India has an economic growth problem

As 2019 has developed we have been noting the changes in the economic trajectory of India. Back on October 4th we noted this from the Reserve Bank of India as it made its 5th interest-rate cut in 2019.

The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

This was in response to this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

For India that was a slow growth rate for what we would call the second quarter as they work in fiscal years.

What about now?

Friday brought more bad news for the Indian economy as this from its statistics office highlights.

GDP at Constant (2011-12) Prices in Q2 of 2019-20 is estimated at `35.99 lakh crore, as against `34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent. Quarterly GVA (Basic Price) at Constant (2011-2012) Prices for Q2 of 2019-20 is estimated at `33.16 lakh crore,
as against `31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent over the corresponding quarter of previous year.

The areas which did better than the average are shown below.

‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ ‘Financial, Real Estate and Professional Services’ and ‘Public Administration,
Defence and Other Services’.

The first two however slowed in the year before leaving us noting that the state supported the economy as you can see below.

Quarterly GVA at Basic Prices for Q2 2019-20 from this sector grew by 11.6 percent as compared to growth of 8.6 percent in Q2 2018-19. The key indicator of this sector namely, Union Government Revenue Expenditure net of Interest Payments excluding Subsidies, grew by 33.9
percent during Q2 of 2019-20 as compared to 22.2 percent in Q2 of 2018-19.

Regular readers will not be surprised what the weakest category was.

Quarterly GVA at Basic Prices for Q2 2019-20 from ‘Manufacturing’ sector grew by (-)1.0
percent as compared to growth of 6.9 percent in Q2 2018-19.

Also those who use electricity use as a signal will be troubled.

The key indicator of this sector, namely, IIP of Electricity registered growth rate of 0.4 percent during Q2 of 2019-20 as compared to 7.5 percent in Q2 of 2018-19.

In terms of structure the economy is 31.3% investment and 56.3% consumption. The investment element is no great surprise in a fast growing economy but it has been dipping in relative terms. The main replacement has been government consumption which was 11.9% a year ago and is 13.1% now as we get another hint of a fiscal boost.

Switching to a perennial problem for India which is its trade deficit we see that it was 3.8% of GDP in the third quarter of this year. That is a little better but there is a catch which is that it has happened via falling imports which were 26.9% of GDP a year ago as opposed to 24% now. So another potential sign of an internal economic slowing.

We can move on by noting that this time last year the GDP growth rate was 7% and that The Hindu reported it like this.

Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%, the government announced on Friday.

The lowest GDP growth in six years and three months comes as Parliament has been holding day-long discussions on the economic slowdown, with Union Finance Minister Nirmala Sitharaman assuring the Rajya Sabha that the country is not in a recession and may not ever be in one.

4.5% growth is a recession?

Unemployment

The numbers are rather delayed am I afraid leaving us wondering what has happened since.

Unemployment Rate (UR) in current weekly status in urban areas for all ages has been estimated as 9.3% during January-March 2019 as compared to 9.8% during April- June 2018.

Inflation

This has been picking up as the Economic Times reports below.

Inflation touched 4.62%, according to the data released by the statistics office on Wednesday, compared to 3.99% in the month of September. Inflation, as measured by the Consumer Price Index (CPI), was 3.38% in October last year.

Sadly for India’s consumers and especially the poor much of the inflation is in food  prices as inflation here was 7.9%. Vegetables were 26.1% more expensive than a year before and it would seem the humble onion which is a big deal in India is at the heart of it. From India Today.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

For those wondering about any inflation in pork prices then the answer is maybe.The meat and fish category rose at an annual rate of 9.75%.

Manufacturing

We noted in the GDP numbers that there was a fall but this seems to have sped up at the end of the quarter as it fell by 3.9% in September on a year before driven by this.

The industry group ‘Manufacture of motor vehicles, trailers and semitrailers’ has shown the highest negative growth of (-) 24.8 percent followed by (-) 23.6 percent in ‘Manufacture of furniture’ and (-) 22.0 percent in ‘Manufacture of fabricated metal products, except machinery and equipment’ ( India Statistics)

Fiscal Policy

From Reuters last month.

