Whom does the current bout of inflation the West hurt?

The rise in inflation in Western economies has caused a massive transfer of wealth from savers to investors, contends Adam Tooze in an article in the FT. 

Higher inflation means the nominal debt to nominal gdp ratio goes down as the denominator rises on account of inflation. The denominator has risen also because of the rebound in real output post Covid.

Borrowers, namely government and corporates gain, but savers lose. The poor face higher inflation and a loss of jobs. Tooze thinks this can lead to explosive discontent. 

I am not so sure. The only net debt in an economy is government debt (corporate and household borrowings are from other household savers, so the net borrowing on these two counts is zero). So whoever has invested in government debt is a loser. The rich are losers and also the middle class. But the poor are not investors in government debt. They are net borrowers, hence stand to gain from the real value of their debt getting eroded. If inflation can be quickly reined in, they could emerge as beneficiaries from the current bout of inflation. 

The notion that inflation hurts the poor is common. Higher prices mean a higher cost of living. True. But this effect could be overwhelmed by the erosion the value of debt that the poor carry. 

 

Crisis? What crisis?

 Last November, there was talk of a serious external accounts crisis staring in India in the face. Maybe, not as bad as the one in 2013 but still pretty bad.

The current account deficit, analysts said, could exceed 3.5 per cent of gdp for FY 23. The rupee would be above Rs 85 to the dollar, could even touch Rs 90. It was futile for the RBI to expend dollars to support the rupee- better to simply let the rupee fall and exports do the trick.

Well, less than six months on, little of that has come true. The current account deficit has narrowed and may end up at under 2.5 per cent of gdp, a comfortable position for us. The rupee is trading in the range of Rs 82-82.7. Foreign exchange reserves are at an eight month high of $579 bn.

Lower commodity prices are a factor. Another is that world economic growth has turned out to be better than forecast, with the US escaping a recession in 2023, again contrary to many forecasts. India's gdp growth for FY 2023 is projected to be slightly below 7 per cent

No sign of any crisis, eh?

Recent bank failures

 The question pops up again: what was the board of directors doing at the spectacular bank failures we have seen recently?

An article in FT is informative. Only one of SVB's directors had banking expertise and he didn't sit it on the Risk Management Committee (RMC). The bank's RMC included a director with considerable experience in the premium wine industry. SVB did not have a Chief Risk Officer (CRO) for months and when the CEO appointed one, it was considered a big enough achievement to be a factor in his outsized bonus. At Silvergate Bank, the CRO happened to be the son-in-law of the CEO.

Questions need to be asked also about governance at Credit Suisse as it hurtled from one scandal to another over several years. Even if they are, we are unlikely to get lasting answers. It does seem that the board of directors of a company is amongst the most unreformable institutions in the world.

Consulting as the Big 'Con'

 

Mariana Mazzucato made a huge splash with her book, The Entrepreneurial State. She argued that there are high-risk, breakthrough ideas such as the Internet that could never have happened with massive funding of the initial creative work. In an interview with FT, she takes on consulting firms, the McKinseys, BCGs and the rest.

Her point is not the usual one about consulting firms not adding much value: as the old chestnut goes, a consultant is somebody who looks at your watch and tells you the time. No, her point is more nuanced. She says that governments are becoming too dependent on consulting firms for ideas. As a result, governments are taking enough responsibility and doing worthwhile work. In the process, the civil services are not attracting the brightest.  

I don’t think that’s true of the IAS. The beauty of India’s competitive exams is that the talent pool is so incredibly large that when you are looking to fill, say, 150 slots out of half a million applicants, you are bound to get incredibly good talent. The IAS, in my view, still gets some of the best talent in the country. But that could also be because our government hasn’t developed the UK sort of dependence on consulting firms! Or, there is so much of work to be done in government that if even if you farmed out work to consultants, there would be a great deal left for government to do.

Four trends that will impact the Indian economy

 

I identify four broad economic trends from which there is no escape for the Indian economy:

1. Government capital expenditure will drive the economy in the medium-term.

2. 2. High fiscal deficits are here to stay.

3. 3. Inflation will be higher than before

4. 4.  Self-reliance and import-substitution are a reality

The macroeconomic outcomes that we can realise will be constrained by these four trends.

More in my BS article, Four economic trends that will impact India.

Four economic trends that will impact India

There are four broad trends that will impact the Indian economy in the years to come. The Budget for 2023-24 affirms these trends.

1. Government capital expenditure will drive the economy in the medium-term: The latest Economic Survey underlines the fact that government capital expenditure has risen from a long-term average of 1.7 per cent of gross domestic product (GDP)in the period FY09 to FY20 to an estimated 2.9 per cent of GDP in FY23. The latest central Budget expects capex to rise to 3.3 per cent of GDP in FY24.

