Economy is fine says the Economic Advisor.. As usual I beg to disagree..

The Economic advisor to the prime minister says the economy is doing fine and we can expect a growth rate of 8.5% this year. Good News.

As always I am a naysayer and my only grouse is that we have inflation running at an average of 10% for the last four quarters and with nominal interest rates lower than the inflation rates we have already run into negative real interest rate territory for the last three quarters. This does not bode well for the foreign exchange rate front. As long as the real interest rate remains negative, Rupee will keep being under stress, new symbol not withstanding. May be, this is good for the software companies and other export led businesses, but since we are an oil importing economy with a trade deficit of close to a billion dollars and heavy reliance on "invisibles" to Balance our BOP, we need more to be done on the trade deficit side.

All through the blog you will find mention of this inflation in India being more due to non availability of supply than the over supply of money. Managing this inflation by using monetary policy is like managing hypertension by asking the heart to pump less blood rather than by exercising more. Ask any doctor for a remedy he will certainly say that your body needs exercise to counter high BP and not drugs to slow your heart down. But our regulators are not "doctors" they have their monetary policy blinkers on all the time.

what next? INR (sorry I still do not have the font to write the symbol of the Rupee) will weaken to offset for the negative real interest rate for another six months and then if we see some inflation management (monetary or otherwise) we may see a stop to the rupee losing value.

This, along with the money due to be pulled out from emerging markets, thanks to the new act signed by Obama will lead to depressed markets for the next six months. a recovery for the markets is seen only later.

A review of the economy is expected on the 26th evening. The shape of things to come will be decided later. But, since it is an RBI event and therefore a monetary event, it may not give any medicine for the disease of low investment and low supply kind of situation we are in.

Till then short a few August futures and make money.

"If it isn't broken dont fix it" says RBI

That seems to be the mantra from our venerable Governor of the RBI. this credit policy is just a tweak with respect to raising the SLR to 25%. All the other rates have been maintained at the same level. RBI's review has pared down the GDP growth outlook of 6%.
The stimulation of the economy on the back of the financial crisis in the form of eased liquidity remains nearly constant. The powers that be, have been crying hoarse that it is still not time to repeal the stimulus given during the crisis. One fails to understand, why should the government not stimulate the economy constructively on a continuous basis? Why should the government only think of monetary measures when fundamental shift in stimulating the economies are needed?
The best form of stimulus would be to encourage individual savings and collective investments.
Now, what does one make of this credit policy? The policy may have said many things in words but as far as deeds are concerned, it is very clear. The Governor does not think anything is wrong and he does not want to rock the boat when everything is to the Government's satisfaction.
What do we expect in the market? The markets are more concerned with the slow growth expectations. We have already witnessed sluggish growth in corporate sales, this may start affecting the margins and profits in the next quarter. That is the fear in the minds of the players in the market now. The markets have also gone up on one way street for most part of the last year and the time for profit booking is ripe now.
So BOOK PROFITS AND DON'T WAIT TILL THE MARKETS TOP OUT.

Will the FM deliver?

If you happen to watch the business channels these days, all of them want to sensationalise and make news of something there is no news about. these news channels survive on sensationalising the banal. That's exactly the thing they are doing with the upcoming budget. they have already labeled it as the "Big B" (The original Big B must be squirming at the thought of this unlikely and banal competition).

What can be reasonably expected by the budget?

1. Income tax slabs will be raised to make way for the 6th pay commission. may be the lowest slab will be up from Rs.150000 to 200000.

2. A broad and vague statement about GST to be introduced will be spoken of with a deadline of three to four years so that the listeners will feel good about some progress in the administration and the practitioners will also feel good that it is not coming soon yet.

3. A proposal for disinvestment to bridge the gap in the fiscal deficit will also be talked of and an arrangement of selling equity in PSUs to other PSUs will be taken up to satiate the views of people hankering for fiscal prudence. Whether it is fiscal prudence to disinvest by transferring the money from one pocket of the government to the other pocket is a debatable point.

