With a deficient monsoon, no acche din for rural economy anytime soon

This column has been due for a while now and I am finally getting around to writing it. Given that there has hardly been any mention of this topic in the mainstream media, it is still not too late to write about it.

For two years in a row India has had a deficient monsoon. In its end of season report, the India Meteorological Department (IMD), the nation’s weather forecaster, stated that “rainfall over the country as a whole was 86% of its long period average (LPA). Thus years 2014 & 2015 was the fourth case of two consecutive all India deficient monsoon years during the last 115 years.”

IMD uses rainfall data for the last 50 years to come up with the long period average. If the rainfall is between 96% and 104% of the 50 year average, then it is categorised as normal. If it is between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.

If something has happened only four times in 115 years, there is clearly reason to worry. Further, IMD at the beginning of June 2015 had predicted that the rainfall this year will be 12% below normal at 88% of the long period average(LPA) and they have more or less been proven right, with the rainfall coming in at 86%. The funny thing is that at the end of June it looked that the IMD might have got the forecast wrong.

The rainfall in June was at 116% of the long period average. Nevertheless, IMD proved to be right given that the country saw deficient rainfall in the coming months. It was at “84% of LPA in July, 78% of LPA in August, and 76% of LPA in September.”

The accompanying table from Crisil Research gives a breakdown of monsoon performance across various parts of the country.
South-west monsoon performance across regions

Interestingly, the IMD no longer uses the term ‘drought’ primarily because it believes that the entire country does not face a drought, at the same time.

As I keep pointing out, averages don’t give the complete picture. If we were to look at state wise monsoon data, the situation is very bad in some states. As Crisil Research points out in a report titled Rain Check: All You Need to Know About Monsoon 2015: “Five states have seen a rainfall deficiency of 20% or more. At 45.8%, Uttar Pradesh (UP) had the highest deficiency, which is nearly as bad as last year’s 47.2%. In Haryana, the deficit was 36.7%, in Punjab 31.7%, in Maharashtra 25.2% and in Karnataka 19.9%.”

The impact of the deficient rainfall varies depending on the kind of irrigation cover that is available and that varies from state to state. “While irrigation cover is high at ~77-99% in UP, Haryana and Punjab, it is low ~18- 34% in Maharashtra and Karnataka. The impact of deficient rains, therefore, differs by geography,” Crisil Research.

In fact, there are variations within a state as well. The Marathwada region of Maharashtra has been the worst affected region in the country, with a rainfall deficiency of a huge 54%.

The deficient rainfall will have a considerable impact on rural incomes this year. Depending on who you believe 40-60% of country’s population is engaged in agriculture.

India Brand Equity Foundation, a trust established by the Ministry of Commerce with the business lobby CII, puts the number at 58%. Crisil Research puts the number at 40%. Given this, we can safely say that the deficient monsoon will roughly impact half of the country’s population.

Slowing as well as falling rural incomes, will have an impact on rural demand. In fact, this is already being seen. Hindustan Unilever Ltd (HUL) has had to cut prices of its soap and detergents by seven percent, in order to counter falling rural demand. Soaps and detergents make up for around half of the company’s sales.

Further, tractor sales have been falling all through this financial year. Data from the Tractor Manufacturers Association shows that sales have fallen by 20% during the first six months of this financial year (i.e. April to September 2015). “The decline is the sharpest since 2003, a year when India faced a severe drought,” a newsreport in the Mint newspaper points out.

In fact, this is the second year of falling tractor sales. In 2014-2015(April 2014 to March 2015) tractor sales had fallen by 13%.

The slowdown in rural demand is also reflected in the falling motorcycle sales. Data from the Society of Indian Automobile Manufacturers (Siam) points out that motorcycle sales during the first six months of the year are down by 4.06% to 5.36 million units, in comparison to the same period last year. The fall in motorcycle sales hasn’t been as big as the fall in tractor sales given that motorcycles are significantly cheaper than tractors.

Companies are also scaling down their future expansion plans due the slowdown in rural demand. Take the case of Hero MotoCorp Ltd, which has huge exposure to the rural market, with half its sales happening in the hinterland.

As the Mint newsreport referred to earlier points out: “In a post earnings conference call with analysts on 21 October, Hero’s chief financial officer Ravi Sud said that the company has scaled down the initial production capacity at its upcoming facility in Gujarat from 1.2 million units earlier to 750,000 units now.”

The failure of the monsoon has had an impact on the kharif crop. It is now expected to have an impact on the rabi crop as well. The sowing of the rabi crop has started in some parts of the country.

