Wed, 23rd August 2017

Anirudh Sethi Report


Archives of “Government” Tag

MPC members warn inflation could accelerate: RBI minutes

The Reserve Bank of India’s monetary policy committee (MPC) members said easing consumer inflation had supported the need for a rate cut at its August meeting, but warned prices could start accelerating, minutes showed on Wednesday.
The comments reflected continued caution by most of the six-members of the committee, despite pressure by government officials and some economists to cut rates more aggressively after consumer inflation has remained below the RBI’s 4% target since October.
The RBI cut the main policy rate by 25 basis points to a more than 6-1/2 year low of 6.00% on Aug. 2, but kept its policy stance at “neutral”.
Four MPC members, including Governor Urjit Patel, voted for the move, while one voted for a 50 bps cut. The remaining member, RBI executive director Michael Patra, voted to hold rates at 6.25%.
The MPC members warned inflation could start accelerating later this year, while noting the focus should be on ensuring banks cut their lending rates further: despite the RBI rate cut, none of the major lenders have lowered the cost of loans.
“While the transmission has improved, there is still some space for banks to cut their lending rates,” Patel wrote.
“Resolution of stressed balance sheets of banks, therefore, will remain important for reviving credit demand and the investment cycle.”
Propon nts of more easing have argued real interest rates are too high, and that India needs to boost an economy that grew 6.1% in January-March from a year earlier, fast by global standards but the slowest pace in over two years.

Japan’s long-term rates glued to the floor

For months, Japan’s long-term interest rates have stayed near the floor, with the Bank of Japan buying the vast majority of government bonds as part of its ultra-aggressive monetary easing program.

The central bank’s extraordinary campaign to stimulate the economy out of its deflationary stagnation has effectively destroyed the ability of interest rates to serve as a key indicator of the nation’s economic health.

 With yields on Japanese government bonds artificially frozen by the BOJ, investors have been leaving the bond market in droves.

“We seldom receive phone calls from our customers anymore,” a bond dealer at a major Japanese brokerage said. “Our team can be downsized at any moment.”

The government bond market is suffering from the strong effects of the BOJ’s highly unconventional program, launched last year, to smother long-term rates by purchasing enormous amounts of government debt.

“In the past several months, transactions for profit-taking have also significantly decreased to very low levels,” a government bond trader at another major brokerage said.

Emerging Markets :An Update

  • South Korea proposed resuming military and humanitarian exchanges with North Korea.
  • The European Union may sanction Poland over its controversial judicial overhaul.
  • Turkish Prime Minister Yildirim announced a cabinet shuffle after meeting with President Erdogan.
  • Turkey’s worsening relations with Germany will come with economic costs.
  • South African Reserve Bank surprised markets by starting the easing cycle with a 25 bp cut to 7.0%.
  • Brazil will raise fuel taxes and freeze spending in an effort to meet its fiscal targets
  • S&P raised the outlook on Mexico’s BBB+ rating from negative to stable.
In the EM equity space as measured by MSCI, South Africa (+1.8%), Chile (+1.6%), and China (+1.5%) have outperformed this week, while Indonesia (-1.8%), Russia (-1.5%), and Colombia (-1.5%) have underperformed.  To put this in better context, MSCI EM rose 1.2% this week while MSCI DM rose 0.5%.
In the EM local currency bond space, Brazil (10-year yield -23 bp), South Africa (-17 bp), and Russia (-10 bp) have outperformed this week, while Chile (10-year yield +10 bp), Colombia (+4 bp), and China (+4 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 10 bp to 2.33%.
In the EM FX space, BRL (+1.9% vs. USD), KRW (+1.3% vs. USD), and THB (+0.9% vs. USD) have outperformed this week, while ARS (-3.0% vs. USD), PLN (-1.4% vs. EUR), and ILS (-0.4% vs. USD) have underperformed.

One Way Or Another – Venezuela Will Send Oil Prices Up

In a desperate bid to survive its economic meltdown, Venezuela is lobbying other OPEC members to agree to steeper oil production cuts, a move that would likely lead to higher oil prices.

Venezuelan officials have reached out to their counterparts in Iran, Russia and Saudi Arabia to press them on more collective action, according to Argus Media. If there was enough interest, the next step would be an “extraordinary meeting,” which would weigh the option of cutting deeper.

 The rumors about deeper OPEC cuts have been floating around since June, when oil prices collapsed into the low-$40s. The markets have grown deeply pessimistic about the health of the oil market, and doubt the OPEC cuts will balance the market by the end of the compliance period in March 2018.

But the behind-the-scenes effort from Venezuelan officials is notable, if only because the South American OPEC members was one of the earliest and most aggressive supporters of the original deal to reduce output. In 2016, for months the more powerful members of the cartel rebuffed Venezuelan pleas, but in the end they agreed to reductions in November after oil prices continued to wallow below $50 per barrel.