After the corporate tax cuts and lower nominal GDP growth, Moody’s now expects a government deficit of 3.7 per cent of GDP in the fiscal year ending in March 2020, compared with a government target of 3.3 per cent of GDP.

Also there is this from the Economic Times.

In India, private debt in 2017 was 54.5 per cent of the GDP and the general government debt was 70.4 per cent of the GDP, a total debt of about 125 of the GDP, according to the latest IMF figures.

The ten-year bond yield is 6.5% showing us that India does face substantial costs in issuing debt.

Comment

We get another hint of the changes at play as we note this from the Reserve Bank of India in November and note that the result was 5%.

For Q1:2019-20, growth forecast was revised
down from 7.2 per cent in the November 2018 round
to 6.1 per cent in the July 2019 round.

As we look forwards it is hard to see what will shake India out of its present malaise.Of course if the daily news flow that the trade war is fixed ever turns out to be true that would help. But otherwise India may well still be suffering from the demonetarisation effort of a couple of years or so ago.

After the falls of last year the Rupee has been relatively stable and is now at 71.6 versus the US Dollar. A lower Rupee is something which gives with one hand ( competitiveness) and takes away with another ( cost of imports especially oil). But as it starts its policy meeting tomorrow the RBI will feel the need to do something in addition to changing its fan chart for economic growth ( lower) and inflation ( higher) giving us what is for India something of a stagflationary influence.

Podcast

 

 

The story of India, its banks and five interest-rate cuts in a year

This morning has brought us a reminder of what has become one of the certainties of life. Oh for the time when we thought they were simply death and taxes whereas now we can add interest-rate cuts to this list. So without further ado let me look to thw sub-continent and had you over to the Reserve Bank of India,

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 4, 2019) decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 per cent from 5.40 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.
The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

As you can see the 0.25% interest-rate cut has been accompanied by some Forward Guidance of more being on the way. This is another reminder of my point earlier this week that central bankers are pack animals as to any impartial observer the whole concept of Forward Guidance has not worked or we would not be where we are. Still it does flatter central banking egos and make them feel important. After all it was only on the 4th of April I was pointing out they were telling us this.

The MPC also decided to maintain the neutral monetary policy stance.

Now I do not know about you but five interest-rate cuts in a year only three-quarters finished does not especially look neutral to me. So they were certainly not singing along with the Who.

I can see for miles and miles
I can see for miles and miles
I can see for miles and miles and miles and miles and miles
Oh yeah

Indeed there was dissent back then about the rate cut.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

Furthermore it is worse than this because when I have contact with central bankers and point this out I do get the reply that it does not matter if Forward Guidance is wrong. This proves that the thin air up in top of their Ivory Towers does affect the brain.

What has caused this?

We have another reminder of central bankers being pack animals. What is Indian for Johnny Foreigner anyway?

Since the MPC’s last meeting in August 2019, global economic activity has weakened further……..The macroeconomic performance of major emerging market economies (EMEs) was weighed down by a deteriorating global environment in Q3…….worsening global growth prospects.

You could circle the world via central bankers doing this but would then be reminded of the wisdom of Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from

In terms of the domestic economy there was this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

So we are reminded of a couple of things. In addition to the slowing growth we have the fact that 5% GDP growth is considered slow in India. Oh and they mean second quarter as it is slightly unusual to present the numbers in a fiscal year style.

Now the central banking Johnny Foreigner facade crumbles away.

Of its constituents, private final consumption expenditure (PFCE) slowed down to an 18-quarter low.

So the weakness was mostly domestic after all. Perhaps they were hoping no-one would read this far down the report.

You will not be surprised to learn that there was also an issue here.

Industrial activity, measured by the index of industrial production (IIP), weakened in July 2019 (y-o-y), weighed down mainly by moderation in manufacturing. In terms of uses, the production of capital goods and consumer durables contracted……… The Reserve Bank’s business assessment index (BAI) fell in Q2:2019-20 due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins of the surveyed firms.

Also this is hardly hopeful.

The sales of commercial vehicles, a key indicator for the transportation sector, contracted by double digits in July-August.

Meanwhile as this is India there is also a reflection on the Monsoon season.

