Tag: Car Sales | Page 3

30 September, 2014

RBI keeps repo rate at 8%: Lower interest rates are not a solution to slow economic growth

Vivek Kaul

Ramachandra Guha in a wonderful essay titled An Anthropologist Among Marxists writes about what he calls a “possibly, apocryphal anecdote.” As he writes “When Indira Gandhi was assassinated, her ashes were sent to different cities to allow public homage. When her ashes lay lay in Calcutta’s Government House they were visited one evening by the state’s finance minister. In the previous year this man had delivered no less than two hundred and sixty-two speeches on the discrimination against West Bengal in the release of funds from the central treasury. As the minister came out of the Government House, he was asked how he felt when confronting the mortal remains of his most resolute political opponent. He replied in character: Centre Kom Diye Che (the centre has again given us less than our rightful share).”
In another essay titled Political Leadership Guha writes “Jyoti Basu’s government, it was said, began every discussion on federalism with the words, “Centre kom diye che.”
The communists who ruled West Bengal for more than three decades liked to blame all the problems of the state on the central government, which they felt did not give the state a fair share of the funds.
Dear Reader, if you are wondering why am I talking about West Bengal and its politics in a piece which has the term “interest-rates” in the headline, allow me to explain. Over the last few years, everyone from politicians to businessmen to bankers have called for interest rates to be cut as a solution for reviving economic growth in India. The assumption is that at lower interest rates people will borrow and spend more and that will lead to economic growth.
In that sense, these individuals are not very different from the communist politicians of West Bengal for whom “Centre kom diye che” was an explanation for all the problems of the state. Along similar lines, individuals calling for a cut in interest rates seem to believe that higher interest rates are a major reason for the slowdown in economic growth, and a cut can really get people borrowing and spending all over again.
The former finance minister P Chidambaram was a major propagator of this belief. His successor Arun Jaitley has carried of where Chidambaram left. Other than the politicians, bankers have also regularly asked the Reserve Bank of India (RBI) to cut interest rates.
Today with the RBI deciding to keep the repo rate unchanged at 8% in the fourth bi-monthly monetary policy, the interest-rate-wallahs will be at it again. Repo rate is the rate at which the RBI lends to banks.
The RBI had its reasons for not changing the repo rate. As it pointed out in a statement “Since June, headline inflation has ebbed…The most heartening feature has been the steady decline in inflation excluding food and fuel…to a new low. With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly.”
Nevertheless, over the next few days you will see bankers, real estate company owners, industry lobbies and possibly even the finance minister Jaitley, wondering why the RBI did not cut the repo rate, to get lending going again.
The most recent occasion when the interest-rate-wallahs came out in the open was when the bankers asked the RBI to cut the repo rate, after the growth in bank loans fell to a five year. As on September 5, 2014, the one year growth in bank loans stood at 9.7%. During the same time last year the number was at a significantly higher 17.9%.
The belief as explained earlier is that at lower interest rates people will borrow more. But as the American baseball coach Yogi Berra once famously said “In theory there is no difference between theory and practice. In practice there is.”
Lower interest rates do not always lead to more borrowing and revival of economic growth. An excellent example of this is what has happened in the aftermath of the financial crisis that broke out in September 2008. Western central banks brought down interest rates to very low levels in the hope that people will borrow and spend more, and help revive economic growth. But that did not happen. All it did was lead to many stock market bubbles all over the world.
Closer to home let’s take a look at car sales. The sales have revived from May 2014, after having continuously fallen for nine months. In August 2014, car sales grew by 15.16%, in comparison to the same period last year. This has happened without much change in interest rates. Why is that the case? Let’s try and understand this through a simple example. Let’s assume that an individual takes a car loan of Rs 4 lakh to be repaid over a period of five years at an interest rate of 10.5%. The EMI on this loan works out to around Rs 8,598.
Let’s say that interest rates were to come down by a massive 100 basis points (one basis point is one hundredth of a percentage)to 9.5%, all at once. At this interest rate, the EMI would work out to around Rs 8,401 or around Rs 200 lower than the earlier EMI. Now how many people will go and buy a car just because the EMI is now lower by Rs 200?
