Economic growth

HNY to HNQ??

As I sit to pen my first blog for this year in the early days of another New Year, I am reminded of my first post for the last year which was titled “Thank God it’s a New Year”! That time (1st week of 2021) we were just coming off what appeared like a terrible year. The entire world was disrupted by the global pandemic in a scale not seen or heard in many, many decades.  But then by January, we already were recovering and started gradually getting back to pre-Covid way of living. Lockdowns were over, travel started and so on. So, the theme of my piece then was that the worst was behind us and we must thank God that we are in a New Year and raring to go.

In the year 2021, we did finish the first quarter on a high. There was optimism all-around of a sharp turn around. But then, just in a few weeks, the world in general and India in particular was mauled by the 2nd wave.  I shudder to recount the horrifying things which were happening around us in the months of April/May/June/July. Enough to say that the cursed tentacles of the virus were still spreading all over spelling doom on all recovery predictions.  Drawing room conversations were all around the availability of vaccines and the time when vaccines will provide an eventual shield for the virus.

If we recall, by the third Quarter of 2021 however, things on the ground started changing rapidly. The vaccination pace picked up dramatically with better availability of vaccines by August. And we were talking about flattening the curve for the second time. Through the festival season in the months of October/November the mood was upbeat and we could start seeing the recovery even in “Contact sensitive sectors” like travel, tourism and so on.

Things started dramatically changing again with the discovery of the Omicron variant in South Africa in early December. And towards the end of December and as we speak now, we are witnessing another rapid spike in cases and preparing ourselves for the inevitable third wave!  If you have been following the IMF predictions for the global economy and specific countries through the pandemic, you will realise that they have been changing their forecasts every quarter up and down. Now, what am I trying to drive at here?

With such an uncertainty in the world triggered by a virus and its variants today and it could be something else tomorrow what does it leave for long range planning for a country /company /household etc.?  It is tough. To elucidate this point let me talk about the way Indian government handled the economic support during the pandemic versus some of the larger well to do countries. When the pandemic struck in March 2020, big economies like the US, Canada and European countries who could afford, opted for cash transfer to its people to pump prime the demand and therefore the economy. Some of the Non-resident Economists of Indian origin of the likes of Dr. Raghuram Rajan, Dr. Kaushik Basu and Dr. Abhijit Banerjee also advocated this route for India and were extremely critical of the Narendra Modi government for not going the whole hog and opting for a more calibrated “Drip support” approach.

In this approach, instead of direct cash transfer, the government opted for free supply of rations to the needy and generous support of working capital to ensure that the businesses stay afloat. There were also moratoriums on loan repayments for most part of the year 2020. The logic of the economic think tank that included the likes of Dr. Bibek Debroy (Chairman – PM’s Economic Council) , Sanjeev Sanyal (Principal Economic advisor in the Finance Ministry) and Dr Krishnamurthy Subramanian (Chief Economic Advisor) was to take one step at a time when how the virus situation will pan out was uncertain, uncertainty being the key word. The time period for which any support was to be provided was not clear. Also another important thing, during the pandemic induced lockdowns, the issue was in the supply side largely. People stopped going to salons during the pandemic not because they didn’t have money. The same logic can be extrapolated to other service sectors as well. So, the idea was to keep the powder dry for eventualities in the future. As per IMF’s Dr. Gita Gopinath, large economies including the US have no more leg room left to keep supporting the economy and hence are facing an imminent challenge if the virus continues to hold sway. I must say therefore that the Indian think tank certainly stand vindicated on this account when we had to contend with the second wave and now the third wave.

My point therefore is, are long term planning or Annual plans relevant anymore? Things on the ground change so dramatically and drastically these days that any assumption for the better or worse of the future happenings is proved wrong very quickly. Since in India we understand similes from Bollywood easily, let me give an example. RRR is the next film after Bahubali from the ace director Rajamouli. This is also a magnum opus that has been made in multiple languages. Obviously due to the huge budget involved, it had to opt for a theatrical release and was planned for a release in January. The entire team was seen doing mega roadshows in different cities as part of the promotion for whole of December. But then, I see today that they have taken a call to postpose the release due to the like increase of restrictions in many cities due to the Covid surge of late! So it is a matter of few weeks for things to change for the fate of a film that was on the works for five years!

