Economic Survey 2017-18:Underscoring the pink

The Economic Survey 2017-18

The Economic Survey provides us with analytical overview of how the economy has fared in the previous year, which in turn acts as a guiding light for the government to chart its path for the next fiscal year. The survey is also used by laypersons to understand the general direction of the economy.

The Economic Survey for the 2017-18 was tabled in the parliament on 29 January 30, 2018. This year’s survey was presented in Pink colored booklets to highlight its support for movements to end violence against women.  It was also the second time in history when Big Data Analytics was effectively used to provide insights for the survey.

Following are the major highlights on the state of the economy as described in the survey:

1)  The Economic Survey predicts the GDP growth for FY2017-18 to be at 6.75% YOY, the average GDP growth rate after 2014 has been 7.3% YOY which is highest among the major economies.

2)  For the coming FY GDP growth is predicted to be at 7-7.5% YOY, the survey argued that this growth will be supported by:

1. Revival of global demand
2. Impact of shocks like demonetization and GST to the economy will smooth over time

3)   Introduction of GST has led to a direct increase (50%) in number of indirect            taxpayers.

4)    India has jumped 30 spots to reach top 100 in the ease of doing business ranking, which is a sign that more foreign and domestic investments can be expected over time.

5)    Survey highlights the steps taken by the government to resolve the “twin balance sheet problem” by:

1.  The increase in recognition of stressed assets
2. A bank recapitalization package amounting to approximately 1.2% of GDP 
3.  By implementation of the asset resolution process as mandated by the Insolvency and Bankruptcy Code (IBC).

6)    The survey acknowledges the twin balance sheet problem as the “festering, binding constraint” on growth.

7)    The story of revival in the Survey is not without warnings of risk factors within the economy. A key risk in the upcoming fiscal arises from the rise in oil prices.

8)  The second major risk as highlighted in the Survey, which can impact India's growth, is a possible correction in the stock markets. As the Survey points out, a sharp correction cannot be ruled out in case future growth of the economy and corporate earnings do not remain in line with current expectations.

Concluding Remarks:

In conclusion, the outlook for 2018-19 will be determined by economic policy in the run-up to the next national election. If macro-economic stability is maintained and the ongoing reforms are stabilized, and the world economy remains on a revival path, growth could start recovering towards around 8 percent in the medium term.

Putting all these factors together, a pick-up in growth to a range between 7% and 7.5% in 2018-19 can be forecasted, re-instating India as the world’s fastest growing major economy.

The biggest source of upside potential will be exports. If the relationship between India’s exports and world growth returns to that in the boom phase, and global growth for 2018 is in line with IMF projections, then that could add another 0.5% point to the national GDP.

Against this overall economic and political background, with general elections coming up next year; policy formulation will be challenging in the coming year. The obvious threats (such as fiscal expansion) still have to be avoided and the risks well mitigated by fiscal prudence and planning, for India to achieve its full potential. All this has to be done while ensuring that the rural demand picks up and corporate earnings increase, so the government has to tread a fine line and come up with a balanced budget.

Note To Readers: Due to some academic constraints I, Anurag Dubey, was unable to publish new blogs since August last year. I will try to publish more this year. This blogpost has been co-authored with Prasad Pansare.
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Ripples: Demonetisation, Trump and OPEC Part-3

This is the third part of ripples series. For the previous parts click on :-
PART 1
PART 2

The oil prices have been under pressure for quite some time due to the supply glut. This has diminished the profit margins of many oil exporting countries. 

The organization finally attempted its first production cut since 2008. Despite many political difficulties, a September 2016 decision to trim approximately 1 million barrels per day was codified by a new quota agreement at the November OPEC conference. The agreement (which exempted disruption-ridden members Libya and Nigeria) will be in effect for the first half of 2017 – alongside promised reductions from Russia and ten other non-members, offset by expected recoveries in the US shale sector, Libya, Nigeria, and spare capacity.

International oil prices rose to an 18-month high of more than $58 a barrel after the Organization of Petroleum Exporting Countries and several non-members agreed on Dec. 10, 2016  to end two years of unfettered production and instead cut output to increase price in the market. 

Despite this agreement to cut oil production and thereby reducing supply Crude still slipped about 5% from that peak as traders await proof that OPEC will follow through on the deal. Producers have already removed 1.5 million barrels a day of supply from the market, Saudi Minister of Energy and Industry said in Vienna. 

Representatives of OPEC and several other major oil producers met in Vienna for their first meeting to monitor compliance with an agreement to cut output. It remains to be seen as to how effective this agreement is in bringing down the supply and increasing prices of crude oil. 

