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Analysis

Demonetisation: Hawkish RBI has been economy’s biggest demon

The Reserve Bank of India (RBI) has to answer a simple question: Why have policy rates declined by only 200 basis points when inflation has declined 700 basis points since 2013?

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In a global financial landscape where everyone is enjoying a swim in a pool of excess liquidity created by central banks in the developed world, Indian interest rates remain amongst the highest in the world.

Earlier this month, the International Monetary Fund (IMF) upped its global growth forecast to 3.6 per cent in 2017 and 3.7 per cent in 2018, both 0.1 percent higher than projections in July. Global growth in 2016 was 3.2 percent and these projections really put the global economic recovery close to growth levels last seen before the great financial crisis. Meanwhile, India has grown at 5.7 percent YoY (2017 Q2), which is below the average growth seen during the last two years of the second stint of the United Progressive Alliance (UPA) regime (2009-2014).

One of the major factors that has contributed to such a sharp slowdown in India’s GDP growth, according to the Modi government’s critics, was demonetisation. While demonetisation has certainly impacted our short-term economic growth prospects, one has to ask what our central bank has done to support economic growth.

The Reserve Bank of India (RBI) has to answer a simple question: Why have policy rates declined by only 200 basis points when inflation has declined 700 basis points since 2013?

The central problem lies in the fact that the RBI has yet to accept that inflation in India is in a secular downtrend. In February 2015, the RBI and the government had signed a monetary policy framework that envisaged that the inflation target for FY17 and all subsequent years shall be four per cent with a band of two per cent. Since September 2013, the RBI has managed inflation in the decided band. Much of this “management” has been due to depressed oil prices.

At the last meeting of its Monetary Policy Committee (MPC), the RBI increased its inflation forecast for 2HFY18 to 4.2-4.6 per cent, implying a mean forecast of 4.4 per cent and made the point that “the extent of the rise in inflation, excluding food and fuel, has been somewhat higher than expected. Also, implementation of farm loan waivers by states may result in possible fiscal slippages and undermine the quality of public spending, thereby exerting pressure on prices”. Despite this slight increase in its forward guidance of inflation expectations, the RBI will have to accommodate at least a 25-50 basis points cut as monetary support to the economy will need to be extended as the central government will have to cut spending in the later part of the year as 96 percent of the budgeted fiscal deficit for FY18 has been exhausted as of August 2017; and (2), even as the efficacy of a rate cut can be questioned, the government is publicly exerting pressure on the RBI to cut rates.

Globally, inflation is nowhere to be seen. The Federal Reserve has no clue why average wages and the overall price level in the US economy has been extremely tepid and well below the two per cent target. The same is the case with Japan and the Eurozone. Thus, it comes as no surprise that even though talks of monetary policy tightening in the US, the UK and Eurozone have begun, they will undertake the loosest monetary tightening path in financial history. The aggregate assets of the US Fed, the ECB, BoE and BoJ have risen by 14 per cent from $13 trillion at the end of 2016 to $14.9 trillion at the end of September.

Even within the emerging market economies, India has the highest level of rates after Brazil and China. A cut in rates would encourage domestic demand in sectors such as affordable housing, consumer durables and construction. Also, interest rate subvention in certain sectors such as exports, housing and small enterprises would also help economic growth according to the Confederation of Indian Industry, which has asked for a reduction of 100 basis points in the benchmark rates.

With interest rates in India near a 16-year high, there is just one way they can trend: Down. The RBI must accept it has been behind the curve all along in its inflation forecasting ability and now must address the urgent need of a drastic fall in the cost of capital in India.

By : Vatsal Srivastava

(Vatsal Srivastava is Chief FX Strategist at D.V. Capital. The views expressed are personal. He can be contacted at [email protected])

(Editors: The above article is part of a series of demonetisation stories leading up to November 8)

Analysis

Blow to BJP ahead of 2019 Lok Sabha polls – News Analysis

In the first instance of a party getting majority on its own in 30 years, BJP won 282 seats in Lok Sabha in 2014. The BJP-led NDA had won 336 seats out of 543.

