Indian Economy: News and Discussion (June 8 2008)

Vikas · Post by **Vikas** » 15 Oct 2008 09:27

Singha Saar, You have amazing writing skills. Do you also get moments of inspiration like Mo used to have while creating ROP.
If you take up writing full time, you might be our own "Aravind Adiga", if you already are not one writing under pseudo name.

Suraj · Post by **Suraj** » 15 Oct 2008 09:58

sugriva wrote:India highly prone to global credit crisis

http://www.business-standard.com/india/ ... ono=336891

Citigroup cites India’s very high ratio of total external finance to forex reserves and high level of mobile capital compared to the reserves as the main drawbacks, making the country highly vulnerable to the global financial crisis.

Looking for this study, I came across several mentions of this PR release, a bunch of them dated mid-Sept. It goes to reason that their computations of exposure to hot money, short term debt and other volatile components were made *before* the massive equity downturn since mid-September. Considering we've already shown resiliency so far, it seems rather sensationalist to characterize India's case in this manner. The Koreans and Indonesians though, are a different matter...

Suraj · Post by **Suraj** » 15 Oct 2008 13:14

The next measure appears to be a reduction of the statutory lending ratio (SLR), which prescribes the percentage of bank deposits that must be invested in government bonds. The lower the SLR, the more liquid deposits on hand for banks:
Indian bond yields rise on expectations of SLR cut

Indian federal bond yields rose further in late afternoon on Tuesday on growing expectations of a cut in statutory liquidity ratio (SLR), which will reduce demand for debt, dealers said.

Dealers said a cut in SLR, or the amount of deposits banks have to invest in government debt, would require them to hold fewer bonds. SLR is currently at 25 percent.

Suresh Tendulkar, chairman of Prime Minister Manmohan Singh's economic advisory council had said on Monday that cuts in banks' cash reserve and bond requirements could be used to ease a cash crunch in the money markets.

sugriva · Post by **sugriva** » 15 Oct 2008 13:46

Suraj wrote:
sugriva wrote:India highly prone to global credit crisis

http://www.business-standard.com/india/ ... ono=336891

Citigroup cites India’s very high ratio of total external finance to forex reserves and high level of mobile capital compared to the reserves as the main drawbacks, making the country highly vulnerable to the global financial crisis.
Looking for this study, I came across several mentions of this PR release, a bunch of them dated mid-Sept. It goes to reason that their computations of exposure to hot money, short term debt and other volatile components were made *before* the massive equity downturn since mid-September. Considering we've already shown resiliency so far, it seems rather sensationalist to characterize India's case in this manner. The Koreans and Indonesians though, are a different matter...

Suraj,
How is a reduction in CRR and now SLR by the RBI a measure of our resiliency? As I see it the RBI is responding to a liquidity crisis with the available tools at its disposal. Also with reference to the article that I had originally posted, I don't think the point of the article was to sensationalize anything. Rather based on the ratio of the mobile capital(FII and Domestic investments in our markets rather than FDI) to the reserves, it made the contention that India was less stable than Japan and China. Also if I have read the papers correctly the massive equity downturn in the recent days has mostly been caused by domestic redemption pressures. So not sure how that fits in your argument that there isn't a liquidity crunch. Also today's TOI reports that RBI has instructed banks to lend money to MF houses that are facing redemption pressures.

vina · Post by **vina** » 15 Oct 2008 14:02

The big elephant is govt spending.. SLR cut and govt bond sales program suspension will inject liquidity.. But what about the commie-ding dong driven NREGA and other fat babu pay rises that the UPA got had committed to when the going was good 6 months ago ? . The inflation spiked because Chidambaram took the best case optimistic scenario and planned for that and had no maneuver room when it shot up. So what will you do when the fiscal deficit starts gaping once again and inflation starts going up , this time due to macro imbalances, rather than commodity price led as was recently ?

I think the govt immediately needs to tighten it's bloated belt. Let AI and IA go under and stanch the bleeding immediately. That will immediately take excess capacity out of the Indian market and Jet and KFcan go back to competing. Do that with some 20 terminally ill PSUs and govt companies and announce a downsizing of govt depts.. (how about dept for promotion of Hindi aka.. Rashtrabasha ?..) I am sure there are hundreds of such depts around. Impose a 10% budget cut right away on ALL depts.. Tell them to chop heads /retrench if need be.. But get people costs as percentage of total costs of govt down by 10%.. That will free up massive amounts of productive capital.

sugriva · Post by **sugriva** » 15 Oct 2008 14:50

Government expenditure as a percentage of GDP, data for 2007

http://anepigone.blogspot.com/2008/03/g ... ge-of.html

France : 61%
Sweden : 68%
Italy : 55%
UK : 50%
Germany : 48%
Japan : 30%
China : 22%
Russia : 20%
India : 20%
US : 20%
Brazil : 17%
Bangladesh : 12%

Going by the figures it doesn't appear that India's government expenditure is abnormal for
country of its size and appears to be on the lower size (142 in a list of 160) countries

Singha · Post by **Singha** » 15 Oct 2008 15:02

but our tax revenue as a % of GDP is likely to be lot lower than OECD ?

