Not the time for doom & gloom

2020 has started with a lot of disruption for personal life & business as well. Starting with the Coronavirus & it’s rapid spread across the globe resulting in business disruption as well as requiring companies to come up with alternative means of engaging with clients, prospects & various stakeholders.

There have been other disruptors globally like Australian bushfires, protests in HK & India CAA protests, on the back of one of the biggest trade wars between US & China. All these have caused the economic engine to slow down faster than expected. These would be a precursor to a slowdown in growth with many predicting a global meltdown or a looming recession. In these uncertain times, here are a few take from me on what one can do to avoid the doom & gloom & stay positive.

For businesses: Don’t let this be a time that goes waste. The global disruptions will mean that changes in profitability/balance sheet (attributable to global economic scenario) are bound to happen. These would be out of control of a business. This would be a good time to reflect on the product/service changes which you may not have been able to manage in regular course of business. This also may be a good time to identify geographies/business lines which will sustain revenues & profits while keeping a sharp eye on areas for growth to capitalize on once the economic engine is up again.

For individuals: This may be a troubled time as people may be retrenched considering economic outlook or may not be in the most positive frame of mind. I think each one of us should work on the following points:
·      Maintain personal hygiene & stay safe
·      Stay sharp & focused on the task /job at hand
·      Upskill & identify areas for improvement

A simple thing like opening up the drapes from your office window in the morning & letting the sunshine hit you can have a positive effect on your daily routine. Rather than being huddled in conference rooms with gloomy lighting do move out & explore the outdoors. Nature will provide the strength in times that we may need going forward.

The Great Indian Consumer Story

We have all heard of the great Indian consumer growth story wherein every brand is eyeing for all the eyeballs & increasing spending power of Next Gen India. The growing consumer base is tech savvy & is also spending a lot more than the previous spend thrift generations. That got me thinking on the future of Indian banking industry (15-20 years down the line) in this context. Few data points to note while considering this:

o   Indian Household debt has been going up & the average savings rate has been going down every year for a few years. There has been a big change in investment, spending & saving behavior of the consumer.

o    The tech savvy next gen has newer avenues of investment (MF, P2P loans, simpler options like sweep In FD’s/net banking) & is actively using these for their banking needs.

o   Growing credit culture: The generation is also not averse to debt as the rise of EMI culture has hit the Indian economy as well which we believed to be the bane of western economies only.

The fallout of these data points could be:

-          Macro: The increased household debt could be a problem in recessionary times. As average Indian household income is lower, they will be more prone to such shocks & might need bailouts/loan waivers. Govt borrowings could go up with inflationary shocks being more rapid than regular business cycles.

-          Banking:

o   Liabilities:  The SA book in CASA will surely go down as :

§  Lesser number of people are keeping money in their bank savings accounts & are looking at other avenues of investment/liquidity. This trend will only continue to grow.

o   Assets:  The effect on assets might be :

§  This loss of SA base will lead to ALM /pricing issues which might lead to higher interest costs as the effect of SA loss will surely come back to effect the loan pricing. The higher interest costs would affect corporate banking customers as well.

§  Lower savings rate might lead to higher delinquencies on loans as well. We already see higher credit card debt for Indian consumers (It is a vicious cycle which is very difficult to get out of).  

§  Margins for retail banking would be under pressure & subsequently corporate bank as well.

-          MF Industry: MF industry will surely benefit gathering this liability business (It has been growing well over the past few years)

-          Fintech: The fintech industry is tapping the payment landscape & will benefit from the pie of market being taken from banks/new borrowers inducted into the formal borrowing economy.

The current household debt figures are not at any alarming levels & with a growing economy these figures should not go out of hand. But a major point to consider is that Debt provides a good boost to consumption/GDP growth in the short term but in the long term it can have catastrophic significance. The only point to consider is that whether the necessary evil (debt) will have more short term benefits or a higher long term negative.

Retirement Calculator

Hello,


Putting up a blog after a long time. Have made a calculator to find out corpus needed at time of retirement. The cells in green are to be entered as data points. Enjoy & let me know feedback on the same.

Retirement Calculator

Rollback of Stimulus: A Risk or need?

