Next week, CSO will be coming out with its figures for GDP growth for the Indian economy in the second quarter. Nobody is looking forward to it.
A back of the envelope calculation - assuming agriculture growth at 3%, taking industry growth at 4.4% and believing that services could not have come in at less than 9% - leaves one with the amazingly low figure of 6.2% for the quarter. This is before the worst of the global economic crisis hit in October.
Agriculture remains a bright spot, and we should not ignore its demand impact on the rural population which has little to do with global developments. Bumper harvests are expected due to the good monsoons. [The massive Bihar floods unfortunately are below the monsoon performance radar, and most people have forgotten that millions remain unable to go back to their homes due to flood waters still not receded - but that is another blog]. Farmer credit will be a major problem going forward if the markets remain frozen in confidence.
Industrial growth has plummeted unbelievably low. Even CMIE has lowered its growth forecast, an institution that remained confident on the basis of corporate results that it monitors, quite forgetting that the unorganised sector is estimated to contribute over half of all output, including agricultural. It may talk about faulty IIP, but essentially, IIP is a wide-area survey and gives a good picture of direction.
Services, which contribute over half of economic growth, are the uncertain factor. We can keep all fingers crossed that it would not have gone lower than 9%, or even the 6.2% will appear too optimistic.
I firmly believe that the common man has greater economic savvy than the economic forecaster. So I would ask the vegetable vendor or the plumber about their opinions on life. If they grudgingly said 'okay' then GDP would come in at over 9%. If they launched on a rant against high prices and the Gorement, things were looking down. And if they wore an expression of stoic calm, things were really bad. Since I moved out of India, this ready reckoner is alas not available.
No, I certainly am not looking forward to 28 Nov
Thursday, November 20, 2008
Tuesday, November 18, 2008
HIGHER AND HIGHER....
Here's the latest score on India and the US in higher education: Indian students in USA -94 thousand plus plus; American students in India - less than 3000. Guess which country can ill afford to send its youngsters out, yet wants to maintain its tight control on higher education, and includes education loans under priority sector.
I would not say that we are still sending out our best and brightest, because many of these students may not have got admission in decent Indian colleges, given that 'decent Indian colleges' is a contradictory statement. But even sending out the next tier, maybe mostly on scholarships, is costing us a lot of money. If the average cost is USD 40000 per student, how many zeros is that? And then there are the thousands of others who assiduously apply for US colleges - spending money on SAT and GRE/GMAT exams, application fees, coaching, consultants and touts - without finally making it. And there are the thousands who go to UK, Australia, Singapore, New Zealand, and even Malaysia. A back of the envelope calculation easily places annual expenditure on foreign education at $6 billion.
To its credit, the Gorement has examined the effects of liberalising higher education for FHEP (Foreign Higher Education Providers). The concerned report happily said it would be a good thing for India. Kamal Nath enthusiastically announced FDI in higher education three years ago. That was the last that was heard of it. From being a reputed and attractive destination for overseas students (at one time, 50000 students from Malaysia were studying in India), India has become a major buyer of higher education services from other countries.
Gorement has made a major push for expanding centers of excellence in India. Proposed are many new IITs and IIMs, science universities, central universities, et al. The heavy control of UGC will loom large over them, admissions will be limited by reservations, quality will continue to remain suspect. In the meantime, private colleges of relatives of politicians will continue to be set up without much regulation, affiliated to some state university nobody ever heard of. On the other hand, ISB Hyderabad with no affiliation is a highly reputed institution because of its strong backing.
So how can the higher education conundrum be resolved? More competition is needed in the sector. Easier entry, better regulation, and marketable skills. Most of all, FDI from reputed sources must be allowed in the area. In these days of internet connectivity, it is really impossibly foolish to imagine that by not allowing 'subversive' foreign universities, we are protecting our culture and morals. And the money we could make from getting overseas students to Indian colleges! Alas, like all other areas, nobody wants to ease the rent-seeking that comes from imperfectly functioning higher education.
I would not say that we are still sending out our best and brightest, because many of these students may not have got admission in decent Indian colleges, given that 'decent Indian colleges' is a contradictory statement. But even sending out the next tier, maybe mostly on scholarships, is costing us a lot of money. If the average cost is USD 40000 per student, how many zeros is that? And then there are the thousands of others who assiduously apply for US colleges - spending money on SAT and GRE/GMAT exams, application fees, coaching, consultants and touts - without finally making it. And there are the thousands who go to UK, Australia, Singapore, New Zealand, and even Malaysia. A back of the envelope calculation easily places annual expenditure on foreign education at $6 billion.
