Volatility in numbers

'Food deflation, crude oil prices and rupee has led to sharp downward revision in inflation forecast making MPC members scratch their heads to substantiate their policy decision'

Is forecasting easy?? Ask a statistician or an econometrician and he will use a number of variables to arrive at a certain specific two-decimal value of an indicator or to be on the safer side give a wide range of predicted values. Forecasting is certainly not an easy task especially in a volatile external environment as experienced in the global economy in recent times.

The recently released minutes of the Reserve Bank of India (RBI) shows that members of the Monetary Policy Committee (MPC) are finding it difficult to make inflation forecasts in such a volatile domestic and external environment. Drastic and sudden changes in three key indicators driving inflation namely food inflation, crude oil and the value of rupee against the US dollar has led to a downward revision of the inflation forecast for the second half of FY19 by around 120 bps (100 bps is equal to 1%). The upper limit of the inflation forecast for the second half of FY19 at 3.2% stands 80 bps lower than RBI’s medium term target for CPI of 4%. The recent period of unpredictability has unequivocally made it onerous for the MPC members to forecast inflation. How these indicators have changed in recent times needs to be put under the lens. In addition, going forward, the risks on account of uncertainty and surprise element remains, making it even more challenging for the MPC members to make inflation forecasts and anchor inflation expectations.

Food inflation

First, one needs to look at the unexpected large collapse in food inflation. Food inflation has witnessed a sustained decline since May, contracting by -0.1% in October and subsequently by -1.7% in November (not part of December MPC analysis). These have primarily been on account of prices of vegetables, pulses and sugar going into the negative territory. Vegetable prices have seen a contraction in the last 4 months while sugar prices have seen a contraction since February. The biggest and sustained collapse in prices have been seen in case of pulses having witnessed on an average a double digit contraction in prices of around 15% since December, 2016. Jawahralal Nehru University (JNU) professor Himanshu, in his recent column in Mint has highlighted a combination of factors like unnecessary imports, market restrictions, oversupply of some commodities and an overall demand deflation, particularly in the rural economy as factors contributing to food deflation. Although decline in food prices and in-turn low inflation numbers bodes well from the consumer angle but is remains an implicit punishment for the farming community. The increase in Minimum Support Prices (MSPs) announced by the government in July on 17 notified kharif crops by around 25% (on an average) have not translated into higher prices. This was an important upside risks considered by the MPC members in the previous two meetings, which now seems to have mitigated. However, the members have highlighted that there could be a reversal in this food deflation in the coming months which needs to be closely monitored. Though the MPC does not look at the Wholesale Price Inflation (WPI) as an inflation-target, it is also important to note here that the WPI for food prices has seen a contraction during the last 5 months.

Oil prices and Rupee

The movement in oil prices and rupee has been looked at in conjunction as moderation in international oil prices improves the external sector prospects for the country engendering the currency to strengthen appreciably. The fall in oil prices and a stronger rupee is a positive from the inflation angle. On the other hand an increase in crude oil prices and depreciating rupee poses a double whammy threat for inflation, especially fuel inflation.

The point to note is the unpredictable developments witnessed in the international oil market which have kept the oil prices volatile. With domestic prices of petrol and diesel changing on a daily basis, an increase in the international crude oil prices instantly translates into higher domestic prices and in-turn higher inflation.  For the first 4 months of the current fiscal, the oil prices witnessed a gradual increase from $65 per barrel in the start of the year to $73 per barrel by end July, after scaling a peak of $76 per barrel during mid-May. This increase in oil prices was considered as an important upside risk while forecasting inflation by the MPC during the initial 3 meetings of the fiscal. The volatility in oil prices have been noticed since the 3^rd MPC meeting held in first week of August. Between the 3^rd (Aug) and the 4^th (Oct) MPC meet, international crude prices rose by around 15% and between the 4^th (Oct) and 5^th (Dec) MPC meet have crashed by around 30%. The rise in oil prices in the month of September-October can be attributed chiefly to the possible sanctions which were to be imposed by the US government on one of the key oil producers, Iran. The temporary relaxation granted by the US President on the sanctions to a set of 8 countries coupled with rise in US oil stockpiles and expectations of a temporary global demand slowdown (due to global trade wars and geo-political concerns) has led to a reversal in prices in a span of 45 days (Nov-Dec). Going ahead, upside risks like decision of OPEC and Non-OPEC members to cut production levels for next six months and easing global trade wars could pressurize oil prices while rising US stockpiles and overall slowdown in global demand could off-set the upside risks, continuing with the uncertainty and volatility. Basically, one still remains clueless about the oil price movement.

