Business

Raghuram Rajan’s 10 Solutions to Get Economy Going Again


Summary: This one is for all of you, where are the solutions wallahs. Of course, I have offered many of the solutions that Rajan has offered in a column, but never put them together in one place.

One of the perils of writing on the Indian economy in the last six years has been the repeated comment from a few, don’t tell us about the problems, but give us the solutions. I mean how do you discuss solutions without highlighting problems. How do you come up with a prognosis without coming up with a diagnosis in the first place?

It’s not that one hasn’t highlighted solutions in what one has written over the years, but it’s just that where are the solutions wallahs, don’t seem to notice them. This belief that economics has solutions to everything (particularly among the non-economists, which means most of us), is very strong.

Over the years, I have come to believe that this is primarily because almost all of us are brought up writing exams where every question has an answer and every problem (in the mathematical sense of the term) has a solution. Life and economics don’t work like that. If everything had a solution, the word problem wouldn’t exist in the first place.

Nevertheless, this piece is all about solutions; things that the central government can do right now (and should have been doing by now) to get the economy going again. I have just finished reading Dr Raghuram Rajan’s piece on the Indian GDP (Gross Domestic Product) collapse. GDP is a measure of the economic size of a country.

Dr Rajan, who was the governor of the Reserve Bank of India (RBI), has offered many solutions. These are things that the government can do to get the economy going again. I have offered many of these solutions in my writing as well, though never gotten around to writing about all the solutions together at one place.

Let’s take a look at these solutions, one by one.

1) The government needs to expand its resource envelope in every way possible, Rajan writes. At the cost sounding like a broken record, it needs to sell its stakes in many public sector enterprises (how many times have I said this). In fact, in a sense it has already missed out on the current buoyant state of the stock market. The total amount of money collected through the disinvestment route during this financial year, remains close to zero.

Rajan also suggests that the government should be ready for on tap sale of its stakes in public sector enterprises, to take advantage of every period of market buoyancy.

2) Many public sector enterprises own land, in prime areas of India’s cities. And this land needs to be sold (Again, how many times have I suggested this). In fact, in a city like Ranchi, where I come from, the Heavy Engineering Corporation (a public sector enterprise) sits on acres and acres of government land. All this land across all these companies needs to be sold and money be raised. Of course, this isn’t going to happen overnight.

But that’s not the point here. If the government shows serious intent on this front by announcing a time-table to do this, as well as making preparations for the sale, this is something that the bond market will notice and be happy about.

3) Why is it important to keep the bond market happy? With tax collections collapsing by 30%, between April and July 2020 in comparison to the same period in 2019, it is but natural that the government will end up borrowing more. This is likely to push up the return (or the yield) that the market demands on the government borrowings, given that there is only so much financial savings going around. Other factors that will give confidence to the bond market is the publishing of the correct fiscal deficit numbers unlike the massaged numbers that are currently declared (well, well, well, I have been saying this for a couple of years now). Fiscal deficit is the difference between what a government earns and what it spends.

Another important reform suggested by Rajan is the setting up of an independent fiscal council, which can keep an eye on the deficit numbers (This is something that the former deputy governor of the RBI, Viral Acharya, has also been suggesting).

All in all, the government should seem like making serious moves towards restoring fiscal stability, which is currently lacking.

4) The world will recover faster than India, given that the covid-curve has been flattened across large parts of the world. Given this, economic demand in many of India’s bigger trading partners will recover faster than in India (Again, a point I made in a piece I wrote for the Mint on September 7, 2020). This means that faster exports growth can be a way for India to recover, suggests Rajan. But the trouble is that we are looking at import substitution as a policy more and more and imposing tariffs on imports. This raises the cost of inputs that go into goods that are ultimately exported.

Of course, the intermediary goods that go into the making of goods that are exported, can be produced in India, but this will happen at a higher price. Hence, this makes us uncompetitive at the global level (A point I made in a piece I wrote for the Mint in February). Also, reversing the entire import substitution bogey will mean going against the current atmanirbharta campaign, a very successful perception management campaign. (In economics, just because something sounds good, doesn’t mean it is necessarily good). Economics is not the only thing that any government is bothered about.