Due to a bad monsoon the water level in the reservoirs is well below normal. The Central Water Commission monitors 91 reservoirs in the country. The water level in these reservoirs currently is at 58% of the total live storage capacity. At the same time the water level is at 76% of the average availability during the last ten years.

This is clearly not good news for the rabi crop, given that with low water levels in reservoirs, the irrigation needs of farmers cannot possibly be completely met.

Some of the crops grown during the season are onion, masur, mustard and wheat.

All in all things look tricky for the rural economy as of now. No acche din for them anytime soon.

The column originally appeared on The Daily Reckoning on October 30, 2015

Why the Bihar poll matters for stock markets: A BJP win will allow stockbrokers to sell ‘ache din’ again


The assembly elections in the state of Bihar are scheduled to happen across five phases between October 12, 2015, and November 7, 2015. The constituents of the stock market are closely following the run up to these elections like they had followed the run up to the Lok Sabha elections last year.

While the stock market following the Lok Sabha elections is but natural, why is it following the run up to the assembly elections in Bihar? Bihar is the poorest state in India as measured by the per capita income. Data released by the Ministry of Statistics and Programme Implementation shows that for 2014-2015, the per capita income of the state was Rs 36,143. This was the lowest among the states and union-territories, which had declared their per capita income when the data was published in July earlier this year.

During 2013-2014, the per capita income of the state was at Rs 31,199, the lowest among all states and union-territories. The state of Uttar Pradesh came in second from the bottom at Rs 36,250. This when the per capita income of Bihar has grown at greater than 15% in each of the last three financial year’s.

Data from the India Brand Equity Foundation points out that the per capita income of the state is around 43% of the Indian per capita income. The gross domestic product (GDP) of the state is around 3.25% of the Indian GDP, even though the state has more than 8% of India’s population.

The installed power capacity of the state is 2759.8 MW, which is around 1% of the total capacity in India. Over and above this, given the many years of lawlessness and the lack of electricity that the state has faced, it barely has an industry.

Data from the ministry of finance shows that the state has 26 public private partnership projects. This is less than 2% of the 1409 projects all across India. The India Brand Equity Foundation points out that the “total FDI for Bihar and Jharkhand combined during the period from April 2000 to May 2015 stood at US$ 59 million.” On this my guess is that even this miniscule amount would have gone more to Jharkhand than Bihar.

The state barely contributes to the Indian GDP, has virtually no industry and almost no FDI is going into the state. In this scenario why is the stock market worried about Bihar? As Shankar Sharma, Vice Chairman and Managing Director of First Global recently told Business Standard: “Bihar election is important from the context of whether the Modi government still enjoys popular mandate or not.”

And how will that help the stock market? A win in Bihar for the Bhartiya Janata Party(BJP) led coalition will allow the stock brokers to sell the Narendra Modi “ache din aane waale hain” story all over again to foreign investors as well as Indian investors.

As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Forecasting: “The one undeniable talent that talking heads have is their skill at telling a compelling story with conviction, and that is enough.”

Stock market investors love a good story and Narendra Modi in control is a compelling story that can ‘still’ be sold with some conviction by stock brokers. What works for it is the fact that it has already been sold once between September 2013 and May 2014, in the run up to the last Lok Sabha elections. The BSE Sensex ran up 33% between September 2013 and May 26, 2014, when Narendra Modi was sworn in as the prime minister of the country.

This was purely a sentiment based rally based around a compelling story that was well sold. The stock brokers are hoping to repeat this in the time to come. The trouble is that unlike the last Lok Sabha election this election remains too close to call. Hence, up until now, various opinion polls have swung both ways. Some have suggested that the BJP led alliance will win, whereas others have suggested that Lalu Prasad Yadav + Nitish Kumar + Congress (or the Grand Alliance) will win. Let’s see which way things swing.

