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3 March, 2015

With Jaitley talking about 10% growth, should Rajan be cutting interest rates?

Vivek Kaul

The budget presented by finance minister Arun Jaitley on Saturday, February 28, 2015, leads me to ask—will the Reserve Bank of India(RBI) governor Raghuram Rajan cut the repo rate now? Repo rate is the rate at which the RBI lends to banks and acts as a sort of a benchmark to the interest rates at which banks carry out their lending business. Rajan had last cut the repo rate in January by 25 basis points(one basis point is one hundredth of a percentage) to 7.75%.
In the commentary that accompanied the interest rate cut, Rajan had said that the “key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation.”
What Rajan meant here was that further repo rate cuts would happen if inflation kept falling or remained where it was. At the same time he would expect the government to work towards bringing down its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
The government finances the fiscal deficit through borrowing. If the fiscal deficit goes up, the government borrowing also goes up, leading to what economists call the “crowding out” of the private sector.
The government borrowing more, leaves a lower amount of money for others to borrow and in turn pushes up interest rates. Further, increased government expenditure is also likely to lead to higher inflation, with more money chasing the same number of goods and services. In fact, the recent era of double digit inflation that prevailed in the country was primarily because of the Indian government increasing its spending. Given this, it is very important that the RBI governor keep a watch on the fiscal deficit number.
When Jaitley had presented his first budget in July 2014 he had said: “My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” Hence, the impression he had given in July and in the months that followed was that the government would work towards bringing down fiscal deficit in the years to come.
But in the budget speech that he made on Saturday, Jaitley abandoned this promise. As he said during the course of the speech: “I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously. Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.”
In absolute terms, the fiscal deficit that Jaitley is targeting is Rs 5,55,649 crore, against the Rs 5,12,628 crore, during this financial year. The question how is that will Rajan cut interest rates now, given that Jaitley has postponed the fiscal consolidation plans. The first bi-monthly monetary policy statement for fiscal year 2015-16 is scheduled on April 7, 2015.
The Economic Survey presented a day before the budget on February 27, 2015, forecasts that the economic growth during 2015-2016 (period between April 1, 2015 and March 31, 2016) will be between 8.1-8.5%.
The survey lists a number of reasons to back this forecast: “In the short run, growth will receive a boost from lower oil prices, from likely monetary policy easing facilitated by lower inflation and lower inflationary expectations, and forecasts of a normal monsoon.”
As I have written a few times by now the ministry of statistics and programme implementation recently revised the way in which the gross domestic product is calculated. This revised method led to the economic growth for 2013-2014 being revised to 6.9% against the earlier 5%. In fact, using the new model the growth projected for 2014-2015 is at 7.4%.
The high frequency data that keeps coming out suggests otherwise. For the period October to December 2014, corporate profits on a whole fell. Car sales which are an excellent economic indicator remain muted and are only expected to go up by 3-5% during this financial year. Lending by banks is much slower than it has been over the past few years. Exports during the course of this financial year have gone up by only 2.44% to $258.72 billion. The indirect tax collections have risen by 7.4% during this financial year. When the budget was presented in July 2014, it was expected that indirect taxes would grow by 20.3%.
Other data appearing in the Economic Survey all suggest that all is not well with the Indian economy. “The stock of stalled projects at the end of December 2014 stood at Rs 8.8 lakh crore or 7 per cent of GDP,” as per the Economic Survey. While the rate of stalled projects has come down a little, it still remains very high.
Further, data in the Economic Survey shows that household savings (both physical and financial) have collapsed from 25.2% of the GDP in 2009-2010 to 17.8% of the GDP in 2013-2014. This is a huge collapse.
Household financial savings have fallen from 12% of the GDP to 7.2% of the GDP. High inflation that prevailed over the last few years is a major reason for the same. Inflation has been brought under control only very recently. What this means is that the Indian consumer might decide to rebuild his savings over the next couple of years instead of getting his shopping bags out. This means that the consumer spending may not pick up, as it is expected to. And if consumers go slow on spending, it doesn’t help businesses as well as the overall economy.
Nevertheless, it seems that the finance minister has bought in to these new growth forecasts. As he said during the course of his speech: “Based on the new series, real GDP growth is expected to accelerate to 7.4%, making India the fastest growing large economy in the world…We have turned around the economy dramatically, restoring macro-economic stability and creating the conditions for sustainable poverty elimination, job creation and durable double-digit economic growth. Domestic and international investors are seeing us with renewed interest and hope.”
Given the fact Jaitley is now talking about 10% economic growth, should Rajan really be cutting the repo rate? Now that’s something worth thinking about.

