Month: March 2015 | Page 4

18 March, 2015

Sonia Gandhi, Congress protesting against land acquisition law is sheer hypocrisy

Vivek Kaul

Sonia Gandhi, the soon to be replaced president of the Congress party if media reports are to be believed, is leading the charge against the land acquisition bill. And this is very ironical given that it was the Congress party which created the land acquisition mess in the first place.
Until 2013, land acquisition in India was governed by the Land Acquisition Act 1894. This Act came into being during the period of British rule in India and survived for nearly 120 years.
A 1985 version of this Act stated: “Whenever it appears to the [appropriate Government] the land in any locality [is needed or] is likely to be needed for any public purpose [or for a company], a notification to that effect shall be published in the Official Gazette [and in two daily newspapers circulating in that locality of which at least one shall be in the regional language], and the Collector shall cause public notice of the substance of such notification to be given at convenient places in the said locality.”
Given the fact that the Act was a remnant of the British era, it gave enormous powers to the government to seize almost any land that it wanted to. The British were the rulers of India, and not a democratically elected government. They could do what they wanted to.
The surprising bit was that the Land Acquisition Act 1894 managed to survive through 66 years of independence as well. It was abused by almost all governments over the years. The governments seized land from people and handed them over to corporates who made a killing. It would be safe to say that many politicians also benefited in the process.
The humble farmer whose land was being seized saw this happen. The land that was acquired from him at a pittance(if at all anything was paid) by the government was handed over to private parties and everyone except the farmer benefited in the process.
Hence, the trust that is required for any system to work completely broke down. And this will not be easy to repair. Unless this trust is rebuilt land acquisition for business purposes will not be easy at all. The farmer or individuals whose land is being acquired need to start to feel that they are not being taken for a ride.
Further, given that governments acquired land for them, Indian corporates have become lazy over the years. Also, many of them started to see themselves as landlords and wanted land just for the heck of it. This can be said from the inefficient use of industrial land in India.
Let me first share something from personal experience. I grew up in Ranchi, which had many public sector enterprises. The biggest of them all was the Heavy Engineering Corporation (HEC). It was built on land acquired from farmers. But only a small portion of the total amount of land that was acquired was ever put to use. Large portions of land at HEC were simply lying unused.
Professor R Krishna Kumar makes a similar point in a recent column in The Hindu Business Line in a more precise way: “Japan uses a mere 1.9 million hectares for residential and industrial use. This is only 5 per cent of their land; forest cover in Japan is a whopping 67 per cent. Compare this with the 22 million ha of Indian non-agricultural land. That is, Japan uses less than 10 per cent of the non-agricultural land available in India to produce three times more industrial output! The inefficiency of Indian industry in land-use is glaring.”
Hence, those corporates who have acquired land over the years haven’t put it to efficient use, given that they haven’t paid for it or got it an extremely concessional rate. One look at the five-star campuses of Indian IT companies should make this clear as well.
The Congress party was in power for most of these 66 years with only brief interludes where other coalitions came to power in Delhi. And it chose not to do anything about the 1894 Land Acquisition Act, for nearly six decades, even though it was in power in every decade after independence. In 2013, the party put forward The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013, which went to the other extreme and brought all land acquisition to a standstill.
Hence, the party protesting against the The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014, which is nothing but the Congress 2013 Act with a few amendments, is nothing but sheer hypocrisy. After taking the people of this country for ride on more than six decades, the party suddenly seems to have discovered its humane side.
To conclude, for the land acquisition system to start working again the trust that has been lost needs to be rebuilt. For this to happen the government needs to proceed very carefully. As Namita Wahi writes in a column in The Indian Express: “Acquisition of land by the state for private industry must only be done upon the showing of a demonstrable public purpose in each case.” And that is very important.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Mar 18, 2015

18 March, 2015

Are acche din for the Indian consumer about to start?