Anyone who has the ability to repay an EMI of Rs 8,401 can also repay an EMI of Rs 8,598. Hence, what people look at while taking on a loan is their ability to service the EMI. This involves at looking at factors like job prospects, the prospects of the company the individual works for and some idea of how he expects the broader economy to do. A major reason for the revival in car sales has been the election of Narendra Modi as the prime minister of India.
People have bought his election slogan “acche din aane waale hain” and hence, have taken on car loans and bought cars because for now they believe that their future will be better than their past. Interest rates have had no role to play in the revival of car sales.
Let’s consider real estate next. Here again the belief is that if interest rates are cut people will borrow and buy homes. This logic again doesn’t really hold. Home prices are now way beyond what an average Indian can afford. Let’s consider the city of Mumbai. A July 2014 report in The Times of India quotes Pankaj Kapoor of property research firm Liases Foras as saying “In Mumbai, the average cost of a flat is Rs 1.2 crore.”
An estimate made by Forbes puts the average income of a Mumbaikar at $5900 or around Rs 3.54 lakh (assuming $1 = Rs 60) per year. This means it would need nearly 34 years of annual income (Rs 1.2 crore divided Rs 3.54 lakh) for an average Mumbaikar to buy a home in this city currently. What this tells us very broadly that homes in Mumbai are very expensive. Similar calculations done for other parts of the country are most likely to show similar results.
Hence, the point is that homes in most parts of the country are now much more expensive than what most Indians can afford. Given this, lower EMIs because of lower interest rates aren’t going to help much. The real estate market has priced itself out.
This was the demand side of things. Now let’s look at what the economists call the supply side. Investments made by corporates have fallen rapidly over the last few years. As Sanjeev Sanyal of Deutsche Bank Market Research writes in a research report titled India 2020: The Road to East Asia and dated September 2014, “Gross Fixed Investment by the private corporate sector dropped from a peak of 14.3% of GDP in 2007-08 to 8.5% of GDP in 2012-13 (and likely even lower in 2013-14) with investments in machinery and equipment being particularly hit.”
The interest-rate-wallahs would like us to believe that this fall in investment has primarily been because of the high interest rates that have prevailed over the last few years. Nevertheless is that really the case? As Rahul Anand and Volodymyr Tulin write in an IMF Working Paper dated March 2014 and titled Disentangling India’s Investment Slowdown “Our results suggest that real interest rates account for only one quarter of the explained investment downturn. However, we find that standard macro-financial variables (interest rates, external demand, relative prices, global financial market volatility and others) do not fully explain the recent investment slump. Finally, using the new measure of economic policy uncertainty, the results suggest that heightened uncertainty and deteriorating business confidence have played a key role in the recent investment slowdown.”
Hence, if the current government really wants to get corporate investment going it needs to bring in a lot of much delayed structural reform. Also, it is worth remembering here that a some of the major business groups in India have already borrowed a lot of money and are having tough time paying interest on the debt they already have. Hence, where is the question of borrowing more?
Further, it also needs to be remembered that financial savings in India have fallen dramatically over the last few years. The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc. The household financial savings were at 12% of the GDP in 2009-10. Since then, they have fallen dramatically to 7.2% in 2013-14. A major reason for the fall has been the high inflation that has prevailed since 2008.
The rate of return on offer on fixed income investments(like fixed deposits, post office savings schemes and various government run provident funds) has been lower than the rate of inflation. This has led to people moving their money into investments like gold and real estate, where they expected to earn more. If the household financial savings number has to go up the rate of interest on offer on fixed income investments needs to be higher than the rate of inflation. Only recently has the consumer price inflation fallen to levels below the rate of return available on fixed income investments. This situation has to be allowed to persist if the financial savings of India are to increase.
To conclude, calling for lower interest rates on almost every occasion is not a solution to anything. It is time the interest-rate-wallahs understand this.

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

29 August, 2014

Best growth in 9 quarters: Election effect or real recovery?