5) Rajan suggests that the focus on Mahamta Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as a way of putting money directly into the hands of the poorest, should continue. If this means spending more money under the scheme, then so be it. (Okay, I had suggested this as far back as March in a piece I wrote for the Mint, even before the government had taken this route.)

6) While, MGNREGS takes care of the lack of economic activity in rural areas, the urban areas get left out under the scheme. Hence, the government should be making more efforts to put money into the hands of the urban poor, suggests Rajan.
One of the things that the government has done is to put Rs 1,500 over a period three months into female Jan Dhan accounts. This cost the government around Rs 31,000 crore. I think it is time to put money into male Jan Dhan accounts as well (Again, I have been saying this for months now). This will take care of the urban poor to some extent. I know this isn’t the perfect solution because proper targeting will continue to remain a problem, but it is better than doing nothing.

7) Rajan further suggests that the government and public sector enterprises should clear their dues as fast as possible. This will put more money into the economy and particularly into the hands of corporations and help them survive. (Something I had said in March). A newsreport in The Financial Express today points out that the total amount of money owed by the central government and the public sector enterprises, amounts to Rs 9.5 lakh crore, or a little under a third of the Rs 30.4 lakh crore that the central government plans to spend this year. Of the Rs 9.5 lakh crore, Rs 2.5 lakh crore is owed to the Food Corporation of India (FCI). The remaining Rs 7 lakh crore is a large amount on its own. Even if a portion of this is cleared, the economy will get some sort of a stimulus.

As far as a real stimulus goes, focusing on physical infrastructure is the need of the hour, leading to creation of demand for everything from steel to cement. One area that can really get the Indian economy going again is real estate. I have discussed this so many times before. But for that to happen, so many other things need to happen, including many of the current real estate firms going bust and banks losing a lot of money. Creative destruction needs to be unleashed. Of course, the deep state of Indian real estate is not ready for something like this and will not let it happen.

8) Rajan also suggests that firms below a certain size could be rebated the income tax and the goods and services tax, they paid last year (if not the whole amount, but at least a part of it). This could be an easy and direct way of helping smaller businesses, which have faced the brunt of the pandemic all across the world. (Okay, I haven’t suggested anything like this anywhere, from what I remember).

9) Rajan recommends that public sector banks need to be properly recapitalised as the extent of losses due to covid are recognised. I feel that if the government doesn’t have the money to do so, then it needs to let these banks raise money from the market and in the process, the government should be okay with the idea of diluting its stake. (I have written a book on this )

10) And finally, as the moratorium on repaying loans taken from banks and non-banking finance companies has come to an end, there are bound to be defaults. Here, the government should have a variety of structures in place to deal with the emanating problems, and not have a one size fits all approach. Also, in my opinion, dilution of the entire insolvency and the bankruptcy process, is really not the right way to go forward.

So, to all the where are the solutions wallahs, these were 10 solutions that Dr Raghuram Rajan has offered to the government (Actually, there are more solutions in the piece he has written, but I have stopped at ten. Some of these solutions are about land reforms, labour reforms, genuine ease of doing business reforms, etc., to improve India’s competitiveness, which keep getting made endlessly over and over again). Rajan has also said that the time to do these things is now and not wait for things to get worse.

In my writing over the last few months, I have recommended eight or nine of these solutions as well, though never put all these solutions at one place. One important solution that I think needs to be quickly implemented, is a reduction of the goods and services tax on two-wheelers.

The trouble is that most of these solutions need money to start with. And for that the government needs to come out of its comfort zone and start raising money in ways that it has never done before (like selling land). Also, all reforms need intent and communication clarity to be able to explain these things to the junta at large. Plus, they may not lead to electoral gains immediately, something like a focus on an actor’s suicide may.

You see the government just doesn’t have the incentives to do the right things.

PS: I sincerely hope this should satisfy the appetite of all the where are the solutions wallahs, out there.

Money lessons from Uber


When it comes to technology I am a slow adopter. I got an email account only after most of my friends already had one. I started using Facebook and Twitter after these two social media websites had already taken off big time. Further, its been less than a year since I got a smart phone and given that I have only recently started using the app-based Uber taxi service.

For those who have used Uber will know that the company primarily offers three levels of taxi service. Its most basic service is uberGO. This is followed by uberX in the mid-range and UberBLACK in the top-range.

