link]

Andy Mukherjee has a lovely piece on how (Mukesh) Ambani is taking on Amazon in India. A great line:

The e-commerce industry, including online food delivery, is just $15 billion a year, or 40 percent less than Alibaba Group Holding Ltd.’s Singles’ Day sales in China. [Link]

Will be an invaluable case study for B-School students.


Credit where credit is due

The surprise news on Friday morning was that Moody’s Investor Services upgraded India’s credit rating to Baa2 from Baa3 and changed the outlook to ‘stable’ from ‘positive’. About a year ago, S&P had ruled out an upgrade to India’s sovereign rating for at least two years. Their rating is BBB-, similar to Moody’s pre-upgrade rating of Baa3.

The Government of India and its Chief Economic Advisor have, on several occasions, criticised the rating agencies for their slow response or non-response to India’s improving or sound fundamentals. They may have a point because for foreign investors, the ratings agencies’ decisions are useful signposts, whether correct or not, justified or not. They do not have the time to go into depth. They go by the so-called ‘due diligence’ done by the rating agencies.  To that extent, the optics of a good rating matters.

But, philosophically, the Government is better off doing its job and letting rating agencies arrive at their conclusions at their own will and pleasure. In the long-run, it is only a marginal factor. But, politicians in democracies with regular elections (with elections to States, it is worse, in India) are anything but long-term.

The timing of the Moody’s upgrade is a surprise because the day before, India’s Finance Minister, speaking at a Morgan Stanley forum, had said,

“No pause (on fiscal consolidation) but challenges arising from structural reforms…could change the glide path,” Jaitley said at the annual Asia Pacific meeting organised by Morgan Stanley in Singapore. [Link]

In plain English, the Government of India is all set to miss its fiscal deficit target for 2017-18 and there might well be a slippage in 2018-19 compared to the target set out earlier. Whether it is good or bad and whether it is for the right reasons or wrong reasons are separate debates. But, that is the truth and hence, Moody’s might be a bit embarrassed about its timing.

Further, the Government of India has sought a special dividend from the Reserve Bank of India to pay for its bank recapitalisation. All told, that may not be deemed a credit positive. Employees’ union in the central bank has opposed it.

All that being said, the Government of India deserves praise (I am not being cynical here) for managing the international optics better in recent times. It earned a 30-ranking jump in the ‘Ease of Doing Business’ ranking thanks to the implementation of the Goods and Services Tax (could have been done far better) and Insolvency and Bankruptcy laws. The latter, for all the gaming being attempted by borrowers, is somehow, going well and as one would expect. There is learning and there is a quiet determination on the part of the creditors to use it to bring wilful defaulters-debtors into line.

Whether we are government supporters or not, any observer has to acknowledge that India’s business environment is undergoing a structural transformation, for the better. The big boys are being dragged, ‘kicking and screaming’ into better behaviour and not rely on their connections. Well, some are above the fray, still. That has to wait for some more time, I guess.

So, the government deserves credit for improving the optics. They do matter. Further, India’s credit rating at Baa3 was a bit harsh compared to the single A rating that China enjoys with its own poor public debt and fiscal deficit dynamics. Ask the IMF or check out my brief for the Gateway House published in September.

The relevant tables are worth re-publishing. IMF, in its Article IV consultation report, generated the gross public debt and fiscal deficit dynamics for China up to 2022. Contrast that with what the IMF estimated for these two parameters one year ago. The two tables are reproduced below:

IMF_China public debt and deficit dynamics_2017

Source: * Projected figures | Source: People’s Republic of China 2017 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2017 (Table 1, page 43)

IMF_China public debt and deficit dynamics_2016.png

Source: * Projected figures | Source: People’s Republic of China 2016 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2016 (Table 1, page 39)

Fiscal deficit minus expected revenue from land sales equals net lending/borrowing in the above tables. In other words, properly accounted fiscal balance and public debt are worse than India’s general government (centre + states) fiscal balance and public debt.

The table below provides corresponding figures for India on general government deficit and debt to facilitate comparison.

IMF_India_public debt and deficit dynamics_2017

* Projected figures | Source: India 2017 Article IV consultation—press release; staff report; and statement by the executive director for India, International Monetary Fund, February 2017 (Table 7, page 62)

Despite the recent downgrade in May this year, China has an A1 credit rating from Moody’s.

As for India, whether it would result in enhanced foreign investor interest in Indian stocks and bonds, I am not so sure. Most of them would be inclined to look through the upgrade in the light of recent data in India. The Indian rupee has strengthened almost a full percentage on the news. It is trading below 65 to a (US) dollar. There is room to think that this is as good as it gets for the Indian rupee.

India’s October inflation and trade data were both disappointing and worrying.