The deal pushed prices above $50 for a period of time, but after six months of restraint, the market is back in sub-$50 territory.

However, the urgency for higher prices is more acute now for Venezuela. Protests have spread nationwide in the South American nation as the economy contracts at a torrid rate. Violence is becoming more widespread, and the nation is suffering from political gridlock and economic and social disaster.

Over the weekend, the opposition organized an informal referendum, which attracted more than 7 million votes, to oppose anti-democratic moves by the government. The vote demonstrated widespread anger and opposition towards the government’s upcoming effort to consolidate power in a July 30 vote to rewrite the constitution, a move that would weaken competing institutions like the National Assembly. The referendum opposing the July 30 vote was not recognized by the government, but it was a show of force for the opposition.

There is no way out of the downward economic spiral for Venezuela in the short run without significantly higher oil prices.

The Economist: “Get Ready For A World Currency By 2018”

THIRTY years from now, Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the last twentieth century.

At the beginning of 1988 this appears an outlandish prediction. Proposals for eventual monetary union proliferated five and ten years ago, but they hardly envisaged the setbacks of 1987. The governments of the big economies tried to move an inch or two towards a more managed system of exchange rates – a logical preliminary, it might seem, to radical monetary reform. For lack of co-operation in their underlying economic policies they bungled it horribly, and provoked the rise in interest rates that brought on the stock market crash of October. These events have chastened exchange-rate reformers. The market crash taught them that the pretence of policy co-operation can be worse than nothing, and that until real co-operation is feasible (i.e., until governments surrender some economic sovereignty) further attempts to peg currencies will flounder.

 The new world economy

India : 5 Flaws of GST

Image result for FLAWS# GST should have been one standard tax rate (with a concessional rate and a demerit rate), but it is not. We have rates of 0, .25, 3, 5, 12, 18, 28 and many higher rates depending upon the cesses that may be imposed on so-called sin goods.

# GST should have been under one unified tax authority, but it is not. There will be a diarchy. States and the Centre will divide the tax bases into 90:10 (for turnover under Rs 15 million) and 50:50 (for turnover over Rs 15 million). I suppose a lottery will decide whether one’s tax authority will be the state government or the Central government!

# GST should have stipulated fewer returns, but it does not. By the most charitable count, a business must file three returns a month and an annual return (total 37). If the business is a multi-state business, and the tax authority is the state government, that number must be multiplied by the number of states in which the business is located.

# GST should have eliminated classification disputes, but it does not. Fitment rates were changed many times. We saw interest group advocacy in full play. There will be disputes. Mr Veerappa Moily asked, ‘Is KitKat chocolate or biscuit?’, because chocolates and biscuits suffer different rates. I suppose the Supreme Court will be requested to answer such questions in due course!

# GST should have reduced the discretion of the tax administrator, but it does not. On the contrary, draconian powers have been conferred on the ‘Anti-profiteering Authority’. Whoever conceived of the bizarre idea has no knowledge of economics or business or markets or competition. A century of experience on economic regulation has passed him/her by. He/she is a holdover from a dirigiste regime that believed that the government knows best and it is the government’s right and duty to tell business what it should sell and at what price.

India’s war on cash: ATM network expansion has seen sharp drop since 2014

As the world marks the 50th year of the first Automated Teller Machine (ATM) rolled out by Barclays Bank at Enfield in London, India seems to be in the midst of a full-blown war against cash. Five phenomena capture the Modi administration’s attempts to restrict the use of cash and steer India towards a less cash economy

One indicates that the government is squeezing easy access to cash through ATMs which had grown exponentially during the erstwhile United Progressive Alliance (UPA) administration. Reserve Bank of India (RBI) data suggest that in the three years from the Modi administration taking over in May 2014 to April 2017, the increase in the number of on-site and off-site ATMs has been 26 per cent when compared to the previous three-year period. This is the lowest growth rate for ATM additions in decades. During the last three years of the UPA government — from April 2011 to April 2014 — the number of ATMs had increased 117 per cent over the preceding three-year period. So, the difference between the growth rates in the successive three-year periods has been a whopping 91 percentage points. 

While most public and scheduled commercial banks had shown double-digit growth in ATM additions across the country during the UPA regime, banks have been less eager to expand their ATM networks during the Modi administration, which is working to restrict the use of cash to make financial transactions more transparent.

While the number of people with debit cards has increased exponentially during the period, the number of ATMs hasn’t grown proportionally. This is where the second phenomena of a rise in the number of debit card machines (called point of sale terminals) further throws light on the kind of less cash economy unravelling under the Modi administration. During the Modi regime, the number of debit card machines have grown by 143%. In the comparable period during the UPA regime, the growth in these machines was just about 79%.

