China trade surplus and other links

In absolute dollar terms, China’s trade surplus with the United States reached USD275bn in 2017. The previous high was USD260bn in 2015. Clearly, the United States matters to China. If the United States monetary policy remains loose in the guise of supporting economic growth and employment, because inflation is not showing up and if financial instability risks are disregarded, clearly it is to China’s benefit. Just saying.

A fascinating and even somewhat frightening report on China’s appetite for commodities. The geopolitical influence that this buys China will be hard, if not impossible, to match.

I read a piece by Mohamed El-Erian in FT. He is permitting himself economic optimism and less discomfort with asset prices. I wonder how he would react to this story about the ‘shocked’ market reaction to the tiny shift in the asset purchases by the Bank of Japan. In other words, how durable is this so-called global recovery?

This page gives details on the asset purchase programme of the European Central Bank. The 10-year Greek bond yield is at 3.75%. There has been no big improvement in its unemployment rate or in its debt ratio. This table gives the youth unemployment rates in European Union countries. Check out the statistics for Greece, Spain, Italy, Portugal and France. This is annual data up to 2016. This table gives you the figures as of August 2017. You can compare the numbers for the above countries and figure out the improvement, if any and decide for yourself whether this is the stuff of a sustainable recovery that justifies Mr. El-Erian’s optimism.

India’s consumer price inflation data for December 2017 was a bit of a worry. JP Morgan finds the momentum in core CPI (headline minus food and fuel) surprising and concerning. Among States, Tamil Nadu and Kerala contribute quite a bit to the inflation rate with their 7% inflation rate and a combined weight of 11%. That means nearly 80 basis points of inflation out of an inflation rate of 5.2%. That is nearly 16% contribution. Inflation in Uttar Pradesh is well behaved. Is hoarding by intermediaries an issue in Tamil Nadu and Kerala? Just asking.

Industrial Production data for November, notwithstanding the outsized contribution by the Pharma sector (and that too, antacids!), was more encouraging than that of the inflation data because motor vehicles, other transportation equipment and basic metals constitute 20% of Industrial Production. They are growing nicely. Pharma with a weight of 5% was growing at an annual rate of 40% and that gives you a contribution of 2% to the annual IP growth rate of 8.4% – almost 25%.

The rather poor growth in textiles and apparels must be worrisome for a country that is looking to light manufacturing to create jobs. It is not that they command a high percentage in the index. In fact, their should increase and they should be productive.  There is a role for policy action here?


Blase Blasio and other links

New York Mayor decides to sue oil companies for climate change. Seems like a publicity stunt to me.

Stephen Gandel points out that Intel CEO’s share sale – in the context of the problems revealed with computer chips – does not pass the smell test. Quite. Do not miss the chart on Intel CEO’s shareholding before and after the revelation of problems with computer chips.

A Social network company in  China for Truck Drivers decides to slip ‘blockchain’ into the conversation and the stock jumped. Well, it is almost two decades since companies pulled this trick on financial markets. What would poor investors do? They are rational, at one level. They are not buying because they expect this or that company to pull it off. They simply hope to be early buyers so that they stand a very good chance of finding someone else to dump the stock on them, at a higher price, of course. What about the last guys who hold these stocks before they go down? They just happen to suffer from amnesia or they were born after the year 2000. In this context, Roula Khalaf has a good piece on millennials and the crypto-currency craze.

Eastman Kodak said that it would use blockchain to help photographers protect their copyright. The stock jumped 119% during market hours and more after.

Citing precedence from the way that stocks that had dotcom in their names jumped from 1998 until 2000 before the bubble burst, Andy Mukherjee thinks that the collective market value of the stocks of companies using ‘blockchain’, ‘crypto’, etc., may still go up before they go down. But, he does not advocate betting on it. Good for him.

Jamie Dimon says he regrets calling Bitcoin a fraud. May be, JPM wants to facilitate trading in Bitcoins.

Madan Sabnavis has a useful table on how much interest rates had come down in India and yet how little credit growth to industry has revived. But, no amount of evidence would persuade believers that, in the presence of balance sheet constraints, lower interest rates do zilch to revive lending and investing. They may help create asset bubbles and make some richer.