The GDP growth for the period April to June 2014 has come in at 5.7%. This is the fastest economic growth that India has seen in the last nine quarters. During the period of three months ending in March 2014, the GDP had grown by 4.6%. Between April to June 2013, the GDP had grown by 4.7%.
This growth was on back of ‘electricity, gas & water supply’ which grew by 10.2 per cent , ‘financing, insurance, real estate and business services’ which grew by 10.4 per cent and ‘community, social and personal services’ which grew by 9.1 per cent.
Manufacturing which is one of the bigger components of the GDP grew by 3.5% during the quarter. It had contracted by 1.1% between April and June 2013. Manufacturing has grown even on a quarter to quarter basis. During the period January to March 2014, it had contracted by 0.7%.
Trade, hotels, transport & communication which forms the biggest component of the GDP at a little over 25%, also did well relatively better and grew by 2.8% during the period. Between April and June 2013, it had grown by 1.6%. The agriculture sector grew by 3.8% during the period, in comparison to 4% last year and 4.7% between January and March 2013.
All in all most sectors have done better than they had in comparison to last year. What are the reasons for the same? Supporters of Narendra Modi are likely to suggest that this is a clear impact of Modi taking over. But Modi took over as the Prime Minister of the country only on May 26, 2014, and by that nearly two-thirds of the three month period under consideration was already over. So his impact cannot be really great.
Nevertheless at the start of April 2014 it was clear that the Modi led National Democratic Alliance would dislodge the Congress led United Progressive Alliance from power. Hence that could have played some role in the increased activity in the manufacturing sector. Most business houses before the Lok Sabha elections had become pro-Modi. There was a belief that after Modi was elected to power the business and economic environment in the country would improve and that could have led to increased activity in the manufacturing sector. At the consumer level one important reason for the growth in the manufacturing sector could be improving car sales. Take the case of Maruti Suzuki, India’s largest car maker. For the period April to June 2014, the car sales for the company stood at 270,643 units, up 10.3 percent from April-June 2013. This after car sales had more or less stagnated for close to one year.
Car sales are a reasonably good economic indicator. Floyd Norris writing in The New York Times explains it best: “New-car sales can be a particularly sensitive economic indicator because few people really need to buy a new car, and thus tend not to do so when they feel uncertain about their economic prospects. Even if a car purchase can no longer be delayed, a used car is an alternative.”
Postponing the purchase of a car obviously has an impact on the car company. But it also has an impact on a host of other companies. As T N Ninan wrote in a column in Business Standard in January 2013 “The car industry is a key economic marker, because of its unmatched backward linkages – to component manufacturers, tyre companies, steel producers, battery makers, glass manufacturers, paint companies, and so on – and forward linkages to energy demand, sales and servicing outlets, et al.” And car sales growth leads to a growth of a lot of other sectors as well, and ultimately shows up in manufacturing growth as well.
While car sales growth is a very good economic indicator in developed countries, the same cannot be said totally about a developing country like India. There are other important factors at play when it comes to economic growth.
Another important factor which led to better economic growth in April-June 2014 was the fact that the sixteenth Lok Sabha elections were conducted during the period. One estimate suggested that the total expenditure on the elections would come to close to Rs 30,000 crore, including the Rs 7,000-8,000 crore spent by the government to carry out the elections.
A sudden increase in spending gets the multiplier effect into play. Money spent ultimately lands up as income in the hands of someone. He or she then spends that money again and that in turn lands up as income in the hands of someone else. This is how the multiplier effect comes into play and leads to faster economic growth. It is interesting to see that the services part of the economy grew significantly faster during this period, in comparison to the same period last year. This could clearly be because of all the money that was pumped into the economy by the government, political parties and candidates, during the course of the Lok Sabha elections.
This is an important factor that needs to be kept in mind while analysing these GDP numbers and the best economic growth in nine quarters. The GDP numbers for the period to July to September 2014, will clearly tell us whether economic growth has really revived to some extent or was the 5.7% growth a blip due to the Lok Sabha elections?
Also, the Monsoon this year hasn’t been normal. Data from the India Meteorological Department shows that Monsoon this year has been 18% below normal. If you look at the data in a little more detail, Monsoon in the North West region (basically Punjab, Haryana and Rajasthan) has been 34% below normal. Even though large parts of land in Punjab and Haryana is irrigated, there is bound to be some impact on agricultural growth.
Further, Central India which produces pulses and oil-seeds has seen a Monsoon deficiency of 17%. This part of the country is largely unirrigated and depends on rainfall for agricultural produce. A deficient Monsoon is bound to have an impact on agricultural in this region. And that will translate into lower spending and thus have an impact on other sectors as well.
To cut a long story short
, Indian economic growth hasn’t come out of the woods as yet. And the GDP data for the period July to September 2014 should give us a clearer picture.