Even in the context of business in the pre-Covid times, I have not been a big fan of rigorous annual planning as, over a period of time, I have seen that assumptions and market conditions change drastically leaving the annual plans as an academic exercise. Now in the post Covid New normal, I feel that time has come to focus on QSQT (Quarter Se Quarter Tak).  While an overall Annual plan can be made for directional purposes, the drilling down of everything to quarters and months and weeks is a wasteful exercise in my opinion. In the sense does it make sense to assume that Omicron is not going to impact the economy so much and plan expenses accordingly for the coming fiscal year? Or we in any position to comment the recurrence of any new waves in the future? Instead in the current situation, whether it is the country or corporation or housing society or our own house hold we may be better off to keep the horizon of three months and take it from one quarter to another. On that note, wishing you all a Happy and contented New Year or should I say Happy New Quarter (HNQ)?

Image courtesy: Kat Millar.com

Catching up on the Economic Agenda!

Social Media is an ongoing battlefield for the IT Cells of political parties. There, you routinely find claims and counter claims by BJP and the Congress, which get forwarded and go viral.  Among the regular updates from the BJP side, the ones which are popular are those where Narendra Modi era (Post 2014) and Manmohan Singh era (2004-2014) are compared which show how the country has progressed rapidly in the last 7 years whether it is Highways construction, Rural Electrification, Toilet construction, Clean water supply etc. etc. However, one thing on which the BJP IT cell is put on the back foot by the Congress is the Economic growth. This is a graphic which is popular among the Congress supporters and rightly so where in comparison, the Singh era shows higher average GDP growth than the Modi era, so far.

I am certain that if there is one thing Modi as a person, who likes to leave behind a legacy in whatever he does, would like to correct, it would be this. Frankly, I had high hopes from this government in its first term on its economic agenda. I thought that with a clear majority, it will pursue bold and long pending reforms with a much higher vigour than the reformist Vajpayee Government which was always bogged down by coalition pressures.  It turned out that, but for the introduction of GST (a landmark and very important reform, in my opinion) and Demonetisation (in which the costs outweighed the benefits), the 1st term was lack lustre and was more or less on “Maintenance mode” as far as pursuing a bold economic agenda was concerned.

It is my opinion that lawyers do not make good Finance ministers. P.Chidambaram, a fine lawyer, who is regarded as one of the most reformist Finance ministers the country had, always use to come up with one nit picking thing in his every budget, which cast a dark shadow on all the other good reforms he came up with. We all know what happened with Pranab Mukherjee, another Finance minister with a legal background. His retrospective taxation idea much against the wishes of even the economist Prime Minister Singh, punctured the “India Story” then and our economy went into a tailspin. So, that’s what happened with the Modi Sarkar in its first term. Arun Jaitley, another fine legal eagle was picked as the finance minister but, even during his regime the retrospective taxation was not rolled back! With no much economic traction, the 1st term of Modi ended on a disappointing low economic growth path.

In 2019, when Nirmala Sitharaman was made the Finance minister in a very surprise move (not Piyush Goyal who was touted as the favourite), expectations were quite low. But, I had mentioned that time, that she could surprise the critics at the end of the day. I felt that considering her background and her studious nature, she can be expected to meticulously follow the agenda as laid out in the manifesto. Not just that, but also follow through methodically in terms of execution.  You can see that this is what is happening now.  In her 1st budget in 2019, when corporate taxes were cut – a bold economic move to boost private investments and sentiment, it appeared that the Modi Government in its second term had got its intentions right in pursuing its economic agenda to boost growth which faltered in the 1st term.

 

The pandemic though, which hit all economies hard including India in Feb/Mar 2020 put a spoke all further bold moves. Economic management during a pandemic is a double edged sword. The government needs to focus on lives on one hand and livelihood on the other and that too when its income is crippled.  But, I thought that the team managing the economy in this government weathered the Covid storm very well and managed to tide over the crisis very well, under the circumstances.

In the midst of the pandemic last year and perhaps even now, top economists of the likes of Dr. Abhijit Banerjee, Dr. Raghuram Rajan and Dr. Kaushik Basu have been of the opinion that the Central government should not worry about fiscal deficit, agency ratings and all. Among other things like increased spending on health, they maintained that it should just do cash transfers through DBT mode to the needy. However, the government took a more cautious and calibrated approach of support by providing free ration to the needy, extending loan support to businesses etc. instead of cash transfers.  This has been a clash of ideas between the economists in the government and economists commentating from outside.  Frankly, I felt that what our government did is a better approach for a country like India.