Further, the company does not take cash payments. In order to use Uber, you first need to create a wallet account with Paytm, transfer money into it from a bank account and then link it to the Uber app on your smart phone. The cost of the travel is deducted against the money in the Paytm account.

After using the Uber service, you don’t pay paper money or cash to the company. As mentioned earlier, the payment is deducted directly from the Paytm account. Hence, in that sense the situation is similar to when you buy something using a credit card or debit card.

And this is where things get interesting. Research shows that when people use their credit/debit cards they are likely to end up spending more in comparison to when they use cash, simply because there is no pain of purchase, as is the case when using cash.

Gary Belsky and Thomas Gilovich explain this phenomenon beautifully in Why Smart People Make Big Money Mistakes and How to Correct Them: “Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”

The same stands true about using a debit card as well or for that matter a wallet account like Paytm, to purchase things. “In fact, the money we charge on plastic is devalued because it seems as if we’re not actually spending anything when we use cards. Sort of like Monopoly money,” the authors add.

Hence, as people don’t feel the pain of spending money, they are likely to spend more. “You may be surprised to learn that…you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash,”Belky and Gilovich write.

So how is all this linked to Uber? The area that I live in central Mumbai, uberGo, which works out cheaper than even a kaali-peeli taxi and is air-conditioned, is not so easy to get. On days I don’t find an uberGo I end up using an uberX which is more expensive than a kaali-peeli. And on a couple of occasions I have also ended up using UberBLACK, which is significantly more expensive than a kaali-peeli taxi.

The reason for this is straight forward. Since I don’t have to pay Uber in cash, I don’t feel the pain of paying and end up using a service which is more expensive than a kaali-peeli. In fact, since I am paying using a smartphone the pain of payment is even lower than when using a credit or a debit card, given that payment through a smart phone using a wallet is one more step removed from cash than a credit or a debit card.

This also explains why almost every e-commerce site wants you to shop using an app and not from their website. Since you may pay using a smartphone through a mobile wallet account, there is chance that you will end up spending more money.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on June 17, 2015 

Huge debt: The real reason why Indian corporates are not doing well

In a column that appeared on Firspost last week, we had shared a chart which showed that profits of Indian corporates as a proportion of the gross domestic product(GDP), have been falling. As can be seen from the accompanying chart, corporate profits as a percentage of GDP have fallen from 7.1 percent of the GDP in 2007-2008 to around 4.3 percent of the GDP in 2014-2015. That is indeed a huge fall.

Why has this happened? The answer perhaps lies in the following table. The table has been made using data from 433 companies which are a part of the BSE-500 stock market index. It does not include banks and financial services companies. The net sales of these 433 companies accounted for 83.3 percent of the total net sales of close to 3,400 listed manufacturing and services companies excluding banks and financial services companies. Hence, the sample is a fair representation of the Indian corporate space.Chart2

Take a look at the total debt column. As of the end of 31 March 2005, the total debt of the Indian corporates had stood at around Rs 3,49,296 crore. By 31 March 2014, this debt had shot up by 8.1 times to Rs 28,43,155 crore. In comparison the total amount of equity or the money that the owners of these companies put into their respective businesses, had gone up by just five times to Rs 25,83,606 crore.
This meant that the debt of the Indian firms went up at a much faster pace than their equity, and in the process managed to push up the debt to equity ratio from 0.68 to 1.10.

Further, the excessive borrowing did not translate into sales. The sales during the period March 2005 and March 2014, went up by around 5.1 times. The profit on the other hand went up just 3.2 times.

Hence, to summarize, an 8.1 times increase in debt, led to a 5.1 times increase in sales and 3.2 times in net profit. What this clearly tells us is that as Indian corporates took on more and more debt, the new debt wasn’t as productive as the older debt that had been taken on.

And this finally started to reflect in the net profit margin of Indian corporates. As can be seen from the table, the net profit margin (net profit divided by net sales) fell from 10.51 percent in 2004-2005 to 6.55 percent in 2013-2014. This is primarily because a greater amount of profit over the years was used to repay the debt as well as pay interest on it and in the process pulled down net profit margins of Indian companies.

