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RBI’ Revenge

Posted by fairval on October 28, 2017

India’s real interest rates are at rates rarely, if even, seen in its history. Why does RBI not lower rates? Revenge for getting screwed on Demo?

When demonetisation (DeMo) was announced by Prime Minister Narendra Modi (NaMo) in a dramatic press conference on 8th November 2016; several commentators said it was a bad move. The subsequent shoddy implementation and its inability to reveal any immediate black money – notes came back into the banking system – heightened the criticisms. Today, almost one year down the line, it is almost universally acknowledged that DeMowas a failure.

While the NDA government has faced flak for it, the central bank Reserve Bank of India (RBI) has faced even more criticism. When DeMo was announced, RBI had just passed under a new leader. The resignation was the previous governor – posterboy Raghuran Rajan (RR) – was mourned by many. Experts said NaMo had let RR go because he wanted a pliable chief. RR had crossed the line by making political observations; he was giving indications of being anti-NaMo.

When DeMo was announced, the experts immediate said ‘RR wouldn’t have done it’. The new RBI governor immediately became painted as a sinner; someone who sort of lowered the independence of the RBI. The ‘experts’ were also clear – from now on, RBI would dance to the tunes of the government.

Well, a year since DeMo, nothing of that sort has happened. RBI refuses to dance. Despite a slowing economy, and hugely comfortable inflation situation, RBI refuses to lower interest rates. The result – India’s real interest rates are at levels perhaps never seen before in Indian history.

Remember India has always been a high inflation country, and for most parts, we have operated in zone of negative real rates. But now, our real rates are above 4.5%. While one has not seen history of real rates since last few decades it is likely these levels could be all time high. When economy has clearly slowed, should they be so high? This level is also much higher than other countries (see chart below)


The Economic Survey (vol 2) released in Aug’17 by Ministry of Finance has a detailed section explaining the situation on real interest rates and suggesting how much should interest rates go down. Says the Survey – Cyclical conditions, then, suggest that the policy rate should actually be below—not 50-100 basis points or so above—the neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable, more than that suggested by comparison with neutral interest rates.

So why is RBI not listening? Is it the RBI trying to leave no doubt in anyone’s mind about its independence? Or worse, is it trying put the government down for destroying its reputation with Demo? RBI’s revenge?


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Indian handicraft exports are booming

Posted by fairval on May 17, 2017

Our research arm India Business Reports (IBR for short) recently did a note on handicrafts and handloom exports out of India. Good to see that this segment is booming.

Handicrafts exports touched USD 3.66B in 2016-17, a growth of 11% over FY16 in USD terms. In Re terms exports grew 13.8% to Rs245B in FY17, as compared to Rs216B in FY16. These figures does not include export of carpets, which is another sizeable market by itself.


(Source: EPCH)

Over and above the handicraft exports, India exported around USD1.8B of carpets an floor coverings. A major portion of this is handmade.

Growth rates for both – handicrafts and carpets – are healthy. Over FY10-17, handicraft exports have grown at ~15% in USD terms. Over FY97-17, a 20 year period, handicraft exports have grown at 10.2% CAGR in Re terms. Growth rate of carpets is slower, but impressive nonetheless. Exports of carpets have grown at 5% in USD terms over the last 5 years, and 13% in INR terms.

In the last 1-2 years, growth rates have slowed down for all sectors, in both domestic markets and exports. In light of that, this growth in exports in handicrafts is commendable, and makes it a ‘growth sector’.

For the full report, you can write to reports@indiabusinessreports.com; also available on Slideshare at  https://www.slideshare.net/IndiaBusinessReports/handicrafts-market?qid=c91002da-202a-47a6-bce5-9592f319fa73&v=&b=&from_search=1


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India tops JBIC FDI survey for 2016

Posted by fairval on January 14, 2017

For the third year in a row, India has emerged as the most promising country for overseas business, in the annual survey ‘Outlook for Japanese Foreign Direct Investment’ by Japan Bank for International Cooperation (JBIC). 