“The good news is that we may be at the end of a free fall. The rate of economic decline has slowed. The bottom may be near – perhaps by the end of the year. But that does not mean that the global economy is set for a robust recovery any time soon. Hitting bottom is no reason to abandon the strong measures that have been taken to revive the global economy”.-Joseph Stiglitz (in “Stimulate or Die” dated 8 Dec 2009)
Economics defines business cycles as economy-wide fluctuations in production or economic activity over several months or years. It includes periods of rapid growth and those of relative stagnation as well. The world economy is on a revival path from the huge contraction that it suffered due to the subprime crisis. As the credit crunch gripped the entire financial system, the central banks moved in unison to avert further deepening of the recession by injecting liquidity into the system. These stimulus packages have provided crutches to the crippled world economy. But these crutches come with a caveat , the longer that you hold on to these crutches the more you get used to them and the lesser become your chances of standing up on your own. This analogy applies to the stimulus packages as well. The government needs to return to a path of fiscal consolidation to avert dire circumstances like hyperinflation which have the potential to ruin a perfectly healthy economy.

Stimulus Packages across nations

The size of stimulus has varied significantly across nations. Including the measures undertaken in 2008, the U.S. stimulus is largest (a cumulative 4.8 percent of GDP during 2008–10), while Italy and India are at the lower end of the spectrum. Two sets of factors help explain the relative size of stimulus packages: (i) differences across countries in the need for stimulus; and (ii) differences in fiscal space. Source: IMF database & 2010 forecast
Countries in which the automatic stabilizers are larger need smaller discretionary stimulus. Government size is a proxy for the impact of automatic stabilizers and is smaller in China, India, the U.S., Canada, and Japan, and it is negatively related to the fiscal stimulus.

Growth impacts and needs

Stimulus efforts, together with the impact of the automatic stabilizers, provide an important boost to growth and help forestall a negative downward spiral. According to IMF Preliminary staff estimate, fiscal policy may have contributed 2–2½ % points to PPP-weighted growth of the nine countries in 2008 and may provide 2–2¼ % points in 2009 and ¼–½ % points in 2010.The decreasing impact of fiscal stimulus is indication for the rollback of stimulus worldwide.

A rollback of stimulus is necessary to bring the economy back to its natural growth path. This artificial growth is not sustainable in the long run and needs to be dealt with on priority. The global markets are upbeat on the magical carpet of the stimulus packages, but the real test for these economies would be when they would be left all alone ,high and dry, in mid air. The action plan should now involve a gradual and judicious withdrawal of the stimulus package as any sort of misconceived notion of a V shaped recovery will be disastrous to say the least. The central banks need to work on their strategies to maneuver themselves on this tight rope with the help of an effective monetary policy.

Risk Analysis

The systemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement in the economy. Even with the momentum significant risks remain. These are as follows:
• The recovery is driven largely by government spending in many economies
• Commodity and asset prices have risen aided by high levels of global liquidity
• Emerging market economies which are generally recovering faster than advanced economies, are likely to face increased inflationary pressures
• Uncertainty about the pace and shape of the global recovery
• The surge in oil prices, if global recovery is stronger than expected
• Sharp increase in capital flows, above the absorptive capacity of the economy, which may complicate exchange rate and monetary management
• Large fiscal deficits command a bigger risk to both short-term and to medium-term economic prospects

Global Scenario

Last five year the world has seen a dramatic downside in term of negative growth in their domestic products. All the major economies except China and India have undergone contraction varying from -2.5% (France) to -10.2 % (Brazil) during 2009, as evident from the chart.


The IMF says that, led by China, the world economy is bouncing back strongly from its 2009 decline. US growth is projected to reach 2.7% this year, a nice rebound from last year's 2.5% decline. The IMF, in its latest financial stability report, says there is an urgent need for more regulation of financial institutions.

This entire fiscal stimulus comes at the price of greatly expanded debt. The Congressional Budget Office this week said the US deficit will for the second straight year exceed $1 trillion, an amount equal to about 10% of GDP. This explosive volume of debt will at some point have to be halted and rolled back. But, says the IMF, not yet. The exit from stimulus towards fiscal balance should come only when there is a tangible pickup in consumption, investment and exports. Unfortunately none of these elements are yet present.

Indian Scenario

The economy is steadily gaining momentum, though public expenditure continues to play a dominant role, and performance across sectors is uneven, suggesting that recovery is yet to become sufficiently broad-based. The baseline projection for GDP growth for 2009-10 is now raised to 7.5 per cent.
The Industrial Growth in India has been significant with 7.6% growth rate up to 3rd Q and 11.7% in November but the closest indicator of Industrial growth, bank credit has not exhibited a parallel picture. Growth in Bank credit is sluggish at 8.8% for the first 3 Q of year as against 12.5% last year. This can be due to either low demand of funds from industry or the banks are not lending easily.
Industrial Growth has been high at 6.3% but according to a recent study of 1752 manufacturing firms, done by RBI, financial performance of these firms has declined by -1.6% while net profit were up by 9.6%.This happened mainly due to sharp cut of 9.3 % in raw material cost. The import of capital goods and raw material usually increases during industrial growth but this is yet not visible and it has been negative for November. The fourth indicator of state of industry is the movement in price. Growths of manufacturing industry prices are still low at 5%.