 

This points to an inconvenient fact: Private investment has remained sluggish and the government has had to compensate. The behaviour of private investment is not unique to India. It is part of a trend that is seen in emerging and developing economies (EMDEs). As the World Bank’s Global Economic Prospects (2023) points out, investment growth in EMDEs in 2022 remained about 5 percentage point below the 2000-21 average, and nearly 0.5 percentage point below in EMDEs excluding China. 

 

The World Bank does not see private investment returning to the level suggested by the pre-pandemic trend through 2024. It lists several factors responsible for the slowdown in investment growth in EMDEs: Slower output growth in 2010-19; lower commodity prices; lower and more volatile capital inflows to EMDEs; higher economic and geopolitical uncertainty; and a substantial build-up of public and private debt. Many of these factors apply to India.  

 

The government sees a sharp rise in capex in FY24 as boosting output growth. This overlooks the fact that the fiscal deficit is projected to decline by 0.5 per cent of GDP in FY24. We have a withdrawal of stimulus, something that is contractionary in nature. 

 

True, the composition of expenditure has shifted even more towards capex, and this is expansionary. But this effect can overwhelm the contractionary effect of a fiscal deficit decline only if the rise in capex is greater than the decline in the fiscal deficit.  In  the budgetary projections, the rise in capex is 40 basis points whereas the decline in the fiscal deficit is 50 basis points. The net effect will, therefore, be contractionary

 

2. High fiscal deficits are here to stay: Analysts cheered the finance minister for sticking to the fiscal deficit of 6.4 per cent for 2022-23, and projecting a fiscal deficit of 5.9 per cent for 2023-24. The figure for 2023-24 is a budget estimate. If the Ukraine conflict escalates and the global situation worsens, government subsidies (which have been pruned in FY 2023-24) will rise and we could be back to square one. We must also expect sops to be rolled out in the run-up to elections in 2024.  

 

The fiscal situation can be turned around in a fundamental way only if the tax-to-GDP ratio goes up significantly (say, above 12 per cent of GDP) or if capital receipts from disinvestment rise significantly or both. On either count, the outlook is not promising. The tax-to-GDP ratio   is estimated at 11.1 per cent for 2023-24.  The peak in the past decade has been 11.4 per cent.  

 

As for the proceeds from disinvestment, the Economic Survey notes that total proceeds from sale of equity in public sector units (PSUs) amounted to ~4 trillion in the eight-year period from 2015 to January 2023, or an average of ~50,000 crore in a year. Strategic sales have yielded a mere ~69,412 crore in the entire period. It does look as though the Fiscal Responsibility and Budget Management target of 3 per cent will remain a distant dream. 

 

After the global financial crisis and then the pandemic, we are seeing a rise in government deficits and public debt everywhere. India is no exception. If anything, the rise in debt to GDP ratio from 81 to 85 per cent between 2005 and 2021 looks modest in comparison with the increases elsewhere-- 66 to 128 per cent in the US; 39 to 95 per cent in the UK; 26 to 72 per cent in China; and 69 t 93 per cent in Brazil. India’s public debt position looks even better when we take into account the fact that 95 per cent of the liabilities are domestic, and we have the growth-interest differential working in our favour.

 

3.Inflation will be higher than before: High fiscal deficits can be expected to translate into high inflation. That apart, de-globalisation will happen in a greater or lesser degree. The movement may be gradual, but the direction is clear enough. 

Globalisation was about procuring goods and services at the lowest cost from almost anywhere in the world. Princeton historian Harold James noted recently that there is a historical pattern of globalisation driving disinflation. Alas, it appears the trend towards globalisation is now being disrupted.

Post-Covid and post-Ukraine, every country is reassessing its extent of dependence on outside suppliers from a range of goods and services. The US and its allies are determined to reduce dependence on China to the maximum extent possible as the containment of China has become the West’s strategic priority. 

There has been serious academic discussion in the US about revising upwards the inflation target of 2 per cent so that monetary policy has more room for manoeuvre in the downward direction. In India, the inflation target of 4 per cent threatens to become largely notional. We would be thankful now if inflation falls below 6 per cent.  

4. Self-reliance and import-substitution are a reality: For the reasons cited in (3) above, “make at home” will gain in importance. This will be especially important for leading economic and military powers. As India moves towards becoming the third largest economy in the world with matching military clout, a lurch towards greater self-reliance is inevitable. We need not be unduly apologetic about this trend: We are only falling in line with a worldwide trend. The adjustments in tariffs in the recent Budget, analysts have noted, are aimed at helping domestic industry.

It’s no use bemoaning the trend towards protectionism in various economies, including India. It makes no more sense instead to make a success of schemes such as Production-Linked Incentives. We must find ways to limit abuse of discretion in industrial policy. We need to monitor the effectiveness of the PLI scheme using appropriate metrics. Industrial policy will be integral to economic policy in the years to come.

 Macroeconomic outcomes in the coming years will be governed by the four trends outlined above. 

