A meeting on Thursday of the Organization of Petroleum Exporting Countries (Opec) to decide whether to cut production could have an impact on India's inflation expectations. The betting is that Opec will opt for the status quo, but the point is we don't know for sure that oil prices - and with that India's inflation outlook - will stay benign indefinitely.
Despite the inherent uncertainty of economic forecasting, everyone from the finance minister to chief executive officers appear to have 20-20 foresight and believe slowing inflation means it is time to cut interest rates. At the World Economic Forum (WEF) earlier this month, WEF's Klaus Schwab sounded as ever Kissinger-like, full of gravelly gravitas in his interview with Arun Jaitley, who in between congratulating his government and castigating the last one, predictably called for a rate cut. The affable Anand Mahindra, in a discourse marked by clanging metaphors of flywheels moving, pipelines and pipes needing plumbing and the wind being in India's sails, called on the central bank to "be courageous". As The Economic Times giddily reported, "Calls for an interest rate cut reverberated through the World Economic Forum's India Economic Summit in Delhi with industry leaders adding their voices to a rising crescendo that RBI Governor Raghuram Rajan will find difficult to ignore."
Well, I could not have summed up the mood there better - except to add that they are all wrong. Crisil picked that overheated moment to put out a report that made several sane and salient points. Among them: real interest rates are much lower than they were during the pre-crisis years between 2004 and 2008 when investment growth rates were averaging 16 per cent or so, compared with today's feeble rate. "During (fiscal 2013 and 2014) the policy rate in real terms - repo rate minus inflation - has been negative, and real lending rates averaged 2.4 per cent. This is significantly lower than the 7.4 per cent seen in 2004-2008." Crisil is spot on when it says that a sharp slowdown in demand, policy uncertainty and the sharp fall in the corporate return on assets - to 2.8 per cent in fiscal 2013 and 2014 from about six per cent in the pre-crisis years - explains sluggish investment levels in India currently.
This is borne out in the most recent quarterly results for the quarter ended September. As Credit Suisse observes, Nifty sales growth was at five-year lows. Bellwethers Larsen & Toubro grew only three per cent while BHEL's sales actually fell: "More than half the companies saw sales grow less than 10 per cent and only five saw sales grow more than 20 per cent."
India Inc is suffering from classic quarter-by-quarter myopia by repeatedly calling on the Reserve Bank to abandon its fight against inflation. One reason domestic demand is so weak is because the vicious inflation of the past couple of years has had the effect of a steep pay cut on many urban consumers. Domestic demand is subdued because expectations of inflation are so high. A survey of 1,700 consumers in the five big and small metros by UBS found that there is pent-up demand for durables and cars, but it is held back in large part by a wait-and-watch approach to inflation and salary raises. More than 50 per cent of those surveyed have expectations of an inflation rate of 1-10 per cent while a staggering 35 per cent expect prices to go up by more than 10 per cent annually in the next one-two years. Inflation's "moderation could boost consumer sentiment in the future", says UBS.
Our credit system is seizing up, but this has little to do with the level of interest rates and a lot to do with the perverse way our public sector banks are managed and the manner in which unscrupulous owners of large companies have gotten away with taking large loans and not repaying them. Both in different ways were highlighted on the front page of Wednesday's Business Standard. The first in a table that showed that banks such as Indian Overseas Bank to Central Bank of India have "stressed assets" of anything from 15 per cent to 20 per cent of gross loans. The second in a hard-hitting speech by Raghuram Rajan in which he spoke out against the "riskless capitalism" perfected in 21st century India whereby "the system renders the banker helpless vis-à-vis the large and influential promoter." Mr Rajan said that the total write-offs of loans in the past five years by commercial banks, which if anything understate the extent of the problem since banks put off this day of reckoning, amounted to 1.27 per cent of gross domestic product. He estimates that would have put 1.5 million poor children through university at the top private universities in the country. It is roughly equivalent to the Indian government's miserly outlays on public health every year.
While Mr Rajan was delivering this blockbuster of a speech in honour of the work of Verghese Kurien in Anand, I was meeting a small businessman. He pressed me to read so many documents of related-party transactions that benefited in-laws and relatives of a well-known promoter at one of India's large companies that I began to feel sick. By contrast, visit Amul's headquarters and it seems a successful example of a marketing cooperative that started as a response to an overbearing cartel. We decry loan waivers for farmers vociferously, but are more muted in our outrage against unscrupulous promoters playing the system as cases meander through debt recovery tribunals and appellate tribunals. As Mr Rajan notes, "The promoter who misuses the system ensures that banks then charge a premium for business loans." He points out that the average interest rate for loans to the power sector on average is close to 14 per cent while you and I can get a home loan for about 11 per cent. "When the large promoter defaults wilfully or does not cooperate in repayment to the public sector bank, he robs each one of us," Mr Rajan said at Anand. He's right.
Twitter: @RahulJJacob
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