Why Nervousness of Rupee's Fate Will Continue for Many Months

Rupee's rollercoaster ride continues. Down yesterday, and today first up down, up... Well, I am sure people will get the drift. Of course, the fear that the rupee will plumb the depths it had some months back is still fresh in people's minds. I have been asked a couple of times in the last two months, especially in a popular radio show, whether I expect a major turnaround in the fortunes of the rupee. My reply has always been been that it is unlikely that it will appreciate beyond Rs 60 to a dollar in the best case and in most days till March-end it will probably hover closer to Rs 60 than Rs 65. I do still believe so. As we move ahead in the remaining part of the financial year, we can expect exports to perk up as US and some European economies recover. If the gold imports remain in control as they have (the unofficial imports i.e. smuggling must be going on), this should be a decent factor helping the rupee. Inflation is unlikely to spike internally (monsoon is behind us) though it can remain stubbornly high at the current levels.That leaves us with US Fed's so-called "Tapering". It is unlikely that anything drastic will be done by Fed real soon. History teaches us that economies recovering after recession triggered off by a financial crisis take long time to recover and do so slowly. The current global financial crisis is no different. It has been six years since 2008. Median wages today in the US are what existed about four decades back and public investment is at the same level as 1947. These are not the indicators of an economy out on a hundred metre dash in the next few months raising inflation and employment levels which the Fed will be eyeing before it begins the "Tapering". Of course, that will not stop people from getting nervous about the rupee since confidence in a currency is also about the confidence in the economy it represents. One has to admit that India's fundamentals need to be fixed. A critical milestone will be the fiscal deficit figure that will be mentioned in the next Union Budget on February 28. Once the world has known that the Government has been able to meet its target (by hook or crook) and also has been able to control the external deficit, which I think it will be able to meet, people will start feeling a little less nervous about the rupee. But that's more than three months away, isn't it? Well, till then, we can expect more of the same.    

Searching for the Bottom

Did people actually buy televisions and other appliances before the festive season began? If you take yesterday's industrial production figures seriously, you would probably conclude so. Consumer durable production has done badly. Whether anyone takes the figures seriously or not, the figures look quite serious with almost all sectors doing badly except electricity. One of the reasons one has to carefully look at industrial production data is because it often has quirks that are not immediately apparent. Thus, it is probably better to see something going on for some months before concluding something is actually happening. Of course, there can be no doubt in anybody's mind that industrial production and industry is doing badly. That has been going on for many months now. Even though people keep looking for signs of a turnaround, there just doesn't seem to be any evidence of it. Very clearly, manufacturers are making adjustments to their production levels, in many cases reducing production, sometimes even shutting down facilities periodically. Even as this happens, adjustment of inventories is also happening. Then, there is the prickly receivables issue where people down the line are grappling with outstanding payments thanks to the tight liquidity conditions. In such conditions, it is not unusual for smaller outfits to go belly-up. We all know that you can be asset rich and have sales going but working capital or shall we say, cash, is the king. It is the lifeblood of business. Suck that out and business first heads for the ICU and then to its grave. Much of all this happening at a pretty wide scale and I realised this during my short break last week as I interacted with various people from small scale entrepreneurs to shopkeepers on sidewalks .
 Of course, there are people who keep wondering when the investment cycle will kick off. I would say that it is a long way off. Biggies will wait for elections. Nobody likes dealing four-, ten-, twenty-headed authorities indulging in multiple speak about rules and giving them a hard time. For others, they will try to first get a  fix on what to do with their existing investments and capacities. That would go on for some time. As for me, I am really not expecting industrial scene to change any time soon.       

Another Crutch for Your Provident Fund

Well, this is a reaction to one of those unconfirmed press reports. It seems that Employees' Provident Fund Organisation (EPFO) is mulling investments in private sector bonds.  On the face of it, this sounds like a trivial detail. Actually, it isn't. This is one more effort to boost returns that is declared every year. Thanks to terrible control structure of the EPFO, the trustees nominated by the Labour Ministry propose a high rate every year and Finance Ministry, the other controlling Ministry, which finally has to endorse the rate, drags its feet or the final returns, either, or, and most of the times, both. It is a dreadful annual ritual. Given the state of the bond markets, believe it or not, but the large provident fund (PF) monies don't have adequate quality bonds in which they can be invested in. Of course, there are investment norms for PF monies. The sad part about EPF is that despite being a long term savings option, it has never given more than 2.0-2.5 per cent annual returns adjusted for inflation in best of times. And in these times of high inflation, you can banish the thought of a positive real rate of return. Imagine all this happening to funds where 12 per cent of one's basic heads before even one says boo. Unless I am wrong, this 12 per cent is one of the highest in the world.