To its credit, the Gorement has examined the effects of liberalising higher education for FHEP (Foreign Higher Education Providers). The concerned report happily said it would be a good thing for India. Kamal Nath enthusiastically announced FDI in higher education three years ago. That was the last that was heard of it. From being a reputed and attractive destination for overseas students (at one time, 50000 students from Malaysia were studying in India), India has become a major buyer of higher education services from other countries.
Gorement has made a major push for expanding centers of excellence in India. Proposed are many new IITs and IIMs, science universities, central universities, et al. The heavy control of UGC will loom large over them, admissions will be limited by reservations, quality will continue to remain suspect. In the meantime, private colleges of relatives of politicians will continue to be set up without much regulation, affiliated to some state university nobody ever heard of. On the other hand, ISB Hyderabad with no affiliation is a highly reputed institution because of its strong backing.
So how can the higher education conundrum be resolved? More competition is needed in the sector. Easier entry, better regulation, and marketable skills. Most of all, FDI from reputed sources must be allowed in the area. In these days of internet connectivity, it is really impossibly foolish to imagine that by not allowing 'subversive' foreign universities, we are protecting our culture and morals. And the money we could make from getting overseas students to Indian colleges! Alas, like all other areas, nobody wants to ease the rent-seeking that comes from imperfectly functioning higher education.
Tuesday, November 11, 2008
OBAMA MANIA
With the whole world coming out with blogs on the new US president, I couldn't let myself be left behind in the opinion rush. Admittedly, I followed the entire election process from the beginning of the year as avidly as if it was a hot reality show. The CNN atmosphere is still much like The Amazing Race.
The 'first African American president' part didn't really appeal, because Obama didn't run on that platform and was never a black leader. It is even doubtful how much of the African American experience he represents. His father was truly from Africa, but he was a student rather than a descendant of slaves/immigrants. Plus he was raised quite apart from the African American historical baggage. In a part of America which was probably more racially diverse than most parts. But if African Americans can get inspired by him, who are we to quibble - we are just as inspired.
What was impressive, apart from the oratory, was the immense organisational aspect of the whole process. It literally took on the establishment and overset it. That in itself portends change. Also, the multicultural experience, especially in a developing economy, is beyond the ordinary American's life.
Nobody expects the follow-through to be as dramatic, as we are all ultimately cynics. But there is still a grain of perverse hope that maybe peace, or rather less hostility, can come to the world, with this man who can turn water to wine and can part the ocean.
For India, he has no option but to engage forcefully. The nuclear deal stressed bipartisan support from the US Congress for us, and we are basically harmless souls. We are also a large market, and a low-cost producer. And we are not China.
This is a reality show that will be on air for at least the next four years, and we will all be watching.
The 'first African American president' part didn't really appeal, because Obama didn't run on that platform and was never a black leader. It is even doubtful how much of the African American experience he represents. His father was truly from Africa, but he was a student rather than a descendant of slaves/immigrants. Plus he was raised quite apart from the African American historical baggage. In a part of America which was probably more racially diverse than most parts. But if African Americans can get inspired by him, who are we to quibble - we are just as inspired.
What was impressive, apart from the oratory, was the immense organisational aspect of the whole process. It literally took on the establishment and overset it. That in itself portends change. Also, the multicultural experience, especially in a developing economy, is beyond the ordinary American's life.
Nobody expects the follow-through to be as dramatic, as we are all ultimately cynics. But there is still a grain of perverse hope that maybe peace, or rather less hostility, can come to the world, with this man who can turn water to wine and can part the ocean.
For India, he has no option but to engage forcefully. The nuclear deal stressed bipartisan support from the US Congress for us, and we are basically harmless souls. We are also a large market, and a low-cost producer. And we are not China.
This is a reality show that will be on air for at least the next four years, and we will all be watching.
Saturday, November 8, 2008
TOO LITTLE, although not too late
The official economic cognoscenti is patting itself on the back - with the delirious momentum of the international financial crisis going on, at least our policy-makers took some decisions. No more can people fault them for slow or even non-existent reactions. They woke up, smelt the smoke, and took rapid measures to douse the fire. Thus RBI cut the repo rate, slashed CRR and lowered SLR, flushing Rs 100000 crores into the system. Great.
A great article recently pointed out that while some commentators were felicitating previous RBI governor Reddy for his cautious approach, others were talking about the reforms that India's financial system still needs. The latter seem keen to fix on a conventional inflation-management regime for the central bank, and let the rupee take its own course. Both approaches are flawed. A cautious approach may protect us from financial ills elsewhere in the world - and it may be noted that such crises arise once every decade or so in different parts of the world - but it ultimately rebounds on the entire economy as savings and investments are not properly matched, and financial inclusion and integration with the world remain distant.