The volatility in the oil markets, global trade wars leading to higher safe-haven demand, a hawkish stance by the US Fed leading to increasing interest rates 4 times in 2018, domestic factors like widening current account deficit and other geo-political tensions like the Turkish crisis have been factors depreciating the Rupee taking it to an all-time low of 74.33/$ in October. The Rupee depreciated by almost 14% between April to October. This depreciation has seen a reversal by almost 5% in November with the Rupee strengthening on the back of waiver granted by US on Iran sanctions, softening crude oil prices and higher foreign portfolio inflows.

Despite the unpredictable reversal (moderation) in the above components in recent months, the members of the MPC highlighted the upside risks to inflation like high core inflation (inflation without taking food prices and fuel prices into account) at around 6%, effect of 7^th Pay commission implementations, government fiscal slippages and sudden reversal in food prices in order to keep the interest rates unchanged and adopt calibrated tightening as its policy stance. The volatility seen during this fiscal is likely to continue atleast till the end of FY19.  This keeps all analysts and economists at the edge of their seats while chalking out their predictions while this ambivalence turns out to be a nightmare for any forecaster, including the model based MPC!!

Sushant Hede

23rd  December 2018

Data Source:

1. Centre for Monitoring Indian Economy

References

1. Minutes of the MPC Meeting (Dec 3-5)

2. The political economy of the persistent agrarian crisis by JNU Professor Himanshu

Are we saving enough?? India’s consumption driven growth story

I recently attended this 3-days shopping bonanza popularly termed as the “Lil Flea Market” organised at Bandra Kurla Complex, Mumbai’s most prominent and planned business hub. A riveting conception of assembling shopping kiosks of different categories ranging from clothing to decorative items to healthy snacks made my experience similar to a buffet lunch which is filled with a myriad of cuisines to be savoured. A sparsely dense crowd in the scorching and humid heat of Mumbai gathered pace and made the venue jam-packed as the early winter sunset came in. This enchanting experience aided me in comprehending how the different stalls in the market were reaping agglomeration benefits. Walking across different aisle’s and watching shoppers experimenting with items on different stalls made me ask myself: what proportion of the window shopping will actual turn into actual sales? To lure the customers, almost each stall had either the desirable boards of “Sale” or had re-worked and discounted price tags. More than the shopping stalls, the highest demand-driven outlets were those of food with people delightfully enjoying a drink or a pizza-slice amidst the music in the background.

 As I walked out following my window shopping, looking at the surrounding atmosphere brought out a pertinent and apposite thought in my mind: How much does India’s total gross domestic product (GDP), which measures the total annual value of goods and services in the economy, comes from the consumption spending by individuals. To simplify, the total GDP of an economy is bifurcated into expenditure on consumables (C), expenditure incurred by the private sector entities and government of green-field, brown field investments and financial security investments (I), government spending- (G)  (apart from investment nature) and net position of exports (X-M) i.e difference between exports (X) and imports (M). Mathematically, we represent the above details in the most lucid manner which every commerce/arts student will relate to from one’s 11^th standard textbook of economics:

GDP = C + I + G + (X-M)

By making certain adjustments to the above equation, we arrive at one of the most imperative macroeconomic equation which is denoted as the “Savings – Investment balance”. This theory explains that the difference between the total savings and investment of the nation is equal to the difference in the foreign account balance (in economic terms known as the current account balance). To put this down from an individuals’ perspective, try taking your own example. If you save Rs. 100/- and need Rs. 150/- for an abroad trip or to buy the latest released One Plus 6T costing around Rs. 200/-, you will have to resort to a lender (in this case being your parents) to fund the difference. This funding from the external side is the current account balance which is required on the macro level to fund any difference between the savings and investment numbers.

