Four pieces to wake you up on a Sunday morning

(1) In a hard-hitting piece – peppered with cushioning and placatory statements, Mohandas Pai and his co-author – blast the government for failure to tackle tax terrorism. The truth is that the NDA government had taken greater recourse to it.

(2) My batch-mate, N. Jayakumar of Prime Securities, had given an interview to ET. It is worth reading. I had shared it with a bureaucrat in Delhi whom I have come to know recently and whom I admire for his clarity of thought and plain-speaking. His reaction to the article was as disturbing as it was revealing.

My friend focused on this sentence in Jayakumar’s interview, in particular:

Is there something that the government can do? I go back to another comment that I have actually made which is that no favours, no hand me downs. Can the government merely instruct every single government agency that deals with a private sector party to make their payments on time? That means state electricity boards, the NHAI, the various tax refunds. Tax refunds by the way is a huge amount. Even if that amount came back without the kind of loops that one has to…

The reference to loops by Jayakumar is also consistent with Mohandas Pai has written. 

(3) Shankkar Aiyar’s two recent pieces – one as part of his regular columns for ‘New Indian Express’ and one, also part of his regular columns for Bloomberg Quint – are, as always, worth reading.

Two important points he makes in the piece on BJP’s Socialist Conservatism are these:

In 2014, the Modi government promised expenditure management, and in 2019 the debate is about extracting resources from the RBI’s contingency reserves. The Securities and Exchange Board of India is estimated to have reserves of about `3,800 crore. The finance Bill seeks transfer of 75 per cent of SEBI’s general reserves of `3,800 crore to the consolidated fund of India. The government also wants 15 per cent of the unspent CSR funds with companies.

The following line is consistent with what Mr. Pai and his co-author had written:

“Socialistic conservatism is also about taxation—an 18 per cent GST on small service providers flies in the face of the rhetoric on creating job providers, as does tax on start-up investors.

Note the following for it is an interesting revelation (for me):

During NDA I, BJP ministers ensured the burial of the most comprehensive expenditure management exercise.

(4) On raising dollar resources through issuance of sovereign dollar bonds, Shankkar suggests alternatives:

Yes, India must raise additional resources and in dollars to finance the aspiration for high growth. Why not raise dollar resources by listing LIC? Why not aggregate surplus land with government into a land bank and call for bids? Why not transfer government ownership of public sector banks and enterprises into an exchange-traded sovereign fund?  The yen to dollarise government debt with sovereign bonds instead of monetising assets is perplexing, to say the least. It is what Adam Smith would characterise as a case where imagination is baffled by facts.

Just wondering if it is possible for a democratically re-elected government with a better majority to become a lame-duck administration in less than two months? Searching for that imagination, innovation and boldness in governance that went into the re-election campaign.

Sovereign dollar bonds

Many of you might have noticed that the Indian government announced a plan to borrow in dollars in international capital markets. It will be India’s first foreign currency sovereign borrowing from capital markets.

In one short sentence, it is ill-advised. If you thought that the issue of ‘Masala’ bonds (rupee bonds issued for foreigners to subscribe) were safer, that is wrong too. Happy to elucidate. Have done so here.

I wrote about it in my column on the budget published the day after the budget was presented:

One headline that grabbed attention pertains to the government announcing its intention of issuing sovereign debt in foreign currencies. Apparently, India thought of it in 2013 but did not go ahead as the macro fundamentals were deemed dodgy then. But, probably the best time to borrow would be when the domestic currency is undervalued. The Indian rupee in the second half of 2013 was close to being undervalued. Right now, India’s macro fundamentals are not weak, although big question marks remain over the economy’s growth rate, its sustainability and vulnerability to a global stock market correction. In other words, the risk is tilted towards further weakness of the Indian rupee. In 2013, it was tilted towards its strengthening after a hefty correction.

On the other hand, the timing is opportune in another sense because global central banks are back to considering further crazy monetary easing moves. To that extent, raising foreign currency borrowing now is a case of good timing. Another upside is that the government would not be crowding out domestic savings, which have declined in recent years and show no signs of reviving. That is a good thing. [Link]

The above two paragraphs only focused on the micro issue of timing the bond issuance in foreign currency. But, the argument in favour of issuing foreign currency denominated bonds in terms of it not crowding out domestic borrowers is not entirely correct, I admit, because Dr. Y.V. Reddy had pointed out lucidly as to why it is no help to domestic non-sovereign (private sector borrowers).

The argument is this: if India’s safe current account deficit is 2% of GDP and if Government of India borrows from foreigners (it is part financing of the CAD), then the amount available for other domestic borrowers in foreign currency is going to be reduced by that amount. The ‘ceiling’ is unofficially set by the ‘safe’ current account deficit for the country.