Conclusion

There is a need for a prudently planned exit from the fiscal stimulus. A phased rollback of the stimulus is essential to maintain a balance between delivering sustainable growth and stabilizing the economy. A hastily worked out stimulus could end up being disastrous and counter-productive for the industry. There also needs to be greater coordination between fiscal and monetary exits to avoid conflicting results between them. We need to understand that we are not out of the woods yet and that the darkness might prevail for a longer time tha

Lessons from a decade of financial misfortunes

This decade has been quite fascinating to say the least. It ended with a recession at its tail quite similar to the way it had started off with. The IT bubble gave way to the real estate bubble both of which burst with equal tenacity leaving the taxpayer at the mercy of the Capitalist system. As these huge financial institutions gambled away the savings of the common man, the brunt of the losses was borne by the hapless tax payer who was left in a lose-lose situation .The cherry on the other hand was taken by the few who actually recklessly gambled away the savings of the many who diligently paid their dues to society. An insight into these financial crises gives us an understanding of what happened, how it happened and why it happened as these are a critical part of stabilizing the financial system in the long run.
The learnings from these crises are one too many but the biggest of all has been that of the importance of regulation in our financial markets. Without adequate regulation markets become susceptible to manipulation and lose their self correction mechanisms. The invisible hand remains invariably invisible.
As in the case of the recent Global financial crisis the “invincible” sector – Real Estate also revealed the mess that was underneath the massive housing market. Right from the late 1990’s to the mid 2000’s housing prices in US rose at a CAGR of 8%. The expansionary monetary policy followed by the Clinton administration led to extremely low lending rates due to which more and more people were able to afford houses thus leading to growth in the economy in general.

But this growth was temporary as the housing bubble burst sending a ripple effect throughout the financial system. Default on mortgages and foreclosures became commonplace, thus leading to a credit crunch for the banks that had lent out these subprime loans. Soon these banks went insolvent which triggered the downward spiral that engulfed the entire global financial system. Globalization of these toxic assets made this the local problem global. Thus an understanding of complex financial products requires great expertise and judgment.
During the first half of this decade American-style consumption offered a new model of economic development. The world revolved around American consumerism. During the recession the savings rate of the debt ridden economies shot up due to reduction in disposable income of these economies. This led to a further deepening of the crises while revealing the massive overcapacity of the US retail market. So while the last decade was an age of Consumerism the next one is sure to be one of the Service Economy which would emphasize human interaction more than individualistic consumption.
Another learning from these difficult times has been the impact of labour and financial markets on the economy. The inefficiencies of the labour markets lead to escalated costs on society. On the other hand capital market failures strongly affect the labour markets. The recent global recession has left the United States with approximately 8 million jobless while the global unemployment levels have reached to around 220 million. Such weakness in the job market takes a huge toll on economic and personal well-being.
We also know that not all innovation leads to a more efficient and productive economy. Financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly. Thus to check the excessive leverage of the last decade, stiffer capital adequacy norms need to be put in place.
In the current crisis, China, India, and certain other emerging-market countries are coping fairly well. These countries all had strong external balance sheets and ample room for fiscal maneuver before the crisis, which allowed them to apply countercyclical policies to combat external shocks. They have also nurtured industries in line with their comparative advantage, which has helped them weather the storm. In today’s competitive global marketplace, countries need to upgrade and diversify their industries continuously according to their changing environments. The focus now should be on establishing well-functioning markets that enable developing countries to fully tap their economies’ comparative advantage.
With the advent of globalization, integration and synchronization of the business cycles across the world has become a common fact. It has its pros as well as its cons. Increased financial integration can lead to a positive effect on the exports of neighbouring countries through inter-linkages between monetary policies of these nations. On the other hand we can also have demand shocks in one country severely affecting the output of another. As was the case when the demand in US declined it affected the exports of India and as well as China immensely. The developing economies need to build up their own demand levels and reduce the burden on exports to mitigate the impact of such crisis on their growing economies. Decoupling of major economies is not a viable option as the self-sustained growth can only be possible after decades of superlative growth.
All in all this decade has proven to be one of great hurdles which have taught us important lessons about the role of greed and fear in the markets. We need to take our learnings forward and make sure that the next decade can handle all the impediments that come across its path.