Dileep · Post by **Dileep** » 15 Oct 2008 15:15

Singha, you leave me no choice but to KILL you! Choose the method (though I prefer kazhukettal , form of hang/draw/quarter in Travancore).

The only way out of the fatwa is to complete the story.

satya · Post by **satya** » 15 Oct 2008 15:22

but our tax revenue as a % of GDP is likely to be lot lower than OECD ?

What about Govt borrowings both at center & state ones ? Also it might also include expenditure by PSUs .......

JMHT

Dileep · Post by **Dileep** » 15 Oct 2008 15:28

Life sucks!! That summarizes things here at midlands.

Became poorer by an order of magnitude. Was feeling smarty to buy the rubberland, but rubber prices dropped through the floor. As the economy flows down the tubes, no one is going to buy the gizmos we make. If no one is buying, the gora is not going to keep this SDRE making them. I have seen him cutting pays and laying off people on lesser crises.

Man, I am too old for this $hit!! Been feral for too long. Can't get back into a pack anymore. Maybe should start a teashop or something.

The only silver lining is, as Rupaiah tanks, I get more of them for the dallahs. till the dallahs last that is.

Vikas · Post by **Vikas** » 15 Oct 2008 18:40

How about joining the commie party as a second carreer option ?

John Snow · Post by **John Snow** » 15 Oct 2008 20:02

GD>> about two months ago I had posted a report about how Pepsi and Coke were sharing the same transport (trucks) delivering both products and cut costs. One side of the truck lorry is painted in Pepsi ad, the other side Coke...

so this is going to happening in India for banks, airlines consumer goods ads etc.

Singha · Post by **Singha** » 15 Oct 2008 21:08

Dileep I will continue it in a few days under mil scenario thread. been spoiling for a naval enagagement
with PLAN for sometime now. you might want to read that thread periodically because vivek ahuja is
already deep into a Indo-PRC war.

Suraj · Post by **Suraj** » 15 Oct 2008 21:12

sugriva wrote:How is a reduction in CRR and now SLR by the RBI a measure of our resiliency?

I am confused. How did the RBI and interest rates come into a response to an article about Indian external obligations and hot money ? All I said in response to the article claiming 'India was highly prone to crisis' was that the numbers they are quoting were from before the current market crash, and that part of the FII outflow has already happened as a result (net FII outflows >$10 billion this fiscal, or calendar - it wasn't clear which 'year' was referred to), but that the consequences haven't been as alarming (a la 1997 Asian crisis) in our case this time.

S.Korea and Indonesia are far more leveraged than we are. Yes we'll see higher ratios than China/Japan because their denominator (forex reserves) is far greater than ours. But in terms of absolute figures, they are quitely to have a significant exposure to hot money, which would mean greater market volatility; the Shanghai index is down ~60% as opposed to ~45% for Sensex.

Katare · Post by **Katare** » 15 Oct 2008 21:37

Actually 8.5% Cash reserve ratio and 25% Statutory liquidity ratio are two biggest safeguards that Indian Banks have and US banks didn't. This is hard cash on hand besides 10-15% of equity capital that Indian banks are sitting on which gives them amount of liquidity that US banks could only dream off. In the older days free-marketwallah used to make fun of our system by calling it colossal waste of money and inefficient use of capital but now those prudent choices/regulations are the impregnable shields protecting Indian Banks.

For example - The 2.5% CRR cut would release Rs1 lakh corer of confiscated Bank money which was not generating any interest for Banks. At 10% PLR this would generate Rs 10K corer/year of additional interest income for Banks.

vina · Post by **vina** » 15 Oct 2008 22:16

Katare wrote:Actually 8.5% Cash reserve ratio and 25% Statutory liquidity ratio are two biggest safeguards that Indian Banks have and US banks didn't. This is hard cash on hand besides 10-15% of equity capital that Indian banks are sitting on which gives them amount of liquidity that US banks could only dream off. In the older days free-marketwallah used to make fun of our system by calling it colossal waste of money and inefficient use of capital but now those prudent choices/regulations are the impregnable shields protecting Indian Banks.