Vivek Kaul

Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). This proportion comes down as income levels go up. Nevertheless, if food prices go up, the pinch is fell by almost everybody except the upper middle class and the rich.
This has an impact on consumption given that incomes don’t always rise at the same pace as food prices and overall inflation. People then cut down on their expenditure on other things leading to a slowdown in consumption growth.
In 2012-2013 and 2013-2014, private consumption growth was at 4.9% per year. In comparison this had been at 8.4% in the preceding five years. This was primarily because both food inflation and inflation as measured by the consumer price index(CPI) were at greater than 10% levels. As people spent more money on things they consumed on a daily basis, the growth in expenditure on non-essentials slowed down.
As Crisil Research points in a research note titled A Rs 1.4 trillion consumption kicker looms: “Sales growth in air-conditioners, washing machines and refrigerators nosedived from 18-20% in fiscal 2010 to 3-4% in fiscal 2014. Passenger vehicle sales plummeted to an average 6.2% in fiscals 2013 and 2014 compared with 29% in fiscal 2011.” This clearly tells us that many people postponed the purchasing things that were not essential for everyday living.
Things have changed in the recent past. The consumer price inflation for the month of February 2015 stood at 5.4%, well below the double digit levels. Food prices remained flat during the course of the month in comparison to February 2014.
Over and above this, oil prices have also fallen big time in comparison to where they were last year. On March 18, 2014, the price of the Indian basket of crude oil was at $104.47 per barrel. On March 16, 2015, around a year later, the price of the Indian basket of crude oil was at $52.11 per barrel or 50% lower. The entire fall in price of oil has not been passed on to the end consumers. The government has increased the excise duty on petrol and diesel. Nonetheless, there has been some relief for the end consumer. The retail price has fallen by Rs 12.3 per litre for petrol and Rs 6.8 per litre for diesel, since April 2014.
Crisil Research expects lower food inflation and lower oil prices to do the trick in pushing up private consumer expenditure growth: “The fall in food inflation and lower fuel prices will together yield additional ‘savings’ (or increase in spending power) of Rs 1.4 trillion in fiscal 2016 compared with nearly Rs 509 billion in fiscal 2015. Savings on fuel expenses alone will be Rs 300 billion, while on food it will be more than thrice that at Rs 1.1 trillion.”
Another factor that should help is a fall in inflation expectations(or the expectations that consumers have of what future inflation is likely to be). In the inflation expectations survey released by the Reserve Bank of India(RBI) for September 2014, the inflation expectations over the next three months and one year were at 14.6 percent and 16 percent.
In the latest inflation expectations survey for December 2014, these numbers crashed to 8.3% and 8.9%. A belief among consumers that prices will not continue to go up at the same rate as they have in the past, is very important to get consumption going again. Hence, a fall in inflation expectations should help.
What will also get consumption going is the fact that increasing disposable income will help people to borrow more, given that their capacity to repay will go up. As Crisil Research points out: “The household sector in India is under-leveraged, with the household debt (from bank and formal non-bank sources) to GDP ratio at just 12% compared with close to 80% in United States. Household debt from commercial banks and non-banking financial companies was nearly Rs 14 trillion as of March 31, 2014, including housing and educational loans. This is just 22% of household consumption. Moreover, most of the debt was accumulated in the last decade and more than 60% was taken to buy houses. If we exclude these housing loans – which do not form a part of consumption — then the ratio falls to 8%.” What this means that there is a huge scope for the Indian consumer to borrow and spend.
All these reasons will essentially ensure that in the financial year starting next month, the Indian consumer will make a comeback with his shopping bags. Crisil Research expects private consumption to grow by 7.8% in 2015-2016. “An increase in purchasing power led by declining inflation and improvement in incomes will ensure a gradual but steady pick-up in consumption demand next fiscal. At the sectoral level, we expect passenger vehicles sales to grow by 9-11% in fiscal 2016, up from 3-5% growth in fiscal 2015. Similarly, household appliances sales are forecast higher – television sales at about 9% compared to a 0.3% decline in fiscal 2015, air conditioners at 15% compared to 9%, and refrigerator at 10% compared to 5%.”
What can spoil this upcoming party for the consumer? The recent unseasonal rains in the Northern states will push food prices up in the coming months. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note: “Disinflation in food prices have ended and it is more likely than not to expect higher food prices from March onward, especially given the recent unseasonal rainfall, which may have impacted some crops.”
Despite this negative, it looks like acche din for the Indian consumer are about to start.

The column originally appeared on The Daily Reckoning on Mar 18,2015

17 March, 2015

Will Federal Reserve spoil the stock market party by raising interest rates?