In economics journals, papers written by women authors are more readable. The review process for their papers is longer than it is for male authors. Women authors become more readable as they age. It is not so, for men. Well, damning evidence that male economists-authors are undeservedly privileged. But, will it change things? Unlikely.

MINT has a good Edit on how China is ‘bribing’ its way to superpower status. May be. But, it won’t be the first time nor the last time. There is little outsiders can do about it except to whine. They have to grow their own financial muscles. Is India doing enough on that? I doubt. India, by and large, has retained the control mindset rather than the enabling mindset.

How to fall if you have to and why two pizzas would do

Megan McArdle presents the unintended consequences of measurement and metrics. Doctors turn away very sick patients because chances of success are slim. Recovery statistics would look bad. How much we excel in confusing means and ends?!

Nobel Laureate Angus Deaton’s comprehensive piece on how inequality works is well written. Even though it reminded me of the piece by Jonathan Rothwell in New York Times on November 17, Angus Deaton’s piece is well written and did not claim exclusivity for his arguments.

Did not know that Professor Deaton had questioned India’s economic growth statistics after the revision. This is from October 2015. He has also had some rather useful observations on India’s official poverty statistics.

The Dutch teach their elderly how to avoid falling and how to fall if they have to! There is a feeling among some in India that Western societies lack the human touch.

A lovely article in Wall Street Journal about Amazon, the company. This line caught my attention:

Amazon famously adheres to the rule that any new business should be built by a team small enough to be fed with two pizzas. [Link]

The year everything went up – some eighteen charts from Wall Street Journal of all assets that went up in 2017. But, that said, do check out  the image in this tweet by Jason Zweig.  He writes about four things sure to happen in financial markets in 2018.

U.S suspends two billion dollars in security assistance to Pakistan. This is for real.  Someone looks at the India angle to this developing story. Andrew Small’s nine tweets on this development are thoughtful. Link to the 9th tweet.

Consciousness in the Indian society

(1) The Indian Raksha Mantri (Minister for Defence) announced the following:

Requirement for special uniforms for safety of soldiers deployed on borders / field areas in the country is assessed regularly and provision for introduction of new items / improved version of existing items is made as per prescribed procedure.

The Government undertakes procurement of Bullet Proof Jackets (BPJs) and other necessary protective gears / garments for soldiers from time to time as per authorization.  During 2016-17, 50,000 BPJs have been procured for Indian Army through Revenue route.  Procurement of 1,86,138 BPJs through Capital route is under Buy (Indian) category.  Further, a contract for procurement of 1,58,279 Ballistic Helmet through Capital route has been concluded in December 2016.

Upgradation and provision of improved version of special uniforms is a continuous process for which necessary steps are taken regularly.

This information was given by Raksha Rajya Mantri Dr. Subhash Bhamre in a written reply to Shri Surendra Singh Nagar in Rajya Sabha today.


(Release ID: 1515033) Visitor Counter : 1281 [Link]

It is all fine. But, there is one minor detail. The procurement was initiated 15 years ago – yes, it is not a typo. Pl. see here.

(2) ICICI Bank and ICICI Prudential have sold insurance products to farmers (poor or not) who had not understood what they were getting into. [Link]. It is far too callous and irresponsible.

(3) Sucheta Dalal wrote a piece on the travails of the poor and the old with Aadhaar. In places, it was over the top and, second, she lumped other issues that had nothing to do with Aadhaar. For example,

Now, imagine the plight of the 82-year old in Mumbai, who was curtly told by an Airtel employee that he could not have his SIM (subscriber identification module) card transferred from his daughter’s name to his own, despite having all identification documents including Aadhaar. Why? Apparently because Airtel has an unwritten policy not to issue SIM cards to people over 75 because “they may die soon.” [Link]

As soon as I had finished reading this, The Tribune broke the story that one could get two things done, illegally, with respect to Aadhaar:

(a) Pay Rs. 500 and get a “gateway” into the UIDAI Aadhaar demographic database and get all the personal details with the Aadhaar number – name, address, postal code (PIN), photo, phone number and email.

(b) Pay Rs. 300 more and get a ‘software’ that prints out the Aadhaar card too, for the number entered.

The story is here.

So, armed with an Aadhaar number, one could generate the card and use it. But, strictly speaking, the reporter did not have access to ‘billion Aadhaar details’ as the headline claimed.