For example - The 2.5% CRR cut would release Rs1 lakh corer of confiscated Bank money which was not generating any interest for Banks. At 10% PLR this would generate Rs 10K corer/year of additional interest income for Banks.

The US has 10% as the reserve ratio for large banks. The US controls money supply thru FOMC operations and it is just a different system. The SLR if my understanding is correct (dont know the intricacies of how it is done in India), it is a means by which the govt implements it's borrowing program. Basically, the govt has the first claim to bank deposits and gets it at dictated rates. The US meets the borrowing and lending program through the open market operations and just like the banks in India are required to buy the govt securities, there too, a list of primary dealers must mandatorily bid during the auction of treasury securities. , which they then either resell to others or keep on their own books. The systems are not very different really.

The difference is that the CRR tool is rarely used if ever in US. That will cause immediate liquidity problems for banks and hit profitability of banks. Playing with the CRR is the tool of choice of command and control economies, like PRC and also India because the banking system is largely nationalized and works under a license permit raj system.

But note however, the reason why Indian banks have not got into trouble is not becuase of the CRR and SLR .. they are a colossal waste of internal resources beyond what is required for safety , but because they took zero risks and did not venture outside India (the one guy who did in a big way , ICICI , an innovator and leader in the Indian banking space , got hammered. but thats okay, they came from nowhere and are now the 2nd largest in India and when the market quietens down, will rocket ahead of the pack).

svinayak · Post by **svinayak** » 15 Oct 2008 22:29

vina wrote:

The difference is that the CRR tool is rarely used if ever in US. That will cause immediate liquidity problems for banks and hit profitability of banks. Playing with the CRR is the tool of choice of command and control economies, like PRC and also India because the banking system is largely nationalized and works under a license permit raj system.

Because of the big credit system in the US domestic economy they will not use the CRR tool. Large credit market will get hit rapidly and entire industry such as car financing industry will go bust with such measure. Treasury Sec is now pumping money into the large banks to make sure that these credit financing keep going.

India and China do not have much domestic credit based consumer economy. India has only top 1% people who have this facility. China does not have even a rudimentary system.

How Paulson pressed banks to sign intervention deal
http://www.mercurynews.com/business/ci_10722647

By Mark Landler and Eric Dash
New York Times

WASHINGTON — The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry Paulson said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard Kovacevich, protested strongly that, unlike his New York rivals, his San Francisco bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine CEOs had signed — setting in motion the largest government intervention in the U.S. banking system since the Depression and retreating from the rescue plan Paulson had fought so hard to get through Congress only two weeks earlier.

No choice

What happened during those 31/2 hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with them.

Suraj · Post by **Suraj** » 15 Oct 2008 22:34

I agree that the SLR isn't exactly the positive thing it is made out to be. Under the present circumstances it does help, but in general it is just a GoI imposed quota that provides them guaranteed access to the capital market. Thanks to all the rate hikes in recent years, GoI now has a lot of headroom to effect rate cuts.

The US situation is different. Part of the problem is that they blurred the lines between commercial and investment banks. Instead of learning from the Savings and Loans episode, and the collapse of LTCM in the 1990s, they went about repealing the Glass-Steagal Act, which placed a barrier on crosspollination between commercial and investment banking spheres.

satya · Post by **satya** » 15 Oct 2008 22:46

There's a Fin. Min. proposal to allow FIIs in domestic bond market , with SLR in place , does it mean that Banks will act as primary dealers for Govt. Bonds or it will be a level playing field ?

vina · Post by **vina** » 15 Oct 2008 22:54

From what I hear from my grapevine, Lehman (and maybe Goldman too) were jockeying to be in the panel of primary dealers for G- secs in India.

satya · Post by **satya** » 15 Oct 2008 23:00

Vinajee

thnxx , confirms my suspicion. So now we will have Unkil & PRC ( via ICICI) making a decent cut for no reason .

vina · Post by **vina** » 15 Oct 2008 23:02

Acharya wrote:India and China do not have much domestic credit based consumer economy. India has only top 1% people who have this facility. China does not have even a rudimentary system.

I seriously doubt that in this day and age, any big ticket asset like a car or a house is bought in India or China without a loan of some sort. It is very hard to believe that people go and pay all cash for a house in India , given current income levels and price of assets like those.

Yeah, people probably dont use credit for daily stuff like groceries, milk etc. because 1) it is not available or severely limited 2) culturally we are not into credit usage like that. I doubt that most folks who spend on credit cards actually use the credit and not pay off the entire balance by due date ( i have never used the credit facility in my credit card ever and have always paid off full balance on the due date, however much i spent, )

vina · Post by **vina** » 15 Oct 2008 23:05

satya wrote:Vinajee

thnxx , confirms my suspicion. So now we will have Unkil & PRC ( via ICICI) making a decent cut for no reason .