The prospect of future company earnings are supposed to drive stock markets. But this basic theory has broken down in the aftermath of the financial crisis that started in September 2008.
Western central banks led by the Federal Reserve of the United States have printed an astonishing amount of money over the last six and a half years and some like the Bank of Japan and the European Central Bank, continue to do so. The idea was that money printing would lead to lower interest rates, and at lower interest rates banks would lend more and consumers and businesses would borrow more. This would lead to businesses and in turn, the economy doing well.
But that hasn’t turned out to be the case. As the following table clearly shows, bank loans to small and medium enterprises(SMEs) in the United States have been falling as a proportion of total loans, over the years.

The shrinking importance of SME lending

Nonetheless, lower interest rates in much of the Western world, has allowed investors to borrow money at rock bottom interest rates and invest it in stock markets all over the world.
This is why stock markets including the Indian one have rallied big time over the last few years. For this rally to continue it is important that Western central bank continue to maintain low interest rates.
The economic situation in Europe continues to remain bad, and as of now there is very little chance that central banks of Europe will go around raising interest rates any time soon. In fact, in Switzerland the short term interest rate currently is at − 0.75%.
Japan also continues to remain in doldrums and the chances of the Bank of Japan, the Japanese central bank, raising interest rates any time soon remain minimal. This leaves the Federal Reserve of the United States, the American central bank. And this is where things get a little tricky.
The Federal Open Market Committee of the Federal Reserve which decides on the interest rate is supposed to meet today and tomorrow (i.e. March 17 and March 18). The rate of unemployment in the United States has come down significantly over the last one year. In fact, the USA Today reports that in 2014, job growth hit a 15 year high.
Typically, a fall in unemployment leads to an increase in wage growth, as employers compete to recurit employees. But that doesn’t seem to have happened in the United States. The Fortune magazine reports that the average hourly pay of an American worker has risen by just $0.03 in the last one year. This basically means that wage growth in the United States has been more or less flat over the last one year.
The overall inflation also remains much lower than the Federal Reserve’s target of 2%. The Federal Reserve’s preferred measure of inflation is personal consumption expenditures(PCE) deflator, ex food and energy. For the month of January 2015, this number was at 1.3% much below the Fed’s target of 2%.
This number falls further once the imputed(i.e. made-up data) is excluded. Before we go any further I need to explain what imputed data is. Take the case of an individual who owns the house he lives in. As the Statistics Bureau of Japan points out: “Buying a house or a piece of land is a form of property acquisition and not consumption expenditure. Such a purchase, therefore, is not counted in the CPI. Still, it is an undeniable fact that a household living in a house it owns receives some service from the house…Also, many households are paying a mortgage. Here, it leads to an issue that, one way or another, the housing expense of an owner-occupied house should be counted in the CPI calculation.”

Hence, such a situation needs to be taken into account. It is done by assuming that the “house-owning household is renting the same house from someone else.” “Then, the household has to pay some rent…An “imputed rent of an owner-occupied house” refers to the rent paid to owner-occupied houses assuming that owned house were rented. Such imputed rents are taken into the CPI calculation,” the Statistics Bureau of Japan points out.
If such data were to be excluded from inflation calculation in the United States, the results would be significantly different from the way they currently are. As Albert Edwards of Societe Generale points out in a recent research note titled Forget the ECB: A key measure of global liquidity is now in freefall, published on March 6, 2015: “We use a variant of this core PCE where the US statisticians exclude imputed (i.e. made-up) data..Five out of the last six months have registered zero inflation with only one 0.1% rise! Headline core PCE is being inflated by made-up data.”
As the fall in price of oil seeps through the system Edwards expects the inflation rate to come down to 0.3%. The other major reason for low inflation in the US is the fact that dollar has rallied majorly against all major currencies. This ensures that imports to the United States become cheaper, and thus drive down inflation.
In this scenario of almost no wage inflation and low overall inflation, will the Federal Reserve start increasing interest rates? If the Fed does not raise interest rates then foreign investors will continue raising money in dollars and investing that money in stock markets all over the world, including India.
But if the Fed does start to raise interest rates then this carry trade may run into some trouble and fresh money from foreign investors may not come into India at the same pace as it has in the past. The way things stand as of now, this remains too close to call. Nevertheless, I will stick my neck out and say, the Fed won’t raise interest rates in June this year, as it is widely expected to.
Having said that, I have my fingers crossed!