Shankkar Aiyar says that the problem is because a simple query with an Aadhaar number need not have to return the full set of demographic details. That has not been plugged. Sloth, again. Read the story above on procurement of army uniforms. See his article from 3rd December in ‘New Indian Express’: ‘Habeus Corpus in the age of Aadhaar’.

Demographic data – name, address, postal code, email ID,etc., are shared by us with all and sundry private providers who, in turn, take our implicit or explicit permission to share that with many other agencies for a fee. They sell the data, basically. We do not seem to think much of it. But, there is far too much hullabaloo about these demographic data being released advertently or otherwise. Of course, the argument is that those are voluntary sharing by us on our own volition (is it?) and this is involuntary and unauthorised and hence, objectionable. Of course, the premise of this argument is questionable.

I think that this Tribune ‘expose’ has diverted attention from the issues raised by the Sucheta Dalal article on the travails of old people with the Aadhaar what with India’s connectivity issues, etc.

(4) A story broke out that the State Bank of India (SBI) had collected Rs. 1771 crores through penalties imposed on accounts that failed to maintain minimum charges. On a stand-alone basis, it is a staggering number. But, given that they have more than 40 crore individual accounts, it is not such a big number. Second, this would not have been or could not have been slapped without due information given when the account was opened. Second, certain types of accounts and basic savings accounts are exempt from minimum balance requirements. SBI has now clarified the matter.

(5) Check out this story in ‘Financial Express’ on how small businesses are understating their GST returns in a big way:

While there are roughly 15 lakh small firms registered under the composition scheme today, the number was around 10-11 lakh in September. Of these firms, around six lakh filed their returns for July-September by December 24. The total tax they paid was around `250 crore. Assuming a 2% tax incidence on their turnover — it is 1% for traders, 2% for manufacturers and 5% for restaurants — this means these firms had an average turnover of Rs 2 lakh in that period, or Rs 8 lakh for the full year if you annualise the data. The problem, however, is that firms that have a turnover of less than Rs 20 lakh a year, don’t even need to pay GST or file returns. In other words, these firms are understating their returns in a big way. [Link]

(6) We should not forget what Andy Mukherjee wrote about HDFC and Axis Banks understating their problem loans in a big way. Not to mention, YES Bank of course. Their understatement was the most egregious.

Without a modicum of consciousness, morality, values, fairness and accountability, the so-called demographic dividend in terms of higher economic growth and prosperity for many millions of Indian will be out of reach.  With the breakdown or absence of such basic norms, the society could well implode well before that happens.



Confusion that brings tears

A story in ‘BusinessLine’ published in September suggests that the Government of India was not keen on establishing a floor price for the export of onion. Quite why the Government should set a floor price on agricultural produce is another matter. After all, the export price is what the market is willing to pay for India’s onions given quality, transportation costs and other considerations. What role does the Government have in this matter is beyond me. Be that as it may, the stance was reversed just in two months. See here.

Clearly, India has two conflicting policy goals. Doubling farm income and keeping inflation in check are incompatible at least in the short-term. If farmers have to become productive and respond to price signals, it is far better for the government to let price signals – domestic and international – pass through to them and to consumers and let the RBI target consumer prices excluding food.

In the short-run, if I were the government, I would rather raise the inflation target and/or target CPI excluding food than shackle farmers in many ways. India’s pulses strategy has been a tragedy. Prices rise in one year, the government imports plenty the next and farmers resort to excessive sowing. Prices crash. Farmers are trapped. Without price signals being allowed to pass through impeded, chances of farm productivity enhancement are slim.

In the short-run (may be, even five years), I would focus on ensuring farmers getting price signals without government intervention and distortion and then target inflation. Once farm productivity picks up, the trade-off between farmers’ remuneration and inflation target too would disappear.

Fifth largest economy

I have been away from Singapore since the afternoon of December 14. A journey that took me to Delhi (transit), Udaipur, Chennai, Kumbakonam-Mayiladuthurai (Temples), Chennai (December South Indian Classical Music Festival) and now finally in Coimbatore. It was time to give blogging a break. Now, it is time to slowly get back into the familiar routine.

I wrote on the FRDI Bill in India for the MINT on December 12. Even gave an interview in Tamil on that. You can find them here and here.