With the prices slipping again it will become imperative for the OPEC to prove  that the group is serious about finally eliminating a three-year crude oversupply and dispel skepticism stemming from previous unfulfilled promises. The outcome will depend on the degree of compliance.

Whatever be the out come on the compliance front, this decision by OPEC is bound to create Ripples in the global markets.

Ripples: Demonetisation, Trump and OPEC Part-2

 This blog post is part of the series on "Ripples: Demonetisation, Trump and OPEC". To read the previous part click here. This post was written in collaboration with  Akansh Gangil and Shikhar Bansal.

 Trump election and failure of Analytics

The election of Trump as the next President of the United States came as a shocker for many. The various pre poll surveys and analytics failed to predict his victory. Trump has campaigned on a slogan of "Make America Great Again" by announcing to do away with past economic policies of the US. His policies of first 100 days will have huge implications on global economy and polity.

The good news can start with US growth, which might accelerate above the 2.2% average annual rate. Trump may implement the Keynesian fiscal stimulus that Obama often proposed but was unable to deliver.

Trickle Down Economics

Mr Trump proposed to cut taxes dramatically. His tax cuts would mostly benefit the rich, which would limit the boost to demand somewhat, but a large increase in the government deficit could not help but give a jolt to the economy. At the same time, Mr Trump seems likely to increase spending on defense and on infrastructure (and, possibly, on a wall, which would seemingly count as both).

Decrease in corporate taxes will help mainly the service sector and not the manufacturing sector. As the taxes are lowered, more disposable income will be available with individuals which will raise the inflation levels, which even though desired, leading to raising the already high wages. Thus labor cost will remain as the major hurdle for manufacturing growth.

 Shift in Trade Policies

 During the presidential campaign Trump has repeatedly called for repealing or renegotiating the trade deals.

 This adamant attitude towards US participation in blocs like NAFTA, TPP  and TTIP will adversely impact automotive industry all over the world as import duty on automobiles and auto-parts, coming from Japan, China and other countries, will increase by a large margin. Consequently the big OEMs (Nissan, VK, BMWs, Ford) and their suppliers manufacturing outside the US might shift their manufacturing plants to US. But, as already discussed, labor cost will make manufacturing costly, thereby leading to price rise for SUVs, Trucks and as well as cars.

 Geopolitical Issues

Mr. Trump being the next commander in chief has to tread very carefully as geopolitical tensions can rise by any impulsive move from his side. And tensions among nations is always bad for business( other than defense suppliers). US position on critical international issues like climate change can change. The US stand in various international forums on climate change will need to be carefully analyzed. 

 It is hard to know or anticipate how he will use the army, or the diplomatic machinery of the American government. Any move toward greater conflict in the Middle East or Asia could have serious economic consequences: from soaring oil prices to market panic to interruptions in global trade. The economic and human costs of war are impossible to anticipate but frightening to consider.

Indian Perspective

Perhaps the most negatively impacted industry will be IT as more stringent laws and higher cost for H1B visas seems to be  in the offing. This will considerably increase the cost for IT companies. Apart from trade, the diplomatic position of US towards Pakistan and China will also have huge implications on Indian trade and international policy making.

Whether we like it or not, Donald Trump is set to be the US President and his policies are bound to create Ripples.  

 

Ripples: Demonetisation, Trump and OPEC Part-1

Since my last blogpost, a lot has changed around the world sending shockwaves through the economy. Some of the ripples form these shocks have been felt globally, some felt nationally, and others are looming to be felt.

The three major events from an Indian economy point of view were the demonetisation of Rupees 500 and 1000 notes, election of Donald Trump as the US President, and the decision by OPEC to cut oil production.

I will be writing about the three major shocks in this "Ripples" series in 3 different parts in collaboration with Shikhar Bansal.

Demonetization

On November 8, 2016 Prime Minister Narendra Modi in his address to the nation announced the demonetisation of Indian Currency notes of 500 and 1000 denominations from midnight, thereby, turning almost 85 percent of the Indian cash in circulation to "worthless pieces of paper" as these notes will no longer be legal tender. There’s a complex system of exemptions and exceptions to this demonetisation. The public was asked to submit the old currency in the banks and post offices, and was urged to embrace cashless transactions using mobile banking and internet banking.

The move was touted as a masterstroke against corruption and black money. The opponents of the move, on the other hand, are citing it as a major hubris. They point to the lack of preparedness and proper planning in implementation. The lack of proper internet and financial/general literacy in the rural India is also being considered as a major hurdle to India transcending to a cashless society.

The businesses and markets reacted to this shocker in the manner as described below:

1.  Sensex performance after demonetisation.

Due to initial panic among the investors, specifically those who were invested in adversely affected sectors, the markets tumbled by about 1800 points in just five sessions of trade. Demonetisation cannot be hailed as the only cause for tumbling of the markets, as US Presidential elections also had a major impact on IT bigwigs. But the largest impact of the government's move will be in the unorganised sector, which isn't represented in the markets.

     2.  Sectors which are affected negatively are: Real Estate, Auto, FMCG, Luxury, and Bullion Markets.

The sudden drop in money supply and increased incidence of deposits have had an adverse effect on consumption in the economy. This sudden demand curtailment further leads to a cascading effect due to decline in consumer confidence. With consumers preferring to hold cash in hand, consumers will stick to purchase of necessities and will cancel/ postpone buying premium FMCG products and luxury items. Due to real estate and construction sector getting affected, related industries like cement and construction material will experience a slowdown.

    

   3. Sectors with an upswing: The number one beneficiary are banks, with an improved CASA. RBI might cut rates by 50 bps. This will help banks lower funding cost, therefore, lending fillip to credit demand (in near to medium term). SME may face near term payment issue due to sudden scrapping of high currency notes. This would increase demand for working capital loan. Cheaper credit coupled with Make In India will provide imputes to SME, which may lead to a boost in manufacturing growth. With the cap on gold holdings being announced, pressure on gold finance players will increase.

  4.  Digital wallet and UPI : The demonetisation has been a boon in disguise to the mobile banking and digital wallet providers like Paytm and Mobikwik which have been successful in increasing their reach to local vendors. Digital Paytm on 29th november said that it has seen 35 million transactions for mobile and DTH recharges on its platform since demonetisation which is over 70 percent of the total recharges done in the country. Also, the banks have come up with Unified Payment Interface which can act as game changer in making mobile transactions safer and easier.

Does India has what it takes to become a cashless economy? Only time will tell, but one thing is for sure that such an endeavor will need the private sector to create the cheap and easy mechanisms for cash transfers using smartphones that would make cash redundant. And though this process is ongoing, and swift, it’s far from complete.

Post Brexit musings - Bullish vs Bearish.

As markets struggle to adjust to the post Brexit bloodbath,  many analysts and experts are looking backward, juxtaposing the event to past crises and modeling their responses accordingly. There are many who see it as the seeds of doom, and believe that it is time to cash out of the market. There are others who vehemently argue that not only will markets bounce back but that it is a buying opportunity. The sentiments in India on Brexit also fall in the same binaries, along with some out of the box witty tweets.

Here are some of the major global economic effects of Brexit:

1. Government bond rates in developed market currencies (the US, Germany, Japan and even the UK) have dropped, gold prices have risen, the price of risk has increased and equity markets have declined.
2. If this is a battle, the British Pound is on the front lines and taking heavy fire, plummeting to 10% over the last week against the US dollar and approaching three-decade lows, with the Euro seeing collateral damage against the US dollar and the Japanese Yen.
3. The Pound is expected to go down further as predicted by various rating agencies.                                 
   
                                                  Source: Bloomberg
4. The damage is greatest in the EU, but even within the EU, it is the old EU countries (primarily West European, that joined the EU prior to 2000) that have borne the biggest pain, with sovereign CDS spreads rising and stock prices falling the most. The new EU countries (mostly East European) have been hurt less than Britain's other trading partners (US, Australia and Canada) and the damage has been damped in emerging markets. At least for the moment, this is more a European crisis first than a global one.
5.  Many people have opined that financial sector companies are being hurt more than the rest of the market by Brexit and that smaller companies are feeling the pain even more than larger ones,what I have observedis that the evidence is not there for either proposition at the global level. At more localized levels, it is entirely possible that it does exist, especially in the UK, where the big banks (RBS, Barclays) have dropped by 30% or more and mid-cap stocks have done far worse than their  large-cap counterparts.
   

   Contradictory advices from 'experts'

    At one end of the spectrum, some experts are suggesting that Brexit could trigger a financial crisis similar to 2008, pulling the global economy into a recession, and that investors should therefore reduce or eliminate their equity exposures while they have the time. At the other end of the spectrum are those who feel that this is much ado about nothing, that the UK will renegotiate new terms to live with the EU and that investors should view the market drops as buying opportunities.
   
   Going the way experts have failed miserably in the past, I am skeptical to trust either side and decided to study the basics to understand how the value of stocks could be affected by the event and perhaps pass judgment on whether the pricing effect is understated or overstated. The value of stocks collectively can be written as a function of three key inputs:
   a) the cash flows from existing investment,
   b) the expected growth in earnings and cash flows, and
   c) the required return on stocks (composed of a risk free rate and a price for risk).
   

   Ending Note

   I see the effects as falling midway to the two extreme 'expert advice'. I think that doomsayers who see this as another Lehman moment have to provide more tangible evidence of systemic risks that come from Brexit. At least at the moment, while UK banks are being hard hit, there is little evidence of the capital crises and market breakdowns that characterized 2008.Like in India the markets have stablilized and the Brexit shock absorbed. It is true that Brexit may open the door to the unraveling of the EU, a bad sign given the size of that market but buffered by the fact that growth has been non-existent in the EU for much of the last six years.
   If the European experiment hits a wall, it will accelerate the shift towards Asia (look East) that is already occurring in the global economy.
   I also believe that those who believe that is just another tempest in a teapot are being too naive. The UK may be only the fifth largest economy in the world but it has a punch that exceeds its weight because London is one of the world's financial centers. I think that this crisis has potential to slow the 'new mediocre' global economy further. If that slowdown happens, the central banks of the world, which already have pushed interest rates to zero and below in many countries will run out of ammunition. Consequently, I see an extended period of political and economic confusion that will affect global growth and some banks, primarily in the UK and the US, will find their capital stretched by the crisis and their stock prices will react accordingly.

Arrival of the 'new mediocre' : Why global growth rates continue to be low.

Let me begin with some facts and figures-

1. The latest growth projections for the world economy as provided by IMF predict a 3.6 per cent growth rate.
2. The falling oil prices have failed to provide an impetus to the world economic growth.
3. As revenues have fallen, the oil companies have cut their expenditure and this has plummeted the global demand.
4. In many developing countries, like India, where oil is imported in huge amounts, the fall in prices has not been passed on to the customers.
5. The growth rate numbers from China and Japan are indicating a slowdown in the global economy.
6. Several central banks in the EU and Japan have moved to  negative interest rate policy  in order to boost demand.

This low rate of growth in the economies is being called the "new mediocre", a term  used by IMF Managing Director Christian Lagarde, is a cause of worry because of mainly two factors.

First, when the growth rates are low then the financial markets are bound to be unstable. Since most of the world markets are interlinked, so when one country's markets fail others feel the tremors. Also, the nervous investors have the proclivity to dump assets at even the mildest hint of trouble. This kind of money movement can wreck havoc for small and emerging economies.

Second, geopolitical risks have risen sharply in the recent years. The heightened tensions between Russia and U.S.; the humanitarian disaster and the influx of refugees into Europe; the possibility of BREXIT; the rise of protectionist tendencies in the U.S.; and the internal strife in several countries which can be a huge market, are some of the major geopolitical factors that are affecting business. And as someone rightly said,"when geopolitical risks rise, investors tend to retreat."

But, is there no way to recovery? How do we tackle this "new mediocre"? In my next blogpost I am going to explore the solutions to and roadblocks ahead of the global economy.

Monday Market Massacre -effect of the chinese slump

On Monday equity markets allover the world went on a downward spree. This avalanche in the markets was triggered by over 9% rout in the Chinese markets. Chinese markets plummeted owing to the fears of the economic slowdown despite the devaluation of Renminbi. The devaluation of Yuan, officially the Renminbi, led to speculation that the economy is slowing, and this slowdown has led to the devaluation of Yuan to contain this slowdown by increasing exports.But, it seems as though China is on a unmanageable slow down trajectory.And similar fears among the investors has led to an increase in the volatility of the markets.

Tremors of the global equities sell-off were felt in the currency markets, bullion markets, and energy markets.The Rupee hit 66.60 against the US dollar on Monday. The rupee, however, gained 54 paisa to close at 65.87 on Tuesday, as the Chinese central bank cut the interest rates by 0.25 percentage points and the reserve requirement ratio by 0.50 percentage points.Gold prices increased with the rise in fear over the volatility in the global markets while the oil prices continue to be decreasing amidst supply glut.

As far as India is concerned, both the Sensex and Nifty took a beating on Monday but have regained some of their losses in trading on Tuesday.Indian economy though vulnerable to the global changes, especially those in China, is comparatively more robust than other economies due to a variety of factors.First,inflation rate is under control and moderate; second,current account deficit(CAD) is low; third,fiscal deficit is manageable; fourth,growth is still good compared to other major economies; and with positive investor sentiments over increase in the infrastructure spending and most probably the passage of bills like GST.An expected untimely rate cut by RBI is also a major factor which is keeping the market sentiment in high spirits.

Experts have opined that the volatility in the markets will continue mainly due to decreasing manufacturing growth rate in China.The stocks continue to plummet wiping billions from Chinese equity market, amidst the efforts by the Chinese government to contain the losses ,showing that the government efforts have not had the desired effect. What remains to be seen is that will China be able to curtail this downward spiral?