Indian Economy is not in a crisis, there is a demand issue

This article was published in The Economic Times on the 11th of Dec 2019

India's abstinence from RCEP - Free Marketeers are getting it surprisingly wrong

This was published in The Economic Times on the 20th of Nov 2019

Nationalisation - The only plausible silver bullet for the NBFC crisis

This article was published on Nov 11, 2019 in The Economic Times

Privatisation instead of Decontrol - Wrong end of the Reform stick

This was published in The Economic Times on 30th Oct 2019

Low Inflation - A Self-inflicted policy would

This article was published in The Economic Times on 4th Oct 2019

Corporate Tax Rate Cuts - A gamble on the structural, not a palliative for the cyclical slowdown

This was published in The Economic Times on 25th of Sep 2019

PSU Bank Mergers - Road to somewhere, but not reforms

This was published in The Economic Times on 11th of Sep 2019

Transfer of RBI Reserves is an accounting exercise, nothing more

This article was published in The Economic Times on 2nd Sep, 2019

Growth is the biggest national security issue

This article was published in The Economic Times on 22nd Aug 2019

Offshore Sovereign Bond - The 6 Napoleon Problem

This was published on Aug 5 2019 in The Economic Times

Not Big Ideas, but Efficient Grind is the new normal

This was published in The Economic Times on 31st May 2019

Tax Arbitrage - the Policy Nudge that engenders the Debt MF crisis

This article was published in The Economic Times on 6th of May 2019

Targeted Basic Income - Sans Bold Policy, its a 50:50 measure

This article was published in The Economic Times on 16th April 2019

RBI Fx Swap - A Precursor to an Indian sovereign bond

This was published in The Economic Times on the 25th of Mar 2019

Managing Risk - The Bank-able isnt always Investable

This article was published in The Economic Times on 12th Mar 2019

India's Defence Budget is drowning in pay, pension and policy paralysis

This was published in The Economic Times on 7th Feb 2019

As usual, defence found mention in interim finance minister Piyush Goyal’s budget speech earlier this month. Behind the rhetoric, though, the rot in defence finances is all too visible. While the anaemic 6% rise in the headline allocation to defence in 2019 is understandable — given the interim nature of the budget and electoral considerations — the allocations bring to sharp relief the composition of defence spends.

For starters, India’s defence budget is much higher than what goes under the rubric of ‘defence budget’. Goyal announced that it crossed Rs 3 lakh crore for the first time this year. Actually, that landmark took place in 2016. The missing jigsaw lies in pensions, an expenditure head that was taken out of the defence budget several years ago.

It is now reported under a different head, defence pensions. With pensions added, India’s total outlay on defence is Rs 4.2 lakh crore. To put the expenditure into perspective, this is more than 11% of GoI revenues, and the single-largest allocation in the Union Budget after debt servicing.

More tellingly, it is four times the allocation to education and seven times the allocation to health. So, is defence underfunded as the popular narrative goes? Not by a long shot. The devil lies in the composition of expenditure. 56% of the budget comprises salaries and pensions, especially pensions, which constitute 27% of the entire budget, up from 18% in 2014.

India’s nominal GDP in rupee terms has grown around 87% in the last five years. The overall defence budget has grown by around 68%. However, salaries within this component have grown 75%, while pensions have by a whopping 146% in the same period.

Unsurprisingly, capital expenditure budget has grown only 30%. Effectively, India’s defence budget is being wrecked from within by its pension liabilities.

Unfortunately, the issue is structural. Military pensions (and any other publicly funded ones) are sovereign liabilities — they cannot be rescinded once committed. Unlike Europe, India dodged a massive public financing bullet on public sector pensions in 2004, when all civilian public servants moved to a defined contribution (DC) pension from the old defined benefit (DB) one.

The military, however, remained under the older DB plan, and with the implementation of ‘One Rank, One Pension’ (Orop), the liabilities have ballooned exponentially. Add to it, the very wide coverage of pensions in India (70% of all defence personnel get covered by pensions, compared to about 25% in the US military).

The mathematics of the programme lends itself to a continuing growth that would, more often than not, outstrip reasonable growth in fiscal revenues. In that context, the pension budget for this year (estimated at a 5% growth) seems quite understated.

