Month: July 2017

What a Slowdown in Retail Loans Tell Us About a Slowing Economy

In the recent past a lot has been written about the overall slowdown in bank lending. Take a look at Figure 1. It essentially tells us about the loans given out by banks during the period between May 2016 and May 2017, and May 2015 and May 2016, before that.

Let’s start with non-food credit. These are the loans given out by banks after we have adjusted for food credit or loans given to the Food Corporation of India and other state procurement agencies, for buying rice and wheat directly from farmers at the minimum support price (MSP) for the public distribution system.

Figure 1:

Type of LoanTotal Loans Given Between May 2016 and May 2017 (in Rs Crore)Total Loans Given Between May 2015 and May 2016 (in Rs Crore)
Non-Food Credit4,22,0016,25,975
Loans to industry-56,45524,383
Retail Loans1,94,5532,27,863

Source: Reserve Bank of India 

The total amount of non-food credit given out between May 2016 and May 2017 is down by 33 per cent to Rs 4,22,001 crore, in comparison to the period between May 2015 and May 2016. Hence, there has been a huge overall slowdown in the total amount of loans given out by banks over the last one year, in comparison to the year before that.

Why has that been the case? The major reason for the same are loans to industry. Banks are in no mood to give out loans to industry. During the period May 2016 and May 2017, the total loans to industry actually shrunk by Rs 56,455 crore. This basically means that on the whole the banks did not give a single rupee of a new loan to the industry. During the period May 2015 and May 2016, banks had given fresh loans worth Rs 24,383 crore to industry, overall.

This is happening primarily because banks have run a huge amount of bad loans on loans they had given to industry in the past. As on March 31, 2017, the bad loans ratio of public sector banks when it came to lending to industry, stood at 22.3 per cent. Hence, for every Rs 100 of loan made to industry by public sector banks, Rs 22.3 had turned into a bad loan i.e. the repayment from a borrower has been due for 90 days or more.

Not surprisingly, these banks are not interested in lending to industry anymore. This has been a major reason behind the overall slowdown in lending carried out by banks, as we have seen earlier.

But one part of lending that no one seems to be talking about is retail lending carried out by banks. This primarily consists of housing loans, vehicle loans, consumer durables loans, credit card outstanding, loans against fixed deposits, etc. The assumption is that all is well on the retail loan front.

As far as bad loans are concerned, things are going well on the retail loans front. But what about the total amount of retail loans given by banks? Between May 2016 and May 2017, the total amount of retail loans given by banks stood at Rs 1,94,533 crore. This was down by around 15 per cent to the amount of retail loans given by banks between May 2015 and May 2016. This, despite the fact that interest rates on retail loans have come down dramatically in the post demonetisation era. You can get a home loan now at an interest of as low as 8.35 per cent per year.

A major reason for this slowdown in retail loans are housing loans, which form the most significant part of retail loans. Between May 2016 and May 2017, the total amount of housing loans given by banks stood at Rs 92,469 crore down by 22 per cent in comparison to the housing loans given out by banks between May 2015 and May 2016.

Lower interest rates on home loans haven’t helped much. The only explanation of this lies in the fact that high real estate prices continue to be the order of the day across the country. How do things look with vehicle loans which form a significant part of the retail loans? Between May 2016 and May 2017, banks gave out vehicle loans worth Rs 18,447 crore, 26 per cent lower than the vehicle loans given out by banks between May 2015 and May 2016.

What does this tell us? It tells us very clearly that things have deteriorated even on the retail loans front. People take on retail loans only when they are sure that they will be able to continue repaying the EMIs in the years to come (unlike corporates). The fall in the total amount of retail loans lent by banks over the last one year clearly tells us that the confidence to repay EMIs, is not very strong right now.

This is another good indicator of the overall slowdown in the Indian economy, which has happened in the post demonetisation era.

The column originally appeared in Equitymaster on July 24, 2017.