Unlike the West, in India, people are more conservative financially. So, when a person gets free cash during a pandemic his first instincts will be to save it for spending on essential goods rather than on non-essential stuff to boost demand. Secondly, thanks to the lock down, there were supply restrictions. It is not logical that people will spend money just because they have been provided with cash support. So, the Government’s calibrated approach of providing free rations to the needy serves the purpose of protecting livelihoods during the pandemic. The salaried upper middle class and above were anyway not so affected as they were getting the salaries and even they spent only on essential stuff basically due to lockdown restrictions. So, the argument that Direct cash transfer would have boosted demand in the times of a pandemic doesn’t seem logical at all.  If not all, a few economists like Swaminathan Aiyar finally admitted that this approach worked better for India.

It is in this context of understanding the thought process of this government on handling economic issues during the pandemic that I bumped on this video. In this speech, Sanjeev Sanyal, Economist and Principal Adviser in the Ministry of Finance, articulates brilliantly the approach of the government in managing the pandemic from an economic stand point. If you haven’t watched it, please do so.  It answers quite a few questions which are routinely thrown at this government at the way it has been responding to the pandemic.  Its clear from the speech that there is a “method” in the thinking of the government while there is “madness” in the newsrooms that feed us information.  I wish that the government articulates the thinking behind their decisions more regularly for the benefit of all.

Now if you see the last few months, it is clear that the government is dead serious in reviving the economic growth. Some of the decisions since March have been bold and commendable. The rolling back finally of the retrospective taxation is one.  The Asset Monetisation program is another.  Taking a call to relieve the stress on the balance sheets of the banks by forming a “Bad Bank” is also another one.  Again, addressing sector specific long pending issues like in Telecom is yet another.  So, there has been a slew of bold decisions recently that gives a hope that in this term, with the pandemic hopefully behind us, the Modi Sarkar is pushing aggressively on its economic agenda.

As an economy, I believe we are at an interesting and crucial point. The pandemic is ebbing (or so we believe). Vaccination is progressing at a rapid pace. Economic activity is getting back to normal. These should bring the economy soon to pre-Covid levels. Now, if the bold reforms that have been unleashed this year has the desired effect, the growth only can be higher from here. For the Modi Sarkar which is finally catching up on the economic agenda, it will be a lasting legacy to demonstrate a higher average economic growth than the Singh era. And for the IT cell of the ruling party, few memes less to counter!

Debate around the Growth of the Indian Economy!

Few weeks ago, the GDP numbers for the 1st quarter of this fiscal year for India were published. As per that, the Indian economy grew by 20.1%. In the following days, there were columns, Op-Eds and Social media commentary on whether it was a good quarter or not. Since “Neutral media” is an Oxymoron, depending upon the leanings of the media, the economic performance was either branded “historic” or “pathetic”. There are no surprises here and we have now learnt to live with the media spin on all issues.

Along with the media, the tribe of “Neutral Economists” is also on the wane.  Depending upon their political affiliation, the first quarter performance was touted to be “record breaking/highest ever” or “worst/shocking” in decades by reputed economists.  Therefore for an Aam Admi, it is difficult to judge what actually the situation is. And the truth as in many situations may be somewhere in between.

I am no economist but as an ardent follower of the Indian economy, I tried to make sense of the numbers and the trends thereof and this is what I find. I would like to hear the opinion of the readers as well on my hypothesis.

In isolation, a GDP growth of 20.1% is of course very good. But, we should not forget that this is at the back of a low base of -24.4% same Quarter last year. In that sense, some of the commentary from pro Government circles that this growth is massive and is earth shattering etc. is immature.  At the same time, commentary from the opposition side comparing this with GDP rate pre-Covid and claiming that actually it is lower than what it was two years ago is equally immature. And this is why.

First, the reality is, on a trend line after a massive negative growth of 24.4% in Q1 last year and growing marginally by 1.6% in Q4, a growth of 20.1 in Q1 this year shows that the economy is indeed recovering and the recovery is V-shaped to be precise. This is certainly to be happy about.

Second, we must keep in mind that during Q1 this year, we got caught by a massive second wave which again put several curbs on the functioning of the economy, which was as such firing at much lower levels than before. So, among the eight buckets which contribute to the GDP namely Manufacturing, Construction, Agriculture/forestry & fishing, Mining & Quarrying, Electricity/Gas/ Water & other utilities, Trade/Hotels/Travel & Communication, Finance & Real Estate and Public administration, Defence & other services, it is obvious that a couple of engines are not firing at all. It is therefore natural that when you compare with the pre-Covid situation, the GDP in absolute numbers will be lower. This however does not take away the fact that with the easing of restrictions, the economy is obviously recovering.