Abundant rains in August and September have led to improved soil moisture conditions in most parts of the country, particularly central India, compared to the corresponding period of the last year. Overall, the prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.

Some Perspective

The Statistics Times has crunched some numbers so let us start with a perspective on what the growth rate was only recently.

Real GDP or Gross Domestic Product (GDP) at constant (2011-12) prices in the year 2018-19 is estimated at ₹140.78 lakh crore showing a growth rate of 6.81 percent over First Revised Estimates of GDP for the year 2017-18 of ₹131.80 lakh crore.

I often get asked about GNP, well as GNI is the new GNP.

GNI (Gross National Income)  ₹139.32 lakh crore

If we look further back.

In new series, figures are available since 2004-05. GDP of India has expanded by 2.57 times from 2004-05 to 2018-19.

According to IMF World Economic Outlook (April-2019), GDP (nominal ) of India in 2019 at current prices is projected at $2,972 billion. India contributes 3.36% of total world’s GDP in exchange rate basis. India shares 17.5 percent of the total world population and 2.4 percent of the world surface area. This projection would make India as 5th largest economy of the world.

Trouble,Trouble Trouble

One of my earliest themes as a blogger was that central banks have lost control of real world interest-rates.

Monetary transmission has remained staggered and incomplete. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. However, the WALR on outstanding rupee loans increased by 7 bps during the same period.

In terms of economic theory this is along the lines of what was called Liquidity Preference Theory at least in terms of principles. It is why I think interest-rate cuts below around 1.5% are ineffective and at times can make things worse and not better. We now have a new nuance that due to its unique circumstances India has some features of this at interest-rates of around 5%.

Comment

If we start with an international perspective then we have another week where Australia and India have cut interest-rates. This means that the number of interest-rate cuts in the credit crunch era must be pushing past 750 confirming my view of them being one of the new certainties of life.

Next comes the issue of “The Precious! The Precious!” which I have avoided so far explicitly although of course regular readers of my work will have spotted the implicit reference via the transmission of interest-rate cuts. Let me make me point with this from the RBI on the 26th of September.

Rumours are being circulated in sections of social media about operations of banks to create panic among the public. All are advised not to fall prey to such baseless and false rumours.

And Tuesday.

There are rumours in some locations about certain banks including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours.

The trigger for this is described by @fayedsouza

The RBI must communicate with depositors 1. When will they get access to their money? 2. How did the bank fraud go unnoticed for a decade? 3. Which other bank fraud have you missed while napping over the last 10 years? #PMCBankScam

 

What to do with the problem that is Germany?

Sometimes we find ourselves facing a situation where we have the equivalent of a drumbeat that goes on and on and on. This has been provided by the surge in world bond markets which has a particular headliner. If we look towards Europe we see that the Federal Republic of Germany has set a new record for itself this morning as its benchmark ten-year bond yield has fallen to -0.23%. So it is being paid ever more to borrow which I will let sink in for a moment.

We can look at this in price terms as the September future peaked at 171.35 earlier today. In itself this provides a perspective because bond contracts are defined around the price being 100, so it has been “Boom! Boom! Boom!” for quite some time for bond investors. More recently there have been ebbs and flows but the present trend started just over three months ago when the future was below 163. For a bond market that is a strong move in such a period so if you have been long then well played to you.

Those who have followed the situation will recall it was considered an issue when the two-year and then five-year yields went negative. So there has been a spread along the maturity spectrum or a type of contagion. It has influenced even the very long term bonds as the thirty-year yield is a mere 0.4%. So pretty much any infrastructure plan looks viable when you can borrow that cheaply.

So let is look at why this is happening?

Germany

The issue regarding the domestic economy was highlighted by the statistics office earlier.

April 2019 (provisional): new orders in manufacturing 
+0.3% on the previous month (price, seasonally and calendar adjusted)
-5.3% on the same month a year earlier (price and calendar adjusted)

What is considered to be the engine of the German economy has been stuttering and it started back in February last year when the growth ended but the real fall began last October when the index was 110.6 ( compared to 2015 at 100) as opposed to the 105.5 of April. Too much precision is dangerous as the numbers are erratic but the detail is not quite what you might expect. Whilst there was a “trade war” effect for a while more recently non-Euro orders have picked up. It has been orders from within the Euro area itself and then declining orders from within Germany that have driven the fall in 2019.

