Dear Reader,

This article appeared in the Hindu Business Line under my column titled “Tweakonomics.” You can see the article directly at Enjoy!


Sigh! This International Yoga Day is really getting to the economists. The closer it gets, the more hassled they look.

And now that it’s here, even as the world celebrates the uplifting art and science of the body and the mind, the economists will be seen frozen in a corner, with numb bodies and dumb minds. Why, you may ask. Why, you may wonder. Why, you may well say with that snooty indifference which only muggle non-economists can have.

It’s simple. Our hopes stand crashed. We were told that Yoga is the most generic solution to any problem, personal or interpersonal. But we have been conned. And we are now sore as hell. Because it looks like Yoga does offer solutions to all types of issues, so long as they are not of the economic type. The UN Secretary General Mr. Ban Ki-Moon (BaMo) says that the singular act of getting the tree posture (Tadasana) right gave him that “simple sense of satisfaction” of having set the world right. Just try getting that GDP series into the tree posture.

So, imagine, how Baba Ramdev would react on seeing the GDP growth series. OMG! That would be like seeing a seriously distressed patient, with pathetic levels of energy. “Anulom Vilom!” The commanding voice will bark and while all 3500 participants at the Nehru Stadium will demonstrate the sharp intake of the breath, the GDP series will give out a huge sigh and continue on its way out of the stadium, looking more depressed than usual.

Send in the WPI. Hell lot of negativity all over. The Ramdev solution? Immediate pranayam to get the positive vibes back into the series. The entire RBI is now breathless doing Pranayam for the past 6 months, but WPI hain ke manta nahi. Perhaps the right thing is to get the Arabs into Pranayam mode, so that they’ll not swamp the markets with crude.

And just look at the exchange rate series. Like a temperamental artist, it goes all over. It’s so volatile, surely Yoga can help us to calm down this hyper energetic model? “Padmasana!” says the Master. The Lotus will help to stabilize the exchange rate. Really, now. Ahm, that’s too politically correct, isn’t it? No, let the exchange rates dance their zumba.

Baba will have to really think when he sees the interest rate though. Firstly, there’s a schizophrenia issue. Sometimes, the series is a repo, at times it can convert itself into lending rates, and sometimes it dons on an international personality like the LIBOR. “Shavasana!” The posture of the dead body. The classic remedy to calm down mental issues. But surely, we can’t afford a lifeless interest rate, can we? They have been in a dead state in Japan for nearly 15 years now and still the gloom persists.

Further, this is a series that is not in great form physically either; it’s seen too many surgeries for its own good. It is sometimes raised to a great height and pegged to a target and then slashed. Hmm, post-surgical Yoga. Tricky, this one. But no problem. We have a solution, says the Master. “Ardha Titaliasana!” The butterfly posture. But that is recipe for chaos theory. Fluttering of a butterfly in Indian banks causing a storm in businesses, you see. Thanks, no thanks!

Bring in those tricky blighters. The fiscal deficit and public debt. The sweetmeats you consume everyday and the total added up weight of the body. The diagnosis is immediate. Obesity. “Shirshasana!” The headstand. And view everything upside down, eh? And then you’ll claim that economists are freaks and need Yoga to calm down.




My Choice, says the RBI!

My repo, my CRR, my choice. Not to offer a rate cut, even if the corporate spirit roams unrevived.

My choice, to be size 7.5% or a size 4%. They don’t have an optimum interest rate size, and they never will. To use CRR or the repo to trap inflation is to believe that you can halt the expansion of monsoon induced prices. Or capture growth in the palm of your hand.

Growth is caged, let it free. Interest rate is not; let it be. My choice. To cut or not to cut. To have a rate cut before policy review, out of review or not to review at all. My choice.

To cut temporarily, or to cut forever. My choice.