4. The recent success of farm loan waiver in the electoral hustings is bound to cast its shadow (or should I call it lustre) on the budget and there will be a constituency which would hanker for more of the same. This constituency will surely be catered to, and an announcement in some form or the other can be expected out of this budget too.

5. NREGS will also become a mainstream project of the government, given the keen interest of the family in the project. An announcement of extension and raised "deficit funded" programme can be expected on this subject.

6. Securities Transaction Tax, the slow poison affecting the stock markets and the Commodities Transaction Tax the poor cousin of the STT will remain the same and no reprieve on these items can be expected.

7. Some superficial and cosmetic changes can be expected in the indirect taxes system to make it look market friendly. Here the phrase "look market friendly" is important.

8. Education seems to be the new frontier where the government will show its keen interest. especially Higher education, rightly so when we have a former UGC chairman as the Head of the cabinet. More central universities, IITs, NITs, can be expected to be announced in this budget. We can also expect at least 5 universities to get a substantial largess to augment their resources.

9. Defence expenditure would go up by 20%, this has become an annual feature now with the prevailing Geo-political situation.

10. Setting up of a new force of the type of NSG/RAF may be announced to combat internal insurgents.

11. Some politicians are vying for a special status for the Hyderabad-Karnataka region, Bihar, etc., these may see the light of the day and some package can be expected for Hyderabad-Karnataka region and Bihar in an attempt to woo non-congress voters there.

On the topic of special status, one thought crosses the mind, Article 370 gives a special status to J&K and politicians from congress have been talking about a similar status to Telangana, Goa north-east, etc. Does this mean that we are heading towards a decentralised system of governance? Are we heading towards a federal system with a weak centre and strong regional states? only time will tell.

So, if this is reasonably expected of the budget in general, one has to stop and think whether it is really the "BIG B " as our media wants us to believe. I remember economic times portraying a caricature of honourable Shri. P Chidambaram as the superman during the 1997 budget. Ten years ago it was for the print media to raise the hype, now its the turn of the electronic media to do the same. The reach and impact of electronic media is deeper and broader. If the media starts encouraging false hopes and sensationalising no news as BIG NEWS then the nation will be in for a big surprise. It seems that the present electronic media has taken upon itself the mantle of changing the opinions in the country. This type of sensationalism in the electronic media and instant justice meted out to people via the media will not get them anywhere. People are bound to realise sooner or later that the "BIG B" is also same as the case of "prince stuck in the bore well" or "A man who prophesied his death" or "leopard in somebody's house" or "injured tigress on the road". All these media stories took up nearly 48 hours of national TV space at one time or the other leaving aside grave issues like hoisting of the Pakistan flag at Srinagar.

Any way This budget as I see it is going to be a non-event and I pray that I will be proved wrong. Over to Honourable Shri Pranab Mukherjee to to the Honours.

DOLE Time in US and VOTE Time in India

Stimulus packages of the recent times have started to have the "Look and Feel" of socialism. unemployment compensation, food stamps and Subsidized Medical Insurance seem to be from the era of socialistic societies. This further proves the economic management cycle professed earlier. This cycle, as written earlier consists of of "Liberalization, Privatization, Globalization, Nationalization".

The debate of whether to bail out individuals or institutions is another matter which needs attention. Do individuals who speculated in the real estate market on account of greed need a bail out or Institution who nourished this greed and found themselves holding "toxic assets" need a bail out?

Lets once again examine the root of all these problems. Lets start with the housing statistics of USA, for a population of 305 million the country has 130 million houses which makes it, one house for every three people in the country. Its a nobrainer that housing supply is more than demand in this country and people have started buying and selling houses for speculative purposes than for dwelling purposes. When real estate is used for speculation then the "reality" of the investment gets lost and becomes a virtual asset. Now tell me if there is any point is letting banks lend to people who want to speculate in the housing trade? isn't it same as lending money to trade in the stock markets? In stock markets when money is lent, the stocks are subjected to a haircut and the haircut is as big as 50% in India, whereas the haircut here was 5% owing to the fact that this was "Real" asset and not a stock! But it turned out to be an "Unreal" one.