India’s consumer price index (CPI) inflation and wholesale price index (WPI) came in higher than expected. At 3.6%, CPI inflation was slightly higher than  market expectation of 3.5% and vs. 3.3% in September. WPI inflation also recorded an annual percentage change of 3.6% but it was well above  market expectation of 3.0% and 2.6% in September.

India’s trade deficit for October was much higher than expected. Exports at USD233.6bn was 1.6% lower than the level in Oct. 2016. Imports were USD371.2bn in October, about 7.65 higher than it was in October 2016. Oil imports rose sharply in October 2017 over October last year (+27.9%) and oil imports were also higher in the period between April – Oct. 2017 compared to April – Oct. 2016 (+20.2%). It is mainly the oil price effect and there has been no big  change in the volume of import.

Non-oil imports were higher by 2.6% in Oct. 2017 vs. Oct. 2016. But, for the April – Oct. 2017 period, they were sharply higher (22.8%) over the same period last year.

Merchandise trade deficit was USD86.1bn for April – October 2017 vs. USD54.4bn in the same period last year. Including services, the deficit was USD52.6bn vs. USD22.1bn in the same period last year. Source: See the press release from the Ministry of Commerce.

In sum, the quick and sharp jump in WPI and CPI and the Oct. trade numbers show how weak the foundations of the Indian economy are, in terms of productivity. It is an economy that is hemmed in from many sides – production, distribution, infrastructure and governance. Long way to go.

Neelkanth Mishra of Credit Suisse wrote, after seeing the October trade numbers, that, “the fog on the economy now extends to the currency as well.” Oh, well.

So, the Government of India should count November 16 as a lucky day.

Demonetisation update 36- loss of sense of humour and more

Manish Sabharwal wrote:

I’d like to make the case that demonetisation made India a better habitat for formal job creation for five reasons: Rs 18 lakh crore new lending capacity, 7.9 crore new monthly digital transactions, 3 lakh crore new financial savings, 2 per cent lower interest rates, and permanent damage to our sense of humour about the rule of law (1.5 lakh people deposited Rs 5 lakh crore, that is, 0.00011 per cent of India’s population deposited 33 per cent of total cash demonetised). Let’s look at each in more detail.

Rs 18 lakh crore new lending capacity

Without equity capital for banks and better governance in banks and demand for loans, it is a problem and not the answer.

7.9 crore new monthly digital transactions

So what? What does it mean? More revenues for the government and capricious taxmen? Again, without tax governance changes, is it good or bad? May be, even bad.

See this for example. Mohandas Pai had tweeted it.

3 lakh crore new financial savings

What exactly is it? People now put money in banks? Will some of it not be withdrawn for consumption purposes? Further, it is a duplication. He has already mentioned new lending capacity.

In any case, the overall household financial savings rate has been declining.​ We have to wait for 2016-17 data to see the overall stock and ratio of financial savings.​

2% lower interest rates

One, banks are yet to lower rates meaningfully for borrowers.  But, two, they have been lowered for savers and depositors. That is actually a negative. Three, loan demand is a function of investment demand which is only peripherally linked to lower interest rates.

The last one is probably the best – loss of sense of humour.

But, has it also come with a permanent damage to our logical  analytical capabilities?

I fail to understand the oft-repeated assertion that India has a ‘wages’ problem and not ‘jobs’ problem. Well, it has a ‘wages’ problem (they are too low and with too little worker protection, health and job security benefits) because its economy creates such low-quality and low-wage jobs.

As Manish writes,

But if our problem is wages then India needs the higher productivity that comes from structural change: Formalisation, industrialisation, urbanisation, skilling and deep financial markets.

He is partially or mostly right here. India needs to create more jobs in the formal sectors with worker protection provisions. But, were such follow-up measures thought of or did demonetisation trigger thinking along those lines?

Gulzar Natarajan and I argued for the need for such thinking. We wrote that demonetisation could be such a ‘breakout’ moment. But, the evidence that the Government is thinking along those lines is missing.

TJS George channels Kaushik Basu here and it is a worth thinking about:

A bigger worry than the demonetisation itself is the failure to recognise that it was a mistake. That is what is getting investors and businessmen worried about future policy decisions.

What went wrong with GST? – a useful discussion

Friend #1

I think Jaitley is being unfairly blamed for the plethora of rates. Every State Government had a pet commodity on which it didn’t want a reduction in rates. Partly it was fear a reduction in revenues and partly it was political. The GST rate on AC restaurant was a classic case of being politically correct and fiscally stupid. There was a built in revenue buoyancy in that the Idly at the Taj was always going to be a good deal more expensive than the street corner Udupi restaurant. The AC non AC distinction was thus unnecessary for GST purposes. It was Chidambaram who introduced a higher Service tax for AC restaurant in his 2013 budget. Now, rationalising the tax structure for restaurant service would have reinforced the image of ‘suit boot ki sarkar’ which this Govt wanted to avoid. Moreover in the interest of federal consensus the Centre humoured each State Government on its pet peeve. This was a conscious political decision for which the FM
alone can not be blamed. That said, the CBEC had its own axe to grind.