Dont understand what PRC has to do with ICICI .

But if you notice, I used to think that the spread in the banking system between deposits and lending rates which are among the highest in the world in India are do to the "inefficiency" of the Indian banking system..On second thoughts, I think the SLR is a big part of that . The spreads are so high that the govt sucks up a large part of savings of the indian people at dictated rates that the remaining part becomes more expensive for everyone else.

svinayak · Post by **svinayak** » 15 Oct 2008 23:29

vina wrote:
Acharya wrote:India and China do not have much domestic credit based consumer economy. India has only top 1% people who have this facility. China does not have even a rudimentary system.
I seriously doubt that in this day and age, any big ticket asset like a car or a house is bought in India or China without a loan of some sort. It is very hard to believe that people go and pay all cash for a house in India , given current income levels and price of assets like those.

There is still tight control over this credit market. India opened it up only in the last 10 years. Only high income and IT community were eligible. This is still small percentage of the pop.
100% credit based industry is non existent in India

Suraj · Post by **Suraj** » 15 Oct 2008 23:30

Absolutely, GoI has a lock on part of the deposit base via the SLR, crowding out commercial entities . Banks would compensate by widening the the spread between deposit and lending rates.

When one talks about foreign participation in the bond market, there needs to be a distinction between government and corporate bonds. There's already means for external parties to buy Indian corporate bonds, to the tune of $6 billion annually.

RBI is being really proactive here. In addition to the 50bp + 100bp CRR cut announced last week, it just cut the CRR *again* by 100bp, bringing it to 6.5% - a change of 250bp in a matter of a week:
India cuts cash reserve ratio by 100 bps
Official RBI Press Release

"The Reserve Bank of India has been continuously monitoring the liquidity and monetary conditions in the recent period. A host of measures have already been taken over the last one month to ensure that there is adequate liquidity in the system.

The Indian interbank unsecured money market has been functioning normally. Average daily volumes in the overnight call money market, at about 140 billion rupees in October 2008 have in fact been somewhat higher than those observed in the previous six month period.

However, the continuing uncertain global situation is having an indirect impact on our financial markets.

On a further review, the RBI has decided to institute the following measures:

(i) The cash reserve ratio (CRR) of scheduled banks is currently at 7.5 per cent of their net demand and time liabilities (NDTL). On a review of the evolving liquidity situation, it has been decided to reduce the CRR by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on October 11, 2008. This measure will release additional liquidity into the system of the order of 400 billion rupees.

(ii) On Tuesday, October 14, 2008, the RBI decided to conduct a special 14 day Repo at 9 percent per annum for a notified amount of 200 billion rupees with a view to enabling banks to meet the liquidity requirements of mutual funds. 35 billion rupees of this facility was utilised by banks yesterday.

Further, the Reserve Bank announced this morning that this 14 day repo facility will now be conducted every day until further notice up to a cumulative amount of 200 billion rupees for the same purpose. Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR).

It has been decided, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 percent of their NDTL. This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008. This accommodation will be in addition to the temporary measure announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 percent of their NDTL.

(iii) RBI instituted a mechanism of Special Market Operations (SMO) for public sector oil marketing companies in June-July 2008 taking into account the extraordinary situation then prevailing in the money and forex markets. RBI will institute a similar facility when oil bonds become available.

(iv) Under the Agricultural Debt Waiver and Debt Relief Scheme Government had agreed to provide to commercial banks, regional rural banks and co-operative credit institutions a sum of 250 billion rupees as the first instalment. At the request of the Government, RBI has agreed to provide the sum to the lending institutions immediately. This liquidity support will be provided by the Reserve Bank of India under Section 17(3b) and Section 17(4E) of RBI Act to scheduled banks and NABARD respectively.

(v) Interest Rates on NRI Deposits

(a) Interest Rates on FCNR (B) Deposits

Currently, the interest rate ceiling on FCNR(B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 25 basis points for the respective foreign currencies.

In view of the prevailing market conditions, it has been decided:

to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 25 basis points.

(b) Interest Rate on NR(E) RA Deposits

Currently, the interest rate ceiling on NR(E) RA for one to three years maturity should not exceed the Libor/Euribor/Swap rates plus 50 basis points for US dollar of corresponding maturity.

In view of the prevailing market conditions, it has been decided:

to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 100 basis points.

(vi) Banks will be allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.

The above measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions.

The Reserve Bank is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations.