 

 

 

 

Don't believe the experts!

 Arvind Subramanian, former Chief Economic Advisor in the Finance Ministry, has a cheeky take in today's BS on the judgements on experts on sundry matters:

• China’s zero- Covid policy was hailed as a success until the recent spurt in Covid infections threaten to trigger an insurrection of sorts.
• The US was said to have fared badly in its handling of Covid because it’s a polarised society in contrast to the egalitarian Sweden- “until Sweden became a cautionary tale”.
• In the US, the doves ruled on monetary policy until a few months ago. With the persistence of inflation, the hawks took over. Now with signs of inflation abating, the doves “are flying again”· 
• Economists warned that the confluence of the conflict in Ukraine, soaring inflation and rivalry between US and China would plunge the world into recession. The clouds are receding in recent weeks and it appears, well, we may not end up with a recession, after all.
• Anybody remembers how many times the Chinese credit bubble was supposed to collapse and wreck the Chinese economy?

Subramanian thinks the problem is the media: they are looking for snappy comments all the time and experts are happy to give them quotes for their two minutes of fame.

 The problem runs deeper, methinks. Experts simply lack an awareness of grassroots realities. They are mostly armchair pundits who prefer to operate from the comforts of their air-conditioned offices. How else do we explain the high rate of failure of economic forecasts? It is said that economists can’t even forecast the past correctly. Then, there are the stock price and stock market forecasts, earnings forecasts.

 Political forecasts are worse- I have lost count of the number of times President Putin has been pronounced as seriously or terminally ill- seems fit enough to preside over the conflict in Ukraine. We were told that the Mr Putin would be deposed in a coup, the people of Russia would rise in revolt against the suffering inflicted on them, Russian economy would collapse…. and Ukraine was poised to triumphantly retake the Crimea from Russia. So much hot air.

 Mr Subramanian says experts should stick to their area of domain expertise. Alas, they don’t seem to do wonderfully even in that area. No better example that Mr Subramanian warning that a 5 per cent fiscal stimulus was needed to save the Indian economy from the impact of the pandemic- we seem to have managed quite well with a stimulus of under 2 per cent.

 

Forex reserves and RBI intervention

I pinched myself in disbelief when I saw a news item that said the RBI may have BOUGHT $8 bn dollars in the market in the past month. 

So the RBI is causing the dollar to strengthen vis-a-vis the rupee, meaning it wants the rupee to depreciate In the previous months, the RBI had been doing quite the opposite- it had dipped into its forex reserves to SELL dollars in order to contain the depreciation in the rupee. As a result, India's forex reserves fell by about $ 85 bn in the period April-September 2022. 

But that was not entirely because of sale of dollars by RBI. Dollar sales are said to account for about a third of the decline in reserves. The rest of the decline was because of revaluation of reserves. The RBI holds large amounts of bonds in foreign currency, especially US Treasury bonds. These holdings have been falling in value thanks to rising interest rats.

As you know, we've had people howling about RBI's market intervention. Many were worried about the fall in our forex reserves. They said: why intervene? Let the rupee fall. It would be good for exports. 

The RBI Governor gave a fitting response recently. About the fall in reserves, he said that is what the reserves are meant for- for a rainy day. They are not, he said, meant to be a 'showpiece'. As for export growth, I doubt that rupee depreciation will do much to help in the current situation. The export markets are down, so it's unrealistic to expect a big boost to exports. Our major imports, such as oil, as price inelastic, so imports will shoot up with rupee depreciation. Chances are BoP will worsen, not improve, with rupee depreciation. 

That apart, it makes no sense to let the market dictate the exchange rate entirely. It may dictate the direction of the exchange rate but not the magnitude. The RBI is committed to containing rupee volatility. It has an unstated objective, namely, containing the Real Effective Exchange Rate (REER) of the rupee within a band of plus or minus 5 per cent. Excess volatility in the exchange rate makes investors jittery. 

Net portfolio investment flow into India  turned hugely positive in August reversing the trend of the previous months. It turned negative in September and October but has turned positive thus far in November. If portfolio investors sense that the rupee is in a free fall, they will head massively for the exit, causing the rupee to plunge. Rupee volatility must always be managed.

I wonder what is going to happen to the forecasts of the forex pundits who saw the exchange rate headed towards Rs 85 to the dollar or even above that. The rupee is now less than Rs 82 having touched Rs 83 on October 19. The trend has reversed in recent weeks. Inflation in the US has begun to respond to earlier rounds of tightening. There is a sense now that the Fed may not have to tighten as much as thought until now.  

Overshooting of exchange rates is a well-established phenomenon. There are periods when the rate goes above or below the equilibrium value before returning to equilibrium. Some of the depreciation we have seen in recent months falls in the category. The necessary correction may be happening, helped by perceptions about future rate moves in the US. As interest rates in the US correct downwards, the value of US Treasuries will rise and with that India's FX reserves.