To use the CRR or the repo, or both. Remember, the cut is my choice. I am not your privilege. The PDMA to be created, the Monetary Policy Review Committe to be set up, adding your inflation target to mine, they’re all ideas and can be replaced- My commitment for inflation control cannot, so treasure that.

My choice; to declare a review every month. Don’t be upset if I don’t do a review every month. Don’t be fooled if I give a review every week.

My choice, to support growth or not. To pick it up from 2 trillion dollars or not. So don’t get sassy. My inflation control might be your pain; my steadfast rates, your bane. My order, your anarchy. Your sins, my controls.

My choices are like my fingerprints. They make me unique.

I am the central bank of this country. I am the emerging market, not the globe. You are the emerging market. Wake up. Get out of the stagflation storm. I choose to empathise. Never indifferent. I choose to be different. I am the currency. Infinite in every direction. This is my choice.

80 years of RBI operations…The boot on the other foot

So there was this lady, who needed to be fitted with new shoes. We’ll be the left, said the newly formed Government in 1947 and we’ll give you the right one (pun intended absolutely, in every which way) in a couple of years time. But the right one exists already. From 1935 itself. Yeah, sure, said the left indignantly, but it needs to belong now to the rightful (I mean…leftful) Government! Let’s nationalize it…hmm..all shares in the capital of the right were transferred to the left and the right was created so that it would walk the same way as the left. The left would reverse its stance; the right was to reserve judgement. The left would sometimes be undependable; the right was bank-able. The left was left, and the right..well, right.

Right, so we go on…

So they walked their lady, her Achilles Heel being the left one. The lefty was the one with lofty ideas. Lets adopt a socialistic pattern of society and create equitable, Russian kinda footprints on the sands of time. So the lady swerved left and for the next 30 years walked into huge capital intensive steel mills and a fiercely protected industrial structure in front of her. She socked trade and tied her laces more securely against those dainty western ideas. The right lagged behind, dragged into the dance of the left. The left wanted to create this grand growth math; the right was just correcting the inflationary aftermath. The left created deficits; on the anvil of the right were the tools of CRR and SLR.

And in 1978….the lady looked a bit north east and saw these HUGE Chinese boots left behind by Mao. Around those shoes were equitable and negligible small footprints belonging to the populace of one of the most populated country in the world. It doesn’t matter that one is hungry; so long as all are hungry. Surely these are not the equitable footprints I wanted, she thought. And then she looked to the South East…and saw those laces were coming undone. The original Russian shoes were in tatters. The left shoe realized that the time has come to change the step. And, in 1991, even as the lady groaned and moaned taking only 3 steps at a time, the left changed sides and became the right. The original right was delighted; now they could walk together! Walking together did change things; they were now averaging 7, sometimes 8 steps at a time…

2008..Only housing rubble as far as the eye goes. Every step the lady took, there was a resounding gravelly liquidity crunch under those shoes. The left turned right Government now wanted to go extreme right. Maintaining 8 steps was crucial, a national priority. True, said the original right; but our steps fall on dry roads. There’s no monsoon, there’s high inflation, let’s slow down a bit. So the left-turned- right danced a hop with 8 steps and the right-always-right tried to slow down the rhythm a bit. The lady didn’t quite know what to do, with both feet marching her away into different paces; a jig, a walk, fast, slow, excited, sedate…7, 6, 5 steps was where she could manage.

Oh, we will walk alone if we have to, said the left-turned-right haughtily and forced the right-always-right to change material. So they got IMF-cut leather for the shoe and it now shined intellectually and calmed down everyone with its inherently good common sense and communication. However, it essentially continued to bring inflation to heel. IMF cut leather with new nails became something of a warrior. Our nails are neither hawkish nor dovish, it said. We have owl-like, see-by-night wisdom nails fitted into our system, it said. In the meanwhile, those left-turned-right silent shoes also changed fabric and donned on modi-fied textures, a tad saffron, but increasingly fashionable and with lot more squeak than before. Oh, the saffron fashionable and IMF shiny will ne’er ne’er get along, seemed the popular refrain. But time and again, they tried to create one common rhythm, one common pace…and steadily, it looked like the lady would get her glint back in the eyes.