The article originally appeared on www.Firstbiz.com on August 29, 2014

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

4 December, 2013

Of Chidambaram, Salman Khan and the great Indian hope trick

Vivek Kaul
So India is out of trouble. The current account deficit for the period July to September 2013 is down to 1.2% of the GDP in comparison to 5% of GDP a year earlier. The current account deficit is the difference between total value of imports and the sum of the total value of exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through imports and foreign remittances) of foreign exchange .
The gross domestic product (GDP) grew by 4.8% during July to September 2013 as compared to the same period last year. This was much better than the growth of 4.4% seen during April to June 2013.
And given this improvement, the Indian economy is starting to recover. Or so we are being told by politicians, bureaucrats, financial firms and stock brokers. The great Indian hope trick is at work. Leading the pack is finance minister P Chidambaram. “ We are going through a period of stress but there is a ground for optimism…we hope things will become better in the second half of the current fiscal,” he said on December 2.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, seems to be more optimistic than Chidambaram and he expects the GDP growth rate “in the second half of the current year to be better than the first half.”
That might very well turn out to be the case. But whether India grows at 4.8% or 5.1% that is purely of academic interest. It doesn’t matter. If the country needs to get people out of poverty it needs to grow at 8-9%. And the way things currently are it looks very difficult to achieve that kind of growth.
In a speech which was published as an editorial in The Times of India, Chidambaram said “In 2014-15 our growth rate will be close to 6 per cent, in 2015-16 it will be close to 7 per cent and, in the year after, we will be back to the high growth of 8 per cent.”
This is the great Indian hope trick at work. Yes things are looking a lot better on the current account deficit front and GDP growth also seems to have picked up, but there are a host of other economic factors which indicate that getting back to an era of high economic growth will be difficult.
1) The consumer price inflation was at 10.09% in October 2013. Food inflation was even higher at 18.2%. Half of the expenditure of an average household in India is on food. In case of the poor it is 60%. In such an environment people are likely to postpone other forms of consumption which are not immediately necessary, given that more and more of their money goes towards buying food. And this has an impact on economic growth. (In order to understand how inflation is inversely proportion to growth, click here).
2) The slowdown in consumption is clearly visible in the private final consumption expenditure(PFCE) which forms around 60% of the overall GDP, when measured from the point of view of expenditure. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. What this tells you is that people are postponing consumption because of high inflation.
3) A slowdown in consumption is visible in a slowdown in car sales. In the month of November car sales of the major players Maruti Suzuki, Hyundai and Tata Motors were down. It is worth remembering that car sales unlike a lot of economic statistics is a real number and not a theoretical construct. Car sales of Maruti Suzuki fell by 5.9% to 85,510 units. The sales of Hyundai were down to 33,501 units by 3.6%. Tata Motors was the worst of the lot, with sales down by 39.8% to 26,816 units. What this tells you again is that people are postponing consumption because of high inflation.
This lack of demand is also reflected in the slowing down of consumer durables output. As Sonal Varma of Nomura wrote in a research note dated October 11, 2013 “consumer durables output growth remained in the negative, possibly due to a sharper slowdown in white goods production.” This is a clear reflection of the fact that people are not interested in buying things.
4) Economic growth in large parts of the world slowed down after investment bank Lehman Brothers went bust in September 2008. India beat the trend and continued to grow. This was primarily on account of the fact that the government decided to spend a lot of money in comparison to what it was doing in the past.
Given this, the actual fiscal deficit for the year came in at Rs 3,36,992 crore, though the target was Rs 1,33,287 crore. So the fiscal deficit basically more than doubled from a target of around 2.5% of GDP to an actual of 6% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends.
This year the government of India does not have the same sort of flexibility. Data released by the Controller General of Accounts (CGA) shows that between April and October, 2013, the fiscal deficit touched 84.4% of the annual target. The fiscal deficit target for the year is Rs 5,42,999 crore or 4.8% of GDP. During the first seven months it was at Rs 4,57,886 crore or 84.4% of the target, suggesting that Chidambaram has very little room left to manage the fiscal deficit.