The column originally appeared on The Daily Reckoning on Mar 17, 2015

16 March, 2015

SBI’s property e-auction: Why not show same aggression to corporate defaulters?

The Motihari born George Orwell wrote a lot of sensible things during his lifetime. One of them was a book called Animal Farm. My favourite sentence in the book is: “All animals are equal, but some animals are more equal than others”.
More than a sentence this is a phenomenon which is visible at various points of time in the society that we live in. Currently this phenomenon is at play at the State Bank of India(SBI), which has made a decision to e-auction 350 repossessed residential and commercial properties amounting to a total of Rs 1,000-Rs 1,200 crore.
The repossessed properties had been pledged as collateral for housing and other business loans taken from SBI. Reuters reports that “many of” these properties “were put up as collateral by fledgling entrepreneurs.” They were taken over by SBI under the the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act for non payment of dues.
“The SBI auction will be the biggest nationwide online sale to date,” Reuters reports. “We are now a lot more aggressive,” Parveen Kumar Malhotra, a deputy managing director at SBI, who leads a special unit managing stressed assets, told Reuters.
Commercially this makes immense sense and SBI should have been aggressive about defaults from day one. A bank is not in the business of losing money it lends out. It has a certain responsibility towards depositors whose money it is lending out. It needs to ensure that returns are generated on this money that is loaned to those who need it.
Nevertheless, India’s largest bank has not shown the same aggression when it comes to recovering money from big defaulters. In that sense the entire thing is very Orwellian—all animals are equal, but some animals are more equal than others.
As of December 31, 2014, the gross non-performing assets (NPAs) of the State Bank of India stood at Rs 61,991 crore or 4.9% of the total loans given by the bank. Of these gross NPAs of large and mid-corporates accounted for Rs 27,504 crore. The large corporates accounted for Rs 1,074 crore whereas the mid-corporates accounted for Rs 26,430 crore of bad loans.
The gross NPAs accounted for by large corporates has fallen from Rs 3,658 crore to Rs 1,074 crore between December 2013 and December 2014. On the other hand gross NPAs accounted for by mid-corporates grew from Rs 26,191 crore to Rs 26,430 crore, during the same period.
Gross NPAs from retail loans fell from Rs 4,103 crore to Rs 3,082 crore. Gross NPAs accounted for by small and medium enterprises fell from Rs 17,382 crore to Rs 16,427 crore. In fact, the gross NPAs accounted for by agriculture and international lending have also fallen between December 2013 and December 2014. Interestingly, the gross NPAs of every form of lending other than lending to mid-corporates has come down, data from the bank shows.
What this tells us very clearly is that the bank has been going aggressively after all forms of bad loans. The total gross NPAs have come down from Rs 67,799 crore or 5.73% of total loans to Rs 61,991 crore or 4.9% of total loans. But SBI hasn’t shown the same aggression when it comes to recovering loans from mid-corporates. Why is such special treatment being given out to corporates?
This is something that the Reserve Bank of India governor Raghuram Rajan had clearly pointed out in a speech he made in November last year. As Rajan said, India is “a country where we have many sick companies but no “sick” promoters.” “In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken — the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive. And if the enterprise regains health, the promoter retains all the upside, forgetting the help he got from the government or the banks – after all, banks should be happy they got some of their money back!”
And since banks can’t and don’t do much about corporate loans that have gone bad, they go with all guns blazing to recover loans from their smaller defaulters. As Rajan put it “The SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests) Act of 2002 is, by the standards of most countries, very pro-creditor as it is written. This was probably an attempt by legislators to reduce the burden on debt-recovery tribunals and force promoters to pay. But its full force is felt by the small entrepreneur who does not have the wherewithal to hire expensive lawyers or move the courts, even while the influential promoter once again escapes its rigour. The small entrepreneur’s assets are repossessed quickly and sold, extinguishing many a promising business that could do with a little support from bankers.”
This is precisely how SBI’s decision to auction 350 residential and commercial properties in order to recover bad loans is playing out. And George Orwell saw it coming.