The left-turned-right promised that we won’t swerve too much to the right. That particular number is popularly called the FRBM. And asked the right-always-right to also commit to a manageable dance. A targeted dance.

And today, whilst celebrating 80 years of being the always-right-right, the left-turned-right gave impassioned speeches on what is now expected so that the always-right can be always right in the future as well. What’s this? Is the right-always using firang paper in its moneyed lining? That is so unlike what the Mahatma would like. Lets use Make-in-India lining to boot up this system. And, it said, do the increasing number of farmers’ suicides not shake the very soles of the always-right-rights? They ought to. Let the right put its footprints everywhere in the villages so that these suicides can stop immediately.

To blame slow growth on the poor soles of the always-right, I can understand. But to now hold them responsible for farmer suicides as well…sure knocked my socks off, that one.

A brainstorm on the macro framework in Union Budget

Indians have been dished out almost every kind of budget possible till date- the populist, the inflationary, the reformist, the growth oriented, the politically savvy and the market friendly. Arun Jaitley’s first full budget for FY16 was one that was not privy to getting contained into any of these formats. There was a definite vision that the FM and/or the PM and/or the NDA seemed to be finely tuned in to; the delivery of the budget seemed to suggest to me that the exercise was but one more step ahead towards a broader framework. This, to my mind is a big plus, though there were SO many things I wished he would have done differently. 6.5 out of 10 (and that too because I am feeling generous) for a budget I don’t know how to classify. Here’s why:

I have always maintained that the first thing to watch out for in a budget is whether the growth rate is realistic. That forms the backbone of budget analysis. Now, the 8.1% growth estimate on the GDP at market prices (at about Rs.106 lakh crores for FY16) seems to be a bit on the optimistic side. The moment we assume very high growth rates, we are assuming a robust tax income for the GOI. The Achilles heel of EVERY budget is that tax revenues are subject to realization of growth rates but expenses like subsidies and salaries take off like clockwork. Should we fumble on growth, the deficit widens maddeningly, or infrastructure spending takes a hit, propelling us into the well known higher interest rates and/or higher inflation or lower growth whirlpool.

The Finance Commission seemed to already have set pace towards a conservative fiscal deficit target. The Commission had given a target of 3.6%, which seemed to be restrictively oriented towards containing expenditure even when the underlying inflation numbers were so very benign. Apart from the Finance Commission, the rating agencies also seemed to be rather hawk toned about fiscal prudence targets. Now that itself is problematic, since a lower fiscal deficit target implies lesser spending and hence lesser growth. The Budget delivered by the Modi Sarkar does not go all the way upto the 3.6% target but does set for itself a 3.9% fiscal deficit target; the extra fiscal room of 0.3% that it gets will be completely used in terms of infrastructure spending. As I have been arguing earlier too, it is the quality rather than the quantity of the deficit that will matter. It is disappointing to my mind that of the 3.9% fiscal deficit target, 2.8% will get created on the revenue or operational side, leaving very very less room to spend on critical infrastructure.

The FM mentioned that he was spending Rs.70,000 crores more on infrastructure than the last fiscal. He also mentioned in the same breath that this definitely would not be enough. Even as he was talking, my mind went back to the basic GDP equation: GDP = C+ I+ G+ NX. This equation helps us to understand that the chief drivers of expenditures in an economic system are the consumers, the businesses, the Government and the foreign agents. Now, the very idea of a Governmental spending program is that you create growth and multipliers by emphasizing the G part of the story. But, the Jaitley budget seemed to be oriented towards a situation, where the Government would act not as the creator, but the enabler of growth. So, while G would not be spectacular, it would create frameworks for C and I to grow robustly.