Economic Lessons from a Computer Printer

printer

A few years back when I quit business journalism to write fulltime, one of the first things I did was to buy a computer printer. This was primarily to help my reading habit, given that I can’t read long documents on a computer. Also, it helped me to print and send out invoices conveniently, instead of having to visit a shop every time I needed to send out an invoice.

Like any good Indian, I bought the cheapest branded printer that was available. It cost just Rs 3,000. It was only when I started printing stuff did I realise how expensive the printer really was. While, the printer cost just Rs 3,000, every time I bought a cartridge, it cost Rs 800-900. And cartridges kept running out at a very fast pace. At best, I could print around 130-150 pages with a single cartridge. It was only then I realised that the printer was just something the company sold, so that they could get the consumers to buy cartridges, which is where the actual money was made.

As Even Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About it: “By keeping a headline price low, the hope is that we assume that the overall price is low… We judge the cost of a product on the headline price, so the headline price will be kept low… There are the up-front prices versus the ongoing charges. Teaser mortgage rates that become expensive later, cheap printers with expensive cartridges and cheap razors with expensive blades are all examples of the same thing.”

In fact, in some cases the consequences can be dire. One of the reasons behind the current financial crisis was the bursting of the home price bubble in the United States and other parts of the Western world. A major reason behind the bubble was the fact that the EMIs that needed to be paid on home loans had crashed dramatically because of teaser rate mortgages (or home loans as we call them in India). In a teaser rate home loan, the interest rate is much lower in the initial years, after which it goes up dramatically.

This led to a lot of people who shouldn’t have gotten a home loan in the first place getting one. The trouble was that once the high EMIs kicked in (remember it was a teaser loan with low EMIs initially) the borrowers simply did not have the money to keep repaying the loan. So, first the teaser loans led to the home prices going up. Once the EMI defaults started, it led to a price crash, which was one of the reasons which fuelled the financial crisis.

What is the bigger lesson here? As Davis writes: “We tend to make important judgements on the basis of a few key indicators, and so by manoeuvring those indicators our perception can be controlled.” Like anyone buying a printer for the first time looks just at the price (and possibly the brand). He or she doesn’t bother about the cost of running the printer over the longer term. Companies manufacturing the printer manipulate the situation by selling printers for low prices. This basically leads to people buying the printer.

Such manoeuvring also happens in other areas. As Davis writes: “We think that good magazines have good covers, so when we observe a good cover we infer that the magazine underneath will be worth buying. As long as editors understand this rule of thumb, then you can expect inordinate effort to go into the design of the cover, even to the possible detriment of the rest of the magazine.”

Anyone who has read Indian magazines over the last two decades would know that while magazine covers have improved dramatically, the same cannot be said about the articles being published.

The moral of the story is “that as long as we come to a judgement based on only a selection of the available evidence, canny communicators will have a disproportionate impact on our thinking by being selective in the evidence they put forward.”
As the old adage goes, what you see is what you get.

(The column was originally published in the Bangalore Mirror on July 26, 2017).

Who Does Low Inflation “Really” Benefit?

rupee

Every month the ministry of statistics and programme implementation declares the inflation based on the consumer price index. Inflation is essentially the rate of price rise. The inflation for the month of June 2017, came in at 1.5 per cent.

This basically meant that prices in June 2017 overall were higher by 1.5 per cent in comparison to June 2016. This is the lowest inflation that the country has seen over the period of last five years.

Hence, not surprisingly, the government moved very quickly to claim credit. Arvind Subramanian, the chief economic adviser to the ministry of finance, said: “This low, heartening number is consistent with our analysis for some time now.”

This is one of those statements that makes economics the subject that it is, where equally convincing arguments can be made from the two ends of the spectrum.

Allow me to explain.

Low inflation is heartening because the rate of price rise has come down. It needs to be understood here that low inflation does not mean lower prices. It just means that the rate of price rise has come down than in comparison to the past and that is a good thing. Or so the chief economic adviser would like us to believe.