The column originally appeared on The Daily Reckoning on Mar 2, 2015

3 March, 2015

Stimulus and reforms don’t go together: Jaitley should have kept his fiscal deficit promise

Vivek Kaul

Promises are meant to be broken, especially in politics. In the budget speech he made in July 2014, the finance minister Arun Jaitley had said: “My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” Fiscal deficit is the difference between what a government earns and what it spends. A little over seven months later he has gone back on his earlier promise. In the budget presented on February 28, 2015, Jaitley said: “I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously. Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.” The extra space that this creates will allow the government to incur an extra capital expenditure of Rs 70,000 crore during the next financial year. The thing is that just ramping up spending is not enough. At the end of the day what matters is not the quantity of spending but the quality. As Taimur Baig and Kaushik Das of Deutsche Bank Research had pointed out in a recent research report: “Recent budgets have routinely allocated close to 5% of GDP in capital spending, a non-trivial amount by any measure. But these generous allocations have not materialized in a discernible pick up in the investment cycle…If the authorities aim at high quality, high multiplier projects worth 4-5% of GDP as opposed to simply ramping up the rate of spending, they will handily achieve the goal of providing a boost to the economy, in our view.” This postponement of the fiscal consolidation by a year comes at a time when the Bhartiya Janata Party(BJP) has a majority in the Lok Sabha. The National Democratic Alliance(NDA) which the BJP heads, has close to 60% members in the Lok Sabha. The BJP has more than 50% members in the Lok Sabha. Given this, Jaitley and the BJP do not have to pander to the idiosyncrasies of multiple allies like the Congress led United Progressive Alliance(UPA) had to, before them. This is the first time India has had a single party stable government in the last quarter century. Over the years, one item that has wrecked the government finances is the subsidy on oil. Jaitley has been very lucky on that front since taking over. The price of the Indian basket of crude oil on May 26, 2014, the day the Modi government was sworn in, was $ 108.05 per barrel. It had fallen by around 60% to $43.36 per barrel by January 14, 2015. The oil price has risen since then. On February 26, 2015, the price of the Indian basket of crude stood at $59.19 per barrel. While prices have gone up over the last six weeks, they still are very low in comparison to where they were in May 2014, when the Modi government came to power. So, there is not much pressure on government finances when it comes to offering oil subsidies. Further, the government has used this opportunity to increas-e excise duty on petrol and diesel and garner revenue in the process. In fact, the finance minister has budgeted just Rs 30,000 crore for oil subsidies in 2015-2016, against the Rs 60,270 crore that will spent during this financial year. The consumer price inflation has also been brought under control by the Reserve Bank of India(RBI) and in January 2015 was at 5.1%. In fact, this is under the 6% inflation that the RBI will now have to work towards maintaining. As Jaitley said in his speech: “We have concluded a Monetary Policy Framework Agreement with the RBI, as I had promised in my Budget Speech for 2014-15. This Framework clearly states the objective of keeping inflation below 6%.” So, things are looking well on this front as well. The one big ticket item that Jaitley had to deal with were the recommendations of the 14th Finance Commission which increased the states’ share of central taxes from 32% to 42%. Jaitley chose not deal with another big ticket item in this budget. The public sector banks need a huge amount of capital in the years to come. The PJ Nayak committee report released in May 2014, estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The report further points out that “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.” In the next financial year’s budget Jaitley has committed just Rs 7,940 crore towards this. So, he has more or less given this a complete miss. Also, as Jaitley said in his speech: “uncertainties that implementation of GST will create; and the likely burden from the report of the 7th Pay Commission.” This will only make things more difficult when it comes to controlling the fiscal deficit in the years to come. Long story short—controlling the fiscal deficit this year and ensuring that it was at 3.6% of GDP and not 3.9% of GDP was important. Also as Ruchir Sharma of Morgan Stanley pointed out in a recent column in The Times of India: “When the state spends in haste, it will repent at leisure…A stimulus mindset is the opposite of a tough reform mindset, and governments can rarely do both as the contrasting experience of the 1990s showed. By the end of that decade, most emerging nations had no money to burn, no lenders they could turn to.” So, stimulus and reforms don’t go together. Let’s see if Jaitley and the Modi government are able to prove that wrong. Only time will tell. But with 282 members in the Lok Sabha, Jaitley should have kept his promise to bring down the fiscal deficit on 28/2.