But the economic theme has been of a weak manufacturing sector which has put something of a brake on the overall economy.

The German economy continued to grow at the beginning of the year……The gross domestic product (GDP) increased by 0.4% (after price, seasonal and calendar adjustment) in the first quarter of 2019 compared with the fourth quarter of 2018. The German economic performance last declined slightly in the third quarter of 2018 (-0.2%) and stagnated in the fourth quarter of 2018 (0.0%).

I am not so sure about the “continued to grow” point as it previously stagnated after a contraction. But we get a relevant perspective from this.

+0.7% on the same quarter a year earlier (price and calendar adjusted)

That contrasts with the front page of the statistics office which quotes a 1.4% economic growth rate for 2018. Or the 1.1% growth of the first quarter of 2017 alone.

If we look ahead this week’s business survey from Markit showed that this phase is not yet over.

Business activity in the service sector continues to
grow almost unabated, indicating that domestic
demand conditions remain strong. With the drag from
falling manufacturing production lessening in May,
the Composite Output Index has ticked up, although
it remains in territory historically associated with only
modest growth in GDP.

This was enhanced by this earlier today.

After a solid performance in early-spring, the German
construction sector continued to lose momentum during May, recording its weakest rise in total activity for four months.

External Events

One way of looking at this is simply to note that the Reserve Bank of India has joined the Reserve Bank of Australia in cutting interest-rates this week as we note this morning’s announcement.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.75 per cent from 6.0 per cent with immediate effect.

That adds to the hint from Jerome Powell of the US Federal Reserve and the 3.2% annualised contraction in the economy of South Africa where sadly the electricity blackouts are taking quite a toll. This has been added to by the Markit business surveys.

Global surveys indicated the weakest pace of economic growth for three years in May, with business optimism down to a survey low……….Global at lowest since 2012 with 13 out of 30 countries now in decline. Germany again reported the steepest downturn but, of the largest countries, the biggest change was seen in the US, where the PMI fell to its lowest since 2009 ( @WilliamsonChris )

So we see something of a rhythm section building up for the world economy and hence bond markets although some seem to be struggling to name that tune.

Despite increased international turmoil and reduced market growth, interest rates in Norway are set to rise going forward……….We have assumed three interest rate hikes of 0.25 percentage points by the end of 2022, the first of which is expected in June this year. The interest rate on credit lines will then rise to 3.6 per cent in 2022.

That was from Norway Statistics earlier who also left me wondering if they realised it is June! Anyway if they do as planned they need not worry any more about a weak Krone.

Official Interest-Rates

The Deposit Rate of the ECB is presently -0.4% and more to the point will have been negative for five years next week. Indeed it is set to last according to official policy.

The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary.

I wonder if we are seeing an impact from a principle highlighted by the band Ace so years ago.

How long has this been going on
How long has this been going on
Well, your friends
With their fancy persuasion
Don’t admit that it’s part of a scheme
But I can’t help but have my suspicion
‘Cause I ain’t quite as dumb as I seem

It may be that the length of the period we have had them for has built up the influence on the bond market.

Comment

There is much to consider here and it has been added to by the announcement of 4000 job losses at Volkswagen as I have been typing this. But as well as the obvious domestic issues where we have been seeing a sort of reverse rebalancing there are other factors at play. As well as the domestic issues there are external ones and let me add one more.

This is the issue of investing in what are considered to be safe assets. Let me quickly point out that safety is a relative term but a German economy where the public finances are being run at a surplus and with a falling national debt has attractions. Putting it another way after the purchases of the ECB ( 519 billion Euros) you can make a case for there being a shortage of German bonds. Hence the price has risen with two categories of buyers. Those with nowhere else to go and international investors happy to accept a running yield loss because they have some combination of fear for events elsewhere and hope for appreciation of the Euro.

But there is a catch because monetary policy in Germany as we have observed is and has been extraordinarily loose. Except the economy has plainly slowed making us wonder if that was it?

D-Day75

Perhaps we need to spare a thought for those landing on the beaches in Normandy all those years ago, including my maternal grandfather. We should also be thanking them and note that sometimes we do not know how lucky we are.

