Index of ‘small change’

Heard and seen in the last three days in India

Just as there is a Big Mac Index for purchasing power parity, there should be an index for the shortage of ‘small change’ – smaller denomination notes and coins – for the world. When the people of the country stop hoarding small change, then it has reached a certain development state. In India. that tendency is still very high and that indicates a much large catch-up remaining on development. In the Chennai airport on Saturday morning, a man presented a 2000-rupee note for a breakfast that cost him Rupees 230.00. The Teller refused to accept it. The man then pulled out the smaller denomination notes he had in his pocket. They were plenty. He settled it. If we never intend to use them, why do we collect them? Why everyone hoards? Why does the shortage syndrome persist? When will it change and what will make it change?

A family of three stopped to take a selfie before they took their escalator down to their gate and then realised that they had come to the wrong gate. The amount of attention for taking Selfies far exceeds the attention needed on other matters, it seems.

The brilliant acting that queue breakers put on in the morning rush-hour traffic in the airport is worthy of many an Oscar award. They keep an innocent face or sport a worried look or usually both. They then say that their flight is leaving early and proceed to the front of the queue. When I stopped someone and checked, his flight and mine were taking off at around he same time.

Most Indian big-city airports are fully stretched in the early morning rush-hour traffic up to 7 or 8 AM. Capacity will soon be exposed as inadequate if not already.

Most youngsters I saw sport beards similar to the beard of Kohli, K.L. Rahul, et al, in the Indian team. These guys have an impact. Can it be tapped for other things? – discipline, punctuality, road manners, following rules, concern for pedestrians, etc., – small things to begin with.

My 89-year old uncle was very pleased with my responses to the 12 questions of Mr. Chidambaram. He feels that Modi is sincere and that 60 years of misrule cannot be changed in a few years. Interesting perspective because some of the youngsters in some email groups that I am part of, are saying the same things.

That said, I think, TCA Srinivasa Raghavan has a very important message for the PM.

I was happy with this shot I took from my car screen for the way it turned out. Again, that said, it is a tough life for the man making a living sticking posters.

WhatsApp Image 2018-02-11 at 22.32.21




Dangerous currents

An email I sent a friend this morning after another 1000 point correction in the Dow-Jones Industrial Average Index:

With the second day of 1000 point correction in the Dow-Jones Industrial Average, investors are prone to become nervous.

The S&P was down 2.8% on Thursday (Feb. 8) and the DJIA index was down 4+%.

Economic fundamentals in the United States and elsewhere may not have so dramatically changed in the last two weeks to warrant ‘panic selling’ in stocks.

If anything, Atlanta Federal Reserve began its first quarter 2018 ‘nowcast’ real GDP growth estimate at 5% (QoQ, annualised). For the world too, the International Monetary Fund had recently upgraded its assessment of global growth. Of course, they were optimistic on the world economy in April 2007 too. Never mind.

But, to take recourse to economic fundamentals and cite it as a reason (or, excuse) to buy stocks is flawed because we do not usually recommend investors to sell when fundamentals do not support big gains in stock markets as is often the case.

When stocks rise due to generous liquidity and low interest rates (zero or even negative, as in this cycle) and when fundamentals remain stuck in the cellar, we do not advise investors that stock markets are unhinged literally and otherwise.

We reassure ourselves and investors that liquidity considerations dominate fundamentals. Hence, now, we cannot fall back on fundamentals to justify buying at this stage. It is unreasonable and asymmetric.

If economic fundamentals are strong, then it means that the Federal Reserve faces no constraint to raise interest rates more aggressively than what the market expects. Recall the urgent announcement of a more aggressive monetary policy tightening this year by the Bank of England on Thursday. They were quite reluctant to recognise that the Bank of England monetary policy was hopelessly ‘behind the curve’ with respect to the inflation in goods and services and in asset prices.

If the economic fundamentals are weak or have become weaker, then yes, the Federal Reserve may not tighten much. But, is that now a good thing? What happens to assumptions of double-digit growth in Earnings Per Share for S&P 500 in 2018 and 2019? Will they be justified too, still, if fundamentals are weak? Again, will we resort to the liquidity argument to justify being long in the market?

The disconnect between earnings and stock prices remains strong and lasts for a long time, until it does not. At some point, they bite and matter for stocks.

So, the short point is that investors cannot have it both ways.

Should the Federal Reserve go weak-kneed and abort tightening, there could be violent rallies for a short while. But, the dollar will fall heavily and other countries may not be  in a position to take it. The global economic cycle is both fragile – unlike what IMF thinks – and is already long in the tooth.

The mindless exuberance of the last few years fuelled by (yet again) monetary policy mistakes and investor complacency, induced by it.

There may be short-term swift rallies in between. One can look back and realise that global stocks had so many such rallies in 2008 too.

