Monetary Policy Committee - Pre and Post

Monetary Policy committee – Pre and Post

Monetary Policy committee is a new chapter in the illustrious history of RBI functionality. The government has recently appointed a six member committee to assist and take a balanced decision on monetary policy.  Before we submerge ourselves into the detailed reasons behind this move, let us first peep into the relationship between the RBI and the Government. This relationship is basically a union of monetary and Fiscal mastery. Post 70`s worldwide, the duo have worked in tandem but have often been contradictory to each other’s needs. For example, in the case of India, it was post 1990 that fiscal liberalization started inventing measures to improve various economic indicators through effective legislative and administrative actions. The supplement to drive this growth was an ever expanding need of capital. And since then the worded policy and executive action of RBI have become a subject of public scrutiny and legislative supplement.

Worldwide, this mutual relationship has survived with mutual coordination; especially due to the symbiotic nature of economic needs. One of the foremost examples was be the FED decision to continue expanding credit and money supply by lowering rates in response to Ronald Reagan ,the then US President’s call for housing for all Americans. Another equally important development was the emergence of the Euro which is a monetary functionality where different fiscal units despite being sovereign entities decided to forge unity. There are numerous success stories despite hidden fault line and omission.

Coming back to the Indian context, barring a few occasional short lived impasse and verbal insinuations, the RBI and the Government have worked in tandem. The first litmus test happened in the era of ex RBI Governor Mr. Subbarao, who’s passing remark at the time of his retirement speech “I was left alone in my fight to tame inflation…” bemused everybody and explained the nadir of the relation. Similarly discussed insinuations were publicly examined in Mr. Rajan’s period as well. 

Why this? The objectives of both monetary and Fiscal policy are not divergent. Both want high growth, low Inflation, adequate liquidity, low interest rate, stable exchange rate and good employment numbers. But the cycle and time lag is what makes these assessments different bringing in lots of subjectivity into the action.

A carefully drafted RBI policy narrates hawkish underline with liberal action whereas in opposite a dovish worded assertion have been squeezing policy numbers. The impact appears to be contradictory for the businesses and markets.

There has been long demand in India to make the Monetary Policy framing body more democratic with denial of RBI Governor the power of veto to the entire consultancy process. So far all the Governors enjoyed this institution endowed superiority and went against popular market, business or fiscal preferences. Many a developed countries have gingerly diluted this either by making it more democratic or transparent. We finally have allowed the ice to melt and now we have six member bodies in monetary policy committee to spell out the monetary policy actions of RBI.

The credit must be spelled in favor of both the government and ex-RBI Governor Mr. Rajan, who together agreed and inked the details without any public noise and petulance. Here the supplementary sanctimonious action of Government by appointing three Academicians instead of Business lobbies is exemplary. Trust the new committee in its judgment will strengthen the union of Monetary and Fiscal policies and will herald a responsive era to business needs.       

Bottom of Form

2015- Movement of Capital- India and rest of the World .

2015- Movement of Capital- India and rest of the World .

The strength of a financial system is largely calibrated on its ability to create capital. If we analyze the currency mechanism worldwide, event those shaped world financial history were the migration of currency system from Gold standard to Gold pegged standard to floating regime. And today amidst this floating regime, there is equal opportunity for every currency to participate evolve, strengthen, weaken its macro, casting a bearing on its financial system.

The spell of Leveraged economy and ever expending world economy is a norm, which is not ridiculed but intellectually justified for its financial preponderance. Every country is participating and so we are. To add to this mechanism, we are actually a capital deficit nation in both our domestic and foreign account currency, warranting our total subjugation to this model of financing an economy.

In  the backdrop of these two realities, our dependence on FII & FDI is immense. Infect we have graduated a long way from 1992 to 2016 both in quantum and quality of these foreign inflow. There has been a gradual inflow of foreign currency denominated capital investment in Indian capital Market bringing a larger respite to the deficit discomfort. The sources of these inbound capitals are generally capital surplus nation. But of let there has been emerging tendency from tax havens and smaller nation encouraging and funneling dubious laundered money into the system. Since this part of subject is too complicated and offensive, we will leave it to some other days for discussion.

Today, we are largely able to mitigate our three challenges currency exchange rate, CAD (Current account deficit) and domestic requirement of capital through primarily FII and FDI inflow. And hence the importance of we as a nation able to attract quality inflow are noticed everywhere. No doubt there are other countries in the world who are equally competing with us in their pursuit of attracting foreign inflow. The challenges are oozing from competing macro event and consequent macro variables.  Since the macro events are random and varied few leaves skewed impact than the others in justifying the rational of such currency migration.