It’s not just that the number of ATMs are growing slower and card machines growing faster under the present government. While people’s access to ATMs isn’t as easy as before and with the proliferation of card machines, there has been a commensurate rise in the number of debit card transactions at such machines. While debit card swipes at machines grew 136% during the UPA regime, they have grown three times as much during the NDA administration. In effect, the number of times people swiped their debit cards for transacting rose 245% more during the present government than under the UPA government.
 More transactions on more debit card machines points to another peculiar phenomenon underway in India. The value of debit card transactions has grown close to 332% under the present government. During the UPA regime, the value of transactions had just about doubled during the comparable period.

This leads to the final phenomena. The number of ATM transactions seems to be growing at almost half the pace under the present government than it did during the previous one. While the amount of money transacted at ATMs grew almost 57% during the UPA government, it grew at just about 22% under the Modi administration. While millions of Indians still continue to rely on ATMs for cash, these phenomena signal that with the present government’s policy imperative, the 50-year-old ATM may well be losing steam in the world’s fastest growing and cash loving economy.

First India Bans Cash, Now It’s Targeting Gold

In November of last year, India banned certain cash notes in a bold move to force businesses into the banking system to better harvest more taxes from its livestock.

Now, under the guise of “improving transparency” and forming a “common market,” India has begun targeting gold with new taxes, regulation, and incentives for citizens to turn over their undeclared gold to the financial sector.

Roughly 86% of India’s economic activity happened in cash at the time much of it was banned. Presumably that includes the $19-billion-per-year retail gold industry. Again, it appears that India’s government (central bankers) wants a bigger cut of the action and to better track the private assets of citizens.

Bloomberg has been reporting that India’s government is teaming up with crony gold dealers to plan a complete revamp of its gold policy – which is always code for “control, regulate and tax.”

Bloomberg reports

India, which vies with China as the top consumer of bullion, is working on new policies to improve transparency and help expand its $19 billion gold jewelry industry, according to people with knowledge of the matter.

 The plans being worked out by the finance and commerce ministries along with industry groups should be finalized by the end of March, the people said, asking not to be identified because they aren’t authorized to speak publicly….

 The start of a spot bullion exchange, to make gold supply more transparent and help enforce purity standards, is under consideration, the people said. An import tax of 10 percent could also be reduced as the government seeks to eliminate smuggling, they said. The plans also include a dedicated bank for the jewelry industry, according to one of the people.

 The overhaul of India’s disorganized and fragmented gold jewelry industry is meant to bolster confidence among consumers, where the gifting of gold at weddings and festivals or its purchase as a store of value are deeply held traditions. Ensuring quality standards and allowing supply chains to be easily tracked are ways to enhance trust.

EU mulling secret plan B for Greece, sources say

In the wake of last week’s Eurogroup impasse, European officials are mulling a plan B for Greece that would sideline the International Monetary Fund, curb debt relief and reduce the need for austerity after 2019, Kathimerini understands.

According to sources, European officials have already started discussing an alternative plan that could be put into effect in the fall, after September elections in Germany, which have made Berlin cautious of any politically contentious moves.

The plan being considered would ensure that the IMF is no longer in the “driving seat of the Greek bailout program,” the sources said, adding that it would offer Greece less debt relief than it had hoped for but also less austerity in 2019 onward, after the current bailout has expired.

That would mean Athens could revoke some of the tough austerity measures it pushed through Parliament last month. The pension cuts and tax increases are due to come into effect in 2019 and 2020 respectively.

However, a worse deal for Greece as regards debt relief would be a hard sell for the government of Prime Minister Alexis Tsipras, who has basically reneged on all pre-election promises and is keen to deliver something concrete with respect to the country’s debt. His government has already started shifting its narrative away from an insistence on a “comprehensive solution on the debt” to a “solution that will pave the way for accessing the markets.”

India :April core sector growth slows to three-month low of 2.5%

The growth of eight core sectors declined to 2.5 per cent in April mainly because of lower coal, crude oil and cement productions.

The growth rate of eight infrastructure sectors — coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity — was 8.7 per cent in April last year.

According to the government data released on Wednesday, coal, crude oil and cement production recorded negative growth of 3.8 per cent, 0.6 per cent and 3.7 per cent, respectively.
Slow growth in key sectors would also have implications on the Index of Industrial Production (IIP) number as these segments account for about 38 per cent to the total factory output.
Growth in refinery products and electricity output slowed down by 0.2 per cent and 4.7 per cent in April as against 19.1 per cent and 14.5 per cent, respectively in the same period last year.
However, natural gas, fertiliser and steel reported positive growth at 2 per cent, 6.2 per cent and 9.3 per cent, respectively.