At the same time, India's central bank cannot remain a single-agenda manager and control only inflation. This is not a perfect world. India is a developing country, and conventional monetary mechanics of developed economies should not be ritually applied here. Rupee management is a must, considering that so much of India's competitiveness depends on it. If China had really allowed its currency to float - I mean, less than 10% in three years! does anybody still think it is a float? - it would not be vying for the post of top exporter. The damage the yuan has done over the past ten years will only be analysed in economic history books. Meanwhile, America is bankrupt, other developing economies are happy enough to export low value-added items to China, and everyone is worried about the future.
There is immense room for further interest rate cuts, if only to make Indian industry more competitive. It might help restore some demand, and prevent job loss. RBI needs to take drastic measures to deal with the drastic situation.
A great article recently pointed out that while some commentators were felicitating previous RBI governor Reddy for his cautious approach, others were talking about the reforms that India's financial system still needs. The latter seem keen to fix on a conventional inflation-management regime for the central bank, and let the rupee take its own course. Both approaches are flawed. A cautious approach may protect us from financial ills elsewhere in the world - and it may be noted that such crises arise once every decade or so in different parts of the world - but it ultimately rebounds on the entire economy as savings and investments are not properly matched, and financial inclusion and integration with the world remain distant.
At the same time, India's central bank cannot remain a single-agenda manager and control only inflation. This is not a perfect world. India is a developing country, and conventional monetary mechanics of developed economies should not be ritually applied here. Rupee management is a must, considering that so much of India's competitiveness depends on it. If China had really allowed its currency to float - I mean, less than 10% in three years! does anybody still think it is a float? - it would not be vying for the post of top exporter. The damage the yuan has done over the past ten years will only be analysed in economic history books. Meanwhile, America is bankrupt, other developing economies are happy enough to export low value-added items to China, and everyone is worried about the future.
There is immense room for further interest rate cuts, if only to make Indian industry more competitive. It might help restore some demand, and prevent job loss. RBI needs to take drastic measures to deal with the drastic situation.
Monday, October 13, 2008
Eating My Words...
I published my first blog on Sep 19th. Amazing how three weeks have insanely depressed economic mood. While the first blog attempted to hold back negative sentiments by listing the positives of the economy in the face of an increasingly gloomy outlook, the last blog counts out the unsound macroeconomic fundamentals even as everyone is rushing to talk about how the economy remains strong.
Three weeks ago, commentators were talking only about inflation, high interest rates, and slowing industrial production to lower their growth forecasts. Growth forecasts are still being lowered, but now it is due to impact of global developments, rather than our own economic indicators. Well, we still have the high savings and investment ratios, the strong rural demand, and the government's high expenditures. But investments may be drying up in the light of the credit crunch, which is another factor that has taken a u-turn in the last three weeks. The fall of the rupee has hit crisis proportions, and FDI has become tremendously iffy.
I hate to talk about sneezing and colds when everyone else is doing so already. The whole purpose of this blog is to have a contradictory opinion. And therefore my opinion now is: GET THOSE REFORMS REVVED UP
Three weeks ago, commentators were talking only about inflation, high interest rates, and slowing industrial production to lower their growth forecasts. Growth forecasts are still being lowered, but now it is due to impact of global developments, rather than our own economic indicators. Well, we still have the high savings and investment ratios, the strong rural demand, and the government's high expenditures. But investments may be drying up in the light of the credit crunch, which is another factor that has taken a u-turn in the last three weeks. The fall of the rupee has hit crisis proportions, and FDI has become tremendously iffy.
I hate to talk about sneezing and colds when everyone else is doing so already. The whole purpose of this blog is to have a contradictory opinion. And therefore my opinion now is: GET THOSE REFORMS REVVED UP
Saturday, October 11, 2008
SOUND MACROECONOMIC FUNDAMENTALS??
The last two days have had frantic interventions on 'sound macroeconomic fundamentals' by various bigwigs of the Indian economic scene, including FM, RBI governor, and corporate leaders. I would like to know what exactly is the definition of macroeconomic fundamentals. Perhaps our leaders are referring to the FX reserves, which at $283 billion are still in the comfort zone. Regarding other economic indicators, we should not just be afraid, we should be very afraid.
1. Inflation - continues to be at close to 12% where it has been lodged for the past 15 odd weeks. This was enough to elicit rapid-response measures from RBI and FM a couple of months ago, when CRR was hiked, all kinds of exports were banned and import duties were frantically lowered. Well, the rate has come down from 12.2% to 11.8%, and now it has become a sound macroeconomic fundamental.