I wouldn't be surprised if the exchange rate at the end of FY 22-23 is closer to Rs 80 than to Rs 85.( Caveat: I'm assuming no serious escalation in the Ukraine conflict).  I won't be apologetic if I'm proved wrong: the tribe of economists has long claimed a divine right to be wrong in its forecasts. 

 

Central banker jokes

RBI Deputy Governor Michael Patra's recent speech on monetary policy transmission will be of interest to many. The part I liked best was where he cracked a couple of jokes at the expense of central bankers.

These are not the best times for central bankers to wax eloquent. From being knights in shining armour during the pandemic, they have become much maligned and are held responsible for the darkening outlook globally. The story is told of a man stuck in a traffic jam in the capital of a major economy. He asks a policeman about what is going on, and is told that the Governor of the central bank of the country is so depressed about the economy that he wants to douse himself with gasoline and set himself on fire. So, in sympathy, the crowd has decided to take out a collection for him. “How much has been collected?” asked the man. The answer: “40 gallons”.

Here's another one:

A man needs a heart transplant. The doctor offers the heart of a five-year old boy. “Too young!” says the man. “How about the heart of a 40-year old treasury head?” “He doesn’t have a heart”. Then how about the heart of a 75-year old central banker?” “I will take it!” “But why?” “It’s never been used!” 

 If a central banker can laugh at himself, there is still hope for the breed.

Missile attack on Poland : no takers for Ukraine story

 A missile landed in a village in Poland yesterday killing two persons. Ukraine was quick to denounce it as a Russian missile attack on a NATO country. If true, it could lead to the invocation of  Article 5 under which the attack would be deemed to have happened against all of NATO and could provoke a suitable retaliation.

Well, that's not happening in this case. Poland says the missile is not Russian. NATO boss Jens Stoltenberg thinks the missile probably emanated from Ukraine. Biden has said it is unlikely the missile was fired from Russia. So, at the moment there is no prospect of NATO getting dragged in. 

Former CIA analyst Larry Johnson provides an interesting analysis. He contends that it was probably a 'false flag' operation by Ukraine intended to get NATO involved

• The missile landed in the Polish village of Przewodów in the east of the country, about four miles from the Ukrainian border. ....
• The closest Russian ground forces, who in theory could have launched this missile, are located east of Kherson. The distance from Przewodow to Kherson is 613 miles. That distance exceeds the capability of the S-300 by a factor of 3.5.

The S-300 was fired by Ukrainian forces located somewhere to the west of Kiev. It is highly likely that U.S. and Russian satellites recorded this launch. In other words, both sides know where the S-300 originated.

It is highly unlikely — hell, impossible — that this was an “errant” missile that Ukraine fired in a moment of desperation trying to take down an in bound Russian missile. Why? The Russian missiles are flying from the south to the north or from the east to the west. That means if Ukraine is firing an anti-missile defense system at those inbound missiles the Ukrainian missile would travel from west to east.

But that is not what happened here. The S-300 traveled east to west. Unless the Ukrainian operator who launched the S-300 was drunk on his ass, it is impossible to “accidentally” fire this air defense missile in the wrong direction.

Johnson provides a possible motivation for Ukraine's misadventure:

I believe this is another indicator of Zelensky’s growing desperation. Think about it for a moment. If Ukraine really had Russia on its heels, why fabricate an easily disproved claim that Russia attacked Poland with a missile? This was sloppy trade-craft. If Ukraine had used another Russian missile capable of flying the distance from current Russian lines to that farm in Poland, then the circumstantial evidence might have ignited the desired fire among the NATO members.

Johnson is among the analysts who believe that Russia is poised for a major offensive and that the end game in Ukraine is probably not very far off.

Global economic crisis? Banks are unfazed

 

The world economy faces, perhaps, the worst shock since the global financial crisis (GFC). But the world’s global banking system seems not have noticed! How come?

During GFC, regulators banks woke up to the realization that they did not have the capital (in particular, equity capital) needed to survive a major shock. Governments everywhere blew up enormous amounts of tax payer money on saving banks.

After the GFC, the Bank for International Settlements (BIS) put in place higher capital requirements. These were pretty modest. For instance, core equity capital (what we understand as equity in accounting terms) requirement was raised to just 4.5 per cent of risk-weighted assets.

Bankers howled at the time. The cleverer ones realized quickly that the market rewards banks with high capital adequacy through higher valuations. So they built up capital buffers well above the regulatory requirements.

The global average for CET 1 (or core equity capital) is now 14.1 per cent, well above the 4.5 per cent mandated by regulation. This means that we can have an economic crisis but that won’t translate into a banking crisis. Banking crises are the most difficult to get out of, so that’s good news for the world economy.