 

India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

The banking problems of India are mounting

We in the western world have got used to problems with our banking system but yesterday highlighted that we are far from alone. From the Reserve Bank of India.

The Reserve Bank of India and the Securities and Exchange Board of India are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary.

This morning we have seen the government also trying to calm matters.

MUMBAI: Indian Finance Minister Arun Jaitley said on Monday the government is ready to ensure credit is available to non-banking financial companies (NBFCs), just a day after the market regulator and the central bank sought to calm skittish investors.  ( Economic Times of India).

There are a variety of factors at play here but the common denominator is the shadow banking sector.

Yes Bank

Here there were signs of trouble on Friday as the central bank intervened. From Reuters.

 Indian private sector lender Yes Bank Ltd’s shares tumbled nearly a third on Friday, wiping as much as $3.1 billion off its market value, after the central bank reduced charismatic CEO Rana Kapoor’s term, creating uncertainty about its outlook.

Using the word “charismatic” to describe a banker is a warning sign in itself but events here were being driven by this.

Yes Bank’s bad loans spiked in October last year after a risk-based supervision exercise by the central bank forced the lender to account for 63.55 billion rupees ($881.1 million) more in the non-performing category. Kapoor had termed it a “temporary setback” and said remedial steps were underway.

Ah temporary we know what that means especially in banking circles! Yes Bank is the fifth biggest private-sector bank in India and seems to have fallen victim to the effort described below.

Indian banks have seen a surge in soured loans that hit a record $150 billion at the end of March and stricter rules enforced by the central bank are expected to have pushed the industry’s non-performing loans even higher.

So as we note that Yes Bank had been rather too enthusiastic in living up to its name we see that others were competing with it. Somewhat bizarrely it would appear that the RBI is dealing with the private banks because it feels it cannot do so with the state-owned ones.

Earlier this year, RBI chief Urjit Patel said the central bank had limited authority over state-run banks that account for the bulk of bad loans in the sector, and called for reforms to give the regulator more powers to police such lenders.

State Banks

At a time like this we have learned to be very wary of mergers where the reality is often very different from the claims. From News18.

The merger of Bank of Baroda, Vijaya Bank and Dena Bank by the government poses short-term challenges like spurt in bad assets, but will be beneficial over a longer term, a report said today.

Slippages may increase in the short-term as recognition of non-performing assets is harmonised and accelerated, India Ratings said in a note.

By contrast The Times of India appears to have taken up cheerleading.

Made in Baroda, now poised to merge and take on the world

Infrastructure Leasing & Financial Services Ltd

This morning the focus is especially on IL&FS which as Bloomberg explains below has been struggling for a while now.

Infrastructure Leasing & Financial Services Ltd. an Indian conglomerate that has missed payment on more than five of its obligations since August, is seeking to raise more than 300 billion rupees ($4.2 billion) selling assets to cut debt, according to an internal memo seen by Bloomberg.

This is a particular problem because as ever with banking issues the fear is of contagion.

Investors are concerned that defaults by IL&FS, which has total debt of $12.6 billion — 61 percent in the form of loans from financial institutions — could spread to other shadow banks in Asia’s third-largest economy. The firm, which helped fund India’s longest highway tunnel, hasn’t been able to pay more than 4.9 billion rupees ($68 million) of its obligations this year and has additional dues of about 2.2 billion rupees to be repaid by end of October, according to data compiled by Bloomberg.

If we move to the wider shadow banking sector or as India calls them non banking financial companies ( NBFCs) then according to the Economic Times of India we have seen some contagion hints.

The sell-off was sparked by news that a large fund manager sold short-term bonds issued by Indian NBFC Dewan Housing Finance Corp at a sharp discount, raising fears of wider liquidity problem among NBFCs.

DHFC was as high as 679 Rupees at the beginning of the month but in spite of a bounce back rally today it is now at 400.

Bad Debts at Indian banks

The Financial Stability Report of June 26th posted a warning shot.