They didn’t want an altogether simpler tax structure. Jaitley couldn’t or didn’t have the gumption to overrule his officials who were constantly painting a picture of fiscal collapse.

My reactions:

But, somewhere, the buck (or, is it actually a bug, in this instance?) has to stop. Yes, States were reluctant participants for many reasons. Partly, it was about revenues for the State and partly it was about rent for the officials. Someone – and it has to be logically the leader of the whole initiative – should have risen above all these considerations and arguments and seen the big picture and have used all his rhetorical and logical skills to persuade them to go with a simpler structure from day one so that compliance is encouraged and incentivised.

Given that states were given 5-years of revenue loss compensation, then he assumes even greater moral right to articulate and ‘impose’ a vision of the above nature.

I am repeating myself: policymaking is also entrepreneurship. One must take one’s chances, at least from time to time. The GST called for such an entrepreneurship.

It has to be said that the government had proven itself to be poor in the execution of GST and the Demonetisation exercise. Of course, the latter is opposed even conceptually by many. That is a different issue.

Against this, they have a good one in the PMJDY. So, the score line is 1-2 in their favour.

Friend #1 responded:

(2) Viewing it purely through the management spectrum, this is what occurs to me on GST and demonetisation. On GST, it is principally the ‘treason of the clerks’ (to use a phrase made famous by Jagdish Bhagwati). The bureaucracy set up this Government nicely, to take a mighty fall. I mean how else can you explain a GST rate structure that had something like 13 rates? I am including those different ‘GST compensation cess’ rates for specific commodities, to the many basic rates of GST, in this context. For the bureaucracy the motive was fighting to stay relevant in the post GST regime. In the medium to long term the CBEC and the VAT administration at the State level would be rendered redundant (my guess is about 90% of the staff would not be needed). On the  other hand, you could argue with equal force that the top manager (PM/FM) knew that there would be resistance from the bureaucracy (or subordinates) but he might have thought that giving the clerks the impression that they are setting it up to fail might have secured better cooperation than doing something that would have invited complete recalcitrance. The odd civil servant can be made to fall in line. But if the whole system digs its heels in and refuses to move, there is not much that even the most powerful CEO can do in such a situation. The course correction that we are seeing now is perhaps part of that process.

On demonetisation, there were two issues. One was the obvious mistake- not realising in advance that ATMs are not calibrated to handle currency denominations of completely different dimensions to the existing ones. In every strategic decision you cannot factor in all possible consequences. There will always be the ‘unknown unknowns! The ATM problem falls under this category. But not ramping up production of new currency notes is total managerial failure. We now know from news reports that have surfaced in recent times that preparations had started in early April or May or perhaps July. It is possible that everyone along the chain went through the motions thinking that this won’t happen. Only Modi knew otherwise.

Friend #2

XXX gives much more credit to the bureaucracy than it deserves. We often think that Ministers are easy fodder for the wily bureaucrats. Trust me, it is rarely the case. I have been involved in the process of bringing VAT to the States a decade back. People do not remember it now, but the process had similar hiccups. Since it was at the State level, the media glare was not so much. Moreover, there were different experiences in different States, ranging from excellent to shoddy.

Different tax rates is quite normal in the multi-partisan polity like ours. As Sampath himself admits, every State had a pet peeve. Insisting on a single tax rate at that point, or even on 18% ceiling would have been a deal-breaker. Jaitley knew that, as also the Congress. Top Congress mandarins never wanted GST, but had to give in to the political realities. Jaitley deserves great credit for using his deep connections to fool the Congress mandarins to push the Constitutional Amendment through. Nobody else could have managed that.

The mistake was committed at the implementation level by keeping CBEC in the driver’s seat. CBEC had no experience in handling the small traders, who constitute 90% numbers but only 5% value, whereas the States had great experience in dealing with the small traders. Small things like using the Excise codes instead of the VAT codes have created so much confusion at the ground level that could have been avoided if Adhia had used the State officials more than the CBEC mandarins. Even the earlier insistence on monthly returns, and then the mismatch in quarterly and monthly returns is due to CBEC’s ignorance of VAT procedures.

All in all, it is a good thing if mistakes are being pointed out and being quickly addressed. Rahul Gandhi has woken up late as usual, but his party fully cooperated in passing the Constitutional Amendment.