Not to pat myself unduly on my back, but students of my banking courses at IIMA (SPB and MFI) will remember that I had emphasized that higher capital was crucial to competitiveness and valuation in banking post the GFC.

My article in BS, Global Banking is a bright spot.

 

Global banking is a bright spot

 T T Ram Mohan

The Ukraine conflict poses the biggest challenge to growth since the global financial crisis (GFC) of 2007. The world economy will grow at 3.2 per cent in 2022 and 2.7 per cent in 2023, says the International Monetary Fund (IMF).  Growth in 2023 will be the lowest since 2010, leaving aside the pandemic year of 2020.

Slow growth and rising interest rates are bad for banks. Slower growth spells an increase in bad loans. Rising interest rates translate into losses in the bond market.   

The astonishing thing is that it appears that the global banking system does not face any high risk of collapse even in these trying times. There is thus hope that the global economy can get back to normal after 2023. Assuming that we escape nuclear annihilation.

The world’s financial system faces an intimidating set of challenges, apart from slowing growth and rising interest rates. The IMF’s Global Financial Stability Report (GFSR, October 2022) lists these challenges:

• China’s housing market woes: Stringent lockdowns in China have impacted home sales. Buyers do not want to make advance payments for the purchase of properties. As a result, developers face liquidity pressures and many have gone bankrupt.   Banks’ exposure to the property is 28 per cent of total loans. (In India, a bank exposure of more than 10 per cent to the property market is considered risky). The IMF estimates that, in a sample of Chinese banks it looked at,  15 per cent (mostly small banks) could fail to meet the minimum capital requirement.  
• Poor market liquidity: Central banks are tightening monetary policy and shrinking their balance sheets. This has meant less liquidity in the market. Investors would like to sell securities when interest rates rise.   When liquidity is limited, the fall in prices can be steep. Investors trying to exit their holdings of securities end up incurring losses that can trigger panic. 
• Corporate debt at risk: Rising interest rates pose challenges for firms with high debt. The composite picture across advanced and emerging markets is not pretty. The IMF’s sensitivity analysis shows that under conditions of stress 50 per cent of small firms would have difficulty servicing debt. Banks are bound to be impacted. The IMF warns that government support may be required to contain bankruptcies at small firms.
• Leveraged finance under pressure:  Leveraged finance is lending to companies with high debt or a poor credit history. It is, therefore, of the high-yield variety. An increasing share of leveraged finance in recent years is “private credit” or credit that is outside the regulated bank market and the financial markets and is of poor quality. As a result, in the US today, more than 50 per cent of leveraged finance is composed of firms with a B rating or relatively higher risk of default. The leveraged finance market is under increased risk in the present conditions.
• Housing price declines: Rising interest rates could trigger a steep decline in housing prices worldwide. The GSFR estimates that in a “severely adverse scenario”, housing prices could fall by as much as 25 per cent in emerging markets over the next three years; in advanced economies, the fall could be 10 per cent. These orders of declines will have adverse implications for banks.

 

Now, that is a pretty serious set of risks that banks are exposed to. One would think that, in combination, these could spell disaster for banks. The big surprise in the GSFR report is that the world’s banks seem well-placed to cope with the very worst.

All growth forecasts at the moment are predicated on economic conditions continuing pretty much as they are today —that is, the Ukraine conflict remains at the present level, oil prices will be around $92 per barrel, inflation starts coming around to normal levels in the next couple of quarters, etc.

But what if conditions worsen? What if the Ukraine conflict escalates and the US and its partners impose secondary sanctions?  What if the risks listed above materialise together as a result? 

Obviously, global economic growth will be severely hit.  The IMF looks at a nasty scenario. Growth drops from the baseline projection of 3.2 per cent to below minus 3 per cent in 2023 before recovering to around 3 per cent in 2024. The global Common Equity Tier I ratio (the pure equity component) in banking falls from 14.1 per cent of risk-weighted assets in 2021 to 11.4 per cent in 2023 and 11.5 per cent in 2024. These are all well above the regulatory minimum of 4.5 per cent. 

Banks in emerging markets would face a serious problem: Banks accounting for a third of banking assets would lack the minimum capital required. Globally, however, banks that fall below the 4.5 per cent minimum would account for no more than 5 per cent of global banking assets. 

Suppose global growth turned out to be below the IMF projection of 3 per cent plus in 2024 in the adverse scenario. Even then, on the average, one can expect banks globally to be well above the regulatory norm. 

How do we explain these outcomes? Well, there has been a big change in the banking system following the GFC. Bankers have come to realise that it pays to have capital way above the regulatory norm. The market rewards them with higher price to book value ratios because it sees these banks as less susceptible to failure. As a result, banks have raced well ahead of the regulatory curve when it comes to capital adequacy. That is standing the banking system in good stead in these difficult times. 