In this scenario there is very little chance for the government to increase expenditure to drive economic growth. In fact, if one looks at the GDP numbers for the period July to September 2013, the government final consumption expenditure fell by 11.7% in comparison to the period between April and June 2013.
5) Also, it is more or less certain now that the finance minister P Chidambaram will meet this year’s fiscal deficit target by delaying payments. .Reuters columnist Andy Mukherjee explained this best in a column he wrote on October 25, 2013. “India’s government recognizes revenue and costs not when it actually incurs them, but when it writes or receives cheques. By simply delaying payments, New Delhi can therefore give the impression it is sticking to its promise of keeping this year’s budget deficit within 4.8 percent of GDP,” wrote Mukherjee.
So oil marketing companies will not be paid for their under-recoveries in this financial year. Similarly, the Food Corporation of India(FCI) will not be compensated for the grains that it sells at a subsidised price, this year.
What this means is that by postponing payments, the current government will leave a bigger headache for the next government. As economist Abheek Barua writes in a column in the Business Standard “Let’s face the fact that even if Finance Minister P Chidamabaram were to produce a 4.8 per cent fiscal deficit-to-GDP ratio in 2013-14, it would not mark the end of India’s fiscal woes. The only way to compress the fisc this year is on the back of a hefty deferment of big-ticket expenditures such as subsidy payments for oil and fertilisers…How will a new government handle this? Will it have the courage to prune or jettison some of these revenue-guzzling welfare programmes, and risk eternal damnation by voters? Can it afford to finally do away with oil and other subsidies at one shot?”
Such a scenario will not be good for economic growth. Also, if the government continues in its current way, there is always the risk of a downgrade from one of the international rating agencies. And that will mean a run on the rupee.
6) Chidambaram in a recent speech said that “India is not an island. We are part of the global economy, and what happens in the globe will affect India.The global economy…is expected to achieve a growth rate of only 2.9 per cent in CY 2013. Advanced economies are expected to grow at only 1.2 per cent this calendar year. The eurozone area, which is one of our major trading partners, is expected to shrink 0.4 per cent this year. Therefore, what happens in and what we are able to do, must be seen in the context of the global economy.”
This is classic politician speak. When India was growing then it was because of all the things that the government was doing right. And now that we are not growing it is because of external factors. But let me not get into that. The point here is that if the global economy does start to recover, how well is the Indian economy placed to benefit from it through increased exports? Economist Rajeev Mallik of CLSA has an answer. “Recovery in global demand and trade flows will be positive for India, but it’ll be more positive for other Asian economies. This is because even though India’s ratio of exports in GDP has increased in recent decades, it remains the lowest among the Asian economies. Consequently, the incremental increase in growth in some other Asian economies will outstrip that for India,” explains Mallik in a column in the Business Standard.
7) The current account deficit has been brought under control by clamping down on gold imports. Another major reason for its fall is the slowdown in growth leading to lower imports. Imports declined 4.8% to $114.5 billion during the July to September 2013 period. As an editorial in The Financial Express points out “But, more than anything else, it is the continued collapse in GDP that has ensured CAD remains under control, implying that the situation can once again get out of control as GDP picks up—with no policy on opening up of the coal sector, for instance, coal imports will pick up once again as GDP rises.”
8) So in this environment few are investing. As The Financial Express editorial points out “a recent study by Kotak Institutional Equities shows how sanctions for fresh projects have been tapering off from R1,13,900 crore in Q1FY11 to R74,900 crore in Q1FY12, R41,300 crore in Q1FY13 and to just R22,000 crore in Q1FY14.”
What all this tells us is that there are serious economic issues that need to sorted out if India has to get back anywhere near 8% GDP growth rate. In this scenario anyone trying to tell us that India will soon go back to a high economic growth rate is like Salman Khan telling the world that he is a virgin who is saving himself for his wife. We all know that is not something to be taken seriously.
The article originally appeared on www.firstpost.com on December 4, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