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Congress workers Karnataka civic polls

The results in the Hindi heartland states of Madhya Pradesh, Chhattisgarh and Rajasthan came as a major shock for the Bharatiya Janata Party (BJP), which has won all the major states barring Delhi, Bihar, Punjab and Karnataka in elections held after the sweeping 2014 Lok Sabha victory.

The BJP was routed in Chhattisgarh and defeated in Rajasthan and Madhya Pradesh in closely-fought contests. The party mostly banked on the image of Chief Ministers Raman Singh, Shivraj Singh Chouhan to lift the party’s fortunes.

In Rajasthan, where opinion polls had written off the BJP, Prime Minister Narendra Modi and party chief Amit Shah put in extra efforts, besides banking on the hardcore Hindutva image of Uttar Pradesh Chief Minister Yogi Adityanath, to take the battle to the Congress, but still lost.

The BJP, however, managed to open its account in Mizoram, where the Mizo National Front (MNF) ousted the ruling Congress partty, but saw its numbers fall from five to one in Telangana, where the Telangana Rashtra Samithi swept the polls.

The results of these five states, which were dubbed the semifinals ahead of the next general elections in April-May 2019, could be a factor in the battle between the BJP-led National Democratic Alliance (NDA) and the Congress-led opposition.

The major issues raked up by Congress, specially the farm loan waiver amid an agrarian crisis across the country, employment and anger among upper caste, seems to have worked in its favour and could haunt the ruling dispensation if remedial measures are not taken.

The BJP is not ready, however, to accept the defeat as a referendum on the Modi government.

Union Finance Minister Arun Jaitley said issues in state elections are entirely different. The BJP won Madhya Pradesh, Rajasthan and Chhattisgarh in 2003 but lost the Lok sabha elections next year, he pointed out.

The general elections in 2019, he added, would be fought around Modi’s performance, with people voting for a tried and tested leadership instead of a non-ideological opposition coalition which is bound to collapse sooner than later.

The Congress, which had a disastrous performance in the 2014 Lok Sabha elections and suffered successive defeats in various Assembly elections, smiled for the first time after defeating the BJP in a direct contest in the three crucial states in north India.

Party president Rahul Gandhi, who campaigned vigorously, said the Assembly election results were a referendum on Prime Minister Narendra Modi’s non-performance on issues of unemployment, agrarian distress, corruption and negating the ill-effects of demonetisation.

Out of total 678 Assembly seats in the five states in the current round of elections, the Congress has won close to 300 seats while the BJP managed to win over 200 seats. In the 2013 Assembly polls, the BJP had won 377 seats in Madhya Pradesh, Rajasthan, Chhattisgarh and Mizoram while the Congress had won only 122 seats in these states.

In the 2014 Lok Sabha polls, the BJP had won 62 out of total 83 Lok Sabha constituencies of Madhya Pradesh, Rajasthan, Chhattisgarh, Telangana and Mizoram. Now the three Hindi heartland states will be ruled by Congress and the its impact would definitely be felt in the 2019 Lok Sabha polls.

In the first instance of a party getting majority on its own in 30 years, BJP won 282 seats in Lok Sabha in 2014. The BJP-led NDA had won 336 seats out of 543.

Its allies include the Shiv Sena, which has been on the war path for a while. Similarly, N. Chandrababu Naidu’s Telugu Desam Party (TDP) and Upendra Kushwaha’s Rashtriya Lok Samata Party (RLSP) have walked out of the NDA.

Since 2014, BJP has managed to retain just six Lok Sabha seats in by-polls. It won Lakhimpur in Assam, Shahdol in Madhya Pradesh, Beed and Palghar in Maharashtra, Vadodara in Gujarat and Shimoga in Karnataka.