That is true of the Indian banking system as well. Except that, far from being under stress like their counterparts elsewhere, Indian banks today appear to be on song. The 12 public sector banks together have reported a second quarter increase of more than 50 per cent in profit after tax (PAT) over the previous year. Private banks have reported a growth in PAT of over 65 per cent in the same period. Loans in the banking system are growing at 17 per cent. If the global economic outlook is grim, Indian banks haven’t noticed it!

A corporate leader pens a novel

 

Former Ashok Leyland CEO and well-known business leader, R Seshasayee, has a penned a novel, A Dance of Faith. It is an utterly charming work.

The novel is about a Muslim boy in a village in Tamil Nadu who develops an interest in dance while at school. It turns later into an irresistible craving to learn Bharata Natyam. After a great deal of struggle, he finds a teacher in Chennai who is willing to accept him and even help him out financially in his quest.

Seshasayee weaves out of this story-line a tapestry comprising many elements: the conflicts and turmoil in the mind of the Muslim boy as he pursues his quest; family relationships; village life with its many restrictions, prejudices and cruelties; the cultural life of Chennai' and musings about life, religion, art, music and dance. All of this is captured with a deep sense of irony and dashes of humour.

The characters in the novel come alive and their voices are authentic. The reader is left in no doubt as to the literary quality of this debut novel. I particularly liked the Tamil flavor to the novel-  there is a smell of rasam and sambar in the last part.

Two things that struck me were Seshasayee’s grasp of a range of literary techniques and his exquisite turns of phrase. I have known the author for a while now. I must confess I never suspected that he harboured literary talent of such an order.  I have little doubt that his first novel will be acclaimed as a considerable achievement.

 

 

 

Elon Musk takes control of Twitter

It can happen only in the US. 

Elon Musk, who will soon formally become the owner of Twitter, entered the headquarters of the firm dressed in casuals and carrying a kitchen sink. He tweeted the image later with the legend, "Let that sink in". The remark was a reference to the changes he had in mind for Twitter. 

Can you imagine the CEO of an Indian company announcing his arrival in similar terms? Even if he or she had wanted to carry a sink, there would have been an orderly carrying it. Casuals are also an unlikely possibility. And the fellow would have had an army of flunkeys around him.

Musk has reassured employees that he has no plans to prune 75 per cent of the staff as has been speculated. He has also reassured advertisers:

" Twitter obviously cannot become a free-for-all hellscape, where anything can be said with no consequences! ....In addition to adhering to the laws of the land, our platform must be warm and welcoming to all, where you can choose your desired experience according to your preferences, just as you can choose, for example, to see movies or play video games ranging from all ages to mature....Fundamentally, Twitter aspires to be the most respected advertising platform in the world that strengthens your brand and grows your enterprise.”

There is scepticism about Musk's intentions. Many think that easing of content moderation means that extreme statements will become acceptable on Twitter. They believe right-wing extremists will have a free run.

It would be wise to put one's judgement on the deal on hold. Musk is too shrewd a businessman to compromise the worth of the brand. If Twitter degenerates into a platform for abuse, the brand will be seriously undermined. 

It is reasonable to hope that Musk will do what he think is necessary to protect and grow the business. I am reminded of the grim prophecies that accompanied Rupert Murdoch's takeover of Wall Street Journal many years ago. People said it would be the end of the sort of journalism WSJ was known for. Well, they have been proved wrong. WSJ remains pretty much what it was- except that Murdoch managed to turn it around commercially after investing millions of dollars in the paper.

Don't underestimate the competence of top businessmen - or of top politicians.

Early assessments of Rishi Sunak

Rishi Sunak has become PM after Liz Truss's short-lived tenure. It was a period in which the government's ill-conceived fiscal proposals sent the financial markets into turmoil. You could say that after that disaster, anybody would be an improvement.

That's ok, but can can we expect anything more? A columnist in FT, Janan Ganesh, thinks that Sunak's competence is over-rated:

He has crammed a lot of misjudgments into a short career. Among the prime ministers since the EU referendum of 2016, two voted Remain (Theresa May, Liz Truss) and one (Boris Johnson) embraced Leave with the tardiness of an opportunist. Britain is now led for the first time by someone who believed with real fervour that Brexit was a good idea. The lost trade, the forfeited fiscal receipts: he failed to anticipate these costs, or overrated the ease of making them up elsewhere. He does not even have the excuse of being a nostalgic. There was and is a coherent traditionalist case for Brexit. There was never a liberal or free-market one. How a man of modernist, pro-growth sensibilities came to believe otherwise is not just an academic mystery. It forces the question of what other eccentric choices he might make as head of government.

Ganesh still thinks that Sunak is a good choice because of his rectitude. I thought the writer was talking about his integrity in financial matters. No, it's not that. 