India replaced Indonesia as the top investment destination in 2014; and has held the position ever since. The table belows shows the result of of the 2016 survey. The survey is published in December. The 2016 survey was the 28th survey.

This is very significant. China held the no 1 position for more than a decades before Indonesia emerged on top for 2 years, and was then displaced by India.

This should result in increased activity by Japanese companies in India. Out of the 230 companies citing India as a promising, 60% (142 companies) do not have a local production base. They survey asks another key question – do you have a real business plan to go to India? In 2016, 40% of the 230 companies which named India also said they are actively working on India entry. In 2015, this figure was 36% (of 168). So there is a clear increase in in active interest in entering India.


More on India Business Reports (www.indiabusinessreports.com)

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No Modi wave in Delhi Bureaucracy

Posted by fairval on November 12, 2014

Poor Modi may not be able to do much better than previous PM Manmohan. The entrenched sloth in bureaucracy will ensure that. I am writing this from personal experience. A client of ours applied for FIPB approval over 4 months ago. This was for FDI into a manufacturing unit. 4 months on, we have no f__king clue of what is going in inside FIPB. The process is too damn opaque. You apply online, but after that it is the same old file system. It seems there is a guy in FIPB, who then sends a physical file to various departments. In this case, the file has gone to many departments which have no role to play. Our client was recently in Delhi trying to trace what was holding the whole issue up. We found several shocking things, like —

  • The file went to some departments where it should not have been sent. These guys were saying – we don’t know why this has come to us. So it seems 1-2 of them simply tossed it aside and did nothing.
  • Amazing, one guy retired in this period, and the file was lying on his desk!

According to the way the govt functions, if the file does not come back from whom it was sent to, next step cannot be taken. So nothing was happening on this case for 2-3 months. Our client is still trying to find out how many other places the file has gone too, and people are simply sitting on it, because the file should not been sent to them in the first place! If this is how bureaucracy is functioning, Modi can’t do much.

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Make in India: Reduce EC Time

Posted by fairval on September 9, 2014

Great to hear the slogan – Make in India. Finally, there is someone who understands the importance of manufacturing. I would imagine Gujarat’s growth is more manufacturing led (haven’t checked the numbers), given that there is hardly any IT industry in Gujarat. Not much tourism either.
For decades one has heard that India has ‘leapfrogged’ a stage on economic evolution. We have gone straight from agri to services. I always felt that was a spurious argument. With 68% of population still dependent on agri, as per 2011 census, clearly it is a case of lack of manufacturing jobs, rather than any great competence at services.
However, spurring manufacturing’s share in GDP is easier said than done. There are too many impediments, some new, some old.
Came across an interesting chart, on red tape in one specific area – Environmental clearances (EC for short).

Average Time to get Environmental Clearances

Average Time to get Environmental Clearances

In 2007, EC used to take around 8 months. By the time the UPA government was booted out of power, this had increased to an astounding 30 months! This was what Modi referred to has ‘Jayanthi Tax’. This was impacting not just large projects like a Sterlite or other metal/power companies (where there perhaps genuine reasons), but ANY expansion project whatsover, even by small companies. Congress government just froze manufacturing expansion, which anyway has little incentive if you borrow at 15% or more.
Bottlenecks like this need to go, whatever the green lobby may say, if Indian manufacturing has to take even 1-2% of global share from China.

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Restaurant inflation running at 15%!

Posted by fairval on February 10, 2014

An article in The Times of India ‘Rate cards of Mumbai eateries double in 5 years‘ points out that inflation in Mumbai’s mass restauarants, popularly known as Udupi restaurants, is running at 15% per annum for last several years. Prices have doubled since 2009!