2. Production - With the April-August IIP at 4.9%, a massive slide from last year's robust double-digit figures, this is the only aspect that seems to have been affected by the anti-inflation rapid-response measures. If industrial growth is coming in at less than 5% for the year so far, it can only be considered a sound macroeconomic fundamental if we compare it to the rest of the world, which is not exactly a useful exercise considering that the only other comparable economies are those in Africa or China.
3. Fiscal deficit - Everyone knows that despite high tax revenues, the government has frittered away any advantage by totally irresponsible spending on subsidies, salaries, and agricultural loan waivers. We will be fortunate if we can have an overall 10% fiscal deficit for the year, including state government deficits. The myth of 2.5% deficit has been thoroughly discredited, and along with it the reputation of the government is in tatters. There is no point in searching for a sound macroeconomic fundamental on this front.
4. Trade deficit - If the fiscal deficit is an instance of false numbers, so is the trade deficit. In the last week of September, coinciding with PM's visit to USA, the March import figure from USA was suddenly revised from $13 billion to $21 billion. This brought imports from USA in line with their Commerce Department figure of exports to India. Our favorable trade balance with USA of some $7 billion was reversed entirely. Trade deficit overall is now $90 billion, and the current account balance cannot by any account be listed as a sound macroeconomic fundamental.
5. Financial system - Oh yes, the banks are still sound. That's because the government has so far 'calibrated' financial system liberalisation so very carefully. We might as well return to pre-1991 days if we are to talk about financial system as a sound macroeconomic fundamental. Let's impose those 350% import tariffs, ask companies to acquire licenses for increasing production by 5%, and go back to higher taxes for redistributing poverty.
Of course, it will be difficult for the government to say that there is a mess and that it got us into the mess in the first place. It is only too easy to blame global woes for internal problems.
Read http://economictimes.indiatimes.com/Opinion/Its_time_for_hard_policy_decisions/articleshow/3581751.cms
1. Inflation - continues to be at close to 12% where it has been lodged for the past 15 odd weeks. This was enough to elicit rapid-response measures from RBI and FM a couple of months ago, when CRR was hiked, all kinds of exports were banned and import duties were frantically lowered. Well, the rate has come down from 12.2% to 11.8%, and now it has become a sound macroeconomic fundamental.
2. Production - With the April-August IIP at 4.9%, a massive slide from last year's robust double-digit figures, this is the only aspect that seems to have been affected by the anti-inflation rapid-response measures. If industrial growth is coming in at less than 5% for the year so far, it can only be considered a sound macroeconomic fundamental if we compare it to the rest of the world, which is not exactly a useful exercise considering that the only other comparable economies are those in Africa or China.
3. Fiscal deficit - Everyone knows that despite high tax revenues, the government has frittered away any advantage by totally irresponsible spending on subsidies, salaries, and agricultural loan waivers. We will be fortunate if we can have an overall 10% fiscal deficit for the year, including state government deficits. The myth of 2.5% deficit has been thoroughly discredited, and along with it the reputation of the government is in tatters. There is no point in searching for a sound macroeconomic fundamental on this front.
4. Trade deficit - If the fiscal deficit is an instance of false numbers, so is the trade deficit. In the last week of September, coinciding with PM's visit to USA, the March import figure from USA was suddenly revised from $13 billion to $21 billion. This brought imports from USA in line with their Commerce Department figure of exports to India. Our favorable trade balance with USA of some $7 billion was reversed entirely. Trade deficit overall is now $90 billion, and the current account balance cannot by any account be listed as a sound macroeconomic fundamental.
5. Financial system - Oh yes, the banks are still sound. That's because the government has so far 'calibrated' financial system liberalisation so very carefully. We might as well return to pre-1991 days if we are to talk about financial system as a sound macroeconomic fundamental. Let's impose those 350% import tariffs, ask companies to acquire licenses for increasing production by 5%, and go back to higher taxes for redistributing poverty.
Of course, it will be difficult for the government to say that there is a mess and that it got us into the mess in the first place. It is only too easy to blame global woes for internal problems.
Read http://economictimes.indiatimes.com/Opinion/Its_time_for_hard_policy_decisions/articleshow/3581751.cms
Friday, October 10, 2008
INDIAN ECONOMY CRASHES!!!
Soon after I went out and bought two huge bars of chocolate to avoid depression due to global developments, the bad news from the real, as opposed to the monetary, sector hit my screen. August IIP at 1.3%. Just a month ago, we were bragging about our robust macroeconomic fundamentals, our $700 billion worth of investments in the pipeline and our strong corporate performances. Export figures were still growing, FDI was flowing in at over $10 billion in the first quarter, and tax revenues continued to be higher than expectations. So what happened suddenly?