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

The column originally appeared on Firstpost on Oct 6, 2015

Why Modi’s dream of acche din will continue to remain a dream

Sushma Swaraj, the minister of external affairs, must be one unhappy woman these days. This, coming from the fact that prime minister Narendra Modi among other things is also India’s real minister of external affairs.
Modi is currently touring Germany, after having visited France. In an op-ed in the German daily
Frankfurter Allgemeine Zeitung the prime minister wrote: “We have re-energised the Indian growth engine. The credibility of our economy has been restored. India is once again poised for rapid growth and development…It is the only emerging economy where growth rate is rising. The prospects are even better.”
Prime ministers need to say such “optimistic” things when they go on foreign visits. But things on the ground level in India are not very different than they have been in the past. Take corporate performance for one. In a research note released last week Crisil Research expects “India Inc.’s revenue growth to slip to a 7-quarter low of 2.5 per cent on a year-on-year (y-o-y) basis,” for the period between January to March 2015. This is less than half the growth of 5.4% seen in the period October to December 2014.
Crisil believes that the steel sector will see revenue declines of 10-11%. The petrochemicals industry will see a revenue decline of 20-22% on account of drop in global crude oil prices. “Growth for construction and capital goods sectors’ will continue to remain sluggish due to lower order backlog and slow project execution,” the research note points out.
The revenues of the automobile sector are expected to grow by around 6%. “While sales
of cars and medium & heavy commercial vehicles have picked up, muted growth in international businesses and the two wheeler space will impact the topline.” The two wheeler companies are not expected to do well primarily because of the non-seasonal rains in large parts of the country which will impact the production of the rabi crop. This will dent farm incomes.
As Crisil Research points out: “Domestic consumption and export-oriented sectors are likely to outperform but, here too, sectors heavily dependent on rural consumption such as motorcycles, tractors, and FMCG have been facing severe pressure on volumes as unseasonal weather conditions and slow growth in crop prices have dented farm incomes.”
This will have an impact on the Fast Moving Consumer Goods(FMCG) sector as well. Crisil forecasts this sector to grow at 8-9% during the period January to March 2015. The sector had grown at close to 14% in between April and September 2014, the first half of the last financial year.
What this clearly tells us is that the performance of the Indian companies will remain weak during the period January to March 2015. What is interesting is that before Narendra Modi came to power, corporate performance had been relatively stronger than it is now. During the period April to June 2014 (the first quarter of the last financial year) the revenues had grown by 12.8%. In each of the three quarters before that, the revenues had grown at higher than 10%.
Since July 2014, the revenue growth started to fall and has continued to fall. Modi came to power on May 26, 2014. Corporate growth is a function of many factors and just blaming the Modi government for it is not fair. But the claim that Modi made in Germany that “ we have re-energised the Indian growth engine,” is not correct either. Without growth in company revenues, there is no way the overall Indian economic growth can be re-energised. Both are closely linked.
Further, if sustainable economic growth is to be created jobs need to be created to employ India’s burgeoning workforce. Sample this—Every year up till 2030, 13 million Indians will enter the workforce. This means more than a million Indians are entering the workforce every month. And if enough new jobs are created for them, economic growth will automatically happen.
But is that the case? Are enough jobs being created? The trouble on this front is that India does not have good data on employment. In fact, the latest economic survey makes this point: “The data on longer-term employment trends are difficult to interpret because of the bewildering multiplicity of data sources, methodology and coverage.”
Despite this, some broad inferences can be made by looking at data from multiple data sources. (I will spare you the details here. But anyone interested in the details can refer to
Box 1.3 Employment Growth and Employment Elasticity: What is the Evidence? In Volume 1 of the Economic Survey).
As the Economic Survey points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”
This is a major challenge for the Modi government and honestly it doesn’t seem to have done much on this front. Jobs are essentially created by small entrepreneurs as they grow big. The labour laws in India essentially ensure that most firms start small and continue to stay small. For this anomaly to be corrected, India’s labour laws need to be simplified. Nothing has happened on this front at the central level, since Narendra Modi came to power.
Over and above this, the entire process of starting and running a business in India is not easy. As per the Ease of Doing Business ranking India ranks 142 in a list of 189 countries. When it comes to the ease of starting a new business it comes in 158th. When it comes to enforcing contracts India comes in 186th out of 189 countries.
What this clearly tells us is that the entire Indian system works against an individual wanting to establish and run a business. What it also tells us is that in order to run a business in India you need to be well connected and that explains the surfeit of crony capitalists who do well in India.
If jobs are to be created the ease with which a business can be started and operated in India needs to be improved. Sadly, nothing much has happened on that front despite the so called dynamism of Narendra Modi. And unless this changes, the entire dream of
acche din will continue to be just that. 