The column originally appeared on www.firstpost.com on Mar 2, 2015

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

17 February, 2015

Pahlaj Nihalani : Living in glass houses and throwing stones at others

pahlaj
Pahlaj Nihalani, the censor board chief, has aspirations of becoming the conscience keeper of the nation. The former film producer has issued a list of Hindi and English cuss
words that will be banned from films.
Earlier this year Nihalani had told The Times of India that “there is too much nudity on television and internet and it should be controlled,” going beyond his brief as the censor chief. He had followed this with an interview to The Hindu in late January where he had said that he did not “mind being called conservative” if it was “in national interest”. “The censor board is very liberal. But what is the modern generation watching? We are giving them the license to see anything. How is this projecting our culture?” Nihalani had added in the interview.
The irony is that all this comes from a man who gave Hindi cinema some of its crassest songs. Nihalani produced a film called Andaz in 1994, which was directed by David Dhawan. The movie had songs with lines like khada hai khada hai khada hai, roz karenge hum ku ku and main maal gaadi tu dhakka laga (later changed to ye maal gaadi tu dhakka laga). Any one who understands a little bit of Hindi will know what exactly these songs are trying to suggest. They clearly were not in national interest.
Before Andaz, Nihalani had produced Aankhen which released in 1992. This movie had a song with the line “khet gayil baba bazaar gayil ma, akeli hu ghar ma tu aaja balma”. The song starts with the heroine Shilpa Shirodkar lifting her ghagra to reveal her thigh. It is followed by the heroine and a string of women extras gyrating their chests and doing other suggestive movements.
Aankhen also had another superhit song called O Lal Dupatte Waali Tera Naam to Bata. This song had the heroes Govinda and Chunky Pandey chasing the heroines Ritu Shivpuri and Raageshwari. Somewhere midway through the song the heroines sing the line “har ajnabi ke liye ye khidki nahi khulti” and in a very suggestive way slightly raise the hemline of their white mini skirts. This clearly wasn’t a good projection of Indian culture that Nihalani now seems to be so passionate about now. Nihalani might defend himself by saying that these songs were a part of a phase in Hindi cinema where double meaning songs ruled. Subhash Ghai’s Khalnayak had the superhit choli ke peeche kya hai. Sawan Kumar Tak’s Khalnayika went a step further and had a song called choli ke andar kya hai. Prakash Mehra’s Dalal had chadh gaya upar re aatariya par lautan kabootar re. So, Nihalani in a sense was doing what everyone else was doing during that era.
But all these years later he has changed, he might tell us. As a line attributed to the British economist John Maynard Keynes goes: “When the facts change, I change my mind. What do you do, sir?”
Nihalani might have changed his mind but he needs to do a few things to change the facts, so that we can believe him. He should re-censor the films he produced and drop the songs which go against Indian culture and national interest, to start with. Further, in this era of remakes, if he ever chooses to remake or sell the rights of his biggest hit Aankhen, he should insist that the remake won’t have the khet gayil baba bazar gayil ma song. This should set an excellent precedent. Nihalani would be then putting his money where his mouth is.
Until he does that, it is worth remembering a dialogue written by Akhtar-Ul-Iman and spoken by Raj Kumar in the 1965 superhit Waqt, which goes like this: “Chinoi Seth…jinke apne ghar sheeshe ke hon, wo dusron par pathar nahi feka karte(Chinoi Seth…those who live in glass houses don’t throw stones at others).” Nihalani, being a film producer, would have hopefully heard of this.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])
The column originally appeared in the Daily News and Analysis(DNA) on Feb 17, 2015