We as a nation certainly cause heartburn among other nation for the domestic demand we create.  Perhaps Malthus as an economist might find it unpalatable today, where in a rise in a population could be such a guiding factor of economic propriety. He was the one who laid the contrarian foundation and certainly sizable numbers of intellectual thinking has supported his claim.

The unflinching Demand has largely mitigated our other more weakened macro variables. We certainly do not inspire confidence on account of our Inflation number, Nominal Interest Rate, Domestic wealth Inequality, exchange rate and hydro carbon energy insufficiency.

The capital market and currency inflow is biggest leveler. It finds its level and draw stoic inspiration when it comes to distributing capital asset. Though we are a formidable recipient of capital benediction, we are not the largest.  A recent date of 2015 capital inflow arranged in pictorial form illustrates the point I am trying to reinforce.

We have miles to go before we set the dice rolling.  And reversing the trend would be the day of redemption for the illuminating past of the nation.

 

How Hellenic Greece is now reduced to Tiny Greece !!!

How Hellenic Greece is now reduced to Tiny Greece !!!

The Breaking news through a hysterical sounding anchor on the likely debt default by Greece dumbfounded me. The ranting voice of commentator led me to believe perhaps even bigger worry than US 2008 sub prime is waiting to be delivered before the world and investor community.   

Sub prime crisis of 2008 was great disappointment that led to temporary evaporation of huge wealth across the globe including mine a small investor; however Business and capital market returned to track in just few years. It was a gift of wisdom, which I carried through with Systematic investment leading to a more and higher valuation in next few years. What now, despite my pleasant rescue from 2008 crisis, I was shaken and worriedly took shelter in my contemplative best. 

The Greece decline was a gradual and known to world community. It was one among few disastrous and indisciplined economy from PIIGS nation (Portugal, Ireland, Italy, Greece and Spain) who borrowed heavily and disproportionately but spent them recklessly on wasteful priority, instead of transforming those borrowings in a meaningful productive capital asset. Such expenditure is usually termed as revenue expenditure. The profligate financial mismanagement converted the outstanding borrowings into huge mountain of debts. The interest liability on this accumulated debt is today higher than the revenue that these country and Greece specially can generate within the country.  The lender to Greece is World bank, IMF, ECB and countries like Germany. The Greece refusal to service their sovereign debt shall certainly be a colossal loss to their International commitment and financial propriety.

However given the scale and Business isolation Greece had with India and with rest of the world, it is far less worrying. Our material engagement and Business joints are limited and few. Even financial engagement is too modest to be mentioned. Greece was never a nerve point of capital movement for the rest of the world ever. I was sensing more of a ripple effect and a temporary effect on us. And the relieving fact, the surface ripple in ocean never turns to Tsunami.

But the appalling fact, the Great country of Alexander has been certainly reduced to a Tiny Greece.         

Bre-Exit and GST

Bre-Exit and GST

A contemporary event in Business has now immediate and direct bearing on State policy, which is popularly also known as fiscal state of affair. Here both domestic and International event finds mention in our scope of analysis.

We will analyze two event, one each from International and domestic arena which have been significantly discussed in Business world recently. The international event refers to the just concluded referendum by British citizen endorsing the decision to withdraw from European Union. The outcome for Britain and its economy is long event to unfold, but hype around its impact on Indian Business has largely dissipated. Victorian British could be the largest stake holder of Business in India in pre Independence days, but now it is diversified. Out export/ Import quantum, Invisible transfer, remittance movement, rent, dividend and royalty collection are significantly low to be remotely called alarming given any impending stress. Further the investment in Pond and by Pond between the two economies have been on measured side. British stands in our hierarchy  much below than our other preferred destinations like USA, Japan, Germany, Mauritius and Hong Kong. Few individual companies with a concentration of Business portfolio in Britain could agree to the challenging ripples for few months. But Britain certainly would not jeopardize its business interest by blocking or disenfranchising the continuing businesses. The hype surrounding the horror and belligerence of this event has certainly evaporated for commerce.