At the core of the structural issue is the manpower-intensity of the Indian Army. India is the only major military in the world that has seen a growth in its standing strength in the last decade.

This is the period when most modern armies such as the US, Russia and, most recently, China embarked upon radical restructuring of their militaries, premised upon material reduction in numbers. India, in the same period, raised two new mountain divisions and embarked on raising a mountain strike corps.

Despite much discussion and debate, there has been little movement even on the chief of defence services (CDS) reforms. Large sections of the military are ambivalent — or even hostile — to it. The political leadership, however, does not seem to have the courage to push through the changes required, despite Opposition from the services. Consequently, expenditure patterns remain inefficient.

Recently, the Indian Army placed an order for six Apache attack choppers, costing nearly $1billion, just as the Indian Air Force (IAF) is preparing to take the first deliveries of the same chopper (under a $3 billion order placed a couple of years ago). Here’s a case of a turf war eating away scarce budgets in absence of modern joint decisionmaking structures if there were one.

While there is no dearth of committee reports on what to do, there seems to be little political (or military) will to implement radical change.

The biggest security threat to any country is a bankrupt sovereign. With multiple competing demands from an aspirational, impatient India, budget constraints are a reality of our times.

The clamour for ‘more money for defence’ is not only unrealistic, but also self-defeating. We have a crisis on our hands. But it would seem that those who should be most heavily engaged with the same have run out of imagination and ideas.

Liquidity Ballast to Indian Equity Markets

This article was published in The Economic Times on 23rd Jan, 2019

Markets do just fine under a coalition govt; other risks investors must watch in 2019

This was published on 2nd of Jan 2019 in Moneycontrol.com

First things first, India’s macros are on the upswing. The biggest risk to our 8-6-4 benchmark framework for the macro (8 percent GDP growth, 6 percent combined fiscal deficit and 4 percent inflation), for the moment, seems to be a gross under-shooting of CPI inflation.

More seriously, though, tactically and structurally, India’s domestic macros are more robust than they have been in a long time -- with the sharp correction in oil prices taking care of the biggest dark cloud, i.e., current Account Deficit (CAD), which we think has peaked at 2.9 percent of GDP in the last quarter.

The macros have been on the mend for some time. It has been the micros, especially corporate earnings that have been sluggish.

A marked turnaround is under way. While less than originally expected, earnings are expected to show double the growth rate that we have seen in the last 6-7 years.

Add to that, a significant price correction is seen in a range of stocks in 2018. It looks like 2019 should be the year when India’s micro picture should be brighter than in the recent past.

Most of the conversation though would be around the general elections. A lot of projections and investment theses are being predicated on the outcome of that.

While the role and impact of the central government cannot be downplayed, the concerns typically associated with coalitions are not borne out by data.

As can be seen in the table above, coalitions, especially seemingly unstable coalitions (PV Narasimha Rao’s, or UPA1) have delivered fairly robust levels of stock market performance.

Even in terms of policy initiatives, some of the biggest interventions, e.g., the last radical restructuring of direct tax rates, was done during the United Front government of HD Deve Gowda.

Ergo, while a decisive mandate would be taken positively, it isn’t quite a “done deal” that a coalition would be negative from a policy perspective, or indeed even from the waypoint of how the markets view the results.

The nuts and bolts -- high-frequency indicators -- too point towards a cyclical upturn. IIP growth (November, at 8.1 percent, was on the back of a high base), bank credit growth (running at 15 percent, again a multi-year high), volume growth for the private corporate sector (reflected in Nifty topline growth rates) -- the data is coming out to be better than what the general narrative seems to suggest.

The biggest potential headwind for markets in 2019 would be global. A whole bunch of issues -- US-China trade war, a potential recession in the US, the direction of oil prices -- are intangibles that would be the biggest challenges for India.

Especially as India is far more globally integrated than is popularly believed, with trade accounting for 35-40 percent of GDP (higher than even China). This is the space that would be most closely scrutinised for cues by investors.

The problem, to paraphrase Cassius, is not in our stars, but in someone else’s!