Ganesh thinks that Sunak took a principled position in quitting Johnson's cabinet after its murkiness crossed limits. Well, I am not sure. There are many who saw it as opportunism, a case of jumping off  a sinking ship. Johnson supporters saw it as back-stabbing on Sunak's part. It's rather naive to think that there is much room for principle at that level of politics- if you were constrained by principle, you would not survive. Look at what happened to Jeremy Corbyn, the former leader of the Labour party.

A more perceptive article in Russia Today sees the Conservative party as riven by divisions between the old and new elites. The old elites believed were somewhat wary of globalism, identity politics, transgender rights and the rest. They were more inclined towards traditional values such as nationalism, family, Christian work ethic, etc. These divisions explain the conflict between the pro- Brexit brigade (to which Sunak belongs) and the anti-Brexit brigade. The writer thinks these divisions doom the Conservative party. Sunak does not have the skills to achieve a reconciliation:

.....if the party is to survive, even in the short term, it needs a head with real stature and genuine political skills. Rishi Sunak, who has just become the new leader, does not even come close to fitting this bill.  

The writer thinks Sunak will not last till Christmas, which implies he will give close competition to Truss! Well, we'll wait and see.

Ukraine escalation spells gloom for world economy

 The escalation in sanctions against Russia, including a price cap on oil and a possible cap on gas prices, means more trouble for the world economy and especially for the economies of Europe. On top of that, Ukraine has launched counter-offensives against Russia in the north and the south. The Russians cannot be expected to take that lying down.

So, the outlook for the world has worsened in recent days. But it doesn't look as though the world's leading stock markets have noticed. Do they know something that the world's leading agencies, including IMF and World Bank, have missed.

My article in BS today, Global outlook grows murkier after Russian setback

FINGER ON THE PULSE
T T RAM MOHAN

Global economic outlook grows murkier after Russian setback

As Ukraine escalation raises the risk to global economy, it is time to hunker down for the rough ride ahead

“We are at war”, says French President Emmanuel Macron.” German Chancellor Olaf Scholz sounds only a little less sombre. “We live in serious times… but we are prepared”. After more than six months of relatively low-intensity warfare in Ukraine, there is the prospect now of a substantial escalation on both the economic and military fronts. That bodes ill for the world economy. India’s policymakers need to brace for a rougher ride than thought until recently.

Russia has shut down the Nord Stream 1 gas pipeline that supplies gas to Europe. Last year, the pipeline provided an estimated 35 per cent of Europe’s gas imports from Russia. Russia says that Western sanctions against it make it difficult to ensure effective maintenance of the pipeline. Nord Stream 2, which was due to start supplying gas to Europe in early 2022, faces sanctions from the US and the EU, which make it a punishable offense to utilise the system.  

Russia’s decision to shut down the Nord Stream 1 pipeline came soon after the G-7 countries agreed to impose a cap on Russian oil prices. The G-7 intends to apply the cap to all countries purchasing oil from Russia. How to enforce a price cap in the case of non G-7 economies? The idea is to deny insurance and finance to oil cargoes that are priced at above the price cap that the G-7 will impose.   

. The EU is contemplating a cap on the price of gas imported from Russia as well. The West contends that it has little alternative given the steep rise in gas prices. Speaking at the East European Economic Forum earlier this month, Mr Putin explained that the West had only itself to blame for the spiralling price of gas. 

Mr Putin said that Russia had long tried to persuade the EU and other buyers to enter into long-term contracts for gas— at one point, Russia was negotiating the supply of gas at $100 per 1000 cubic metres. After the Ukraine conflict erupted, Ukraine chose to shut down one of the two gas pipelines passing through it. Poland sanctioned the pipeline passing through Poland. For these and other reasons, gas prices have climbed to $3,000 per 1000 cubic metres. 

The EU now thinks price caps on Russian gas are the answer. Mr Putin has warned that price caps would amount to violation of contractual obligations and Russia would not hesitate to cut off all energy supplies — gas, oil, coal and fuel oil — if that happened.  

As though the escalation in the economic war was not bad enough, there has been a change in the military situation on the ground. Until a few days ago, the general sense was that the war of attrition of the past several months would continue. The Ukrainian counter-offensive in the Kharkiv region in the north and in the south has changed perceptions. Ukrainian claims about territory regained need to be taken with the proverbial pinch of salt —the government in Kyiv is known to make exaggerated claims in order to sustain the flow of arms from the West.

Nevertheless, it is clear that Russian forces have been dealt a blow in the north. This has triggered nationalist outrage in Russia and scathing comment from sections of the Russian media. Russia has responded by pounding the eastern region of Ukraine with missiles, causing power blackouts in several parts.  

Russia has thus far contented itself with launching what it calls a “special military operation”, intended mainly to protect lives in the two provinces in eastern Ukraine that have declared independence. But increased Western military support to Ukraine and setbacks on the ground for Russia have prompted calls for a radical change in  Russia’s approach. Mr Putin is under pressure to deliver a knock-out blow by bringing the full might of Russia to bear on Ukraine. Prospects of a negotiated peace have seem very distant now.