Given this backdrop, I tried to analyse India’s consumption expenditure as a percentage of GDP across the time period from 1951 to 2017. India’s consumption expenditure as a % of GDP has declined from a peak of 94.8% in 1953 to 59.1% in 2018, having dropped to a low of 56% in 2011. Post declining to its low in 2011, the proportion has reversed its direction moving upwards and stands at 59% in 2018. To simply put, the share of consumption expenditure on an overall macro-level has witnessed an increase in the last 7 years. If the consumption has increased, the other aspect of from a household perspective which is “the savings” must have dwindled down. Data shows that during the period 2011 to 2017 (latest data available), the savings rate has declined. What could be the reasoning behind the 3% increase in the share of the consumption expenditure in the last 7 years?

Apart from the rise in incomes of individuals which could be one factor of paramount importance, 3 things flashed in my mind which surely everyone will easily relate to.

Firstly, either at home or on your office desk, there is one phone call which may initially irritate you, but over time would be of utmost interest: “Do you want a home loan/car loan?? Do you want to avail credit cards services with low or no charges?” As you can clearly relate to these loan offers from the banking institutions, I look at the bank credit growth in personal loans during this period. RBI’s data on personal loans on home, consumer durable, education, vehicles and credit cards has witnessed double digit growths since 2011 with a compounded annual growth of 15% since 2011. No wonder the low EMI cost loans are turning out to be a positive for beguiling individuals towards the opulent commodities.

Secondly, there will be a delivery truck of Amazon or Flipkart stationed below large corporate offices and more than one Swiggy or Zomato delivery boys awaiting the order outside a restaurant to be prepared at the earliest to zoom out to hand over to the hungry soul. Despite one’s reading in the newspapers about these companies (Indian subsidiary) making losses, what matters to the individual consuming is the hefty discounts, launching big billion dollar sales and a plethora of innovative schemes which will entice one towards filling up the cart and dishing out the payment. This new kind of separate economy, popularly termed as the “Gig economy” would in Joseph Schumpeter's words be a creative destruction which is driving the consumption driven growth in the economy.

Thirdly, the world of technology, artificial intelligence and machine learning in which we live in has made it feasible for individuals to see the image of the items they wish to buy the moment they have it picturized in their brain. The ease of transactions and minimum transaction costs to purchase the item further makes all individuals to fill the shopping cart and complete the entire transactions within no time.

Surely, this is not an exhaustive list of reasoning behind what is fuelling India’s consumption driven story during the last few years.  However, the larger question remains whether savings are enough to propel future economic growth? Savings is an important constituent not only from an individuals’ exigency point, but savings being channelled into the right nature of investment will drive India’s growth story forward and would have less reliance on external sector funding. Since independence, the decline in share of consumption expenditure has been compensated by the growth in share of investment (both private and government). However, a recent reversal in trend towards consumption led growth could slacken future overall growth if it entails growing imbalances by limiting capacity creation and rising debt burden of households. Imbibing a saving’s culture among the millennial's and Z-generation and directing it towards investment amidst stable exports will augur well for a sustainable growth for the economy!!

Sushant Hede

4^th November, 2018

Job Blues in India

My exhilarated sister, with a gush of delirious happiness and satisfaction, on completion of several interview rounds of cut-throat competition, called up her mother to share her achievement of getting a dream job. This “tears of joy” feeling is experienced by each individual on bagging one’s first job. The transition from a university graduate into a formalized and professional outfit is akin to a changeover for a woman from her own family lifestyle to a post-marriage life promulgating a life with greater responsibility. It is important to note that everyone is not born with a silver spoon to have all check-boxes ticked while finding the most desirable first job. Different needs and circumstances beget a choice to be made by an individual which is plausibly not in one’s control. So, the offer letter gets signed off starting a new journey which is completely different, making one realize that the life was (maybe) much more enjoyable before this change.

Three to six months into this journey, those tears of joy turn into #MondayMorningBlues, mid-week struggles and a countdown to weekend to get out of the office desk and run away into wilderness. Individuals are hopeful of an extended weekend or are wishful of holidays which they relished in colleges during the summer or Diwali break. Now, the breaks taken either get deducted from the casual leaves or could also pinch one’s pocket in the form of a lowered salary. The excitement on the start of the very first day at office starts dipping and things which enlivened one during the first week at work turn-out to be points of complaints with each progressing day. Late night working drains out the happiness of an individual who is putting in those extra miles for the employer.