Towards this end, a particular statement of the FM seems relevant. He mentioned that a controlled spending program of the GOI would propel us towards fiscal discipline, which would go a long way in keeping the inflation part of the story rock steady in this fiscal and this, if anything could prompt the RBI to cut rates to propel private investments. So, if he is pushing in Rs.70,000 crores over and above last year on infrastructure, he hopes that the rest will come in from the private sector or from PPPs, spurred by a cut in the interest rates.

However, there are FOUR issues here that trouble me. First, does a lower fiscal deficit always translate into lower inflation? In the past 5 years, India seems to have rather imported her inflation from oil and climate change and food and trade. I am NOT arguing that there is no case for fiscal prudence; but to assume that this necessarily will create a low inflation climate in India seems to my mind, a bit premature. Second is even more dicey. Will the RBI cut rates if inflation remains steady? Or will it choose a more medium term cautious stance by looking at climate uncertainties and oil corrections? Dicier (if there is such a word), does the reduction in policy rates pass through into a reduction in lending rates, given the issues with the monetary transmission mechanism? And the trillion dollar question, if at all we get a lower interest rate climate, is the industry going to quickly ramp up on its investments? If the IIP data is anything to go by, we are not really looking at a uber-excited industry. There are other nuts and bolts that will have to be tightened before the industry will invest more. Till such a time that we do not get clarity on land acquisition issues, environmental clearance issues, dispute settlement bodies for stalled projects, its highly unlikely that the industry will react massively to an interest rate cut. It has been assumed in the budget calculations that these links work, they work robustly and hence, even if the Governmental spending program takes a back seat, the monetary policy will work as a driver of growth for India. But, its been a while since we’ve seen robust monetary transmissions in India and hence I felt, that the budget was excessively positive on private sector participation prospects. This is where the FM loses yet one more point.

Another interesting (or perhaps plain spooky) aspect of the budget was the number of times he mentioned that he had less fiscal room since he was sharing so much more tax revenue with the states. But, is he? Now funnily, of the total revenue that the Center earns, around 62% gets shared with the states. This is in the form of taxes, grants and special grants. This year, of the total revenue he earns, he is going to be sharing about 64% with the states, which is only 2% higher as compared to last year. However, inside the 64%, he will have to share more in the format of taxes and lesser in the format of subjective grants. Now, if one only looks at the tax share, we get a feeling that the states are being 42% share in taxes this year as compared to 32% last year, which is one HUGE jump. But, actually, he will compensate higher tax share with a lower grants share and so, that way the fiscal room has not been compromised too much. Despite this, the underlying tone of bettered center state fiscal management was very much a part of the budget talk and I felt that the idea was that whatever is the shortfall in the infrastructure spending from the Center could be made good via much higher spending by the states (though how is an issue, given that their fiscal room has increased only on paper and in reality they are as fund strapped as before!)

The Economic Survey of India (ESI) released yesterday spoke about the vision of the GOI being one of “creative incrementalism”, and I think that set the tone for today’s budget in a macro sense. That growth will have to be created incrementally is a given, but perhaps the FM is trying to creatively get other sectors inclusively into the loop, rather than be the chief growth driver himself.

Despite all the above points, I think that there are definite points that are coming through as stylized initiatives of the NDA. The references to JAM (Jandhan, Aadhar and Mobiles) as a way of targeting the subsidies better, the increased focus on women or the girl child, huge mentions of Swachh Bharat as not only a sanitation scheme but a bigger health program, the emphasis on affordable housing for the people, jobs for youth, insurance for all, higher benefits for old age security all seemed to be moves in the correct direction. There has been concentrated effort on a few of these flagship schemes and the budget did its bit to re-iterate that commitment financially.

So, was this populist? No, definitely not. Was this growth oriented? Umm, in a limited way. Was this politically motivated? Naah, no. From a macro policy perspective, its a budget that really delivers a mixed bag. Hopito ergo sum. I hope, therefore, I am.