The question is why has the rate of inflation come down? The consumer price index that is used to calculate inflation is made up of a large number of goods and services. The government tracks the prices of these goods and services across the country, in order to arrive at the inflation number.

Food and beverages constitute around 45.9 per cent of the index. Food and beverage prices fell by 1.2 per cent in June 2017 in comparison to June 2016. In fact, prices of some of the constituents like pulses and vegetables have fallen at a much faster rate than the overall rate.

The price of vegetables fell by 16.5 per cent and that of pulses fell by 21.9 per cent. Vegetables and pulses together constitute a little over 8.4 per cent of the index.

So, what does this mean? It means that the overall rate of inflation is down because food prices have actually come down. Lower food prices essentially mean that the farmers growing food, have sold what they grew at a price lower than they had in the past. Also, these lower prices do not always reach the end consumers, with middlemen taking in a bulk of the benefit.

There have been many stories in the media portraying the plight of these farmers who have had to sell their produce at lower than their cost price and face losses and get even more indebted. In fact, it is not surprising that over the last few months, there has been so much demand for loans to farmers to be waived off, all across the country.

The larger point is that if inflation has become very low then someone is not being paid as much as he was in the past. And this can be due to various reasons. In this case that someone happen to be farmers. Farmers form around half the working population. If they face losses then they are less likely to spend as much money as they had in the past. This will impact rural growth and in the process, the overall economic growth.

Hence, when Subramanian finds low inflation heartening, he ignores this line of thought totally. As Evan Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About It: “There are certainly such things as facts, and no one should persuade you otherwise. But aside from quite banal facts (‘the sun is shining’) we always have to use judgement in deciding what is a fact and what to believe: we have to apply a judgement as to the weight of evidence in its support relative to the weight of interpretation put on it.”

The column originally appeared in the Bangalore Mirror on July 19, 2017.

Who Does Low Inflation “Really” Benefit?

rupee

Every month the ministry of statistics and programme implementation declares the inflation based on the consumer price index. Inflation is essentially the rate of price rise. The inflation for the month of June 2017, came in at 1.5 per cent.

This basically meant that prices in June 2017 overall were higher by 1.5 per cent in comparison to June 2016. This is the lowest inflation that the country has seen over the period of last five years.

Hence, not surprisingly, the government moved very quickly to claim credit. Arvind Subramanian, the chief economic adviser to the ministry of finance, said: “This low, heartening number is consistent with our analysis for some time now.”

This is one of those statements that makes economics the subject that it is, where equally convincing arguments can be made from the two ends of the spectrum.

Allow me to explain.

Low inflation is heartening because the rate of price rise has come down. It needs to be understood here that low inflation does not mean lower prices. It just means that the rate of price rise has come down than in comparison to the past and that is a good thing. Or so the chief economic adviser would like us to believe.

The question is why has the rate of inflation come down? The consumer price index that is used to calculate inflation is made up of a large number of goods and services. The government tracks the prices of these goods and services across the country, in order to arrive at the inflation number.

Food and beverages constitute around 45.9 per cent of the index. Food and beverage prices fell by 1.2 per cent in June 2017 in comparison to June 2016. In fact, prices of some of the constituents like pulses and vegetables have fallen at a much faster rate than the overall rate.

The price of vegetables fell by 16.5 per cent and that of pulses fell by 21.9 per cent. Vegetables and pulses together constitute a little over 8.4 per cent of the index.

So, what does this mean? It means that the overall rate of inflation is down because food prices have actually come down. Lower food prices essentially mean that the farmers growing food, have sold what they grew at a price lower than they had in the past. Also, these lower prices do not always reach the end consumers, with middlemen taking in a bulk of the benefit.

There have been many stories in the media portraying the plight of these farmers who have had to sell their produce at lower than their cost price and face losses and get even more indebted. In fact, it is not surprising that over the last few months, there has been so much demand for loans to farmers to be waived off, all across the country.