How do things look in 2014-2015(the financial year ending 31 March 2015)? For the last financial year we have results of around 384 companies and not the entire sample as was the case in earlier years.Chart3

In 2014-2015, the net profit margin is down further to 5.95 percent. Though the debt to equity ratio seems to have improved to 0.89. Whether this trend sustains once all the results of the sample come in, remains to be seen.

The conclusion that can be drawn from this data is that Indian companies loaded up on debt between 2004 and 2011, when times were good. During this period the net profit margin varied between 9-11 percent, except in 2008-2009 when it was 7.44 percent. Nevertheless, 2008-2009 was the year when the current financial crisis started and could be discounted as a bad year.

All the debt accumulated between 2004 and 2011 is now coming back to haunt India Inc. And we haven’t seen the last of this.

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

Data support from Kishor Kadam.

The column originally appeared on Firstpost on June 16, 2015 

Two charts that clearly tell you why the Indian economy is not in good shape

On 29 May 2015, the Ministry of Statistics and Programme Implementation (Mospi) released figures for gross domestic product (GDP) growth last year. The GDP is a measure of the size of an economy. According to this data, the Indian GDP grew by 7.3 percent during 2014-15.

This perky number is the result of a new method of calculating GDP. In January 2015, Mospi, using this new method of projecting growth, had projected a growth of 7.4 percent for 2014-15. Before this number came out, the growth projected by the RBI was at 5.5 percent. The GDP growth finally came in at 7.3 percent.

Not many people believe this higher number given that real economic data like car sales, bank lending, exports, and corporate profits have all been pretty dull. And GDP ultimately is a theoretical construct unlike the real data.

In fact, RBI Governor Raghuram Rajan, in the interaction he had with the media after presenting the monetary policy on 2 June, said: “In the eyes of the rest of the world, it is a discrepancy why we feel the need for rate cuts when the economy is growing at 7.5 percent. Most economies growing at 7-7.5 percent are just going gang-busters and the issue there would be to restrain rather than accelerate growth.”

The answer lies in the fact that there is something not quite right about the GDP growth number. As Rajan put it: “We still have very weak investment. Corporate results, even after adjusting for slow inflation, have been quite weak, suggesting that demand is yet to pick up strongly…Even with the 7.5 percent growth number, there is some discussion of how much that includes special factors in the last quarter, including excise taxes and subsidies. When you subtract that, the growth in the last quarter does not look as strong.”

In fact, Rajan’s argument can be taken further by looking at the accompanying chart 1.

Chart1


This chart essentially maps the nominal GDP growth as per the old method as well as the new method. Nominal GDP is essentially GDP growth which has not been adjusted for inflation. The blue curve shows GDP growth using the old method whereas the red curve shows GDP growth as per the new method. The data for the GDP growth as per the new method is available only for the last few years.

While, there may be a lot of debate around the validity of the new method of calculating GDP, what it clearly shows is that nominal GDP growth has been falling for a while. In fact, the red and the blue curves almost go hand in hand over the last few years.

As Anindya Banerjee of Kotak Securities puts it: “Though the real GDP growth has created quite a bit of controversy, it’s the nominal growth picture which has immense information value. There is continuity between the old series and the new series and they together are pointing towards the weak state of the economy.”

Now take a look at chart 2 which shows corporate profits expressed as a proportion of GDP. In the last financial year they stood at 4.3 percent of the GDP, which was a 10-year low.

Chart2


As Banerjee, who brought these charts to my notice, puts it: “Nominal GDP, which portrays both real growth as well as inflation in the economy, has a strong correlation with the taxes that government earns, the earnings of corporates and hence the price multiples that the equity markets enjoy. A decadal low in the nominal GDP is in line with the decadal low witnessed in corporate profit growth or share of corporate profits in GDP. Corporate profits as a share of GDP is at lowest level seen at least since FY04, at 4.3 percent.”

These two charts clearly tell us that the Indian economy is not in a good shape, despite wherever the real GDP growth number might be. It will be difficult for the government to spend its way out of trouble simply because it won’t earn enough taxes to do that. If it wants to spend more and pump prime the economy then it will have to borrow more and in the process compromise on fiscal discipline. The government borrowing more will also push up interest rates and that will have its own share of repercussions.

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

The column originally appeared on The Daily Reckoning on June 9, 2015 

Why are more than 10 million homes vacant in India?