Then, on July 9, I wrote more extensively for MINT on the dangers of the Indian government borrowing in foreign currency. [Link]. It might open the door, together with other measures announced in the budget, for greater financialisation of the economy at a time, when its macro-economic health and performance are brittle.

Besides Dr. Y.V. Reddy’s piece, one of the best comments on this subject came from Sanjaya Baru. It is well worth a read.

In this piece, Shankkar Aiyar suggests alternatives to raising dollar resources through sale of sovereign bonds:

Yes, India must raise additional resources and in dollars to finance the aspiration for high growth. Why not raise dollar resources by listing LIC? Why not aggregate surplus land with government into a land bank and call for bids? Why not transfer government ownership of public sector banks and enterprises into an exchange-traded sovereign fund?

Government stake in Public Sector enterprises

The Finance Minister said the following in her budget speech on government stake in Central Public Sector Enterprises:

Government has been following the policy of disinvestment in non-financial public sector undertakings maintaining Government stake not to go below 51%. Government is considering, in case where the Undertaking is still to be retained in Government control, to go below 51% to an appropriate level on case to case basis. Government has also decided to modify present policy of  retaining 51% Government stake to retaining 51% stake inclusive of the stake of Government controlled institutions.

In order to improve the capital flows into the Indian economy, it is important to align domestic corporate systems and practices with global ones. It is also appreciated that global finance movement in equity uses certain parameters to evaluate the stocks in which they choose to invest. Government intends to further encourage retail participation in CPSEs which, of late has shown very encouraging upward trend. In order to provide additional investment space, the Government would realign its holding in CPSEs, including Banks to permit greater availability of its shares and to improve depth of its market.

Strategic disinvestment of select CPSEs would continue to remain a priority of this Government. In view of current macro-economic parameters, Government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more CPSEs for strategic participation by the private sector.

Government is setting an enhanced target of `1,05,000 crore of disinvestment receipts for the financial year 2019-20. The Government will undertake strategic sale of PSUs. The Government will also continue to do consolidation of PSUs in the non-financial space as well.

ETFs have proved to be an important investment opportunity for retail investors and has turned out to be a good instrument for Government of India’s divestment programme. To expand this further, Government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This would also encourage long term investment in CPSEs.

For bringing better public ownership of the PSUs and also bring greater commercial and market orientation of the listed PSUs, the Government will take all necessary steps to meet public shareholding norms of 25% for all listed PSUs and raise the foreign shareholding limits to maximum permissible sector limits for all PSU companies which are part of Emerging Market Index.

The highlighted portions above were significant and I had singled them out for praise in my comment on the budget I wrote for MINT on Saturday.

As per ‘India Today’, the Finance Minister has issued the following clarification:

Talking to media persons, Sitharaman said: “51 per cent control assumes that there is a company where the government directly holds 51 per cent and there are also government-run institutions holding additional stake (say 10 per cent).

If the government intends to eventually seek more retail participation where employees of the company can purchase the shares, then even as the government retains 51 per cent, the extra holding through the government-run institutions can be released for employees who want to possess shares, by which the government control is not diluted. [Link]

Disappointing.

Ninan’s missed opportunity

Last weekend (June 29, 2019), T.N. Ninan wrote an article on the departure of Viral Acharya from RBI. He is the Deputy Governor. His first term ends in January. He is leaving six months ahead in July.

Viral Acharya has been personally courteous to me. In fact, when I pointed out that RBI surveys (quarterly surveys) should be captured in Excel for download and analysis, he quickly set the ball in motion and it became a reality. Now, we can download the survey results and do analytical stuff with it.

That is not the point. His departure is neither the end-of-the-road for RBI independence nor is it an embarrassment for the Indian government.

Ninan writes:

Similarly, those within the Indian government system do not speak out publicly against the government they serve. When you are the governor or deputy governor, you do not have the freedom of speech that an ordinary citizen enjoys. Differences are aired only internally. On the occasions when someone feels the need to start a public debate, it is not done in apocalyptic terms. Naturally, when Dr Rajan and Dr Acharya spoke out bluntly (in the case of the former, on issues with which he was not officially concerned), it did not go down well.

No employer will allow their employees to speak out against them publicly when you are still working for them. No private sector enterprise would allow that. Nor, for that matter, do foreign governments – even those in developed countries – allow that.

Independence of the central bank does not mean that they cannot be questioned. It does not mean that they are not accountable to anyone. If they are forced to overturn a decision taken in public interest by the sheer weight and force of authority without logic, that is an assault on institutional independence.

Indeed, those who brandish independence as the first line of defence against and all criticisms are the ones who are shutting out debate.

I was happy to see the header in a MINT report on RBI’s revised circular on the recognition of non-performing assets after the Supreme Court struck it down. The report said that the new circular was an exercise in humility. Well said. I found the new circular pragmatic and it did not sacrifice credit discipline.