4 December, 2013

A fall in current account deficit need not mean a fall in gold demand

Vivek Kaul
The current account deficit for the three month period of July to September 2013 has come in at $5.2 billion or 1.2% of the gross domestic product (GDP). This number is so good that it prompted the Reserve Bank of India(RBI) to release the numbers a month earlier than scheduled.
In technical terms, the current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through imports and foreign remittances) of foreign exchange .
The current account deficit for the April to June 2013 period had stood at 4.9% of GDP, whereas for the July to September 2012 period it had stood at 5% of GDP. Also, this is the lowest current account deficit that the country has seen since the period of three months ending June 2009.
A high current account deficit is not deemed to be good for a country primarily because it means that the outflow of foreign exchange is much greater than its inflow. So in India’s case it means that the outflow of dollars is much greater than the inflow of dollars. This means a greater demand for dollars than supply. Hence, those who need dollars sell rupees to buy them. This leads to a situation where the value of the rupee falls against the dollar. This is precisely what happened between May and August 2013, when the rupee went from around 54 to a dollar to almost 69 to a dollar.
When this happened, Indian importers had to pay a significantly higher amount in rupee terms, for what they were importing. India produces very little oil and imports nearly 80% of its requirement. Hence, the oil marketing companies had to pay a higher amount for the oil that was being imported. But these companies are not allowed to sell cooking gas, diesel and kerosene at a price which is greater than the cost price. The government subsidies them for this under-recovery. This adds to the expenditure of the government and hence, leads to the fiscal deficit going up, which has its own set of problems. Fiscal deficit is the difference between what a government spends and what it earns.
There are two ways of controlling the current account deficit. One is to ensure that the country earns more foreign exchange than it was doing in the past. The other is to clamp down on the demand for foreign exchange. For a government it is always easier to clamp down.
Hence, the government went about increasing the import duty on gold. The duty is now at 10% in comparison to 2% earlier. Another rule, which required a gold importer to re-export 20% of all the gold that he imported, was also introduced by the government.
These two significant changes ensured that gold imports came down dramatically. Gold imports during the June to September 2013 period stood at $3.9 billion, down nearly 65% from the same period in 2012, when it had stood at $11.1 billion. In the period of April to June 2013, the gold imports had stood at $16.4 billion.
This dramatic fall in gold imports is a major reason behind this fall in current account deficit. In absolute terms the fall in gold imports has been $12.5 billion($16.4 billion – $3.9 billion) between the three month period ending in June 2013 and the three month period ending in September 2013.
The current account deficit for the April to June 2013 period was $21.8 billion. For the period July to September 2013 period, it has come in at $5.2 billion. The absolute difference is $16.6 billion. Of this nearly $12.5 billion or nearly three fourths of the fall has been because of lower gold imports.
A fall in the value of the rupee has also helped boost exports. Merchandise exports went up by 12% to $81.2 billion during the period in comparison to the same period last year. This was primarily on account of growth in export of textiles, leather and chemical products.
The major fall in current account deficit has been because of a massive fall in gold imports. And this has meant that the demand for dollars to buy gold has gone down dramatically as well. This has been one of the major reasons for the rupee increasing in value from around 69 to a dollar in end August to around 62.4 to a dollar currently.
The current account deficit was around $87 billion last year. With the clamp down on gold imports, the finance minister P Chidambaram has said in the recent past that he expects the current account deficit to be less than $56 billion in the financial year ending March 2014.
Does a fall in gold imports also mean a fall in demand for gold? India produces almost no gold of its own. But things are not as simple as that.
It is worth remembering here that gold imports were banned in India until 1990. At that point of time, gold smuggling was a fairly lucrative operation. As a recent article in The Economist points out “India consumed only 65 tonnes in 1982. Until 1990 imports were all but banned. Bullion had to be smuggled in and its price within India was about 50% higher than outside it.”