The stress in the banking sector continues as gross non-performing advances (GNPA) ratio rises further……. SCBs’ GNPA ratio may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019………… eleven public sector banks under prompt corrective action framework (PCA PSBs) may experience a worsening of their GNPA
ratio from 21.0 per cent in March 2018 to 22.3 per cent, with six PCA PSBs likely experiencing capital shortfall relative to the required minimum CRAR of
9 per cent.

Sorry for all the acronyms and SCB stands for Scheduled Commercial Banks.

As Reuters reported in May perhaps more of this will be needed.

 When the Indian government announced a surprise $32 billion bailout plan for the nation’s state-controlled banks last October, credit rating firms and the nation’s central bank saw it as a huge step to getting the industry back to robust health – and lending more to businesses and consumers.

Yet the reality as you will have seen already has been one of disappointment.

House Prices

There has been some extraordinary action here in the credit crunch era. According to the RBI house price growth averaged around 15% between 2011 and 2017. Prices are around two and a half times what they were at the beginning of that period. So you might think that the banks are safe. But maybe the times they are a-changing as The Hindu reported in July.

Residential property prices have dropped by up to 15 per cent in Mumbai, NCR, Pune and Kolkata in the first half of 2018 despite government incentives and reduced prices as developers battle with unsold inventory that will take another three years to clear up, Knight Frank said today.

We will have to wait a while for the official data but should we see a dip we will find out which lenders were assuming it would only be up,up and away.

Comment

On the face of it the weekend brought some good economic news for India as Fitch Ratings forecast that GDP would rise at an annual rate of 7.8% next year. In what is a poor country in isolation that is very welcome. But the ratings agencies were also optimistic for the western world before our banks hit the “trouble,trouble,trouble” of Taylor Swift.

In terms of bad economic news then it can be encapsulated in the way that Brent Crude Oil has risen above US $80 per barrel this morning. As well as the inflationary impact India is an oil importer so the balance of payments will be hit again by this. No doubt this has been a factor in the weakening of the Rupee through 70 versus the US Dollar (72.6 as I type this) which adds to the inflation problem. Should the RBI respond to this with another interest-rate increase then we see that there is a chain of tightening going on inside India’s financial sector. Can it take the strain?

 

 

 

 

India is counting the cost of its crude oil dependency

Tucked away in the news stream of the past few days has been a developing situation in India. Whilst the headlines have been made by Turkey there have been currency issues in the largest part of the sub-continent as well. Here is DNA India on the subject.

Indian Rupee on Thursday had hit a fresh record low, the Rupee opened at 70.22 versus the US dollar. In wake of the Turkey crisis, the Indian currency started off the session on a weak note. Earlier on Tuesday, after opening at a marginal high of 69.85 against the US Dollar, the Indian rupee touched an all-time low of 70 per US dollar.

The Indian currency touched an all-time low of 70.08 against the US dollar, while marking depreciation of around 10 per cent in 2018.

The fall came majorly due to a drop in Turkish Lira, which helped the US dollar to gained strength on the back of fears that economic crisis in Turkey could spread to other global economies.

In fact it fell to 70.7 this morning versus the US Dollar which is an all time low. Some of the move may have been exacerbated by the issues facing Turkey but over the past couple of days the Turkish Lira has rallied strongly whereas the Rupee has continued to fall. A factor has been the strength of the US Dollar or what is being called King Dollar. This reminds me that themes and memes can change rather quickly in the currency world if we step back in time to the 25th of January.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. The currency’s short term value is “not a concern of ours at all,” he said.

If pressed now I guess the US Treasury Secretary would emphasise this bit.

“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

Returning to the Rupee we see that it had started to fall before the turn in the US Dollar as conveniently it began at the turn of the year when it was at 63.3 versus it.

What are the consequences?

The first is simply inflation or as DNA India puts it.

Continuous downfall in Indian Rupee is worrisome for imported goods as the cost of imports will go up.  Currently, India imports around 80 per cent of its crude requirement. The rupee downfall will expand India’s import bill and will eventually be contributing to the inflation.

This will add to the situation below. From The Times of India.

Inflation based on consumer price index (CPI) for the month of July came at 4.17 per cent, government data ..

That was an improvement and as so often in India the swing factor was food prices.

The food inflation came at 1.37 per cent, driven by cooling of pulses, vegetable and sugar rates.