29 January, 2015

The govt needs to think out of the box to finance public investment

Vivek Kaul

There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 column in the Financial Times that “the case for investment applies almost everywhere”.
And given that private investment is slowing down, the government needs to increase public investment seems to be the prevailing view. This becomes even more important with the International Monetary Fund recently deciding to revise global growth downward by 0.3% in 2015 and 2016 to 3.5% and 3.7% respectively.
The Indian government seems to be thinking of giving a push to public investment. The finance minister Arun Jaitely said so a few days back: “I think we have to take some special steps as far as public investments is concerned.” In yesterday’s column I had argued that the government needs to be careful about how it goes about financing the public investment programme that it may unleash in the next budget.
The recent evidence in favour of a public investment programme is not very strong. Many emerging market countries tried increasing public spending in the aftermath of the financial crisis in the hope of creating economic growth, only to see it not work and lead to other major problems.
As Ruchir Sharma author of Breakout Nations explained in a recent column in the Wall Street Journal: “Before anyone rushes to spend, however, it is worth noting that the big emerging nations, including China, Russia and Brazil just tried a full-throttle experiment in stimulus spending, and it failed. The average growth rate for emerging economies excluding China has fallen to 2.5% today, from more than 7 % at the height of the spending campaign. That is the lowest growth rate in four decades, outside of a global recession. For leaders in these countries, stimulus is now a bad word.” The Chinese growth also recently touched a 24 year low of 7.4%.
So what went wrong? “Emerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red, from an aggregate surplus equal to 1.5% of GDP in 2007 to a deficit equal to 2% of GDP in 2014. To pay for this deficit spending, public debt has risen significantly, throwing the books out of balance,” wrote Sharma. This is a point that Jaitley in particular and the Indian government in general should keep in mind, before they go on to take “special steps as far as public investments is concerned”.
The rating agencies and the foreign investors are watching India closely after Jaitley said in his maiden budget speech that “my roadmap for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” In the current financial year the government is aiming for a fiscal deficit of 4.1% of the GDP.
Given this, it is important that the government has a clear idea of how it will go about financing the “special steps” for public investment. One way out is to resort to asset sales. Asset sales does not just refer to the government disinvesting its shares in public sector units as well as other companies.
Take the case of Indian Railways, which owns huge tracts of land all around the country. Some of this land can be sold to generate revenue for revitalization of the Railways. Given the shortage of land in cities, this move can garner a good amount of revenue. Also, it is important to carry out some sort of an exercise which tells the government clearly how much land does the Railways actually own.
Over and above this, the Railways can also look at raising money by branding trains and stations. This is a move that has been tried in the past at least with Mumbai local trains. Also, stations on the Rapid Metro route in Gurgaon are sponsored by corporates. This can be one way of raising some “easy money” for the revitalization of Indian Railways. Also, it is worth pointing out that Railways is not the only department sitting on a huge amount of land.
If the government puts its bureaucrats and advisers to some use, such out of the box ideas will come out. Further, there is some low hanging fruit that the government can easily cash in on. One such low hanging fruit is the shares that the government owns through Specified Undertaking of Unit Trust of India (SUUTI) in ITC and Larsen and Toubro which as of January 28, 2015, were together worth Rs 45,386.86 crore (Rs 32,497.29 crore for ITC and Rs 12,889.57 crore for Larsen and Toubro and based on the shareholding pattern as on December 31, 2014). For reasons which can be best explained only by the government this holding hasn’t been sold till date.
These asset sales can directly finance public investment. As economist Sajjid Chinoy writes in the Business Standard: “So what the government needs is a predictable plan – say of 0.8-1 per cent of GDP for the next 2-3 years of asset sales that are directly ploughed into public investment such as highways, roads, bridges, ports, airports – to offset the private sector’s inability to finance this infrastructure.”
Further, the government needs to sort out the mess that it has made of the disinvestment programme over the last few years (I mean the government in general and not the Narendra Modi government which took over only in May 2014).
Over the last few years, the government has assumed that disinvestment of its holdings in public sector units will bring in a lot of money. But that hasn’t turned out to be the case. Take the case of the last financial year when it was assumed that the government will raise Rs 54,000 crore through disinvestment. It actually managed to raise only Rs 19,027 crore.
For this financial year, Jaitley has projected that the government will raise Rs 58,425 crore through disinvestment. But only Rs 1,700 crore has been raised so far, with only around a little over eight weeks left for the financial year to end.
News-reports now suggest that the government is really trying hard to push disinvestment through. Instead of waking up at the end of the financial year, the government along with a big disinvestment target also needs to have an annual plan where it goes about disinvesting shares all through the year. This is a better way of approaching the issue and Jaitley should look at it seriously in the next budget.