In the last four years, the party has lost Lok Sabha by polls in Ratlam in Madhya Pradesh, Gurdaspur in Punjab, Alwar and Ajmer in Rajasthan, Kairana, Phulpur and Gorakhpur in Uttar Pradesh, Bhandara-Gondiya in Maharashtra and Bellary and Mandya constituencies in Karnataka.

The BJP, however, maintained the verdict was a mandate against the state governments and not against the Modi government.

“The results in five states clearly show there is no uniform trend across the country and local factors determined the outcome in each state. This is evident from the fact that even Congress suffered massive defeats in Mizoram and Telangana.

“Despite 15 years of anti-incumbancy in Madhya Pradesh, the BJP has put up a fight in Madhya Pradesh and has a major comeback in Rajasthan. The BJP’s and Congress’ vote share in both the states in Mandhya Pradesh and Rajasthan is almost tied which clearly show that the BJP has the potential to comeback with big victories in 2019 Lok Sabha polls,” BJP Spokeperson G.V. L. Narsimha Rao told IANS.

He also said whenever Congress has tied up with a regional party, it cost them votes.

(Brajendra Nath Singh can be contacted at [email protected])

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Analysis

Election losses in Hindi heartland worry BJP in UP

Is a question that is haunting many in the BJP. For a party that stormed to power after 16 years of political exile, the stunning 2017 Assembly victory is beginning to look like history.

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Modi Shah

Lucknow, Dec 12 : With three major states in the Hindi heartland slipping out of its hands, the Bharatiya Janata Party (BJP) is worried in Uttar Pradesh where even party insiders complain about poor governance and growing lawlessness.

“What if this repeats here too?” is a question that is haunting many in the BJP. For a party that stormed to power after 16 years of political exile, the stunning 2017 Assembly victory is beginning to look like history.

Barely a year-and-a-half later, the popularity ratings of the state government, specially Chief Minister Yogi Adityanath, are worryingly down.

Many of his decisions, like renaming Faizabad to Ayodhya and Allahabad to Prayagraj and his use of acidic language, have soured his appeal, even among BJP supporters. BJP’s allies too are openly speaking against the way the state is run.

“There is a lot of corruption all round. Officials are not even listening to the Chief Minister’s directives,” said Om Prakash Rajbhar, who heads BJP ally Suheldev Bharatiya Samaj Party (SBSP) and is a cabinet Minister.

A perpetual rebel who has often broken ranks with the ruling party, Rajbhar’s disillusionment, unlike that of others, is out in the open.

There are, however, many senior Ministers in the ruling party who complain in private over what they feel is the poor and lacklustre performance of the BJP government.

“The government is directionless and has failed to inspire confidence,” says a party veteran who taunts the party leadership for not meeting the people’s aspirations.

“We are bogged down by a haughty bureaucracy which refuses to fall in line. As a result, our party workers and supporters are disgruntled,” he added.

A BJP General Secretary is accused by a Minister of trying to corner major tenders in irrigation and PWD departments. The Minister moaned that party leaders failed to understand the public mood.

Samajwadi Party spokesperson Abdul Hafiz Gandhi for once agrees with the BJP leaders’ assessment and points out that except for “hatred and rumour mongering”, the BJP government has failed to achieve anything in one-and-a-half years.

Lawlessness, he adds, continues in the state. And despite lofty claims and reckless police “encounters”, in which critics say many innocents have died, criminals continue to have a free run.

An Apple executive was shot dead by a policeman in cold blood. And now a police officer too was shot dead during mob violence in Bulandshahr. Many children have died in poorly-managed state-run hospitals.

“So what has changed?” asks a senior BJP leader, speaking on the condition of anonymity.

Former Minister and Pragatisheel Samajwadi Party (PSP) President Shivpal Yadav says the government was not only anti-farmer but was also fanning communal passions which he says was not in the interest of the state.

The BJP’s defeats in Rajasthan, Madhya Pradesh and Chhattisgarh show that the time for the BJP and Prime Minister Narendra Modi was “fast running out”, he added.

