Saturday, 24 January 2009

State of the Economy and State of the State

Inflation inched up to 5.6% in the last week, it was attributed to the truckers strike during the period of study and all the big names in the financial industry are talking about inflation easing to 2-3% in the next three months. On top of this, these big names are calling for further rate cuts and reduction in statutory ratios for banks. India does not have a Glass Steagall Act, but it is common knowledge that investment banking and commercial banking are kept at arms length in the Indian banking industry. This arms length has significantly shortened in the last five years. In the banking parlance we have a new way of talking about this. Instead of calling these activities investment banking and commercial banking activities we call them by the kind of income they generate and name them as "fee based Income" and "Fund Based Income". Of course some investment banking activities would be fund based activities and therefore they form a grey area.

Now, if the rates are lowered and, what would happen? I happen to run a small "fee based business" and I am drawing this from my own experience. Banks have a PLR range of 12.75% to 13.25% (official RBI figures) and deposit rates of 7.5% to 9.6%, this leads to a margin range of 3.15% to 5.75% on the higher and the lower side. Risk aversion is the rule of the day fr banks these days, bankers these days are wary of giving loans. They prefer to have treasury income rather than interest income. meaning there is a positive bias towards the investment banking conundrum rather than the rig morale of commercial banking. because of the risk aversion I do not expect bankers to lower their PLRs, even if they lower their PLRs they will charge a premium on the PLR for all kinds of customers other than prime customers. Coming to think of it, if we go by the usual definition of the prime customer: steady cash flows, consistent declaration of profits, consistent IT returns, consistent IT payments, etc. i would say majority of Indian customers, individual as well as corporate fall under the sub-prime category. Then what do we do with the lowered PLR? Do we need this PLR only for declaration purpose on the RBI web site? Banks will still have a bad choice of borrowers and therefore will always be risk averse. Therefore expect banks to make more profits but at the cost of taking higher risks. (That's really a nobrainer as more risk only means more profit and there's no such thing as reckless profit)

Now the STATE of the STATE. All these days we had a government which was running on the steam and momentum provided by the Keynesian pump priming done by the earlier NDA government. The present regime was always waxing eloquent about growth rates and was complacent with doling away the tidings brought about by the higher growth rate. Economies grow or de-grow after a lag of two to three years of taking action on the economic system. now that this government is completing its term of inaction, complacence and profligacy, we have the PMs panel re rating the growth to 7% from the earlier projection of 9%+ growth. Has this been due to the global financial crisis? notwithstanding the global financial crisis the momentum of growth could have been kept up by committing public funds to developing infrastructure, housing, water supply, power generation, electricity supply, primary education, secondary education and other such worthy causes. But all these were given a go-by and the government resorted to the age-old "congress" method of appeasement and cheap populism of subsidising the rich farmer.

After this disaster, now we will be a country with an actually inactive Prime Minister for the next four months. doesn't congress have one able man / woman to entrust the top job? If the PM undergoes a cardiac surgery and has to convalesce for three months, can't this country find a replacement for this honourable man? Do we have no choice left at all? Why should Pranab Mukherjee chair cabinet meeting as the stand-in PM? What happens if we have a 26/11 type of a situation again or if we are forced to go to war with our ever friendly neighbours? Why can't the stand-in PM become the real PM? Where are all the so called strongmen from Bihar, Maharashtra? Why don't they claim a stake for the PM's gaddi now? Why should we rely on a Prime Minister (I have high regards for his stature and ability when he is physically fit) who is undergoing a bypass surgery for the second time and is required to take rest for three months? Can we afford to give a three month medical leave to our Prime Minister during this hour of crisis?

No comments: