Thursday, September 13, 2012

Pranab & Mamata Out, Mulayam In: Reforms on - III

Ever since Mamata and Pranab were sidelined and Mulayam joined the government, the government’s messaging around reforms has been clear and consistent.

Whether it be the Vodafone tax issue, the taxation of foreign institutional investors (FII), the petrol price hike, the diesel price hike or noises around foreign direct investment (FDI) in retail, the government is slowly but surely pushing ahead the reforms agenda. And the timing could not be better. With elections just two years away, the government has enough elbow room to push ahead major initiatives and to start to see the fruits of its efforts.

In my stories a few months back (Pranab & Mamata Out, Mulayam In: Reforms on!, Pranab & Mamata Out, Mulayam In: Reforms on – II), I consistently pointed out that with the new political equations in place, India is all set for the next set of reforms.

Here are some key excerpts from my previous stories accompanied with the latest updates.

Excerpt: So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …

Update: As expected, Mulayam is being very flexible.

Excerpt: This was followed by an interview of the prime minister with Hindustan Times yesterday, where the messaging continued. “The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going,” said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.

Update: There is far more clarity around the controversial tax issues and attempts are being made to revive the mutual fund sector. However, not much movement has happened around the fiscal deficit and infrastructure. But I believe those will also start to pick up pace in the coming months.

Excerpt: This messaging continues with reports that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.

Update: Diesel price hiked as projected. Besides, decontrol is a sham, since the oil companies continue to make petrol price decisions only with the approval of the Finance Ministry in spite of petrol having been decontrolled.

Excerpt: So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (PM-Pranab-Sonia hiatus was key cause of policy paralysis), which captures some of the background dynamics that might have contributed to this situation. Here’s what it says:

“It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA’s resounding victory in 2009, the PM made another bid for the job and failed.”

What this history makes clear is that Dr. Singh was always keen on doing the finance minister’s job himself, or getting another economist whom he trusts to do the job for him.

The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was Manmohan Singh’s senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)

Update : A great insight from FirstPost. Chidambaram, after taking over a finance minister recently, lost no time in setting the reforms ball in motion, and in a direction different that that set by Pranab.


In the 1990s, Manmohan did magic with PVR’s support. Is he on his way to another round of magic, with Sonia’s support? I tend to believe so. Time magazine called Manmohan Singh an “underachiever” and he has also been badly bruised in the Indian media. I will continue to keep track of this story to see how it plays out over the next few years.

IIP, Exports and Bank Credit Numbers Bad? No, Not At All

Over the last two days the numbers for the Index of Industrial Production (IIP), exports and bank credit were reported and, on the face of it, they look disappointing. However, a deeper look shows the long-term growth trend is intact and, in fact, all the key indicators point to the possibility that the growth slowdown is also over and the economy is getting ready for the next growth phase.

To understand this better we need to look at the economic and market recovery during 2009 after the great bear market of 2008. During that time, equity markets started to make new intermediate highs in the April-June 2009 period in anticipation of the upcoming growth phase later in the year (which did materialize). These intermediate highs were accompanied with huge increases in foreign institutional investor (FII) inflows, even as IIP, bank credit and exports were tracing negative year-over-year (YoY) growth numbers.

Refer to my analysis of December 2011 (Macro-Technicals Point to a Possible Bottom) in which I talked about a possible bottom and the indicators for the same. My analysis shows that an economic recovery is preceded by falling inflation and a rise in commodity prices after making new lows as well as a rise in U.S. 10-year yields after making new lows. And that equity markets would continue to make new intermediate highs even as IIP and exports trace negative YoY growth numbers and bank credit YoY growth continues to fall.

It is exactly the same recovery pattern that is being traced out now, with equity markets making new intermediate highs, a sharp increase in FII flows, falling wholesale inflation, a rise in commodity prices after new lows and a rise in U.S. 10-year yields after making major lows.

In fact, the growth numbers for IIP, exports and bank credit being posted now are far better than during the economic and market recovery of 2009. For instance, exports are down 9.7% now compared to the minus 35% during the market recovery of 2009. As for bank credit growth, it is at 17% now compared to 15% during the 2009 recovery. In fact, bank credit growth went down to 10% later in 2009 even as equity markets continued to make new intermediate highs. As for IIP, it is running at around 1% now compared to minus 2% during 2009.

The only cause for a concern is a fall in corporate profitability in the June 2012 quarter after tracing a recovery pattern in prior quarters. Overall economic recovery is typically preceded by a slight improvement in corporate profitability numbers and hence the concern. The silver lining here is that most key sectors – including banking, software and consumer goods – showed a rising profitability trend with overall corporate performance numbers being pulled down by infrastructure-related industries, primarily energy and steel. Keep in mind though that infrastructure sectors typically start to recover only when recoveries in the banking and consumer sectors are well-established. The extraordinarily poor numbers in energy and steel were driven by environmental regulatory issues and the banning of iron ore mining in certain states. With the ban already lifted in Karnataka, I believe these issues are transitory and the worst case is that the beginning of the next growth phase might get pushed back by a quarter or two.