The Reserve Bank is committed to maintaining financial stability and active, and flexible liquidity management using all policy instruments is an integral part of this objective.

RBI to announce new liquidity measures: FM

Finance Minister P. Chidambaram on Wednesday identified liquidity as the main concern for the government. He said that the government would provide Rs 25000 crore liquidity to RRBs and banks. He also said that the Reserve Bank of India (RBI) would provide Rs 17500 crore to NABARD and Rs 7500 crore to the banks.

He, however, said that the banks remain well capitalized, adding that no bank has a capital adequacy of less than 10 per cent. He also spoke about the government’s consideration of raising the overseas investment limit for the banks.

Chidambaram said that RBI would provide finance to banks to raise CAR to 12 per cent. He also said that the FII investment in corporate debt has been doubled to $6 billion.

“RBI will release its statement shortly. It will also announce liquidity measures. The banks don't need to give collateral under loan waiver,” he said.
The Finance Minister also said that the market regulator, SEBI, would consider requests on FII equity, debt holdings and the easing of overseas investment limits.

He said that the banks should actively participate in call money market. “The details of the banks’ capitalisation scheme is being worked out, “ said the Finance Minister.

vsudhir · Post by **vsudhir** » 15 Oct 2008 23:45

Sunil Jain: India meets China (Biz std)

Most continue to argue it will take India several years to catch up with China, even though investment rates in India are slowly beginning to catch up with Chinese ones. A recent paper by Jahangir Aziz for ICRIER has some interesting findings in this context. For one, it points out while China’s investment-to-GDP ratio rose by 8.2 percentage points between 2002-05, India’s rose by 9.8 percentage points (in 2005, China’s investment-to-GDP ratio was 43 per cent as compared India’s 30 per cent); private consumption-to-GDP fell in China by 12.2 percentage points and by 10.8 percentage points in India.

After looking at how allowing the cost of capital to rise to its true value (China subsidises capital) would reduce investment-to-GNP ratio to around 30 per cent from the current 45, Aziz’s model shows allowing India’s cost of capital to fall to its true value (India taxes capital) would increase the investment-to-GNP ratio by around 5 percentage points.This would lower China’s average growth to around 8 per cent and raise India’s to roughly a similar level. Apart from the China comparison, the study has important policy implications in the current context of India’s growth slowing and the clamour to get the RBI to reduce the cost of capital.

Download the Aziz paper as PDF here

Katare · Post by **Katare** » 16 Oct 2008 00:57

vina wrote:
Katare wrote:Actually 8.5% Cash reserve ratio and 25% Statutory liquidity ratio are two biggest safeguards that Indian Banks have and US banks didn't. This is hard cash on hand besides 10-15% of equity capital that Indian banks are sitting on which gives them amount of liquidity that US banks could only dream off. In the older days free-marketwallah used to make fun of our system by calling it colossal waste of money and inefficient use of capital but now those prudent choices/regulations are the impregnable shields protecting Indian Banks.

For example - The 2.5% CRR cut would release Rs1 lakh corer of confiscated Bank money which was not generating any interest for Banks. At 10% PLR this would generate Rs 10K corer/year of additional interest income for Banks.
The US has 10% as the reserve ratio for large banks. The US controls money supply thru FOMC operations and it is just a different system. The SLR if my understanding is correct (dont know the intricacies of how it is done in India), it is a means by which the govt implements it's borrowing program. Basically, the govt has the first claim to bank deposits and gets it at dictated rates. The US meets the borrowing and lending program through the open market operations and just like the banks in India are required to buy the govt securities, there too, a list of primary dealers must mandatorily bid during the auction of treasury securities. , which they then either resell to others or keep on their own books. The systems are not very different really.

The difference is that the CRR tool is rarely used if ever in US. That will cause immediate liquidity problems for banks and hit profitability of banks. Playing with the CRR is the tool of choice of command and control economies, like PRC and also India because the banking system is largely nationalized and works under a license permit raj system.

But note however, the reason why Indian banks have not got into trouble is not becuase of the CRR and SLR .. they are a colossal waste of internal resources beyond what is required for safety , but because they took zero risks and did not venture outside India (the one guy who did in a big way , ICICI , an innovator and leader in the Indian banking space , got hammered. but thats okay, they came from nowhere and are now the 2nd largest in India and when the market quietens down, will rocket ahead of the pack).

Vina,

Reserve requirement systems in US and India are fundamentally different. Cash reserves in US are for working capital management of Banks day-to day obligations/cash requirements. Those reserves are charged at 10% of checking accounts (M1) value which is worth peanuts. In India the CRR is charged on total deposits which includes all kind of savings, checking, CDs, bulk, corporate deposits and NRI deposits. So CRR in India is a huge confiscated fund which enables RBI to contract credit/inflation growth in good times and expand it in bad times by adjusting CRR.