The larger point is that if inflation has become very low then someone is not being paid as much as he was in the past. And this can be due to various reasons. In this case that someone happen to be farmers. Farmers form around half the working population. If they face losses then they are less likely to spend as much money as they had in the past. This will impact rural growth and in the process, the overall economic growth.

Hence, when Subramanian finds low inflation heartening, he ignores this line of thought totally. As Evan Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About It: “There are certainly such things as facts, and no one should persuade you otherwise. But aside from quite banal facts (‘the sun is shining’) we always have to use judgement in deciding what is a fact and what to believe: we have to apply a judgement as to the weight of evidence in its support relative to the weight of interpretation put on it.”

The column originally appeared in the Bangalore Mirror on July 19, 2017.

Who Will Survive the Coming Jobs Crisis?

jobs
In last week’s column I wrote about robots, automation, technology and algorithms, taking over human jobs. One reader wrote in asking by when is this likely to happen. I wish I knew. There are no straightforward answers here.

Many new organisations formed over the last few years, barely have any people working for them. Nevertheless, they are worth a bomb. Social media is an excellent example. As Edward Luce writes in The End of Western Liberalism: “In 2006, Google bought YouTube for $1.65 billion. It had sixty-five employees, so the price amounted to $25 million per employee. In 2012 Facebook bought Instagram, which had thirteen employees, for $1 billion. That came to $77 million per employee. In 2014, it bought WhatsApp, with fifty-five employees, for $19 billion, at a staggering $345 million per employee.”

Of course, these companies did not destroy jobs. They did not create them in the first place. But there is a lot of technology being created out there which is helping companies in not recruiting as many people as they did in the past and firing the existing employees as well. As Luce writes: “Facebook’s data servers are now managed by Cyborg, a software programme. It requires one human technician for every twenty thousand computers.”
The point being that jobs which require people to sit in front of computers and manipulate data to manage a system or to present them in an understandable form, are going to go, sooner rather than later. For example, as is well known robots can now driver cars.

The other big question is when will companies start firing employees because they no longer need them, with robots, automation or algorithms, taking over human jobs. This is a tricky question.

As Paul De Grauwe writes in The Limits of the Market: “There are psychological sources of resistance: people who work with old technologies will not always switch to new ones because the change means part of their knowledge has become worthless.”

Over and above this there are economic sources of resistance. As De Grauwe puts it: “Old machines and tools have to be disposed of early, factories have to be closed own and employees sacked. This leads to serious opposition and delays to the introduction of new technologies.”

In the Indian case, it is very difficult for companies to sack employees en masse. It is more than likely for the local politicians and the media will get involved, and the company will end-up getting a lot of bad press. Given this, it is highly unlikely that the information technology companies which have thousands of people working for them, will end up firing employees en masse.

What they will do instead is that they will not hire the number of people that they have been doing in the past. In fact, this phenomenon has already been at play over the last few years, with the salaries at the entry level in information technology companies, remaining more or less flat. Chances are you can make more money owning and driving an Uber or an Ola taxi, than being a new trainee engineer at an information technology company.

It is also visible in a huge number of engineering seats in colleges not being filled up across several states.

When companies follow this strategy of not recruiting, it is a tad easier for them in comparison to firing people whose skillsets they don’t need anymore. That simply gives them a lot of bad press.

It is not just those working in information technology companies whose jobs will be under threat. As Luce writes: “Some types of medical surgeon and architect will be as vulnerable to remote intelligence as plant engineers or call-centre operators.”

And who is likely to survive this onslaught? As Luce puts it: “Ironically, some of the lowest-paid jobs – in barbershops and nail salons – will be among the safest. No matter how dexterous your virtual service provider, it is hard to imagine how she could cut your hair.”

Now that is something worth thinking about.

The column originally appeared in Bangalore Mirror on July 12, 2017.