PM Modi’s Big Boss House!

Dear Reader,

Hi! When PM Modi hosted industrialists and bankers at 7 RCR, I couldn’t help thinking of the Big Boss House with the dramatic inmates! Well, so I created a satire piece out of this, which appeared today in my column titled “Tweakonomics” in the Hindu Business Line. You can read it directly at http://www.thehindubusinessline.com/opinion/columns/pms-big-boss-house/article7633818.ece or you can see it here. Enjoy! And do post in a comment with your views!

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September 8, 2015. There was a flurry of activity at 7, Race Course Road. After all, PM Modi had decided to host the Big Boss show in his own house. The who’s who of industry, banks, industry associations, ministries, mutual funds and the RBI would be called in as inmates. The event was bound to be full of masala and histrionics.

Inmate selection had been a nightmare. Cyrus Mistry had been extremely ruffled by the huge outlays that Big Boss had promised on roads and infrastructure in the last budget. “After all the pain we took to create a toy car which can navigate all the potholes! This guy is going to kill my small car business!” Even after 10 phone calls from the PMO, the man refused to attend. It was only after FM Arun Jaitley cleverly pointed out that there is a difference in outlay on roads and laying out the road that Mistry came to the House.

Sunil Mittal pooh-poohed the whole idea of having a physical meeting in digital India and offered 5G connections to ModiG. “What an absurd idea!” remarked Kumar Mangalam Birla, deciding to nominate the Airtel candidate for eviction immediately.

“Hehehe. Do what you will, guys, but end of the day, there’ll be only one winner. RIL.” That was Mukesh Ambani, the one inmate who had immediately accepted the Big Boss’ invite. He had already won several Big Boss seasons. Mallya did not have dates in his calendar and was not invited.

Culinary conundrum

There was a big issue over who would cook. Chief Economic Advisor Arvind Subramanian, having established himself firmly in the culinary department with the introduction of JAM (Jan Dhan, Aadhar and Mobile scheme) in the Economic Survey, was called in to cook up some steam in the stale economy. Pancake would be cooked by Panagariya, the other Arvind. Minister Goyal, the “power” factor, was jealous of Minister Dharmendra Pradhan, whose job of supplying oil at low prices was being undertaken by the Saudi Prince himself.

The Governor of the People’s Bank of China Zhou Xiaochuan was invited as the firang guest. However, he cleverly declined seeing that the mutual fund inmates had donned “khali” looks at the mere mention of yuan devaluation. It is a nice game of thrones, thought Big Boss, with the policy team at loggerheads with implementation. “Take risks!” he boomed and the game began.

The games begin

RIL wanted all taxes to go; no I-T, no MAT, and certainly no GST. It also demanded no SIA and no ecological assessment when it acquired land. FM Jaitley, startled at such extreme demands, remarked that Mukesh needs to be the next FM. Mutual funds wanted bears out of the house. The bears said volatility needs to be evicted. The industry pointed fingers at banks for keeping rates so high. SBI chief Ms Bhattacharya bristled visibly and asked why the inmates had taken loans they couldn’t repay.

“But why don’t you reduce interest rates?” There was a sudden silence as Big Boss spoke. Ms Chanda Kochhar delicately looked at her empty glass. “No liquidity, Big Boss.” RBI Governor Raghuram Rajan, who was brought in to keep “interest” on the show high, started uncomfortably. No matter how slowly the government moves on critical infrastructure, he knew that eventually his interest rate policy would be blamed for the slow pace of investments. “The weak transmission,” he began but was shouted down by the other inmates. The show had begun.

Big Boss smiled. He could see his TRPs going up.

 

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Yoganomics!

Dear Reader,

This article appeared in the Hindu Business Line under my column titled “Tweakonomics.” You can see the article directly at http://www.thehindubusinessline.com/opinion/knotty-problem/article7339329.ece. Enjoy!

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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.

 

 

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.