These developments render the global economic outlook murkier. The International Monetary Fund (IMF) had projected global economic growth of 3.2 per cent for 2022, down from 6.1 per cent last year, and at 2.9 per cent in 2023. That was the baseline scenario. 

The IMF had also looked at an alternative scenario in which Russian oil exports fall by 30 per cent relative to baseline, Russian gas exports fall to zero and inflation expectations become more elevated. Global growth in that scenario drops to 2.6 per cent in 2022 and 2 per cent in 2023.  The EU would bear the brunt of the shock with growth in the EU being near zero.

That scenario, which would place global growth in the bottom 10 per cent of outcomes since 1970, does not appear far-fetched now.  The changed outlook will increase uncertainty over the conduct of monetary policy in advanced economies —to hike or not to hike policy rates will be a difficult call (except, perhaps, in the US).

How does India respond to increased uncertainty about  global growth prospects? First, it is unrealistic to expect exports to be a key driver of growth in today’s troubled environment. The decision to walk on two legs — to push exports where possible and also promote indigenous production through modest protection and subsidies — is an experiment worth persisting with.

Secondly, it is not advisable to allow the exchange rate to depreciate too steeply and bear the full impact of the shock in the hope of benefiting from a rise in exports. In a crisis such as the present one, the dollar is the default option for investors. Net foreign institutional investor (FII) flows have turned positive in July and August. Too steep a depreciation in the rupee with respect to the dollar could lead to a swift reversal of this trend. The Reserve Bank of India must continue with careful management of rupee depreciation. 

Thirdly, embarking on “big bang reforms” at this point, as many urge, would be unwise. We do not need political turmoil in the country to add to the grim global outlook. We need instead to hunker down for the rough ride ahead. 

 

 

Management consulting firms hike pay for new MBA hires

 This item should tickle the present batches at the top IIMs.....

 McKinsey, Bain and Boston Consulting Group have unveiled one of the biggest rounds of pay rises for new hires in more than two decades, as inflation, booming demand for advice and a tight labour market force the trio of consultancies to compete harder for talent. The firms, which do not publicly disclose their pay scales, will increase annual base salaries for MBA graduates in the US from $175,000 to between $190,000 and $192,000, according to people familiar with the matter. Top performers will be in line to receive more than $250,000 in their first year when performance-related and signing bonuses are included.

 The hope must be that these firms will want to likewise hike pay for recruits in India.

Freebies: Supreme Court frames questions

The Supreme Court has decided to refer the freebies matter to a three-judge bench. Earlier, it had been inclined to constitute a committee of experts on the subject. Now, that is one of four questions put to the three-judge bench. The questions:

1. What is the scope of judicial intervention? 
2. What should be the composition of the expert panel to examine the issue? 
3. Can the court pass any enforceable order? 
4. Whether Subramaniam Balaji vs Government of Tamil Nadu judgment needs reconsideration?

In Subramaniam Balaji vs Government of Tamil Nadu, the petitioner had challenged the decision of the DMK government in Tamil Nadu to distribute colour TVs to identified individuals. The petition was dismissed by the Madurai High Court in 2007. In 2011, the same petitioner approached the High Court with a prayer to restrain the AIADMK government from distributing freebies such as mixies, grinders, electric fans, etc. The case was transferred to the Supreme Court. In 2013, the Supreme Court dismissed the case saying it had no grounds to interfere.

Question no (3) above was, in a way, addressed by the Supreme Court then. The honourable Court decided it could not issue any guidelines in respect of freebies.

I guess the larger issue that has arisen now is whether political parties can provide freebies in ways that undermine public finances. That seems to to the point addressed in questions (1)  and (4) above. While the grounds on which the SC had ruled in 2013 may be valid, is there a further ground, fiscal responsibility, on which Subramaniam Balaji can be revisited? It's going to be a tough call. 

 

RBI and government of India differences?

The RBI put out a paper on bank privatisation in the RBI Bulletin..  The paper argued that public sector banks (PSBs) have done better on financial inclusion that private banks. It also found that counter-cyclical policy happens better through PSBs, no surprise as they are subject to broad government direction.

On these grounds, the paper argued that 'big bank' privatisation is not desirable, we must hasten slowly. Somehow, the seems to have got interpreted in some quarters as anti-privatisation. The RBI was constrained to issue a clarification. The RBI said the paper does not reflect the views of the RBI. It also said that "instead of a big bang approach, a gradual approach as announced by the Government would result in better outcomes", which is correct. 

Any controversy over the paper is entirely avoidable. 

There is another issue, however, on which there appears to be a difference. The RBI put out a discussion paper seeking views on the question of charging for UPI payments. The government clarified promptly that "UPI is a digital public good with immense convenience for the public and productivity gains for the economy. There is no consideration in Govt to levy any charges for UPI services.".