And that is precisely what has been happening over the course of this year. A recent report in The Hindustan Times points out “The Mumbai airport customs has seized around 73kg gold worth Rs.19.71 crore between April and October this year, more than double the quantity (31kg gold worth Rs 9.8 crore) it had seized during the same period last year. The spurt in smuggling activities is a result of the widening difference in the yellow metal’s price between the domestic market and Dubai. The price gap has gone up to Rs 5 lakh a kg in the past few months from being Rs 2.5 lakh a kg in June, and only Rs 1 lakh before that.”
Gold smugglers are also using neighbouring countries to get gold into India. A November 17, 2013, report in The Times of India points out “In the past few months, over 50kg of gold worth more than Rs 15 crore has been smuggled across the Indo-Bangladesh border alone. Sources in Directorate of Revenue Intelligence (DRI) said Nepal too has come up on the radar with some recent seizures on the border. Sources said this was only a fraction of what was being smuggled through these borders.”
A similar point is made by Dan Smith and Anubhuti Sahay of Standard Chartered in their September 12, 2013, report titled “Gold – India’s government gets tough.” As they write “There is much anecdotal evidence suggesting that increased amounts of gold are entering India through unofficial channels, which makes the official figures an understatement. Pakistan temporarily suspended a duty-free gold import arrangement in August, when gold imports doubled. According to media reports, much of this was crossing the border into India.”
A report in the DNA quotes Somasundaram P R, managing director (India), of the World Gold Council as saying “ demand in neighbouring countries such as Thailand has increased and some of this may be because of India demand.”
The World Gold Council in a recent report also makes the following point. “Gold entering the country unofficially through India’s porous borders helped to meet pent-up demand…It is likely that unofficial gold will continue to find its way into the country to satisfy demand. Reports that a good market for ten tola bars is re-emerging,due to the relative ease with which they can be concealed, reinforce this view.”
The point is that a clamp down on gold imports leading to a major fall in gold imports doesn’t necessarily mean a fall in gold demand. These are two difference things. An increase in gold smuggling has huge social implications. It is worth remembering that some of the biggest mafia dons of Mumbai in the seventies and the eighties started as gold smugglers before getting into other illegal activities.
That apart, there are financial implications to this as well. A major reason why Indians buy gold is to protect themselves from inflation. Over the last few years the consumer price inflation(CPI) has been higher than the interest being paid on fixed deposits and other fixed income instruments.
In this environment, gold has looked like a good bet given that it has given positive returns in each of the years between 2002 and 2011. As Chetan Ahya and Upasana Chachra of Morgan Stanley point out in a December 2, 2013 note titled India Economics: 2014 Outlook: A Year of Macro Adjustment “Persistently high CPI inflation has kept real interest rates negative since the credit crisis, encouraging households to reduce financial savings and increase allocation to gold and real estate.”
Hence, buying gold was a perfectly rational thing to do at an individual level. The Indian financial system is rigged towards helping the government borrow money at low interest rates (You can read the complete argument here). Given this, it is not surprising that Indians are fascinated by gold at an individual level. Though at an aggregate level it has led to major problems. One of the problems has been the weak deposit growth of banks. As Ahya and Chachra point out “This is reflected in deposit growth, which has stayed weak relative to credit growth now for the last three and a half years, elevating the loan-deposit ratio near full capacity levels (76.5% currently).”
This basically means that deposits have been growing at a much slower pace than loans being given by banks, due to the fact that people have been diverting their savings into gold and real estate, in the hope of beating inflation. And this in turn has led to higher interest rates.
With the government clamping down on gold imports, the hope was that it would lead to people saving more money in bank and other fixed income deposits. But is that really happening? The evidence available suggests it isn’t because the basic problem in India is high inflation and that hasn’t been addressed.
The article originally appeared on www.firstpost.com on December 4, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