A number of thoughts flash across my mind when I try to understand the rationale behind these feelings. Are these feelings experienced by only those who fail to get into their so called “dream job-profile”? Probably not, as the reluctance to get out of one’s bed on a Monday morning to kick-start a robotic process for the next week is experienced by all.

Firstly, the idea of “Law of Diminishing Marginal utility”, steps into action while analyzing the dip in the enjoyment at work. Utility is measured as the total satisfaction received from consuming a good or service while marginal utility is the incremental increase in utility that results from consumption of additional unit of good or service. To illustrate this idea, a consumer who is fond of eating mangoes is provided with a platter full of mangoes and is told to savour on the juicy aromatic pulp as much as possible. As the number of mangoes intake increases, the utility declines, becomes zero and subsequently turns negative. This idea of diminishing marginal utility can be similar to the hours which one puts, increasing the utility initially, but reaches a saturation level after a given point of time. The weekend acts as savior and puts an individual into inertia of rest (from work). However, life moves forward, giving a jerk (the backward jerk as experienced in a bus) and reminding one of the #MondayMorningBlues.

Another idea close to the idea of utility is that of “Consumer surplus”. The idea of a consumer surplus can be explained as the total difference between the total amount that consumers are willing and able to pay for a good or a service and the total amount that they actually pay. However, this idea gets modified while working in a corporate world. The surplus here is the difference between the salary/perquisites/awards won by an employee and the amount of efforts put forth by the individual. When this surplus turns into deficit, the saturation point gets triggered leading to one just going through the motions day-in and day-out.

The idea of a “learning curve” which teaches us that with the increasing number of hours put in to do a job, the experience to do it increases and the hours to complete the task plateaus. Similarly, by doing the same thing again and again, the expertise increases but the enthusiasm to do the same thing dwindles. However, the falling enthusiasm to do a repeated activity is not experienced by everyone as the perception of each one looking at it is different. If one tries to learn something unique each time one performs the activity, the learning curve (as studied above) will take its normal shape, but the value-addition done each time will never dwindle one’s enthusiasm.

Lastly, the cut-throat competition between employers and peers and the sword (placed near your epiglottis) in the form of “deadlines” tries to bring the best in you, but results in one putting in so much overtime hours that by default you await the distant weekend in anticipation. Those overtime hours bring in additional incentives, but the lack of time to spend them brings further disutility. 

This micro-level analysis brings me to draw a small tangent to a macro level picture on employment concerns based on the recently released annual State of Working India (SWI) report by the Azim Premji University, with a detailed ground level research conducted by Dr. Amit Basole, Dr. Arjun Jayadev and team. The recent article in Livemint by Anurag Behar, the CEO of Azim Premji Foundation, providing a summary of this report brings out few key points which caught my attention:

1. India has been growing at a much faster pace since 1990 than the 1970-80s, but the employment growth has been much slower since 1990
2. Majority of Indians (67% of households as per the report) have a monthly earnings of upto Rs. 10,000/- in 2015, reflective that Indians may not be earning sufficient to have a sustainable living
3. Labour productivity is increasing at a much faster pace than wage increase during the past 3 decades.

The numbers are a reality check not only for the present government, but for all the governments in the past three decades as the idea of “jobless growth” in India clearly gets reflected. The macroeconomic picture looks bleak and requires interventions from all ends (private and government) to clear the deep-rooted problem and create sustainable jobs in India. However, the critical point is from the micro perspective which requires individuals to shed those working blues experienced and focuses more on individual creativity in making the job-profile more and more happening. The idea of the learning curve is not only to gain expertise in doing an activity faster but to learn different things each time you do the same activity. My sister now has a dream job which augurs well for her future. However, it is upon her to re-live that dream and make it as thrilling as she can!!!

-       Sushant Hede

     30^th September, 2018

Bibliography:

a.) Opinion: Sustainable and Just jobs for all; 
Author: Anurag Behar
Link: https://www.livemint.com/Opinion/CM0USHZoSjrJ083yMUgzTM/Opinion--Sustainable-and-just-jobs-for-all.html