India-Real-Estate-Market

Dear Reader,

If you ever go to New Delhi, try taking a drive through the sub-city of Dwarka and you will see miles and miles of built homes with nobody living in them. You can see a similar sight in large parts of the National Capital Region (NCR) around New Delhi.
In fact, Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd., in a recent article pointed out that “around 12 million completed houses” are “lying vacant across urban India”.
A similar point is made by Akhilesh Tilotia in his book The Making of India—Gamechanging Transitions, where he states that India has more homes than households. As he writes: “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households.”
And despite this, there is a huge shortage of housing in urban India. As the latest Economic Survey, a document which is released every year a day before the annual budget of the government of India, points out: “At present urban housing shortage is 18.8 million units [i.e. homes].”
So what is happening here? Many of these homes have been bought as investments by people who have “extra” money to invest. A substantial portion (no one knows how much) of this is black money on which taxes haven’t been paid. Hence, homes have been bought but nobody is living in them.
Further, the dynamics of real estate sector in India have so evolved that builders like catering only to the richer segment of the population. Also, the price levels have now gone even beyond this section of the population.
But the shortage in housing is at the lower income levels. “95.6 per cent [of housing shortage] is in economically weaker sections (EWS) / low income group (LIG) segments,” the Economic Survey points out. Tilotia points out that: “70% of the urban housing shortage arises from the bottom four deciles of households whose ability to pay is severely constrained.” He estimates that unmet needs in India are at price points of Rs 0.5-Rs 1 million. The real estate companies due to various reasons are not interested in satisfying this unmet demand.
A recent research report by real estate rating and research firm Liases Foras points out that the average price of a home in the Mumbai Metropolitan Region, as of March 31, 2015, was Rs 1.3 crore. The numbers for Bangalore and Delhi are Rs 86 lakh and Rs 74 lakh respectively. Given these high prices, it is not surprising that the housing demands of a large segment of population are going largely unmet.
Hence, it is not surprising that as per the 2011 Census, 13.7 million households in cities live in slums. The number of people living in these slums is around 65 million and forms around 17.4% of the urban population. As per the Census, Visakhapatnam with 44.1% of its population living in slums comes right at the top. Mumbai, with 41.3% of the population living in slums comes in third. Kolkata with 31.9% of its population living in slums is eight on the list.
Further, the number of people living in urban slums may be understated. This is primarily because the 2011 Census was carried out only in what are known as statutory towns. These are towns which have some sort of an elected local body.
A Times of India newsreport points out that India has a total of 7935 towns. Of this 4041 are statutory towns. The remaining do not have an elected local body. Nevertheless, they fulfil the criteria of being urban, and the Census classifies them as census towns. The census towns were not considered for counting slums. These towns have a total population of more than 5 crore and substantial part of that population is living in slums.
Further, other estimates put the slum population living in Indian cities at a much higher level. A 2012 newsreport quotes S. Parasuraman, director of the Tata Institute of Social Sciences in Mumbai as saying: “Nearly 60 percent of Mumbai’s slum population lives in 8 percent of land.” The Census number as mentioned earlier is at 41.3%. These differences apart, what this clearly tells us is that with so many people living in slums, India has a huge urban housing shortage.
So what is the way out of this? The government needs to start doing something about it sooner rather than later. Maybe it can learn a thing or two from the South Korean government, which in the late 1980s built around 2 million homes of which around 0.9 million were built around the capital city of Seoul, as Tilotia points out.
In order to do this, the government will have to first and foremost sort out the mess that currently surrounds the process of land acquisition. Further, these homes will have to be built on the periphery of cities, backed up by a good transportation system, so that people can travel to work. The outdated floor space index laws controlled by real estate lobbies (which are often fronts for politicians) will need a thorough re-look. These laws essentially deal with how much area can be built-up, given the size of the plot on which a building is being built. So, if the FSI allowed is 2, then on a plot of 1000 square metres, the building being built can’t have a built-up area of more than 2000 square metres.
If all this is not done there will be more trouble ahead, as more and more of Indian population moves to Indian cities, in the years to come. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.”
What this means is that if affordable housing doesn’t become the order of the day, the slumification of India will continue. And that is not a happy thought.

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

The column was originally published on BBC.com on May 21, 2015