Investors are now beginning to realise that the Federal Reserve is either going to be aggressive or it is too behind the curve. Or, it is both. Both are not favourable for stocks.

Caveat Emptor! This is no an investment recommendation, by the way.

Minimum export price on onions goes

MEP Onions_India deserves what it gets

This is a screen shot from Google search returns when I searched for ‘MEP Onion’ on the morning of the 8th. Good to see that the government had removed Minimum Export price (MEP) on onions.  I had written about the sheer hypocrisy and inconsistency of such farmer-unfriendly policies while India swears by farmers in my MINT column on January 30th.

But, look at the reporting. There is no rejoicing for the former. Yet, when the farmers commit suicide, the media sources will blame the government!  If all that the English-language media wants to report on the price rise, why would policymakers not have an urban bias in policymaking?

I am in favour of a review of the inflation targeting mandate.
Inflation targeting does not anchor inflation expectations
Even if we have to retain the framework – too soon to let go, may be and credibility issues are involved – then the target should be asymmetric. Upper limit: 6% and lower limit 3%; central level: 4%.
Food prices should be allowed to reflect genuine demand and supply without government smothering it with artificial imports and price restrictions
Give farmers freedom to sell whenever, wherever and to whomever and then tax agricultural income too.
Use revenues to provide succour to urban poor when food price spiral up too much. But, otherwise, allow substitution effect to happen.
If inflation overshoots, so be it. RBI can write letters to the Government.
Bond yields? Yes, inflation actually need not rise if government deficits are reduced to the extent that one has freed up the farmer to manage his own affairs. Then, government support to the farm sector can come down and agricultural income can also be taxed.

Yes, of course, there will be time inconsistency and some pain.

But, without addressing farmer distress – largely caused by urban and consumer bias in policy that has placed inflation at a higher pedestal than farmers’ welfare – India’s social and economic stability will not be there. Low inflation will be a very poor consolation, if at all.

Criminal breach of trust

An expanded and modified version of my column that appeared on Tuesday in MINT:

This column continues the analysis of the Indian budget for 2018-19 by examining issues that are either postponed or forgotten. First, the budget has ensured that India has arrived on the global scene. It was confirmed on the 2nd of February. During Asian trading hours, the Indian Sensex Index fell 2.3% or so. Later in U.S. trading hours, the Dow-Jones Industrial Average dropped 2.54%. So, Indian stocks have been the trendsetter for America! Immediately, the conclusion was that the re-introduction of the long-term capital gain tax was the culprit. There was no such excuse for America, however. Yet, it fell. Motivated arguments do not deserve our attention.

If income accruing to labour can be taxed, there is no reason why income accruing to capital should not be. If governments want to encourage long-term capital formation, then long-term capital investments can get some favourable tax treatment. Indeed, there is a case for treating all capital gains up to 36 months as short-term capital gain and taxed at the marginal rates of tax applicable to income. It can be done for foreign investors too. There can be then a 10% tax up to five years, 5% up to seven years and then zero. There is much room to improve and streamline the current methods of taxing capital gains in India. At present, for stock market gains, a rate of 15% for short-term capital gains is too low to induce investors to invest for the long-term and incur a tax rate of 10%. In fact, it might push some investors to become more short-term in their investment orientation. Much work remains to be done. Piecemeal approach, cumulated over time, renders the tax laws complex, unwieldy and hard to comply with, encouraging evasion and corruption.

Second, the Indian budget scores reasonably well on transparency. Having spent the last three days trying to understand the reasons for the revenue deficit ratio overshoot, I can vouch for it. The Open Budget Index for 2017 gives India a decent score of 48 with China scoring an abysmal 13 and Pakistan 44. But, Indonesia (64) and Philippines (67) in Asia score far better than India. I propose that all receipts or expenditure variations above a chosen percentage threshold (10% or 20%) and those above an absolute value of 3,000 crores should be explained in a separate document with cross-reference to the parent documents and pages, etc. More can and should be done. Some specific instances follow.

On the evening of 31st January, the government released the first revisions to economic growth estimate for 2016-17. Nominal GDP growth was revised down slightly to 10.8% from 11.0% estimated earlier. However, due to some upward revision to previous years’ estimates, the level of nominal GDP was estimated to be INR152.5 trillion while the earlier estimate was INR151.8 trillion. Earlier, on January 5, The Central Statistical Organisation (CSO) has estimated nominal GDP growth at 9.5%. On that basis, the GDP for 2017-18 should be estimated at INR167 trillion.  The government has assumed a figure of INR167.8 trillion. Perhaps, the government knows in advance the provisional GDP estimate for 2017-18 to be released later. Of course, this does not really move the needle on the deficit ratios except at the second decimal place. Yet, the government would have been better off sticking to the publicly available estimate of the CSO for 2017-18 GDP released less than a month ago.