While US thinks that market are efficient enough to determine risk and level of credit expansion on there own all it needs is to adjust lending rates for the money that banks borrow from it.

This is the reason you never hear fed changing reserve requirements to control credit/inflation since those reserves are a minuscule part of monetary/banking sys and are designed to serves as a tool for cash/working capital management. Indian Banks also keep some cash reserves and liquid reserves as short-term deposits with liquid funds etc for meeting their day to day fluctuations in working capital/withdrawal/deposit etc.

putnanja · Post by **putnanja** » 16 Oct 2008 03:02

How to fix this mess

How to fix this mess
Pramit Pal Chaudhuri, Hindustan Times

October 15, 2008
First Published: 20:43 IST(15/10/2008)
Last Updated: 01:13 IST(16/10/2008)

There is plenty of brawn in the Indian economy, but its financial brain is in danger of slipping into a coma. New Delhi is loudly blaming the Wall Street plague. However, there is a good case for saying the government’s actions are adding to the epidemic. While Finance Minister P Chidambaram talks smoothly, his policy is full of rocks.

Rewind to earlier this year when double-digit inflation ravaged the country. The primary reason for that was the huge wave of foreign capital that entered the Indian economy from mid-2008. So much money sloshing around helped drive up prices. The government aggravated things by tossing more money into the pyre, spending more on pretty much everything.

The then Reserve Bank of India governor, YV Reddy, warned in June that a deficit-ridden unidirectional fiscal policy would make it difficult to fashion an anti-inflationary monetary policy. A former advisor in the Prime Minister’s Office admitted Reddy had been warning New Delhi for two years that Chidambaram’s fiscal exuberance was going to be reflected in rising prices. The governor tried to steady the boat by hiking interest rates, increasing the cash reserve ratio (CRR) of banks and issuing market stabilisation scheme (MSS) bonds to absorb the dollar inflow. He was partially successful, but he did leave the financial system with a huge kitty: Rs 1.73 trillion of MSS bonds and Rs 3 trillion in the crr.

Chidambaram spent as fast as Reddy saved. Reserve money up to the summer of this year was growing at three times the rate it did last year. The culprit for this inflationary development: government withdrawals from the RBI were nearly six times higher than the previous year. The fiscal deficit of India, including off-budget items, is a red ocean. It is possible that as much a quarter of the inflation Indians are suffering to this day can be traced back to a finance ministry running amok.

The sub-prime crisis in the US was pooh-poohed by New Delhi as a faraway problem in a faraway land. Though real estate and infotech took a few blows, this should have been largely true. The most overt impact of the West’s woes was for foreign financial institutional investors to set sail for home. But they have pulled out over $10 billion this year, hardly enough to rock a trillion-dollar economy. Yet this triggered a credit crunch in India, putting the squeeze on banking, mutual funds, the private sector and even the rupee.

The reason India is a nation searching for liquidity today is almost solely the finance ministry. Sublimely complacent about sub-prime, Chidambaram and the new RBI governor, D. Subbarao, focused on extracting money out of the system. In September and the first week of October, this duo sucked a trillion rupees out of the system. Another stratagem has been to declare lots of expenditure like farm loan waivers, oil and fertiliser subsidies; force the banking sector to pay for these subsidies and then dawdle over issuing the government compensation. These now total well over a trillion rupees — all that much less capital for banks to lend to anyone else.

If there is liquidity problem in India today it is largely self-inflicted. The rupees that the diuretic duo of Chidambaram and Subbarao has released into the system, is dwarfed by the rupees they took out earlier or are hoarding. Presumably, there is logic behind all this, but right now only theories abound.

One theory is that they are still inflation obsessed. It’s still double-digit. And while the wholesale price index is declining, the rural consumer price index rose one point in August. With assembly elections around the corner and a general election around the block, the UPA is in a frenzy about prices.

Economic policies can take months to bear fruit. What is clear is that sinking global prices will temper inflation over the coming months. As the Finance Ministry’s economic advisor Arvind Virmani has noted, the three main sources of rising prices — edible oil, petroleum products, and iron and steel — are all southbound. Even Chidambaram seems to realise inflation is yesterday’s problem and has said, “The root cause of the present uncertainty is liquidity.”