In August, the world economy had not yet collapsed, investment banks were still around, and there was no sign of a $700 billion bailout requirement. Moreover, the Indian holiday season, synonymous with the Indian buying spree, was just round the corner. And yet manufacturing growth fell (we will not even go into the electricity sector and the mining sector, in which nothing much is going to happen until there is some sign of government action). The CSO happily says that as many as seven out of seventeen industries showed positive growth - this just means that ten industries declined.
Obviously, companies, and more importantly, those legions of self-employed persons in the SME and unorganised sectors, were not taken in by declarations of macroeconomic soundness. These people knew better than the rest of us seat-of-the-pants economists and investors that there was a major convulsion just down the road. They knew that the high interest rates would continue to impact demand, and they knew that the best option was to hunker down, stop borrowing, and keep their fingers crossed. And this was well before the credit markets shrivelled up and died.
The good news is that all commodity prices are down by huge percentages unimaginable just a short summer earlier, when oil prices were predicted to hit $200 per barrel. Strangely, RBI has allowed the rupee to plunge drastically, thereby reversing all price gains. Inflation therefore persists at the 12% level. With some $282 billion in foreign exchange in hand, why is the rupee sliding to its lowest levels ever? All these years, we have been proudly touting the ballooning FX reserves as our insurance against current account deficits. Last year, RBI sent the rupee to dizzying heights, drawing the ire of exporters.
While the CRR reduction was essential (although Indian banks so far have been insisting that they are well-capitalised and have enough liquidity), the far greater need is to slash interest rates by 200 basis points, control the runaway rupee downfall, and make enough liquidity available. After a long time, RBI is taking the cue from what other central banks are doing, but it may be too late.
At least FM has made himself visible after a prolonged absence. Although he may look slightly ridiculous talking about sound macroeconomic fundamentals, his presence reassures us that the government is on the job. The economic valleys of India will neither be so deep, nor its extent as long, as the recession in other parts of the world. This year should be the trough, but recovery can be ours from next year onwards, provided interest rates are cut enough to revive the economy. The government so far has desisted from strong policy action on any front, and that is all that is required of it going forward.
For the rest of the world, though, the prognosis is not quite as healthy. All of us seat-of-the-pants economists and investors with fancy models have a simple option - go out and buy more chocolate.
In August, the world economy had not yet collapsed, investment banks were still around, and there was no sign of a $700 billion bailout requirement. Moreover, the Indian holiday season, synonymous with the Indian buying spree, was just round the corner. And yet manufacturing growth fell (we will not even go into the electricity sector and the mining sector, in which nothing much is going to happen until there is some sign of government action). The CSO happily says that as many as seven out of seventeen industries showed positive growth - this just means that ten industries declined.
Obviously, companies, and more importantly, those legions of self-employed persons in the SME and unorganised sectors, were not taken in by declarations of macroeconomic soundness. These people knew better than the rest of us seat-of-the-pants economists and investors that there was a major convulsion just down the road. They knew that the high interest rates would continue to impact demand, and they knew that the best option was to hunker down, stop borrowing, and keep their fingers crossed. And this was well before the credit markets shrivelled up and died.
The good news is that all commodity prices are down by huge percentages unimaginable just a short summer earlier, when oil prices were predicted to hit $200 per barrel. Strangely, RBI has allowed the rupee to plunge drastically, thereby reversing all price gains. Inflation therefore persists at the 12% level. With some $282 billion in foreign exchange in hand, why is the rupee sliding to its lowest levels ever? All these years, we have been proudly touting the ballooning FX reserves as our insurance against current account deficits. Last year, RBI sent the rupee to dizzying heights, drawing the ire of exporters.
While the CRR reduction was essential (although Indian banks so far have been insisting that they are well-capitalised and have enough liquidity), the far greater need is to slash interest rates by 200 basis points, control the runaway rupee downfall, and make enough liquidity available. After a long time, RBI is taking the cue from what other central banks are doing, but it may be too late.
At least FM has made himself visible after a prolonged absence. Although he may look slightly ridiculous talking about sound macroeconomic fundamentals, his presence reassures us that the government is on the job. The economic valleys of India will neither be so deep, nor its extent as long, as the recession in other parts of the world. This year should be the trough, but recovery can be ours from next year onwards, provided interest rates are cut enough to revive the economy. The government so far has desisted from strong policy action on any front, and that is all that is required of it going forward.
For the rest of the world, though, the prognosis is not quite as healthy. All of us seat-of-the-pants economists and investors with fancy models have a simple option - go out and buy more chocolate.
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