However a boost is on its way and as inflation is above the 4% target things could get especially awkward should food prices swing the other way.

Interest-Rates

One of the economics 101 assumptions is that higher interest-rates boost a currency but as I warned back on the 3rd of May the situation is more complex than that and Argentina reminded us again by raising to 45% earlier this week. As for India we see this.

increase the policy repo rate under the
liquidity adjustment facility (LAF) by 25
basis points to 6.5 per cent. ( Reserve Bank of India August Bulletin)

That was the second rise this year and these have reversed the previous downwards trend. Of course the problem is that the RBI is perhaps only holding station with the US Federal Reserve.

Intervention

India maintains a sizeable foreign currency reserve which was US $406 billion at the last formal update in March. However it will not be that now if this from Reuters on Tuesday is any guide.

Subhash Chandra Garg, secretary at the department of economic affairs…………said the RBI has spent about $23 billion so far to intervene ..

So we see that the fall has come in spite of intervention which sits rather oddly with the claim from Subhash Chandra Garg that the currency fall does not matter. Also it is usually rather unwise to indicate a currency level as he did (80) as events have a way of making a fool of you.
Anyway using reserves can help for a while but care is needed as quickly markets switch to calculating how much you have left and how long they will last at the current rate of depletion. At that point intervening can make things worse.
Trade
Looking at India’s  domestic economy a clear factor in the currency debate is its trade position. The latest numbers were as highlighted above by DNA India heavily affected by the oil price.

 

Oil imports during July 2018 were valued at US $ 12.35 Billion (Rs. 84,828.57 crore) which was 57.41 percent higher in Dollar terms and 67.76 percent higher in Rupee terms compared to US $7.84 Billion (Rs. 50,565.29 crore) in July 2017.

Such a development feeds into the existing Indian trade problem.

Cumulative value of exports for the period April-July 2018-19 was US $ 108.24 Billion (Rs 7,29,823.08 crore)……….Cumulative value of imports for the period April-July 2018-19 was US $ 171.20 Billion (Rs. 11,54,881.70 crore).

Whilst a little care is needed as petroleum exports grew by 30% overall Indian export growth is on a tear at 14%. Many would love that, but the rub is that not only are imports much larger but due to India’s oil dependency they are rising at an annual rate of 17%. So as we stand things are getting worse and according to Business Standard there is trouble ahead.

India’s crude oil import bill is likely to jump by about $26 billion in 2018-19 as rupee dropping to a record low has made buying of oil from overseas costlier, government officials said today…….. If the rupee is to stay around 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be $114 billion, he said.

Comment

The other side of the coin about the Indian economy was highlighted by the IMF only last week.

India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax. As one of the world’s fastest-growing economies—accounting for about 15 percent of global growth—India’s economy has helped to lift millions out of poverty.

Although developments since the writing of the report may have more than a few wondering about this bit.

India can benefit from improving its integration with global markets.

Perhaps it is a case of Blood,Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round

There was of course the domestic issue created by the demonetisation debacle not that long ago but the real achilles heel for India is oil. Something of a perfect storm has hit it where the oil price has risen by 40% over the past year and more recently that has been exacerbated by a stronger US Dollar.

So both the economic and Rupee issues seem as much to do with energy policy as conventional economics. Can India find a way of weaning itself off at least some of its oil dependency?

Me on CoreFinance TV

 

India gives us an update on the war on cash

A feature of these times is what has been called the “war on cash” It’s proponents argue for it on two main grounds. The first is that cash and in particular large denomination banks notes are used by criminals (especially by organised crime) and terrorists and so eliminating such notes would be part of the various wars against them. Others make the case that we may need to cut interest-rates even further when the next recession arrives which means that even more countries will experience negative interest-rates and that they will go even more negative for those that already have them. Cash is a barrier to this because it provides 0%. Who would have thought that 0% would be attractive? It is of course as Prince would say A Sign O’ The Times.

Of course interest-rates were supposed to go up in a recovery but Michael Saunders of the Bank of England has opened more than one can of worms with this in his speech this morning.