Another theory is that they want to avoid a run on the rupee. The rupee’s 16 per cent fall this year is the worst tumble since 1991. The RBI is intervening to keep it from piercing the 50-to-a-dollar barrier. At a time when Indian exporters of both goods and services locked themselves into forward dollar trades that assumed the rupee would rise, a rupee in free fall would wreak havoc across the market. It would also cause a trade deficit detonation as oil imports became costlier.

Yet, the rising dollar reflects a shortage of dollars in the system and India happens to be sitting on a record foreign exchange reserve buffer. It exists for such times, but needs to be used credibly.

Finally, there is a view that Chidambaram wants to make the government’s books look better than they are when Parliament meets this week-end. Hence his delayed subsidy compensation. And hence his aggressive collection of advance taxes even though this makes credit scarcer. Note that when Virmani was asked what he thought was the biggest threat to the economy, he said, “I am unable to discuss” because it has to be put in Parliament — the fiscal situation. Brace for bad numbers. Once all accounts are squared, the fiscal deficit may be heading for 10 per cent of GDP.

The finance minister’s pattern seems to be to do the opposite of what the textbooks recommend. When inflationary clouds collected on the horizon, he decided to seed the air with money. When a credit drought struck, he began hoarding liquidity. In between, he has ensured the government’s coffers are filled with debt. As one senior representative of India Inc commented, “Chidambaram is okay in a status quo situation. In a crisis he doesn’t have what it takes.”

ramana · Post by **ramana** » 16 Oct 2008 03:34

What do you expect of the dream budget looter? But interesting article coming from Hindustan Times, the unofficial mouthpiece of the INC. Maybe they realized who pays their paychecks?

Suraj · Post by **Suraj** » 16 Oct 2008 04:21

Besides off budget liabilities, one of the problems is that the Central Government is increasingly turning to cesses rather than formal taxation item measures. Why ? Because according to the Finance Commission, cesses do not qualify for the revenue distribution requirements between centre and states; the centre keeps it. In 1999-00, the Finance Commission had set in motion policies to ensure a greater transfer of revenues to states (which helped them recover from the effects of the 5th Pay Commission faster), but the current administrations actions have been in the direction of greater emphasis on cesses and off-budget liabilities, and lesser fiscal prudence in the process. They kept their heads above the water so far because taxation revenues grew so fast that they couldn't spend it fast enough, so we saw real reduction in the fiscal deficit as a percent of GDP.

While deficit spending in a downturn may not be a bad thing, especially if one is a Keynesian, I don't really like the INC's federal bias and general top down view. It looks like a hangover from the forgettable past.

Paul · Post by **Paul** » 16 Oct 2008 04:25

It was India Inc. who made Chidambaram as FM in the first place. Had some other old school conservative like Pranab (they are less receptive to financial engg) been the FM, India would have been less immune to the crisis.

But why should chidambaram take the blame, isn't MMS the Financial pied piper who pulled India out of the rut in 1991.

Nayak · Post by **Nayak** » 16 Oct 2008 06:27

vina wrote:
I seriously doubt that in this day and age, any big ticket asset like a car or a house is bought in India or China without a loan of some sort. It is very hard to believe that people go and pay all cash for a house in India , given current income levels and price of assets like those.

You are wrong, there are many families who have saved up over a period of years and built a house or bought a high value asset because of the allergy towards loans. They mainly belong to non-IT/Vity types.

The tendency is down more south. No figures or links available, but what I heard from relative (Bank manager in Vijaya Bank).

Nayak · Post by **Nayak** » 16 Oct 2008 09:57

Allah-hu-fubar. Sensex is currently at 10,150 level.

How is the doom and gloom in CNBC and TV-18 studios ?

Where are the smooth talking doods and doodettes in the freshly pressed suits and boots indulging verbal w_nking ?

Singha · Post by **Singha** » 16 Oct 2008 10:04

mr banerjee wears a forlorn look these days and far from holding center stage is
reduced to one of the people in a grid of reporters seen on the screen. the main anchor
posts seem to have been usurped by some others presently.
Ms chopra still dresses tightly and goes on CEO day outs on
golf courses - a tired old format...might as well take the CEOs to hip lounge bars for
keeping the viewer interested.

all in all, just a big yawn.

the redoubtable pink paper has been reduced to just a thin 8 page format now and
no real glossy supplements...a sure sign of subscriber count decreasing and people
stopped reading it due to market situation.

however TOI page3 is recession proof and so is the WAG photos on sports page.
some institutions endure, others adapt and some die.

Suraj · Post by **Suraj** » 16 Oct 2008 11:55

India's Inflation Rate Falls to 11.44%, Lowest in Four Months

India's inflation slowed more than economists expected to a four-month low, the government said.