Donald Trump named China a ‘strategic competitor’ and he is dead right. I just finished reading John Pomfret’s ‘The Beautiful Country and the Middle Kingdom’.  When Trump said that previous Presidents had let America down, he was spot on.

This article in Bloomberg Quint on the implications of U.S. tax laws for outsourcing and offshoring operations of American companies in India and elsewhere suggests that the impact of U.S. Tax Reform Bill is mostly negative for India.

President Donald Trump delivered on his pledge to lower taxes for American companies, reducing and even eliminating the need for many American companies to resort to complicated structures in multiple overseas jurisdictions to avoid paying high American corporate income tax. There is also the reduction in the amount of interest that can be charged to taxable profits. The same goes for mortgage interest deduction. These are welcome provisions in the Tax Bill. See here and here. Foreign exchange markets are not pricing in the positive impact on the U.S. dollar correctly, IMO.

One would hardly have expected even this grudging acknowledgement from the FT on Trump’s first year. Could be behind a firewall.

This story in Wall Street Journal about China, in its most recent economic strategy document, talking of slowing down the delta in debt stock rather than bring down the stock of debt should not surprise anyone, except those who chose to ignore historical evidence in China on debt reduction vs. economic growth targets.

What do all of these have to do with the title of the post? Well, India is expected to overtake the GDP sizes of France and the UK in 2018 to become the world’s fifth largest economy – based on the size of the economy (Gross Domestic Product) measured in U.S. dollars. Indian newspapers were breathless on this development, this morning. Only America, Japan, China and Germany will be ahead of India. But, the reality is a bit more complicated than that. More on that in the coming days and in the coming year.

On bailouts and bail-ins

In a post done two weeks ago, I had noted that the proposed Bill (it has gone to the Parliamentary Standing Committee) on Resolving Financial Institutions did not really hold much terror for depositors and that some of the fears that were being expressed were exaggerated – over the top.

But, on closer reading, I realised that, prima facie, concerns were not wrong. The wording was vague and sloppy. Bailing in Indian bank depositors was flawed on many counts. That prompted my MINT column published today.

This morning, as I was searching for my column online (it was uploaded only this morning due to some technical glitches), I came across a piece by Monica Halan in ‘Hindustan Times’. She writes:

It is the bail-in clause that is causing all the panic in the minds of the depositors. Will my deposits be used to reduce the liability of the bank? No, you do not need to worry that your deposits will be lost in a bail-in. Your deposits will be insured, just as they are today and there is an additional protection for depositors because the bail-in can be invoked, and your deposits be lost, only if you have given your consent for this to the bank when you signed the deposit forms.

Well, it is not that simple. The wording of Clause 52 (5) is not that clear. Here you go:

(5) The appropriate regulator may, in consultation with the Corporation, require
specified service providers or classes of specified service providers to maintain liabilities that may be subject to bail-in and the terms and conditions for such liabilities to contain a provision to the effect that such liabilities are subject to bail-in.

It cannot be optional. If so, it will be a non-starter. Why would anyone opt to be bailed in? Further, as one can see, the wording is not omnibus. It does not simply say that depositors would be excluded from being bailed in for all their present deposits and, in future, they will be, subject to some enhanced deposit size being covered by deposit insurance. It is not that well worded and, perhaps, deliberately so.

Shankkar Aiyar wrote that this Bill is a consequence of the G-20 commitment:

WhatsAppically, the bill is the brain-child of this regime. Factually, bail-in owes its genesis to the financial crisis of 2008. In November that year, the G20, of which India is a member, met in Washington and resolved to strengthen global financial architecture, and expanded the Financial Stability Forum to create the Financial Stability Board (FSB). The concept of ‘bail-in’ made its appearance in a consultative paper of the FSB in July 2011. The proposal (echoed in a RBI report of May 2014) was ratified at the Brisbane G20 in November 2014. The bill was introduced in August 2017. [Link]

But, there is a domestic angle to it. It is part of the recommendations of the Financial Sector Legislative Reforms Commission.

The Finance Minister has issued a clarification but the important thing is to ensure that the Bill reflects such clarifications and assurances unambiguously. Neither this government nor the ruling party nor the economy need this uncertainty right now.