The column originally appeared on www.firstpost.com on Mar 16, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

14 March, 2015

YV Reddy is right: The govt borrowing on its own won’t work

In the budget speech he made on February 28, 2015, the finance minister Arun Jaitley had said: “I intend to begin this process this year by setting up a Public Debt Management Agency (PDMA) which will bring both India’s external borrowings and domestic debt under one roof.”
The government of India, like most governments spends more than it earns. The difference it makes up through borrowing. This borrowing is currently managed by the Reserve Bank of India (RBI). Jaitley now wants to take away this responsibility from the RBI and set up an independent public debt management agency.
On the face of it this sounds like a simple move-one institution was taking care of the government borrowings needs, now the government wants to takeover the responsibility. But it is not as simple as that.
Before I explain why, it is important to understand something known as the statutory liquidity ratio (SLR), which currently stands at 21.5%. What this means is that for every Rs 100 that banks raise as a deposit, Rs 21.5 needs to be invested in government bonds.
This number was at higher levels earlier and has constantly been brought down by the RBI over the years. This provision helps the government raise money at lower interest rates than it would otherwise be able to.
This is something that the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (better known as the Urjit Patel committee) released in January 2014 pointed out: “Large government market borrowing has been supported by regulatory prescriptions under which most financial institutions in India, including banks, are statutorily required to invest a certain portion of their specified liabilities in government securities and/or maintain a statutory liquidity ratio (SLR).”
This statutory requirement essentially ensures that there is a constant demand for government bonds. This helps the government get away by offering a lower rate of interest on its bonds.
“The SLR prescription provides a captive market for government securities and helps to artificially suppress the cost of borrowing for the Government, dampening the transmission of interest rate changes across the term structure,” the Expert Committee report points out.
Take a look at the following chart. Between 2007-2008 and 2013-2014, the government was able to borrow money at a much lower rate of interest than the prevailing inflation. The red line which represent the estimated average cost of public debt (i.e. Interest paid on government borrowings) has been below the green line which represents the consumer price inflation, since around 2007-2008.

The major reason for the same is the fact that there is an inbuilt demand for government securities. The Economic Survey of 2014-2015 has some interesting data which buttresses the point that I am trying to make. The total internal liabilities of the government of India have gone up by 1.9 times between 2009-10 and 2014-2015. Nevertheless, the average cost of borrowing has gone up only from 7.5% to 8.41%.

This financial repression of forcing banks, insurance companies as well as provident funds to buy government bonds, allows the government to raise money at low interest rates, than they would be able to do if they allowed the market to operate.
Now the government wants to take away the debt management function from the RBI and raise money independently. In this scenario the question is can the SLR continue? Dr YV Reddy, former governor of the RBI, made this point in an interview to the The Economic Times. As he said: “If the government is having an independent debt office then how can the statutory liquidity ratio of a high order continue. Once it is an independent debt office, basically, it should independently be able to raise money.”
Fair point, I guess. “So, if the government want to raise money then indirectly the regulator cannot go on supporting through a cell. So the pre-condition will be SLR has to be removed. Because it would be inappropriate to say that you are independent but I will help you do something. So, in all probability the RBI will have no choice except to reduce SLR to zero as a precondition for an independent debt office,” Reddy told The Economic Times.
The question that crops up here is whether the government is ready to take on this risk given that it is likely to lead to higher interest rates. With banks no longer having to compulsorily buy government bonds, they may not buy government bonds all the time, like is the case currently. This will lead to a situation where the government will have to offer a higher interest rate to get the banks interested. While this sounds good on the face of it, given that if the government offers higher interest rates on its bonds, that higher interest rate will become the benchmark.
Given this, banks will have to offer higher interest rates on their fixed deposits. This means that the chances of savers getting a higher rate of interest (which is greater than the rate of inflation) also goes up.
But if banks offer a higher rate of interest on fixed deposits, they will also have to charge a higher rate of interest on their loans. And this is something that the government won’t like, given that it is currently trying to push down interest rates in the hope of getting the investment cycle and the consumption cycle going all over again. It needs to be pointed out that savers are not the ones either governments or politicians are really bothered about.
Nevertheless, the government might force the RBI to keep the SLR at its current level. But then there would be no independent public debt office. It would be a farce. As Reddy put it: “If the government is pressurising the RBI to not reduce the SLR that is inappropriate. That is not an independent debt office. And it would be inappropriate for RBI even to appear to support the government debt programme. It cannot appear to be.”
Long story short-we haven’t heard the last of this issue. There will be more to come in the time to come. Stay tuned.

The column originally appeared on The Daily Reckoning on Mar 14, 2015