The other event which is domestic has lingered for longer than it deserved. The Political squabbling over GST in India is unfortunate and pejorative. Good sense and Good Business will let it rewrite someday soon. Why GST? India such a large nation has both political federal structure and Business federal structure. We are one currency, one monetary but multiple business zones. There are invisible tax boundaries which restrict the uniformity in laws and Business legislation across India.  GST should cut these overlapping ambiguities. Guiding State for uniformity and predictability in taxation, standard distribution of taxation across the federal units and comfort of unambiguous enforcement bodies are few outright consequences. One should infer that taxes on Business will come down. It could be mix of two. There are going to be downward movement on few items of Business tax but there will be upward as well. But a uniform cap will be more relevant word to watch.

Wait to watch how we govern ourselves on this and how this does gets factored into our Business reality.

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Politics of Distrust.

The making of Pakistan in the Annals of History depicts two opposite and confronting views. Whether Muslims can thrive and prosper in an Islamic Land or in a Secular and progressive State?  Decision of such Historical magnitude must have been examined and judged on its merit when it happened and that must have been only partial. The summary judgment could be pronounced only when the consequence are beforehand in course of time. Discounting all prejudice and biases of 1947 the warring view and those disagreements of intellectual must have agreed to be examined best by the time in decades to come.

Come 2013, Pakistan is bracing for Democratic Election on the back drop of growing discontent, chaos and anarchy.  Needless to Say, India too is bracing for an Election in 2013 or 2014.  Six Decades of Governance and its impact on Social and Cultural fabric is enough for this Sub continent’s young generation, Who were born after Independence and Subsequent partition to Judge the consequences of Historical miss- happening on the midnight of 15^th Aug1947.  There are numerous vocal and silent stakeholder of this story today. From Leaders of masses to Slaughterer of masses and from small time Laborer , Artesian ,farmer and Trader to White collar Billionaire  and from Impoverished destitute of street to a splurging  opulent, All  have born lived and will die here only.  History can not erase the mishap of inhumane barbarism of Partition when millions were uprooted, brutally burned, mutilated, raped and slaughtered. And rightfully the scar should not be forgotten in the light of the painful price, agony and suffering an ordinary individual paid.  Both sides were sufferers and humanity was insulted.  The victim and survivor both were innocent, only their fate could be blamed. 

Come 2013, look around Pakistan, it is no better than the Peril that Bangladesh was submerged into in 1971.  The hawkish leadership of Pakistan strangulated a new born child for nearly two decades. East Pakistan was the first successful challenge to the might of predators and slaughterer of 1947, who used Religion as tool for Political Power and drove it beyond the ambit of Spiritualism. A mouth eaten Pakistan was bitten by their own establishment. The emergence of Bangladesh was even uglier and bloody then the 1947 Partition. Scores of Killing, Bloodbath rape and planned Genocide of Bengali Muslim and Bengali Hindu could not quench the thrust of Political crooks. The freedom of Bangladesh and its subsequent recognition by all the countries bluntly refuted the point Pakistan advocated in all through the two nation theory. While people of Bangladesh saved their kith and kin from a savage Pakistan, the scourge of Pakistani Political Junta were left to pursue its roughness.

 A Self destructive, contemptuous feudal leadership of Pakistan remained blissfully ignorant of its reprehensible act of past and zealously pursued its path of violence within and beyond their Nation.  Whole World including specially US and India suffered at the hand of mindless perpetrator of terrorism who’s all act of Violence had direct or indirect traces in Pakistan.  The Moral, financial and State support to terrorism were brazen display of Pakistan arrogance and fanaticism.  The unstated State Actor and stated non state Actor of this violence had flourished under the protective sanctuary of State. Establishment of Espionage, Military, Politically motivated Bureaucracy and Political leader created an unsavory parallel establishment who had vested personal agenda and vendetta.  The continuous dose of bigotry and fanaticism intoxicated a larger section of society.

The consequences were bound to be felt in house. No single day passes without Sectarian violence against Shias, Christians and Hindus, regular Bomb explosion, Targeted killing of Liberal and intellectual. Killings and anarchy is routine and reminiscent to Stone Age.  The depth of horror is fathomless. Could you call a society civilized who deny and shoot a small Girl Child for her desire to attend a School. The Worst, the insensitivity and cowardice within the society failed to protect the victim and could not assure her confidence of honorable future. Who in turn migrated for shelter in west for recovery and pursuing her future?  This one event surmounts all evils and brutality and explains Which Era they are migrating to. It is precisely not even Medieval fanaticism but of even rouge Primitive insensitivity. 

