Thursday, October 27, 2016

TRENDS: ONE DEAD AND THE OTHER DYING?

Recently, Andy Mukherjee of Bloomberg wrote on the day Infosys’ September quarterly results came out that the India IT industry as we know it is dead. Today two Bloomberg columnists James Greiff and Noah Smith have written that globalization too is on its last legs.

The IT industry’s demise is based on the premise that artificial intelligence and IoT will make humans redundant in many of the IT jobs from India where the off shore model employees young legs from India in US, Europe etc. Besides, there is the rising tide of protectionism in Europe and western nations, whose economic prospects are none too bright because of the global economic slowdown and geopolitical uncertainties. Events like Brexit had added to the volatility of economic operations in EU countries. The rising cost levels in China and its shrinking imports are another dampener .Added to this are the uncertainties in the Indian economy itself where new investments are not happening. Besides, the cost of upgrading the skills of Indian engineers and managers is rising because of quality issues in education. For all these reasons, Andy felt that India’s IT industry has no future, especially since the IT biggies are so very short on innovation and creativity.

Globalization is under siege from many quarters. In the US, in spite of the lip service to it, political interests from both sides find protectionism more conducive to their survival. Witness the current US presidential debate. Both Trump and Hillary are batting for protectionism. The unexpected onrush of immigrants from the Middle East into Europe has created a wave of panic against globalization in US as well as in Europe. Added to this is the financial crisis and recession because of which, Europe’s and America’s trade with each other and the world is under severe strain. The net result is the severe curtailment of financial flows across countries. Some of the unethical practices by few big global banks have also disenchanted many countries. And add to all this has been the rising tide of extremism and fears about ISIS.

Slower population growth across many continents, except the African continent is curbing the effective global demand. Low fertility throughout most of the world is also acting as a drag on economic growth. China’s working-age population is falling by millions every year. Europe and East Asia are graying rapidly and fertility has fallen to replacement levels. Only India is somewhat positive on these indices. But, its growth prospects are hampered by poor social, health and educational parameters.

International agencies like IMF, World Bank, WTO, UNO etc. are on steep decline and are becoming irrelevant. No wonder, therefore, that many believe that globalization is going the way of all flesh!

Futurologists are rendering the requiem for Indian IT industry and globalization. You can shut your eyes and disbelieve!!

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Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology

Wednesday, October 12, 2016

AN AIMLESS CUT?

The latest RBI initiative under the new Governor, Mr. Urjit Patel of cutting the Repo Rate by 25 basis points might have pleased both the hawks as well as the doves of monetary policy. However, other leading metrics of growth like the IIP, credit growth to industry etc. have reported declines showing that this may turn out to be a dud cut after all.

The policy makers are perhaps hoping to bank on the boost in private consumption from festivals to drive domestic economic growth. The close to normal monsoon and the disbursement of pay commission bounty together are expected to boost urban spending. Yes, there are positive signs of revival in consumption demand as shown by the rise in the automobile sales in September of 20% - the highest in the past four and half years.  Airlines have reported a robust 23% growth in passenger traffic between April and August this year which works out to a 20% growth over the previous year. Pizza Hut and KFC have reported a robust same store-sales growth in September quarter after 11 straight quarters of decline.

This urban boost will put pressure in prices of most commodities except food perhaps - the latter would benefit from a good harvest. However, the overall private investment has remained muted due to excess capacity and high leverage across firms, according to a CRISIL report.

Disturbingly, the industrial production (IIP) has declined 0.3% year - on - year between April and August 2016 caused by a decline in manufacturing and weak growth in mining. Manufacturing output has fallen 0.3% in August over a decline of 3.4% in July 2016. The mining output is down 5.6% against growth of 0.9% in July. Electricity generation is up by 0.1 % against growth of 1.6 % in July. Cumulatively (April-August) IIP has declined 0.3% this year as against 4.1% increase in the corresponding period of the previous year. Adding to these woes is the abysmal performance of the bank credit growth to industry which has fallen to less than zero (-0.2) as against the January 2016 figure of +5.6%.

Economists say that this contraction reflects high unutilized capacities in industrial units and significant investments not taking place in industry. In such as scenario, a cut in interest rate can hardly give an impetus to fresh investments.

Therefore, the rate cut of 25 basis points obviously is not likely to trigger an investment cycle. It might possibly just send a signal for consumption boost, which ultimately might even generate its own inflationary pressure. In this context, the new Governor’s subtle shift of the goal post in inflation fighting - from targeting 4% CPI inflation to 4 - 6% CPI inflation band is troublesome. It might appease certain business groups without doing any good in terms of boosting industrial production.
In the end, what purpose has this rate cut achieved?

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Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology


Tuesday, October 4, 2016

ALL THE HYPE IS ABOUT RATE CUT; WHAT ABOUT SAVINGS RATE?

Mr. Urjit Patel, Governor of RBI on October 5, 2016, has announced a repo rate cut of 25 basis points – a six year low of 6.25 % from 6.5% with immediate effect (October 5, 2015).

Banks are expected to pass on the benefit of the rate cut to customers. Markets cheered the move, with Sensex rising 91 points and Nifty closing above 8, 750. A positive beginning for the new RBI Governor in kickstarting the so called marketing sentiments.

The assumption seems to be that the inflationary pressures would trim down over time. There may be calls for further cuts in the next round. However, such an easing needs to be balanced with the need to preserve positive real rates of savings to reverse the decline in it. IMF says that India’s gross savings rate has fallen to 31% of GDP, from 37% eight years ago. This is in contrast to China’s saving rate of 49-50%.

The moot point is whether the slowdown in India’s saving rate is influenced by cyclical factors or structural issues. In the rest of Asia, even when the savings rate have been falling, the per capita income has been going up, while India’s per capita GDP is amongst the lowest in the region and is stagnating.

Structural Factors, especially demographics, are in our favour. India’s dependency ratio is moving south, while that of Japan and China are rising. The working age group population (15-64 years) constitute nearly 2/3rds of our overall population.

Therefore, even as structurally the factors are favourable, the savings rate has hit a plateau due to cyclical factors.

The private sector, (households and corporate) is the main driver of total savings, while the public sector is a laggard. Within the private sector, households are the main source of savings which have been pulling down the rate of late.

From a high 70% or years earlier, households, now contribute to only 60% of overall savings. The reason may be low incomes plus long period of high inflation alarmingly forcing them to set aside more of their income for consumption and less for savings. Household savings now constitute only less than a quarter of the family disposal income – down 5%.

Two thirds of household savings comprise of fiscal assets to ward of inflation.
The latest monetary policy, unless it kicks off an investment boom, will not be of much help in increasing the savings rate. In short, in spite of the hype in rate reduction, savings are likely to be in the doldrums for quite some time to come.

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Prof. K. K. Krishnan
Chairperson - CCR &
Prof. Centre for Insurance & Risk Management
Birla Institute of Management Technology