In conclusion, there is no cause for concern around the recently released numbers for IIP, exports and bank credit even though on the surface they might sound disappointing. Most of the economy- and market-related indicators are pointing toward the economic recovery picking up pace and the equity markets continuing to make new intermediate highs.

Friday, September 7, 2012

Interpreting GDP Numbers: long-term trend intact

The GDP numbers declared last week for the quarter that ended in June 2012 showed the economy growing by 5.5% year-over-year (YoY). I came across many economists and analysts who say that in the short term there are signs of recovery given the 5.3% YoY growth in the quarter that ended in March 2012. There are many more who say that India’s long-term growth story is under threat given the sub 7% growth rates in the past five quarters.

Well, here’s the right way to interpret these numbers.

First, the difference of 20 basis points between the 5.5% and 5.3% is of no consequence, especially given the large revisions and mistakes occurring in the government’s numbers. Furthermore, the difference is just around 12 basis points if we include the second decimal place! And if you take into account that the March quarter typically shows a bump up in GDP growth rates, then the June 2012 quarterly growth rate of 5.5% should actually be interpreted a little negatively.

Second, while looking at GDP numbers, an over-reliance on looking at YoY growth rates would very often lead to an incorrect interpretation. In order to correctly see the long-term growth trend and the impact of business cycles, one has to also look at the GDP chart in absolute numbers.

Shown below is a chart of just the YoY growth rates. If you just look at the YoY growth rate chart, it does seem a little depressing.


Now take a look at the chart of absolute GDP.


Does it show that the long-term story is over? Or does it show that the long-term story is well intact, albeit interspersed with minor business cycles? I rest my case.

Recently, even the RBI reduced India’s long-term trend growth rate from 8% to 7.5%. I normally have great respect for the quality of analysis at the RBI, however, this time I would tend to believe the RBI might have been a little premature to reduce that rate.

To put things in perspective take a look at the chart below. It shows a comparison between absolute GDP of the U.S. and India over the same period as the previous charts. Since the U.S. GDP is in USD and India’s GDP is in INR, I have indexed it to start at 100 for both.


If India’s long-term story is supposed to have ended based on the GDP trend, then what about the U.S.? Is it going vanish from the economic landscape and become a powerless player?

Well, no. India’s growth story is not over and neither is the U.S. going to lose its pre-eminent position in the global politico-economic landscape anytime soon. Period.


Related Analysis

June ‘12 : India’s Growth Story Intact: Interpreting macro numbers and trends the right way
May ‘12 : GDP Downgrades: Be wary of research house estimates; India’s growth story intact
May ‘12 : Party Time Again: Time to buy panic for the Sensex ride to 80,000
Apr ‘12 : Bull run intact, Growth rate on a rise
Dec ‘11: Macro-Technicals point to a possible bottom

Darghi Says Nothing New

There has been a lot of anticipation about what European Central Bank president Mario Darghi would say today in the press conference. His statement is out and there is nothing new there. It is purely a clarification of the bond-buying plan declared on Aug. 2.

Here’s what he said in his statement on Aug. 2:

“The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective … Over the coming weeks, we will design the appropriate modalities for such policy measures.”

The complete statement along with the transcript of the press conference on the ECB website provide a fair indication about the modalities, too!

All that he has done today is provide clarification around the modalities and technicalities of the open-market operations already declared. There is absolutely nothing new there.

Here are some key points (reformatted) from the ECB press release titled Technical Features of Outright Monetary Transactions.

  • The Outright Monetary Transaction (OMT) to be undertaken under the overall frame of EFSF/ESM. (Obviously, and already indicated in the Aug. 2 press conference.)
  • The OMT would be preceded by strict conditionalities and a monitoring mechanism, with the IMF being involved. (Nothing new; already happening for Greece and mentioned in the Aug. 2 press conference, too.)
  • Will buy bonds between one-year and three-year maturity. (Nothing new; already indicated in his Aug. 2 press conference.)
  • Purchases will be fully sterilized, meaning the overall impact on the money supply will be neutral. (That’s obvious. The bond-buying program is not to inject liquidity, but to stabilize the bond markets.)
  • The OMT bonds would rank the same (pari passu) with other private creditors. (Obviously, because if they have to take other creditors’ approval for a higher priority, the bond buying will remain on paper as other creditors would be unlikely to agree.)

All the hype around today’s press conference was overdone. In fact, there was really no need for a press conference if the only agenda was to release a few points around the modalities of the OMT transactions.


Related Posts

May ‘12 : OECD Report: Part truth, part scaremongering
May ‘12 : Greece paranoia – a blessing in disguise for India
May ‘12 : Global recovery robust, fears unfounded