Another side of the problem is the propensity of American consumers to consume. Consumption in itself is no taboo but consumption by discounting your future income is a problem. That too using up your future income projections to pay for speculative buying of real estate is a disaster.

If this is the root of the problem, then should the new administration stop housing construction activity and? Should old houses be demolished and new ones built so that a renewal of assets happens and housing supply remains constant? these are the question that need to be answered by the new administration. I, for one would always suggest asset renewal over new asset augmentation that would generate employment and renew the infrastructure. It would also be wise to start a massive Infrastructure renewal plan to kick start the economy. that would surely percolate to other countries and would be an answer to the bulging cash stashed in the banks due to liquidity infusion and hoarding of Cash that has been witnessed in the country.

Lets get back to India, what ails us here? We are witnessing a slowing growth rate. Our policy makers are trying to bring down inflation by reducing fuel prices. I think we are barking at the wrong tree! India is bound to have inflation around 5-6% and it cannot be stopped because of the substantial portion of the economy is unaccounted for. That's what is called the black economy. Controlling liquidity at the wrong time suffocated the demand and drove interest rates higher in the last six months. With inflation higher than the repo rate we still have a negative real interest rate. With negative interest rate there is no hope for foreign portfolio investment and therefore no hope for the stock markets because the strong hands of FIIs will not buy India!

No amount of bullied interest rate reduction will work as the banks have become risk averse and are taking their own time to sanction loans. Housing and real estate prices are set to spiral downwards as the stratospheric levels of real estate prices are not sustainable in India too, even if the country is deficient of housing that's because of the affordability issues.

Stock Markets in India will witness laid back meandering business for sometime now as the country is gearing up for elections. Now non-issues will take centre stage.

Elections in India will be highly entertaining and will have very high educational value.

Stimulus package completed?

Remember? I had written about the stimulus package on december 4th. After that I thought that I should take a break in posting data. The entire package came in two stages and now the petrol and diesel prices cut will also come in two phases. Indian polity probably does not believe that the current slowdown is for real therefore the speed of response is that slow.
All through Indian contemporary history economists have derisively chided our economy and called it the hindu rate of growth.
Let us spend some time on this phenomenon of hindu rate of growth.
Indian inaction is legendary by now. Inaction in war, inaction in peace and inaction in strategy. One of our erstwhile Prime Ministers famously quoted "deciding not to do anything is also a decision". Our politicians, most of whom are lawyers are used to biding time and asking for adjournements in courts of law. They bring this innate trait to the governance table and wish away the problems thinking that time is the greatest healer. Since these lawyers are used to asking for time and biding time theie cases and thier governments bide time till the defendant or in this case the economy dies on its own.
Economies do not die as people have their own ingenuity for survival. They somehow survive based on their "jugad" (thats the hindi word for improvisation). This "jugad" keeps the Indian economy from going to the ruins. Since, government is ambivalent about the economy the entrepreneurs themselves find ways to prosper. This leads to slower growth with no incentive to grow faster and farther.
That's why we have the hindu rate of growth. India was pushed by the IMF to liberalise, privatise and globalise its economy as the economy was in trouble, now that the troubles are over and as our ex-FM said "A finance minister of any country would be ready to give his right hand for a slowed down growth of 7% in GDP". Complacency has set in, Government is counting months in power, elections are around the corner and government bides time letting prices to go south (PRICES ARE NOT GOING SOUTH BECAUSE OF SUPPLY AUGMENTATION BUT BECAUSE OF REDUCED CONSUMER CONFIDENCE AND REDUCED EARNINGS) thinking that lower inflation will be good for a return to power for the ruling alliance.
The ruling alliance needs to know that people of India want action not inaction. With the proliferation of communication networks, it is impossible to gag people and run the government on rumour mills and PR programmes. Decisive action is needed and it can only come from men of action. So where are our men of action can anybody stand up to be counted?