Another Minister, also not wishing to be named, told IANS that after initial bravado Adityanath had failed to control the bureaucracy and was dependent on a small coterie of officers.

He pointed out how while the previous Samajwadi Party regime made giant strides in infrastructure, the present one had not been able to deliver results.

“The 308-km Agra-Lucknow Expressway was built from scratch in 18 months flat. We have not been able to even start the Poorvanchal Expressway,” he rued.

The coming together of bitter rivals Samajwadi Party and the Bahujan Samaj Party (BSP) for the 2019 Lok Sabha polls is also sending the saffron camp into jitters.

(Mohit Dubey can be contacted at [email protected])

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Analysis

Column: “Sadak, bijli, paani”: Basic, yet game-changing – Behind Infra Lines

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Given the varied use of government spending, the question remains on how important it is to focus on the “basic” infrastructure services such as roads, electricity and water — the classic troika of “sadak-bijli-paani”.

Essentially, “basic” infrastructure such as roads, water and electricity are critical drivers of economic growth. Creating the “basic” backbone infrastructure not only delivers value through the usage of the asset or service but, inter alia, offers even greater value through the ecosystem that can be built around the core assets.

A recent tweet by Vinayak Chatterjee, Chairman, Feedback Infra Group, illustrates an example of the value-creation through building “basic” infrastructure: “As per Power Ministry, 15 states now have 100% household electrification. Likely consequences are also emerging like increased sales of electrical appliances.” It drives home the point that electrification infrastructure has a critical impact on creating value through multiplier effects on the economy, boosting demand for goods and services down the consumption chain.

For all the talk of FMCG companies accessing rural markets, consumer durable companies would do well to pay more attention to the infrastructure creation trends in the economy. For example, increased electrification creates entirely new markets for electronic goods-focused consumer durables companies.

However, the creation of a new market is not limited only to the product being sold. Given the relatively higher ticket-value nature of consumer durables, there is a new market for lending businesses as well. This opportunity in the lending space is to finance some part of the consumption trend. This opportunity is applicable mainly to well-entrenched incumbent lending institutions looking for the next phase of growth.

For instance, there might be a Non-Banking Financial Company (NBFC) with a significant business in financing the two-wheeler market in and around the areas seeing increased electrification. The increased electrification trend allows the NBFC to now access a substantial component of existing customers for a new product line of consumer durables. Thereby, the NBFC can deliver value to its stakeholders by building on an existing distribution network and credit information repository.

Additionally, there is a business opportunity for the logistics sector as well. A new market in consumer durables creates the need for transportation, storage and distribution of products in new areas. The above is an example of how “basic” infrastructure creation creates positive multiplier effects throughout the economy. Most importantly, new industries are established, and existing industries can expand into new areas thereby creating jobs and facilitating investments.

For investors focused on India, both in the private and public markets, current trends such as increased electrification create investment opportunities. For example, more electrification begs an important question: Which segment of the supply chain does the investor want to invest in to generate investment returns?

Do investors want to invest in consumer durable companies that can tap into new markets? Do they want to invest in financial firms that can benefit through funding of the consumption? Or do they want to invest in the logistics needed to create the new supply chain? Regarding direct versus non-direct investments, investors have a choice of directly investing in logistics real estate versus investing in publicly-listed companies that have significant exposure to the new markets. The single biggest takeaway is that the creation of “basic” infrastructure creates investment opportunities for all types of investors across the spectrum.

It is also important to note that besides the creation of new infrastructure, significant value creation is possible through improving the quality and maintenance of existing “basic” infrastructure. While new projects tend to grab most of the headlines, gradual quality improvements and effective maintenance of infrastructure is value-additive as well.

In summary, the creation of “basic” infrastructure delivers value on many fronts. Crowding in private capital, job creation, a higher standard of living, access to basic amenities and expansion of business opportunities are some of the obvious advantages that come to mind. Going forward, both central and state governments would do well to build and improve the “backbone” infrastructure.

(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at [email protected] or @Taponeel on Twitter)

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