The graphic from the story gives rates of key items in 2009 and now. The fastest item of costs are the utilities – LPG, water and electricity. LPG cost is up 3x, water and electricity 2x. The only positive here is that LPG cost could stabilise for a while


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FY13 GDP revised downward, its still overstated

Posted by fairval on February 1, 2014

This blog has written earlier how FY13 GDP growth was most likely overstated. In the post ‘Did real GDP grow only 2-3% in FY13?‘ we pointed out that the data in government budget was self contradictory, unless the GDP growth in FY13 was much less than 5%.

Now the figure has been revised to 4.5%. This is how it adds up:

Primary Sector: 1%,  Secondary: 1.2%, Tertiary: 7%
So this growth is entirely dependent on the services sector, which according to government data fluctuates only between 7-9% or so, irrespective of what happens to rest of Indian or global economy. That is hard to believe.





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China’s labour costs could be 2x India now

Posted by fairval on January 27, 2014

Had to dig out info on labor cost comparision between China and India for a client. Here is a small summary of it. The info we could find seems to suggest that China’s labor could be 2x more expensive than India. The conclusion has a few assumptions, but this is how it goes.

Till 2009, we could find a direct comparision from US govt data. This shows:

  1. China had less labour cost than India till 2002.
  2. Parity was achieved in 2006.
  3. By 2009, Chinese labor was 40% more expensive. More recent data is not available.
By 2009, China's labour was 40% more expensive than India

By 2009, China’s labour was 40% more expensive than India

We believe after 2010, the difference between Chinese and Indian labour costs could have widened. Note the following values for Rs/CHY (chart below)

  • 31 Dec 2006: 5.695
  • 31 Dec 2009: 6.81 (20% depreciation for Re over 2006)
  • 31 Dec 2013: 10.077 (48% depreciation for Re over 2009)
From 1 Jan'10, Re fell 48% against CHY

From 1 Jan’10, Re fell 48% against CHY

So between 2006 and 2009, Chinese labor became 40% more expensive, whereas currency explains only half of it. So there is a structural component to Chinese labor cost inflation.

After that, Indian Re has depreciated 48%. It is possible labor cost difference could have expanded even more. Even if it was in line with currency, Chinese labor could be twice Indian costs.

As we have written earlier, this is a golden opportunity for Indian manufacturing to compete with China. However, thanks to UPA’s policies, Indian costs are also rising rapidly (or maybe that is partly why Re has fallen, I am no economist, so the cause and effect may not be spot on).


Posted in China, Indian Economy | 3 Comments »

Job creation heading for a sharp drop

Posted by fairval on January 18, 2014

Employment generation from non-farm sectors – the growth engines of any modern economy – is set to go down sharply over the next few years, says a report by rating firm Crisil. CRISIL estimates that employment outside agriculture will increase by only 38 million between 2011-12 and 2018-19 compared with 52 million between 2004-05 and 2011-12.

The biggest reason for this is the likely slower growth rate of Indian economy in the coming years. Crisil assumes an average growth rate of 6.5% in the 7 year period FY12-19. This compares to an average of 8.5% registered over FY05-12, which led to creation of 52 million non-farm jobs. This helping in pulling out 37 million people from agriculture. Overall employment intensity has been reducing over time as well. Some of newer service sectors like IT it seems are far less employment intensive compared to manufacturing or agri.

In the seven years to 2018-19, India’s working age population would have swelled by over 85 million. Of these, 51 million would be seeking employment. However, job creation in non-farm sector will be only 38 million, or less than the number of people who may seek jobs. So what happens – CRISIL says 12 million may need to be absorbed by Agri. In India, employment is a loose term, there is lots of disguised unemployment.

Employment Generation in India

Employment Generation in India

A rider: economic data is quite complex it seems. As you would notice, net employment generation in FY05-12 period was only 15 million, much less than what one may assume were the number of job seekers, which should have been upward of 50 million.Crisil says – the difference is explained by people voluntarily opting out of employment (old, women etc). Hmm..thats a tricky one. That trend can well continue? If so, net job seekers may not be 51 million as the report assumes. Crisil report assumes the ratio of people seeking jobs as constant between the two periods.

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