Back to Business?

After the attacks and the aftermaths of the attacks. The Indian business community seems to be coming back to its usual business along with the regulators. The RBI is expected to cut rates further during the weekend. What are we bargaining for? Are we saying that as debt becomes cheaper growth will pick up? Inflation was reported to be 8.4% for the week ending November 22. with repo rate at 7.5% we have a negative real interest rate of 1.34%. If we continue to have negative real interest rates then the Rupee will keep on depreciating until either inflation comes below the repo rate or the repo rate goes above the inflation rate. Both seem impossible, looking at the thinking in the minds of the "Powers That Be".

A new thing brewing is the scheme of using $10 bn of forex reserves to finance infrastructure projects in India. Extracts of the scheme being thought of is as follows:

"Under the proposal now being finalized, RBI will use up to $10 bn from its reserves to buy bonds issued by foreign subsidiaries of the Indian Infrastructure Finance Corporation Ltd (IIFCL). The subsidiary will then bring this money into India and the parent company will use the rupee resources thus generated to lend to infrastructure projects. The scheme is being seen as serving several purposes apart from giving IIFCL more funds to lend to infrastructure. First, when IIFCL sells the dollars back to RBI, the central bank will end up adding to the supply of rupees in the system, thus easing liquidity. Second, dollars that would otherwise have gone back to the US to buy US treasury bills will remain in India, thereby adding to the supply of the greenback and help in counteracting the depreciation of rupee. It is proposed that IIFCL will use this money to lend to banks at 9%. Banks will on-lend it to companies executing infrastructure projects at around 11%. However, in this case banks want government to ensure viability of such projects since a two percentage point spread would otherwise not make commercial sense for them. Apart from this, RBI will be asked to extend a line of credit of Rs 10,000 cr to the Small Industries Development Board of India (SIDBI) to lend to small scale units at 8%. RBI will lend these funds at about 6% to SIDBI. A similar Rs 10,000 cr line of credit will also be opened by RBI for the National Housing Bank (NHB), which provides refinancing facilities to housing finance companies. NHB will be asked to lend to housing finance companies at rates of around 6-7% so that they can provide home loans to the ultimate consumers at around 9%. This, it is expected, will help revive the demand for housing that has gone down sharply in recent months. The proposal to allow NBFCs to access external commercial borrowings (ECBs) is also likely to come through. The government believes that some NBFCs have credit lines tied up with foreign lenders and could easily bring in money if they are allowed to do so."

This means that another Rs. 75000 cr being poured into the market. This money seems to be directed specifically at the target. This should spur growth specifically in private infrastructure and housing. Only thing we need now is spending on Government Infrastructure. We only hope that the government starts talking about investing on infrastructure.

China Shows the way

Lord Maynard Keynes must be a very happy man today and must be celebrating in his grave. The Chinese Government has toed his line and announced a $586 billion revival package, most of it is the promise to build infrastructure. This was what was expected of Indian Government too. But our policy makers are busy playing in the money markets. They huddle together for days and come up with damp squibs of reduced interest rates, reduced CRR and SLR. The fiscal deficit be damned, this is the time to act and push for higher government spending in infrastructure, housing, irrigation, power, water and so on.
The government should take a cue from the Chinese government and start a resurgent India programme of stimulating investment. We cannot tamely sit back and murmur about slowing growth, we have to do something ourselves and cannot expect FDI to walk in into India. Unless government starts investing private investors will not bring money to the table. This is a blackjack game where the house has to deal first and put money on the table, unless the players are convinced about money available to be won they will not play. That sums up the need for creation of investment climate in the country.