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

The costly ticket to achche din

A few days back a friend complained on Facebook that since the Narendra Modi government had come to power, power cuts in his city had gone up dramatically, and he had not been able to sleep at all during the night. “So where are the
acche din that had been promised?” he asked. To this someone cheekily replied that the promise was of acche din and not acchi raatein.
Narendra Modi and the Bhartiya Janata Party fought the Lok Sabha election on the plank of “acche din aane waale hain”. The slogan offered “hope” to the people of this country, in an environment where economic growth had been falling and inflation had been rising. It was for the first time that a political party was not treating the voter as a “victim”. The slogan struck a real chord with the Indian voter.
The success of the slogan has now led to a scenario where every tough economic decision that the Modi government makes is and will be viewed through the lens of the “
acche din aane waale hain” slogan. Take the recent case of the decision to increase the railway passenger fares by 14.2 per cent and freight fares by 6.5 per cent.
The hike in railway passenger fares has been the steepest in 15 years and has been long overdue. Between 1999 and 2014, the passenger fares were increased only thrice, of which one hike was reversed. This has left very little money with the railways for any sort of modernisation and the upkeep of railway tracks. It has also led to a scenario were traveling has become increasingly unsafe, as can be made out from the spate of railway accidents over the last few years.
The trouble is that for too long Indian Railways has been used as a political tool and not a service which is economically viable on its own. One way to correct this is to index fares to the prevailing rate of inflation and increase prices on a regular basis, every year. So, if the inflation is 8 per cent during the course of the year, then fares can go up by 8 per cent at the beginning of the financial year, on April 1. If this practice were to be followed, the chances of railways being economically viable and safer are likely to go up. Also, it would rule out the chances of one-off increases in fares, which upset the monthly budget of people who use the railways to travel regularly.
In the short-term, this increase in fares is expected to add to inflation. There are other decisions that the government will have to make over the next few months which will add to inflation. Take the case of oil. The price of the Indian basket of crude oil stood at $111.94 per barrel on June 19, 2014. It averaged at $106.72 per barrel between May 29 and June 11, 2014.
The price of oil has gone up by close to 5 per cent in such a short period of time primarily because of a threat of war in Iraq. India imports 80 per cent of the oil it consumes. The government will have to pass on this increase in the price of oil to the end consumer. If it does not do that it will have to compensate the oil marketing companies for the “extra” under-recoveries they are likely to face on the sale of diesel, cooking gas and kerosene. This would lead to an increase in government expenditure and, hence, the fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
The government is already very stretched on the fiscal deficit front with the last government leaving unpaid bills of more than Rs 1,00,000 crore. Hence, it will have to pass on the increase in the international price of oil to the end consumers. This will mean higher inflation and another jolt to the promise of
acche din.
What makes the situation even more difficult is the fact that the monsoon is expected to be much lower than average this year. In fact, data from the India Meteorological Department shows that rainfall upto June 18 has been 45 per cent lower than normal. This number may improve in the days to come, given that it is still early days for the monsoon. It needs to be pointed out that a bad monsoon does not necessarily lead to a lower production of food. In 2009, even with a 22 per cent deficient rainfall, the agriculture production did not go down. The real problem is once the psychology of drought sets in, the prices of food products start to go up, even though their production may not be impacted.
One thing that the government can do to prevent inflation is to procure a lower amount of rice and wheat from farmers this year. As on June 1, 2014, the Food Corporation of India (FCI) had food grain stocks of 74.8 million tonnes, when it does not require more than 41-47 million tonnes. By buying less from the farmers, the government can ensure that more rice and wheat lands up in the open market, and helps prevent a price rise. The government also needs to ensure that it does not raise the minimum support price of rice and wheat at the rate that the Congress-led UPA government had done in the past. These moves are unlikely to go down well with the farmers, who have also been promised
acche din.
It is important that Mr Modi borrows a leaf from Franklin Roosevelt, the President of the United States between 1933 and 1945. This was a difficult time for the US — the Great Depression was on. Between 1933 and 1944, Roosevelt made 30 fireside chats through the radio, explaining to Americans the tough decisions he was taking to get the economy back on track. Mr Modi and his government need to keep talking to the people and explain why they need to take some tough decisions over the next few months.

The article originally appeared in The Asian Age/Deccan Chronicle on June 23, 2014
Vivek Kaul is the author  of the Easy Money trilogy. He can be reached at [email protected]