As the Pakistan is darting to a drunken path of Dark past, the Society in general and ordinary blissfully blind citizen in particular are at extreme danger. Clueless in identifying their savior, the ignorant and illiterate mass could only turn to all mighty God.  The ocean of nearly 20 Cr hapless destitute without vision and constructive occupation is only a ticking time Bomb. Time only will judge the yesterday`s apathy and insularity of Crooks.  Perhaps Price of their sinister design would be multifold of Partition and Peril of Bangladesh together. Which nevertheless only ordinary citizen will pay.

Blessing of all mighty to those who chosen to side a Secular democracy ahead of theocratic totalitarian way back in 1947. It is imperative upon the opinion maker of today to bear a torch of Knowledge and tolerance to make a meaningful benefit of circumstances. It is also a vivid reminder to all those fascist and communal forces within the Secular India, Whose parochial view is squeezing India towards instability and fragility.  The Social fabric and essence of amenable Constitution are more important institution than the whims or tantrums of individual. Purity of these institutions is the accountability of every citizen. Today`s Ignorance and resulting consequence would not compensate the wound of tomorrow if the educated and Intellectual willingly cower and prefer to retire for comfort in their drawing room.    

 

  

Reading Financial Budget

Reading Financial Budget

Financial Budget more popularly known as Budget is gradually acquiring more followings and more scrutiny with the passage of time. The reason rests with the subtle message of relevance that the Industry, household, Public Sector, Investor both domestic and International institution find in it.

But for sure it is not easy to decipher the conceived meaning of Budget so easily. The complexity further gets embolden when you listen to the circulating noise, conflicting interpretation by expert and screaming anchors of TV studio.

I am attempting to simplify few contours of narrative, which empower you to identify those minimum messages, allow you to examine them and interpret them with minimum of confusion and conflict.

Each Financial budget is a statement of Central Government Revenue and Expenditure for the given financial year. Given our Federal nature of Governance, central Budget is kept separate from the State Budget. Thus we can safely state, the Central Budget outlay is the source of all genuine interpretation of massive number that it unfolds.

Plan outlay which is proposed estimate of expenditure for entire financial year, Revenue the corresponding estimated to meet the expenditure and difference between the two called fiscal deficits are the first important numbers to be understood. These numbers though appear simple but have layers of hidden message when it is further examined. The actual interpretation of the merit of Budget rest with these curves and contours, and hence one should examine the factors of these three carefully.

Higher plan outlay is good for an economy as it largely transfer into augmented aggregate demand and rise in GDP number in following years. But one should carefully examine the resource which is revenue before Government. It is universal practice worldwide following the Great Keyensian experiment of 1930 in US, which accepted the convention of Government spending beyond its source of revenue. This difference is fiscal deficits and is basically borrowings from domestic or international lenders. We too have deficit fiscal but largely domestic.

So one should look at the trend of Fiscal deficit as % of GDP but certainly not in absolute amount. Anything less than 4% is acceptable for growing economy like India, most important it should be a receding number. Expert have different take here, but all are unanimous on the merit of a controlled/modest fiscal deficit with receding trend. Higher deficit is worse and worst scenario. It leads to poor fiscal discipline, inflation, poor liquidity, decline in real rate of return, debt on the Government and future imbalance on the financial sovereignty of state. Some of the worst economy of today known by acronym PIIGS have their origin of financial instability seeded at this fiscal indiscipline.

Beyond the above three, one should look at the composition of plan expenditure. Whether, it is meant to encourage capital expenditure or revenue expenditure. The expense like Interest of previous borrowing, Salary, Pension, Defense outlay, Subsidy and social expenditure are revenue in nature. They are desired and necessary but do not directly contribute to the augmentation in general demand. The capital expenditure directly impacts consumption, investment, expenditure, export and import. The proportion of capital expenditure should be increasing and that is good for all the stakeholder of the economy.

Another area is proposed focus of Government. Government do state some ambitious program on infrastructure/energy/Transport/ urban and rural development/port development etc. Though the allocations under the program are normally modest, but these are part of bigger expenditure to follow in year ahead. These signals you story to unfold in year ahead.  These are specially examined by investor in Economy both domestic and international.

And in the end, one should examine the government guidance on various macro economic variables. Fiscal plan outlay have significant bearing on the macro variables like, Inflation, Interest, liquidity, Exchange rate, Current account, employment etc. The statement in Budget impacts these variables through series of direct and indirect action.

If the Budget speech comforts you on these parameters, one should be prejudiced to call it better or else worse. Upon forming your view, listen to the expert, who will debate insightfully often diplomatically but more often dogmatically as being ideological imprisoned unlike you who is free from all the intellectual shackles. 

Good Luck.