The revenue deficit ratio overshoot of 0.7% in the revised estimate (2.6%) compared to the budget estimate (1.9%) means that one has to account for 1.18 trillion rupees of revenue shortfall and/or expenditure overshoot. Tax revenues are estimated lower by about 190 billion rupees. Most of it is due to the shortfall in indirect taxes which more than offsets the better corporate tax collection estimated. This is also despite the government ‘saving’ 63 billion rupees by not transferring cess collected for addressing calamities to the Disaster Relief Fund. More on the administration of cess later. Revised non-tax revenue receipt estimates are lower but the way in which the interest payments made by Railways (almost double the budget estimate) is shown is not transparent. Further, it was despite Railways spending less than the budgeted capital expenditure. It should not be shown on a net basis. Interest paid by Railways should be added to the overall interest payments. May not make for pleasant viewing but that is the right way to show it.

Vivek Kaul, writing for the Business Standard (‘India’s unpaid subsidies time-bomb just keeps ticking away’, 1st February 2018), has pointed out something that never came up in the post-budget analysis. Quoting from the Report of the Comptroller and Auditor-General of India, he pointed out that the Government of India owed more than 2.0 trillion rupees of subsidies to the Food Corporation of India. The interesting bit is that 60% was for the year 2016-17. The bonds that the government has issued to FCI in the past amount to Rupees 162 billion. No new bonds have been issued to them or cash paid to them in a while. Unpaid subsidies help show a lower deficit due to cash accounting while they remain threats to future deficits. The CAG estimates appear to be erroneous.

Upon cross-verification I found that the estimate of the cumulative unpaid subsidies at the end of 2016-17 could be placed at 538.8 billion rupees. When the NDA came to office, it was around 380 billion rupees. When UPA-2 was voted into office, it was only 46.7 billion rupees. Unpaid subsidies rose 52% CAGR between March 2009 and March 2014 – about 8.2 times! This is just a sample of the scorched earth that the NDA government inherited.

But, we will trust the CAG to report its findings right. While the subsidy arrears to FCI appears massively overstated, other findings of the CAG (Report No. 44 for the year 2016-17 published last December) are more damning. Of the 79 billion rupees that the Government of India collected during this period as R&D cess, only 6 billion had been utilised. Even more damning is the Education cess. In the ten years up to March 2017, 835 billion rupees has been collected as Secondary and Higher Education cess. Not a single rupee had been transferred to an earmarked Fund in the Public Account as no scheme was identified nor a designated fund opened in the Public Accounts of India.

This needs to sink in. The government raises the tax incidence on the public through such levies but does not bother to take the minimum steps to utilise them. It betrays the worst form of callousness to the taxpayer. In the end, all the cloak and mirrors that governments over time have engaged in and continue to do so can be traced to the total lack of accountability for outcomes. Over the years, if governments had provided essential services – safety, security, health and education – well, then the economy would have done better and the government would have benefited too in the form of higher tax take, obviating the need to engage in complicated obfuscation to its accounts.

In his ‘State of the Union’, the American President requested the U.S. Congress to empower Cabinet members with the authority to reward good workers and to remove Federal employees who undermined the public trust. Every member of the Indian Parliament must turn the gaze inward and ask whether the state of affairs as mentioned above is sustainable for the nation and whether they are leading it to doomsday. India is losing time and all of us are engaged in an elaborate charade of analysing numbers, wasting our time.


India budget – part 5

(1) We have a revenue deficit overshoot of 0.7% of GDP (2.6% VS. 1.9% budgeted).

That is about 1.18 trillion rupees of revenue deficit higher than budgeted

About 0.7 trillion comes from tax and non-tax collection shortfall.

0.189 trillion from Tax collection shortfall is the tax collection shortfall. It is made up as follows:

Indirect tax collections are off by 519 billion rupees. They are offset by better corporate tax collection (250 billion). The government expects to save 63 billion by transferring less to the National Disaster Fund. It transferred 16 billion rupees less than budgeted to States.

Whether the indirect tax collection shortfall is because of 11 months collection versus the usual 12 months or it is because of slower economic growth and tardy implementation is a matter of debate. I have friends who argue the former and friends who argue the latter and both are solid folks.

0.5 trillion from non-tax shortfall. Dividends and interest payments make up about 0.42 trillion. There is a shortfall of 0.061 trillion rupees on ‘Information and Publicity’ head. That gives you almost the entire 0.5 trillion shortfall.

On the expenditure side,

On the ‘other transfer’ to States which is the GST compensation shortfall , that is offset by the GST cess collected on luxury goods. That is not therefore an explanation.