What Modi can do to bring acche din for home buyers

Vivek Kaul

People have taken the Bhartiya Janata Party’s election slogan “
acche din aane waale hain”a little too literally. I have often been asked on the social media over the past few weeks whether real estate prices will fall, now that Narendra Modi government is in power. I wish I had a definitive answer for that.
Nevertheless, there are many things that the Modi government can do so that home prices start to mirror the actual demand from people looking to buy homes to live in. Right now, a major part of home demand comes from investors and speculators looking to park their money. How can this be taken care of?
There are a number of steps that can be taken.
a) The Modi government wants to get back the black money Indians have stashed away internationally. As per data from Global Financial Integrity, this amounted to a whopping $644 billion as of 2011. While the intention to get back all this black money is certainly noble, how practical is it? Also, if the idea is to recover black money then why discriminate between those who have managed to transfer the money abroad and those who haven’t.
It will be certainly easier to recover black money that is still there in the country. Also, the amount of black money that has remained in the country is likely to be significantly more than what has left the shores. A lot of this money has been diverted into buying real estate. This link between black money and real estate needs to be broken.
Former finance minister in the budget speechhe made on February 28, 2013, said “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” This number is totally unbelievable given that nearly 27,000 luxury cars are sold in India each year. Over and above this estimates made KPMG suggest that there around 1.25 lakh high networth individuals in India who have an investible wealth of at least a million dollars(around Rs 6 crore), and also own a house and other durables.
What this clearly tells us is that as a nation we barely pay taxes. This means we are generating a lot of black money. A large amount of this money goes into real estate, and ensures that real estate prices remain firm. This wouldn’t have been possible without the cooperation of the highly corrupt Income Tax department.
In fact, the Modi government could do some out of the box thinking like the Greek government, to recover this black money. The Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines need to be come up with. The property dealers of the National Capital Region and the amount of taxes they pay, will be a good target to start with.
If real estate prices need to fall, more and more people need to be forced to report their income properly and made to be paid a tax on it.
b)One of the most well kept secrets of the Income Tax Act is that it actually encourages people to speculate in real estate.
There is no restriction on the number of homes against which you can claim a tax deduction on the interest paid on the home loan to fund the property. Only one of these properties needs to categorized as a self-occupied property. On this self-occupied property, an interest of up to Rs 1.5 lakh can be claimed as a tax deduction.
But this limit does not apply to the remaining homes that an individual may choose to buy. Any amount of interest paid on home loans can be claimed as a deduction as long as a “notional rent” is added to the income. We all know that these days “rents” are relatively low in comparison to the EMIs that need to be paid in order to repay the home loan. Hence, the interest component tends to be massive during the initial years and helps people with two or more homes, claim huge tax deductions.
This “loophole” has been used effectively by well paid corporate employees to bring down their taxable income over the years. People who use this deduction are more interested in claiming the deduction than actually making money from an increase in price. Hence, they are likely not to sell, even in a scenario where prices may be falling.
While offering a tax deduction on a self occupied property makes some sense, there is no logic to offering a tax deduction on a home, one is not living in. This “loophole” needs to be plugged immediately.
c) The Modi government needs to work towards building a credible real estate index. Currently, there is no way of figuring out which way the real estate market is heading. Are prices rising? Are they flat? Or are they falling? These are important questions for anyone looking to buy a home to live in. Brokers will always tell you that prices are going up. Real estate consultants bring out reports on home prices, now and then. But given that they make their money from real estate companies, these reports needed to treated with a pinch of salt.
The National Housing Bank does have a real estate index. But not many people know about it. Also, it is a quarterly index, and by the time the data actually comes out, it is not of much use.
As of now the datafor up to December 2013 is available. But we are already in June 2014. The government needs to look at building an index along the lines of the Case-Shiller real estate indices in the United States. This will not lead to results immediately but will really help over a long term.
d) In the short term the government needs to look at the real estate lending of banks closely. Most recent data released by the Reserve Bank of India shows that between April 19, 2013 and April 18, 2014, the overall bank lending grew by 13.9%. During the same period the lending to commercial real estate grew by a significantly higher 19.8%.
This, in an environment where real estate companies have huge inventories. So, why are banks lending money to real estate companies? And what are real estate companies doing with that money? One possible explanation is that banks have been giving fresh loans to real estate companies so that the companies can repay their old loans. This has allowed real estate companies to not cut prices on their unsold inventory and ensure that prices do not fall.
This is something that needs to be looked into closely.
e) These days more and more real estate companies seem to be interested in launching new projects, rather than delivering the homes that they have already sold to the consumer. Companies use the money they raise for new projects to pay off interest on debt as well as repay debt that they have taken on over the years. Hence, there is no money left to build homes.
In this situation, the only way left for the company to raise more money to build homes is by launching newer projects. The money raised for one project is used to pay off interest on outstanding debt as well repay debt that is maturing. In order to build homes promised under the project, another project needs to be launched. This leads to the first project being delayed. To build homes promised under the second project a third project needs to be launched.
And so the cycle continues. In order break this cycle, the idea of a real estate regulator had been proposed a while back. That does not seem to have gone anywhere. It needs to be re-considered, even though it may not lead to immediate results.
If these steps are taken in the days to come, there might be some relief for people looking to buy homes to live in.
The article originally appeared on www.FirstBiz.com on June 13, 2014 

(Vivek Kaul is a writer. He can be reached at [email protected]