11 September, 2013

Why car sales did not rise and actually fell in August

Vivek Kaul
“Statistics are like bikinis” said Aaron Levenstein. “What they reveal is suggestive, but what they conceal is vital.” Levenstein was an American professor of business administration who died in 1986.
In simple English, statistics never reveal the complete story and can lead to wrong inferences being made. Take the case of domestic passenger car sales number for August 2013. Media has gone to town highlighting the fact that car sales have risen by 15.4% in August 2013, in comparison to August 2012. Also, car sales have risen first time in ten months is another point that has been made. This has been used to infer that the Indian economy is looking up again and the consumer demand is coming back to the market. The situation is far from that.
Let’s look at the numbers. In August 2013, car sales stood at 1,33,486 units. This was 15.4% higher than 1,15,705 units sold in August 2012. So far so good.
This substantial jump in sales came because Maruti Suzuki managed to sell 76,018 units in August 2013. In comparison, it had sold only 50,129 units in August 2012. This 51.6% jump in sales of Maruti cars, helped the overall car sales jump by 15.4% in August 2013. What analysts call the base effect was at work.
The question to ask here is why did Maruti see a more than 50% jump in sales in August 2013 in comparison to August 2012? Smaller car manufacturers can see that sort of a jump in sales. But for the country’s biggest car manufacturer to see a 50% jump in sales under normal conditions, is almost impossible.
The answer lies in the fact that in August 2012 there was a lockout at the Manesar plant of Maruti, after labour troubles and this in turn affected the production of Maruti cars. So Maruti sold fewer cars in August 2012 not due to lower demand, but because it could not produce enough cars to meet the demand. And given that things in August 2013, have just got back to normal for the company.
Lets look at car sales in August 2011. During that month Maruti had managed to sell 77,086 units in the domestic market. Let’s assume that there had been no lockout at the Manesar plant of Maruti in August 2012, and the company had managed to sell 77,086 units during the month, like it had a year earlier in August,2011. In that case, it would have sold 26,957 units (77,086 – 50,129) extra, in comparison to the 50,129 units that it actually sold.
The overall car sales for August 2012 would have stood at 1,42,662 units (1,15,705 + 26,957) in comparison to the actual sales of 1,15,705 units. And this is the right number to use while comparing sales of August 2012 with that of August 2013, in order to adjust for the lockout at Maruti’s Manesar plant.
Hence, the overall car sales should have stood at 1,42,662 units in August 2012. Given this, the car sales for August 2013 are actually down by 9176 units (1,42,662 – 1,33,486) or 6.4%. This is something that is reflected in what Sugato Sen, the Deputy Director General of Society of Indian Automobile Manufacturers, told reporters yesterday “This (growth) is not a reflection of the market conditions. This is mainly due to Maruti’s numbers compared to last year. The tough market conditions still remain. Interest rates are high, fuel prices continue to be high while sentiments are extremely low.”
Car sales in India have slowed down for 10 consecutive months. And what that basically tells us is that people who can buy cars are worried about their economic prospects, and hence, are postponing their purchases. Floyd Norris writing in The New York Times explains it best: “New-car sales can be a particularly sensitive economic indicator because few people really need to buy a new car, and thus tend not to do so when they feel uncertain about their economic prospects. Even if a car purchase can no longer be delayed, a used car is an alternative.”
Postponing the purchase of a car obviously has an impact on the car company. But it also has an impact on a host of other companies. As T N Ninan wrote in a brilliant column in Business Standard in January 2013 “The car industry is a key economic marker, because of its unmatched backward linkages – to component manufacturers, tyre companies, steel producers, battery makers, glass manufacturers, paint companies, and so on – and forward linkages to energy demand, sales and servicing outlets, et al.”
Car sales, unlike a lot of other numbers like inflation, GDP growth, which reflect the state of the economy, is not a theoretical construct. It is a real number. And if it is falling, what it clearly tells us is that the Indian economy is slowing down. There is no better number to show that.
The article originally appeared on www.firstpost.com on September 11, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)