(The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Jan 29, 2015)

7 January, 2015

Coal India unions are blackmailing the nation. Modi govt must call their bluff

Starting yesterday (i.e. January 6, 2015) five trade unions representing the workers of Coal India have gone on a five day strike. The strike is backed the Bhartiya Mazdoor Sangh, which is the labour union affiliated to the Bhartiya Janata Party and the Sangh parivaar.
The unions are essentially demanding that the government should not disinvest its shares in Coal India and at the same time they don’t want any private participation in the coal sector in the country. In December 2014, the government had re-promulgated the Coal Mines (Special Provisions) Ordinance. This ordinance allows the auctioning of coal blocks. The ordinance also has an enabling provision for commercial mining of coal by private companies.
This is something that has not gone down well with the unions. “A consensus has emerged among the unions after the government showed arrogance over re-issuing the ordinance without consultations with the trade unions,” Jibon Roy of Centre of Indian Trade Union (CITU), told the Financial Express. The Indian National Trade Union Congress, All India Trade Union Congress (AITUC) and Hind Mazdoor Sabha (HMS) are the other three trade unions backing the strike.
Reports in the media suggest that the strike has been effective and the production of coal has come down dramatically. A news-report filed by the Press Trust of India suggests that “out of the total production of 1.5 million tonnes a day, nearly 75 per cent has been hit.” Another report by Bloomberg puts the figure at a much lower 50%.
Coal India produces 80% of the nation’s coal. A major portion of this coal is supplied to thermal power plants. As the Bloomberg news-report points out: “Of the 100 power plants that run on local coal, 42 had supplies of less than seven days as of 1 January, according to the power ministry’s Central Electricity Authority. Twenty of these plants had less than four days of stock.”
What this means is that if the strike continues for five days the inventory levels of the power plants will fall further and that may lead to a power crisis. The unions understand this and are using this as a negotiating tool with the government. A Press Trust of India report points out that Yasar Shah, the minister state for Power in Uttar Pradesh, said the state may face electricity crisis if the strike by coal workers extended longer.
The question to ask here is are the points on which the unions have gone on a strike valid enough? Or are they simply resorting to blackmail?
The government needs to auction coal blocks/mines because the Supreme Court in September 2014 had cancelled the allocation of 204 out of the 218 blocks that various governments since 1993 had allocated to private companies for captive consumption.
The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.” This allowed private companies engaged in the production of iron and steel, power and cement to own coal blocks for their captive use.
The Supreme Court cancelled these allocations and in its decisions said that the “the entire exercise of allocation…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected.”
Given this, the government now needs to auction these coal blocks. So, its just following a decision made by the Supreme Court. The trade unions by opposing this are essentially going against a decision made by the Supreme Court.
The trade unions are also protesting against the decision of the government to allow private companies to commercially mine coal. Why has the government made this decision? For the simple reason that Coal India is not producing enough coal to meet the demand.
As per estimates made by the Geological Survey of India, India has third largest coal reserves in the world of 301.56 billion tonnes. Nevertheless, we still need to import coal. Why is that the case?
Coal India produced 323.58 million tonnes of coal in 2004-2005. In 2013-2014, it produced 462.42 million tonnes of coal. The rate of production has increased at an average annual rate of 4.05%. During the same period, the total amount of coal imports has increased from 28.95 million tonnes to 171 million tonnes, at an average annual rate of 21.8%.
So what India needs is more coal. Coal India hasn’t been able to increase its rate of production at a rate which matches the rate of increase in demand for coal. Given this, it is common sense that more companies need to be allowed to produce coal, whether they are run by the government or they are privately run, doesn’t really matter.
Further, should the government be thinking about the more than 120 crore Indians as a whole or about around 3 lakh employees of Coal India who do not want private participation in the coal sector? The decision is a no-brainer. India needs more coal whether the unions representing the workers of Coal India like it or not.
It also needs to be pointed out that when it comes to paying its workers, Coal India is doing a good job. During the year 2010-2011, the total employee benefit expenses (salary, wages, allowances, bonus, leave travel encashment, contribution to PF, gratuity etc.) of Coal India amounted to Rs 19,851.78 crore. The company had an average manpower of 3,90,243 individuals during the course of the year. This means that the average amount of money that Coal India paid a single employee in 2010-2011 was at Rs 5,08,703.
In 2013-2014, the total employee benefit expenses amounted to Rs 27,769.43 crore. The average manpower during the course of the year had fallen to 3,52,282. This means that the average amount of money that Coal India paid a single employee in 2013-2014 mounted to Rs 7,88,273. This means that an average Coal India employee has seen a jump in payment of 55% over a period of four years, which is not bad by any stretch of imagination. Workmen make up nearly 85% of the employees of Coal India.
What these points clearly tell us is that the trade unions of Coal India are essentially blackmailing the nation and nothing more. The government needs to call their bluff even if it leads to some pain in the short term.

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

The column originally appeared on www.firstpost.com on Jan 7, 2015