Final remarks from me:

If you do not read Indira Rajaraman on India’s fiscal policies – whether on  GST or on demonetisation – you are missing something. Her recent article in MINT (published on Nov. 3) can be a case study for management students, for budding bureaucrats and for economists. It is a very important article. I cannot say it often enough and loudly enough. Just a sample here:

I still maintain that the principal reason why GST reduced economic activity had to do with the reporting modalities, not the brambly rate structure. But the rate structure was and continues to be a problem. It has undermined the very principles on which the tax reform process was built seamlessly across successive governments at the Centre, the most fundamental of which was simplification….

…. Any tax reform has to facilitate business in order to secure revenue and willing compliance. Such a configuration for the GST is still possible if the reporting frequency is shifted to quarterly for all, and voucher matching is restricted to IGST transactions.

The highlighted sentence is what I have been calling as ‘policy entrepreneurship’. What is the point of introducing a single tax if the objective was not to create a single market and facilitate better and more economic activity. It boggles and disturbs the mind to find that no one inside the government seems to have thought of that angle at all. Did they think that it would happen automatically and that they could simply pile on their burdens?

Indira Rajaraman’s article is an indirect indictment of the jump in the ‘Ease of Doing Business’ rankings for India. On that topic, read the column by Shankkar Aiyar.

Trump in Vietnam on India

India is celebrating the 70th anniversary of its independence. It is a sovereign democracy, as well as — think of this — over 1 billion people. It’s the largest democracy in the world. (Applause.) Since India opened its economy, it has achieved astounding growth and a new world of opportunity for its expanding middle class. And Prime Minister Modi has been working to bring that vast country, and all of its people, together as one. And he is working at it very, very successfully, indeed. [Link]

In this context, two tweets by Chris Balding deserve mention.

First tweet:

What do you think China’s model is if not “nationalism, protectionism, unilateralism & xenophobia”?

Caroline Freund @CarolineFreund

If Trump’s retreat into nationalism, protectionism, unilateralism & xenophobia continues, China’s model could win.

This is the second tweet:

I’m not about to say yet that Trump got Beijing to open up bank ownership, but if it comes out Trump admin played a role, will everyone who said he was played please step forward? No one? Anyone at all? [Link]

You have to believe this story because it appeared in ‘South China Morning Post’:

Chinese officials pay homage to tree planted by Xi Jinping as Communist Party chiefs get in touch with their roots.

Let me close with Ely Ratner’s tweet:

I’d like to see more reporting on the absurdity of Xi’s major speeches, contrasting his rhetoric about openness and globalization with the actual situation in China.


Demonetisation update 35 – anniversary reading

The Congress Party is fielding its top guns in criticising the government for the perceived failure of demonetisation. Rahul Gandhi had an op-ed. in Financial Times. Praveen Chakravarty interviewed Dr. Manmohan Singh for Bloomberg Quint. Praveen Chakravarty himself has a piece, quantifying the GDP impact of demonetisation. He puts it at 890 billion rupees or little under 14.0 billion dollars. The former PM then turned it into an op-ed. for MINT. From the side of the government, this piece by the Finance Minister is a good read.

Monika Halan has a good piece in MINT on how the initiative has stacked up on the objectives that the Prime Minister set. Nandan Nilekani has written on the impetus that the move gave to digitisation and financial inclusion.

The pro-anti demonetisation arguments would continue. I think the blog post I wrote on Nov. 9, 2016 still holds good. Costs are upfront and benefits would be both amorphous and spread out over the years. So, those who highlight the costs would sound more convincing than those who argue the other side.

In my view, it has been mostly about corruption and illegal black economy. The question is whether they could have been pursued through other means without the massive dislocation caused. There is the legitimate activity that generates black money because it is either not counted or they evade. The exercise could and should result in formalisation of the economy leading to better scale and efficiency and higher potential growth. Evidence on that is thin for many reasons. I do not see much government action on that front. Two, data come with a lag of year or two for us to judge the government’s efforts and success in this aspect. If there are positive movements on the formalisation of the economy with higher formal employment, greater scale and sustainable growth, then the net cost-benefit of the exercise would shift decisively in favour of more benefits than costs.

Tired, old and unhelpful

Read this Edit in ‘Business Standard’ on how India should be cautious about not ‘irking’ or ‘annoying’ China by joining the Quad – U.S, Australia and Japan with India included.

An unfortunate edit especially the finishing note. What has India got to show for its ‘non-alignment’ with respect to China and for being mindful of its sensitivities? Even as this Edit was being written, China was harping on the lack of consensus in the U.N. Security Council on the lack of consensus in the Security Council on declaring Masood Azhar a ‘Global Terrorist’.

When will we be ready or what would it take – over and beyond what has happened over the years – for us to shed old shibboleths and repeat the tired, old advice that have nothing to show for them in terms of results on enhancing India’s security or standing?

Read Richard McGregor here and here as to what and who is driving China’s (what it sees as its inevitable) quest for dominance. These Edits are pointless.