And then there are a whole list of other problems from transferring and withdrawing, with the latter still requiring speed money in many cases.The whole system is yet to have the transparency which the subscriber deserves and is unlikely to get since EPFO, by law, regulates itself. Try finding some other examples.Since people keep withdrawing money from PF on some pretext or the other and take little interest in what is happening to their hard earned money in the long-term, this mess keeps perpetuating itself. In one pension seminar, many years back, I almost fell off the chair when one presentation showed 4 per cent fund management cost. I hope the expert was wrong. Any private asset manager would be crucified for something like that. What could make things change? One, try to popularise NPS. Once people get used to its transparency, they will demand more accountability. Second, have one regulator for all retirement funds. If you can't do that just get it to some other regulator. What the current dispensation has produced is there for all to see.     

The Jobs Problem

Just how much difference can a few basis points of economic growth make in the life of the people of nation? Lots if you ask me. As India's growth rate has gone downhill from 8.5 per cent to sub-5 per cent, there are two very painful implications that straight away come to my mind. First, when an economy adjusts to lower growth rates, so does future and existing employment. There have been various reports doing the rounds of the number of jobs lost in the last 24 months. One such figure that has stayed in my mind is about 10 million lost jobs. When you consider the bloodbath that has happened in financial services especially in life insurance the figure suddenly becomes believable.  When you have so many people losing jobs, staying unemployed or somehow making ends meet, this obviously has implications for the consumption economy. It also starts detering others from buying things and having as much fun as before.

The other painful implication is more significant. Lower growth translates to lower government revenues which means lesser resources to pull terribly poor people out of poverty. Over a longer period of time this might mean losing out a whole generation to poverty. In India, this could be catastrophic given our numbers. All this exactly opposite to what happened in India and China in the very high growth years when millions got pulled out of poverty. With global economic growth targets being hardly expected to be anywhere near the high growth years of the noughties, government anti-poverty resources will become even more precious and will have to be accurately directed to the needy without leakage. Viewed in that context, the government's direct transfer scheme becomes even more important.

But why I am at this today. Well, I read an article by Edelweiss' Rashesh Shah in one of the leading papers in the morning. It talks about how the organised sector has not been able to generate the employment that is required for people coming off agriculture. That is actually not a new development. Most such people have been in the adding up the massive bulge in the urban informal sector for decades. That's not to mention the large non-agri sector in rural areas. In this background, encouragement to small businesses becomes so important. Given the magnitude of problems that this sector has faced and is facing at the moment, whatever that has been done is inadequate. Government regulations, controls and corruption are the usual villains. Ask any small business owner. Possibly economic reforms will really make a difference to people's lives when enabling changes happen in areas like these.

When Will Fed's Tapering Begin?

This is a trillion dollar question. When will the Federal Reserve in the US, actually start reducing the supply of cash that it has been flooding the US since the Lehman Crisis in 2008. This excess cash has, as we all know, found its way across the world and sustained economies and asset markets be it stockmarkets, commodities like gold or oil. Slowly turning the tap off, will naturally make a huge difference to a whole range of factors across the globe. In India, there would obviously be impact on stocks, value of the rupee and the overall economic growth since a lot of the high growth in the last one decade has been financed by incoming foreign funds.  A taste of what could happen if the tapering starts was visible earlier this year when the Fed chairman gave indications and our stockmarkets and currency went for a tail-spin. But since then, thanks to the US govt shutdown in October and other factors, the tapering seems to have got postponed. But then, as RBI governor Raghuram Rajan said that, "it has been postponed". Or the tapering is inevitable. So what signal is Fed looking at?

 Earlier this week I came across this article in Business Insider that gives interesting indications    (http://www.businessinsider.com/hatzius-fed-will-lower-unemployment-threshold-to-6-percent-2013-11). It seems the Fed is looking at two US economic indicators of unemployment falling to 6.5 per cent-6.0 per cent and inflation rising to 2.5 per cent. Well, while all this hardly gives you a sense of certainty but it does give you an idea of possible milestones for one of the most economic events of recent times to get kicked off.