Third, let us take a look at the monthly GST collection numbers for the past couple of years.  The average monthly GST collection figure in 2018-19 was Rs. 98,114 Cr. and the average in the 1st four months of 2021-22 is Rs.113,333 Cr. 2018-19 was pre-Covid, normal times and these four months are right in the midst of Covid. And compared to Rs. 101,818 Cr. monthly average last year. So just a cursory glance shows that the economy is on the mend clearly this year.

Here, I would like to dwell into a larger point and thereafter a question.

I would presume that GST collections represent transactional activity in the economy with respect to both goods and services. We are all aware that post the pandemic all “Contact” based sectors have been severely affected. This includes the likes of Travel, hospitality, Wining and Dining (all these for business and pleasure), impulse shopping, recreation and entertainment of all sorts and other human touch related services (salons, spas…). While the Software industry per se has not got affected due to Covid with “Work from Home” filling in well, the ecosystem around it has been significantly disrupted. This includes transportation, catering, real estate, utilities, other discretionary spending and stuff.

As common public, our shopping is mostly restricted to what is required. We travel only when it is utmost required.  The “Festival economy” which is big in India has been crippled since last April.  So my question is, when transactions around goods and services have been curtailed, how is it that the monthly GST collections have shown a growth over 2018-19? (Pre-pandemic period)

There are can be two inferences from this trend:

First, if the monthly GST collection is showing such a robust 15% growth (over 2018-19) even during the pandemic times, once we are done with the pandemic and when all the cylinders start firing, we are looking at an exponential growth in monthly GST collection figures. (Even adjusting for inflation)

Second take away is, either with whatever limited avenues left to us, we are consuming much more than average or there is a significant shift towards formalisation of the economy. I would like to believe in the latter. I don’t think we are consuming more than what is required. However, certainly our purchasing patterns have changed. Due to the pandemic imposed curbs, it is possible that our dependence on the neighbourhood mom and pop stores have come down and we have got used to the convenience of door delivery for everything.

As a personal example, pre-Covid, we used to buy vegetables and fruits from our neighbourhood bhaiya. Once lock down struck, this shifted to a vegetable vendor who was arranged by our apartment complex for door delivery. Here, payment was through G-pay/PayTm etc. Now in the past few weeks, the same vendor is now part of an E-Commerce aggregator called Bhajiwala.com! Bhajiwala.com, I am sure is within the ambit of GST and hence clearly part of the formal economy! My view therefore is, the benefits of GST implementation which we were all looking forward to is beginning to accrue and will be more visible when we are out of the pandemic.

It was widely believed that once GST is implemented, it will add 1-2% to the annual GDP. I now believe that once the pandemic is over and when economy starts firing in all cylinders like before, the bump due to GST could be in excess of 2% because of the increased formalisation of the economy is the last 2/3 years. This I am talking about even after the pent up demand effect.  That should put the naysayers of the GST to rest.

Though we cannot take the stock markets as a real indicator of the state of the economy thanks to its fickle and speculative nature, probably the markets are seeing into the future as above which others are not.  Which is why the markets have been on fire since the last few months even in the midst of the pandemic.

In conclusion, I would like to say that yes, the high growth in Q1 is due to the low base effect.  Yet, it is a significant milestone and pointer towards a robust economic recovery. It is certainly one to be cheered upon if not celebrated upon as yet.  Acche Din are around the corner!

Pic Courtesy: The Economic Times

Now running successfully worldwide – “India Sorry”

In the corporate board rooms of many multinational corporations the “India Story” which was weaving itself has now given way to “India Sorry” with accompanying pathos.  The overwhelming feeling is of a wholesale deprivation of the aspirations of the talented Indians by their political masters. “Incredible India” is desperately ‘in’ need of a ‘credible’ script, actors, technicians and the works. Flash back to the 2003-06 time frame, thanks to the easy money flowing in from the developed markets to emerging markets that included India, the markets were on fire. Pundits and others claimed that a GDP growth of 7-8 % is the base line rate of growth, come what may and if Govt. and administration did its bit (and If China gets to host events like Olympics 🙂 ), we could head towards 9 – 10 % growth.  The party was briefly interrupted by “the Lehman shock” the tremors of which shook the world – developed, developing and others. I say briefly because within a year or so markets like India and China not only recovered but were again breathing fire. This time the stimuli announced by developed countries like the US, Germany,… injected funds into the monetary system and once again easy money found its way here.  This was when the “India Story” was running full houses worldwide.