[Parenthetically, the transfer to States and UT budgeted for 2018-19 of Rupees 90,000 crores in the ‘Dept. of Revenue’ budget is exactly offset by the cess expected to be collected. It is just earmarked. Debit and credit cancel each other out]

There is 0.3 trillion overshoot on the Establishment Expenses. Which must be mostly salary and pensions on account of Seventh Pay Commission.

I could identify 0.015 trillion from Defence Pensions and other Central Government pensions.

That is 50% of the Establishment Expenses Overshoot.

(Postscript: The total ‘Demands for Grants’ of all Ministries amount to 50% of GDP based on ‘Revised Estimates’ for 2017-18. I am rather surprised at this. What does it mean exactly?)

All that matters for 2018


China bought two years with its 2016 reflation, aborting a global slowdown stemming from its last decision to slow credit growth. This growth cycle has completed and is turning down again.

The fallout from the prior slowdown started showing up after Spring Festival in 2014. From February 23, 2014: China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China.

Regarding the dip in the yuan, I wrote:

If this keeps up, we may soon hear about a dollar shortage in China, which happened last time the yuan spiked. Also, after the 2011 drop, forex reserves fell.

It will only take a small marginal change in the economic trends to create a hurricane force in the financial markets. Once the market moves the other way, the shift will be swift and brutal because everyone is on the other side of the trade. How many people out there have puts on the yuan and expect China’s reserves to start falling?

If history rhymes, there’s going to be some significant negative news out of China in March. If that happens, the clock will start ticking on the next global deflationary wave.

The conventional wisdom about equities, interest rates, inflation and emerging markets is wrong again, just as it was in 2011 and 2014.” [Link]

The emphasis in the first line is mine and I recall what I wrote in MINT in July 2017 querying whether the global economic recovery was statistical or real. It was yet another credit-led growth from China:

China was the main source of that credit growth for the 2016-2017 boomlet. If it is truly over, then global growth will go with it. [Link]

Elsewhere in that blog, the blogger writes this about the yuan:

The yuan is a problem at USDCNY 6.3 and USDCNY 6.9 because China has a massive credit bubble. At one end, the deflationary impact of a rising yuan and at the other, the risk of a major devaluation. In the middle is the Goldilocks exchange rate, not to strong to trigger debt default, not to weak to trigger outflows. USDCNY 6.3 in the current environment is too strong. The PBoC is also pinned in this range. Loosen capital controls to let the yuan weaken, exacerbate the liquidity crunch in the banking system and risk uncontrolled depreciation/capital flight. Let the yuan strengthen and risk a credit crisis. Further reverse yuan internationalization and set the yuan price, but risk an economic response from the United States.

He is quite spot-on. In fact, the paragraph above on the yuan rhymes with what ‘Houses and Holes’ wrote in on Trump’s policies towards China – that they are working.

Weekend snippets

On the other hand, regulation remains a concern for many, with 75 percent of members continuing to feel foreign companies are less welcome in China than they have been in the past. Although down from 55 percent last year, some 46 percent feel foreign companies are treated unfairly compared to local companies and, for the third year running, respondents cited inconsistent regulatory interpretation/unclear laws and enforcement as the top challenge to doing business in China. For the first time, compliance and enforcement made the list of the top challenges companies expect to face in 2018. [Link]

(2) US Non-Farm payroll data for Jan. 2018 [Link]

(a) ​from Jan. 2017, unemployment rate for Whites has declined the most among races.

(b) In terms of education, unemployment rates for

high school or below and

high school but no college have declined the most.

Put (a) and (b) together, ​Trump has delivered for his constituency, I suppose.

(3) This Matthew Klein post in FT Alphaville might be from December 2014 but well worth a read on how Japan is far better placed than most think.

(4) A Chinese company lets go off the option of paying off a perpetual bond and has to raise the coupon by 3 percentage points. [Link]

(5) Dr. Manmohan Singh’s master class in fiscal indiscipline. Indeed! Who is better qualified than him to offer a master class in fiscal indiscipline?

(6) Academic economists close ranks on Janet Yellen as she departs but the last line attributed to Shiller restores a bit of a faith in their judgement [Link]

(7) An important read for financial market participants (aka investors) [Link]

(8) FT records the slump in U.S. stocks on Friday as the worst in the Trump era, leaving not much to the imagination of readers as to what message it wants them to take away.

Curious to know if the FT credited Trump when the stock market kept breaking records on the way up. It takes two to tango – the President would not take the blame for the fall even as he took credit for the ascent (both wrong). Similarly, the media would associate the decline in the stock market with him but not credit him for its ascent for one full year.  Both wrong, again. But, what gives the media folks the right to think that they are morally superior to the man that they love to hate?

(9) Vivek Kaul writes one of the most relevant comments on the Indian budget for 2018-19 [Link]

(10) A good piece on the challenges facing Jerome Powell as he takes office on Monday as the Chairman of the Federal Reserve.