Mr. Ninan concludes his article thus:

Today, with growth having slowed and macroeconomic challenges in every direction, would the government have benefited from the advice of “Harvard” economists? Perhaps, but judging by past record it probably would not have paid much heed.

Is that so? But, Andres Velasco provides a counter perspective. India, probably, does not miss much or would not miss much.

Mr. Ninan has missed an opportunity to write a more useful piece. That is a pity because he is one of the more perceptive, experienced and balanced commentators in the country.

GST and India’s truck drivers

I did not realise that it is more than twelve days since I last blogged here. Once I returned to Sri City to resume my physical presence here as the Dean of the IFMR Graduate School of Business, the time available to blog came down drastically.

I had read this article on how India’s Goods and Services Tax (GST) has transformed the transshipment of goods across India. It is an interesting and informative article. GST has saved time for sure. I am sure the highways are helping too. But, what stood out for me was the wretched conditions under which the truckers survive while on the road:

Ram, being a part-time driver (he tends to his family’s fields during the monsoon period between May and October), is not paid a salary. His income comes from savings in fuel, incentives and whatever he saves from the ₹3,000 his employer pays for food and bribes. “I am given 400 litres for each way. How much of diesel I save at the end of the return trip is paid to me in cash,” he said. This time he had managed to save 50 litres (both ways). That got him ₹3,500. “I end up making, in all, ₹12,000 comfortably for every return trip,” he added. But his ability to realise more income is hampered by the fact that he gets to make just two or three round trips in a month. ….

…. Most drivers end up sleeping under their truck. “No one cares to offer us decent facilities,” rued Ram. That is a valid statement. Companies invest hundreds of crores to build manufacturing facilities but they do not create decent facilities for truck drivers to rest and freshen up inside the factory. After all, they entrust the drivers with goods worth many crores. Salaries are low, cabin conditions are bad and most importantly, there is no value for their time. They need to push themselves very hard to make money.

“The irony is that the demand-supply equation does not work here,” said Ram adding “when there is a shortage of drivers, the condition of the existing lot should ideally improve but that is not the case.” Ram, being a part-time driver (he tends to his family’s fields during the monsoon period between May and October), is not paid a salary. His income comes from savings in fuel, incentives and whatever he saves from the ₹3,000 his employer pays for food and bribes. “I am given 400 litres for each way. How much of diesel I save at the end of the return trip is paid to me in cash,” he said. This time he had managed to save 50 litres (both ways). That got him ₹3,500. “I end up making, in all, ₹12,000 comfortably for every return trip,” he added. But his ability to realise more income is hampered by the fact that he gets to make just two or three round trips in a month. …. [Link]

That is a shame and a pity. It reminded me of how some employers treat their household help and housekeepers in developed Asian countries. They trust their entire household, their valuables and their small children with these live-in maids but won’t feed them well. Some even abuse them physically.

The article has focused on this conclusion and that, indeed, is a big positive:

It took Ram just 42.35 hours to cover 1,288 km. In the days before GST and before India’s highways were the four-lane beauties they are today, it would have taken about four days to cover the distance. Though some issues remain, the flow of goods along Indian highways has definitely become smoother and faster.

Monsoon forecasts

The June 2019 Monthly Bulletin of RBI has an article on the accuracy of monsoon forecasts by India’s Meterological Department and Skymet, a private forecaster. The conclusion of the paper is sobering:

There is no significant correlation between the projected rainfall (IMD and Skymet) and actual rainfall in India. While none of the forecasts are close to the actual, the performance of the IMD’s SSLRF is better than FSLRF and Skymet. Both IMD and Skymet have failed to predict drought and excess rainfall in most of the cases. Nevertheless, the SSLRF nailed down the 2015 drought and its probability of predicting near-normal monsoon has been reasonable and higher than FSLRF and Skymet. In contrast, the predictive power of the international agencies, viz., BOM and NOAA in forecasting extreme rainfall (which generally coincides with the El Nino and La Nina conditions) is much better than that of the IMD. The comparative assessment of all forecasts suggests that for generating macroeconomic forecasts, the use of IMD’s SSLRF and the predictions of international agencies like NOAA and BOM in conjunction may be appropriate as the preliminary forecasts of IMD (FSLRF) and Skymet released in April appear to be noisy. [Link]

An institution learns humility

Whoever chose this header for the story – whether the journalist herself or her Editor – he or she deserves praise for doing so. The header of the article is “RBI’s 12 February circular makes a comeback with a dash of humility”. Nice.

All institutions need to go through the cycle of competence – confidence – overconfidence-overreach-setback-humility. Probably, RBI had to have its moment. Its circular of 18th February 2018 was an over-reach. I went through the circular (‘Prudential framework for resolution of stressed assets’, June 7, 2019) It does not relax the credit discipline and yet it provides time for resolution before the non-performing debt goes before the bankruptcy court.