Economic Renaissance should take precedence over ecological imbalance

The recent financial crisis has put the great economies of the world under immense pressure to rebuild and restructure their financial structures. It demands a comprehensive strategy from all the major countries to restore the growth momentum of the earlier decade. At this stage of the economic cycle the emphasis should only be on kick starting an economic renaissance. Entangling ourselves in the hue and cry over environmental sustainability will only inhibit our efforts in restoring the economy.
We have almost half the world living at less than $2.5 a day. The main concern of these 3 billion people is food security and that can only be attained through economic growth. For poor countries ecological impact takes a back seat as human survival becomes a priority. Even for the developing countries maintaining their growth momentum involves building on their competitiveness which can be marred by environmental constraints. The pioneer in the field of sustainable development should be the rich developed countries which have the necessary resources and technological expertise to explore renewable energy resources and to utilize them efficiently. But sadly even the US, the largest economy in the world, has not ratified the Kyoto Protocol even though it is the largest contributor of greenhouse gases in the world.
We should understand that the topic here talks about giving precedence to growth aspects of the economy and is not concerned with underpinning the environmental sustainability. Both these aspects need to be considered while chalking out a successful business model. The government also needs to be proactive in its approach towards sustaining the environment. Any company which is losing out on its competitiveness due to environmental friendly policies should be provided with the required stimulus to sustain its eco friendly outlook. Giving precedence to environmental aspects without understanding the financial implications of the same can be catastrophic for any business.
The main concern of the environmentalists should not be to stall the growth process rather it should be to develop sustainable energy resources for the future generations. The focus should be on developing cost effective solutions which are competitive in the free market and do not require any subsidies for implementation. They should work towards making global energy supply more efficient while reducing consumer demand for polluting goods and promoting cleaner energy and transport technology.
Be it Kyoto or Copenhagen, there has never been a reconciliation between ecological concerns and economic growth. The current economic scenario is not potent enough to stand any further ecological restrictions. Any attempts to do so might prove to be catastrophic.

Markets and morality don't go hand in or do they??

A market is an all-encompassing socioeconomic system, covering economic institutions, social relations and culture. In this context let us take a more streamlined definition of the market as the rules that coordinate economic activities.
This idea emanates from a Socialistic viewpoint that markets are inherently corrupt and that morals can’t coexist within such a system. As we all know recently, free market capitalism has faced a lot of slack on the premise that greed fostered the subprime crisis and that all capitalists are immoral by nature. Capitalism naysayers have pounced on the bandwagon of Global recession to trounce the fundamental idea behind a Capitalistic society and have started to falsely believe that this downturn shall lead to the eventual death of the prancing horses. These proponents of Socialism should remember that this glitch will only be a learning experience and that the Bull Run shall continue with a more resilient system behind it.
There’s a popular saying that those who live in glass houses should not throw stones at others. Ideologically driven socialistic societies have suffered from stagnated economic performance, a withering civil society and hence a corroded moral character.
On the other hand, the idea behind free market capitalism is that it tends to increase the overall pie hence allowing a much larger number of people to be better off. We need to understand that Moral judgments about particular socio economic activities are different from moral judgments about the rules of the market. The markets flaws stem from the actions and motivations of its participants rather than from its design. Free markets foster free societies which afford people the opportunity to make their own political and social systems more just. Thus in contrast these activities support rather than corrode morality.
For example, In Europe, the integration of former Soviet bloc countries into the continent’s free-market trading system did not have any negative moral consequences. But in China, one can easily find evidence of a decline in both the moral order and business ethics.

Who says markets and morality can’t go hand in hand. We have Infosys which has been the epitome of fairness in all business dealings. The value system envisioned by its founders has been able to keep the company highly competitive in its business while maintaining the virtues of trust and honesty.

There’s nothing inherently evil about profit. The Bill and Melinda Gates Foundation is based on the idea of doing good while making profits. Google’s charitable wing, Google.org, is also designed as a for profit enterprise. We all know of Grameen Bank which was established with the sole motive of providing credit facilities to poor. Currently it has 7 million borrowers + with US $ 175 million in revenue. A perfect example of an enterprise set up with a social cause and one that is able to sustain itself in a highly competitive business environment.

My opponents will argue that markets are an evil place where the rule breakers are the kings. I would like to tell them that the market place is a great leveler; all your misdeeds will come to haunt you sooner or later. Be it Satyam or Enron, everyone will suffer from consequences of their deeds. Any and every immoral act shall be punished by the system.

In the end I’d like to conclude saying that the greatest empires have been built on the foundations of morality and have collapsed due to the lack of it.
With that I rest my case.