It is fully 10 years since the MPC last tightened monetary policy

India

If we go back to early November last year this happened.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

What was called Demonetisation was publicised as an effort to cut corruption. crime and also terrorism and there was a day to consider it as November 9th was a bank holiday. Also as I pointed out on November 11th it was suggested that it would provide an economic boost.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

There were official claims that around 3 lakh crore or 20% of the currency would not come back and therefore a significant cost would be imposed on the criminal and terrorist worlds.Actually I note that the Financial Times is reporting that there were even more inflated claims.

 

At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy — as the wealthy abandoned or destroyed it, rather than admit to their hoardings — reducing central bank liabilities and creating a government windfall.

 

Not everyone was convinced that it would be that easy including The Times of India.

Firstly, gone are the days when people hoarded wealth in gunny bags full of banknotes. In today’s world, there are refined ways of laundering money or stashing it away in benami properties, offshore bank accounts and foreign currency. Only the small fish keep their ill-gotten wealth in currency and the impact on black money will therefore be very limited in this exercise.

What happened next?

As I pointed out on the 26th of November the initial economic effects were negative and some of them were quite strong.

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%……..Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%.

If we move to overall economic output we see that it in fact slowed. The annual rate of economic growth fell to 6.1% in the first quarter of this year so we can say that it showed no signs of the economic boost promised. As to how much demonetisation contributed to the fall we can say that there were downward effects but as ever it is hard to be precise.

What happened to the cash?

Yesterday the Reserve Bank of India gave its annual report and here is The Times of India on the subject.

The Reserve Bank of India (RBI) on Wednesday said that Rs 15.28 lakh crore –or 99% of the Rs 15.44 lakh crore demonetised by withdrawal of Rs 500 and Rs 1000 notes on November 8, 2016 –has been deposited with banks.

So the promises and suggestions of a large windfall gain for the government via the central bank have turned out not to be true. Seignorage is usually a theoretical number but in this instance it became reality except as we looked at above it was expected to be much more than this. Also according to the RBI there were costs in doing this.

Expenditure on Security Printing and Distribution
VIII.12 The total expenditure incurred on security printing stood at `79.65 billion for the current year (July 2016 – June 2017) as against `34.2 billion
during 2015-16.

More fake notes were uncovered than usual ( 345% up on the previous year) but considering what was taking place the number remained low especially if the rumours about how many fake bank notes there are in India have any basis in fact. As some of the returned bank notes have not been counted yet could we see the number of notes climb to say 101%?

According to The Times of India the official response is as follows.

The finance ministry said the five main objects of demonetisation were: -Flushing out black money -Eliminating fake currency – Ending financing of terrorism and left-wing extremism – Converting the non-formal economy into a formal economy to expand the tax base and employment — Giving a big boost to digitisation of payments to make India a less cash economy

Well I suppose the last bit is probably true but this bit is pretty woeful if we note the government’s previous rhetoric.

The finance ministry said in a statement that the government had in fact expected the bulk of the cash to be returned to become effectively usable currency.

Although no doubt you can define “bulk” in a variety of ways.

Comment

Let me completely support efforts to reduce organised crime and terrorism with the only caveat being that care is needed how you define that. After all an area pretty much ignored by Demonetisation is that a clear example of what many would consider organised crime in recent times has involved the banks. For obvious reasons it is hard to get accurate estimates but it seems likely that “banking crime” exceeds “cash crime”.

Returning to the Indian experience there were clear stoppages in the economy and I speculated on the 11th of November last year on who it would hit the most.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

Also let us remind ourselves that India now has more 2000 Rupee notes which surely will only make the stated objectives harder to achieve. The timeline we now know also perhaps provides insight into the resignation of the previous RBI Governor Raghuram Rajan..

On the other side of the balance sheet then if this claim from the Finance Ministry is true maybe there will be a gain going forwards.

Advance collections of personal income tax showed a growth of 41.79% on August 5 over the corresponding year-earlier period. Personal income tax under self-assessment grew 34.25%.

Having mentioned the Indian railways it reminds me of the impact the Monsoon season has on the ( Monsoon Railway if you have not seen it) and that it has been severe this year. My sympathies to those affected.

Me on Core Finance TV

http://www.corelondon.tv/unsecured-credit-boom-j-curve-effect-uk-not-yes-man-economics/