I recall seeing and hearing of many multinational companies having their Board meetings in India that time. Expansion plans for global companies seldom excluded India. Forex reserves were booming whether it was thro FDI or FII money. If you look at it now, that kind of over the top India focus and fuss became detrimental to India’s future. For, the rulers(UPA-I) started imagining and talking of India which is “decoupled” from the world without realizing that if structural reforms are not put in place, the “India Story” will turn apocryphal when the flow of easy money stops. And that’s exactly what happened. This is explained beautifully in Ruchir Sharma’s book –“Breakout Nations – In Pursuit of the Next Economic Miracles”. While he analyses many emerging markets and gives his verdict, as far as India is concerned his verdict is a 50:50 chance for India to breakout. I suspect that his own patriotic “Indian at heart” feeling came in the way of saying that the chances are pretty dim for India to become a breakout nation. Ruchir also says that we will have to get used to the “New Normal” of Pre 2003 GDP Growth which is 5.5-6%.

My own sense is that if India had focused on Governance, the situation would not have been as bad as it is now inspite of the global liquidity party getting over long while ago.  However in India the politics of economics is a deadly game. So instead of focusing on Governance, the Govt. headed by a Cambridge educated Economist was economic in Key decision-making and thereby introduced “policy paralysis” in the lexicon of the opposition/Industry and corporate reviews. Many observers are in unison when they point out that the Union budget presented by the present President of India in the year in the year 2012 as finance minister was the tipping point that led to world relegating India as a foot note in their strategy documents. Pranab Mukherjee amended the Income Tax Act, 1961, to impose a retrospective provision for tax on some types of global mergers, including Vodafone’s 2007 acquisition of Hutchinson’s assets in India. Even for a lay man it is difficult to fathom how somebody in the Govt. can think of passing an amendment with retrospective effect when companies have taken decisions to invest based on prevailing laws of the land.  That this controversial provision passed through the FM, the bureaucracy and even the PM is till today a shocker for me.  From then on it’s been a downward climb with downgrading of ratings, pulling out of money, slowdown in investments, falling off the Rupee,..,..  India got demoted while Pranabda got promoted 😦 😦 To compound to the situation, delay in environmental clearances for new projects, banning of mining, Telecom imbroglio, corruption charges all this made Indian investors to look for avenues outside of the country to invest.

As a rearguard action, Chidambaram was brought in as the Finance Minister to succeed Pranabda and frankly speaking he has been trying his best. The decision-making wheels in the Govt. have started moving. The “Rajan effect” has been just short of magic. From the time Raghuram Rajan was made the Governor of RBI, there has been some great things happening in the economy the most important being the strengthening of Rupee.  But the “Sir Newton effect” has been overpowering. Newton said “For every action there is an equal and opposite reaction”. So the reaction from the world now is of a wait and watch.  With the Government in the December of its term, it makes little sense to investors and others alike to jump into the fray. For them it makes more sense to wait and see if India presents a credible and durable “Change” come 2014.

And it is not just the world which is looking for a change in India but even within India the mood is the same. Though it is still not clear what the opposition’s clear economic agenda is, Narendra Modi the PM candidate for BJP is attracting attention all over.  This can only be due to an overwhelming yearning for change. If that change happens, it will be interesting to see how they tackle the economy differently. Yashwant Sinha an Ex and potential finance minister in his book calls himself a “Swadeshi Reformer”. As oxymoronic as it sounds, except for opposing what the Govt. is doing, even he has not yet spelt out clearly BJP’s stand on key economic reforms.

Shankkar Aiyar a reputed columnist in his book “Accidental India” says and I quote “It would seem that everything the country has achieved has arrived by accident, catalyzed by calamity”. Turning points in the country like the liberalization of 1991,.. as per him “were not the result of foresight or careful planning but were rather the accidental consequences of major crises that had to be resolved at any cost”. For quite some time now I was of the same opinion but dismissed it as a streak of a cynical Indian. But reading this fantastic book has confirmed my worst fears around policy making which is by nature reactive rather than proactive.  As the country is in the throes of another economic crisis if not collapse, we await another “accident” which will bring the “India story” back to the global theatres. Till then it looks like there is no escape (velocity) 🙂 🙂

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Also pls. read my earlier post on reforms “The Politics of Reforms” written in Sep 2012 –  http://wp.me/p1dZc2-bQ