Wholesale prices rose 11.44 percent in the week to Oct. 4 from a year earlier after gaining 11.8 percent in the previous week, the commerce ministry said in a statement in New Delhi today. Economists had expected an 11.86 percent increase.

India Joins Brazil, Russia in Injecting Cash in Banks

India joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch without risking interest rate-cuts that may fan inflation.

The Reserve Bank of India yesterday cut its cash reserve ratio to 6.5 percent from 7.5 percent to ease the worst cash crisis in the economy since 2000. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

Only China among the so-called BRIC economies has cut interest rates after the nation's inflation rate almost halved since April. Prices are still at elevated levels in India, Russia and Brazil, and the decline in their currencies this year may stoke inflation from higher import costs.

``There are a number of countries that haven't cut rates and the common feature for all of them is that their domestic inflation numbers are still quite high,'' said Subir Gokarn, Asia-Pacific chief economist at Standard & Poor's. ``That is really what is holding back the Reserve Bank of India.''

India has injected one trillion rupees ($21 billion) through reserve requirement cuts since Oct. 11 as call money rates surged and mutual funds sought government help to meet the highest redemptions by investors this year. The central bank's moves to inject liquidity helped push down India's call rates to 7 percent today from an 18-month high of 16 percent on Oct. 10.

Finance Minister Palaniappan Chidambaram also increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low.

``This is a step in the right direction as liquidity is much required in the economy,'' said Y. M. Deosthalee, chief financial officer at Larsen & Toubro Ltd., India's biggest engineering company. ``The call money rates had risen sharply because banks were cash-strapped.''

These measures may free up bank lending, giving central bank Governor Duvvuri Subbarao room to resist a cut in interest rates. Inflation is still double the central bank's target even after slowing to a three-month low of 11.80 percent last month.

Besides, the 19.2 percent drop in the rupee against the dollar since January, the biggest decline since 1991, may make imports costlier and negate the drop in global prices of oil, wheat and other commodities, analysts say.

The International Monetary Fund and Goldman Sachs Group Inc. cut their growth forecast for India this month because of the repercussions of the global financial crisis on the $1.2 trillion economy, Asia's third largest.

vina · Post by **vina** » 16 Oct 2008 11:56

Bannerjee ?. I think you mean Mr Mukherjee.. ie Udayan Mukherjee. He seems to be all morose and in mourning these days. Come on, there is life beyond the stock market!.

But Allah!.. The market is just around 50 to 60 short of being in the 9000s!.. What a fall eh ?. From 20K to 10K in around 5 months or so.

Hang in there boys. Cash is king. Dont put your money in the markets . The earnings are going to suck big time for the next two quarters at least.

Add to that the political instability looming thanks to the Sri Lanka situation and the threat by the MPs from TN. If a political shock happens like the govt falling, the Sensex will easily go down to 7000 or so in a twinkle of an eye. No one will do any "analysis".. they will sell first and then do the "anal ysis" later. The scene is really murky and the election timetable and political uncertainty is the last thing you want when you are putting money in.

Singha · Post by **Singha** » 16 Oct 2008 12:34

I just got a marketing call from golden palm spa the 5* feroz khan property in
neelamangala...some pkg deal offered yada yada.

business must really be hurting if they ae setting 'beaters' to flush out cheapo folks like
me from the bushes

now if three 9W hostesses gave me a free massage I would buy in , but for now holding
out till they soften their terms.

satya · Post by **satya** » 16 Oct 2008 12:40

Dont understand what PRC has to do with ICICI .

But if you notice, I used to think that the spread in the banking system between deposits and lending rates which are among the highest in the world in India are do to the "inefficiency" of the Indian banking system..On second thoughts, I think the SLR is a big part of that . The spreads are so high that the govt sucks up a large part of savings of the indian people at dictated rates that the remaining part becomes more expensive for everyone else.

A well informed Dilli-billi loud mouth says PRC has substantial stake in ICICI Bank via S'pore ( same Dilli billi predicted Nano move to Gujrat when Tata announced the work stoppage in Singur ) . Another comforting thought our hon'able FM is also on ICICI Bank .

Agree on SLR & rate issue . OT if FIIs are allowed in G-secs even at secondary level ,it will leave SLR a paper exercise only or GoI planning truck load issuance of G-secs .

Katare · Post by **Katare** » 16 Oct 2008 22:53

Earning season so for looks OK -

HDFC Bank Q2 net profit rises 43% YoY to Rs3991.21 crore

Infy beats St, but stays cautious

rsingh · Post by **rsingh** » 17 Oct 2008 00:45

AoA After reading my post about Jet Pearls, Jet Air decides to keep the pearls home. They are jealous.