An Analysis of India’s Merchandise Exports

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India, being one of the fastest growing economies in the world, has emerged as an important player in the global economic order. What was once an inward-looking economy has now a trade-to-GDP ratio of 31% and is the fifth largest exporter amongst the emerging economies. Export data from UNCTAD shows that Indian exports are witnessing a diversification, both in terms of the export basket as well as in terms of destinations. While India’s export destinations are moving towards emerging markets, its commodity basket is moving towards resource-based manufacturing at the cost of primary products and manufactured goods. Within manufactured goods, India is gradually moving towards high and medium tech goods at the cost of low technology goods, but the share remains significantly below the EM average.

Evolution of India’s Export Basket

India’s export basket is evolving and is moving towards more sophisticated products. On comparing the export basket in 1995 to the basket in 2015, one can clearly see that goods like petroleum products, transport equipment, industrial machinery and parts, and electrical machinery and appliances have gained prominent share in the export basket at the cost of primary and low technology manufactured goods like coffee, spices, feedstuff for animals, vegetables and fruits, footwear etc. India’s top exports comprise of goods like textile and apparel products, gems and jewellery, petroleum products, medicinal and pharma products, road vehicles, organic chemicals iron and steel, transport equipment, cereals, metal manufacture, industrial machinery and electrical machinery and appliances. Textile and apparel with a share of 13% and gems and jewellery with a share of 12% continue to be India’s top exports, suggesting India’s comparative advantage in these categories, although the share has declined to indicate export basket diversification.

The shift towards resource-based manufacturing exports has largely been due to expansion in domestic petroleum refining capacity. As a result of the same, India is outperforming most other EMs in resource-based manufacturing. Figure 1 and 2 gives a glimpse of the same.

As far as the exports of manufactured goods are concerned, India has not been able to increase its share in manufactured goods over the last two decades and it remains a laggard as compared to other EMs. Figure 3 captures this fact.

However, when one observes the technological intensity of India’s manufactured exports, one sees the exports moving gradually towards high and medium technology goods at the cost of low technology goods. Although when the technological intensity is compared across other EMs, China and Mexico are far superior to India.  Figure 4 and 5 capture the same.

Destination-wise Shifts

One can easily see the evidence of a growing ‘South-South trade’ from the Indian export data – the share of developed markets has fallen from 72% in 1995 to 47% in 2015, and, the share of emerging markets which was just 28% in 1995, has risen to 53% in 2015. Figure 6 shows how emerging markets are gaining share in Indian exports at the cost of developed markets with their increasing share of world GDP.

The US continues to be India’s largest export destination with about 16% share in 2015, although the share has fallen as compared to 1995 when it was 20%. Major share gainers have been UAE, China, Vietnam, Turkey, Sri Lanka, Nepal and South Africa.

UAE has emerged as an important export destination for India with its share increasing from just 5% in 1995 to 12% in 2016. A major trend observed is that although the share of most developed markets in India’s exports has fallen, India’s share in the imports of those markets has risen, indicating the diversification of Indian export destinations as well as India’s growing significance in these markets. India’s share in the imports of these countries, although growing, still remains small.

China has grown in importance as an export destination after its accession to the WTO in 2001. The US is India’s largest market for pharma, and textile and apparel exports. Therefore, Trump’s protectionist trade policies could be a looming threat to Indian exports. However, so far India has benefitted from Trump’s withdrawal from the Trans-Pacific Partnership (TPP) since the ratification of the TPP would have meant a greater market access to Vietnam, which is a signatory to the TPP and India’s stiff competitor in Textile and Apparel segment.

A changing world order after 2010?

As the world is becoming more protectionist, the global trade outlook seems uncertain. The conjecture of an increasing inward sentiment is further supported by the data which shows how the GDP growth rate of both EM and DM were highly correlated with both the Indian and global export growth till 2010. With the economic stagnation post-2010, this relation between GDP growth rates and export growth has decoupled, suggesting an emergence of an inward-looking approach, especially by the DMs.  Figure 7 captures this finding.

Conclusion

Although India has managed to diversify its export basket in the past two decades, its market share in most product categories remains low, indicating a need to make domestic products more competitive. Likewise, Indian exports have witnessed diversification in terms of destinations but the country’s share in the import basket of its major trading partners (except UAE) remains small. In conclusion, India needs to step up its performance as far as the exports of manufactured goods are concerned and the success of ‘Make in India’ could be the key to this.

 


Paridhi Rathi

This article has been written by Paridhi Rathi, a student at the Meghnad Desai Academy of Economics.

 

 

Macroeconomic Forecasts and the Pretence of Knowledge

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Title: JULIUS CAESAR (1953) ¥ Pers: BRANDO, MARLON ¥ Year: 1953 ¥ Dir: MANKIEWICZ, JOSEPH L. ¥ Ref: JUL011AG ¥ Credit: [ MGM / THE KOBAL COLLECTION ]

Friends, Romans and Countrymen,

Economists are humble men.

Macroeconomists using their favourite plaything, past data, predict long term trends for a country. Their forecasts, which have the power to shape economic destiny of countries, are not restricted to broad shifts in output, prices, or other metrics, but are quite often very exact estimates  (regularly in two decimal places) of where an economy would be after a certain period of time.

Let’s take an overview of such forecasts in light of the recent controversial notebandi or what has been labelled as ‘Demonetisation’.

A Reuters poll of 30 economists forecasted Q3 GDP growth at a 3-year low of 6.4% while some analysts feared a sharper slowdown to less than 6%.“We are projecting the Q3 GDP growth at 5.8%.” said Soumya Kanti Ghosh, Chief Economic Advisor for the State Bank of India. Equally assertive were private sector economists such as CARE Ratings Chief Economist Madan Sabnavis, who saw growth slowing down to as much as 5.4% in Q3.

What really happened?

The dark art of macroeconomic forecasting, as Prof. Indradeep Ghosh at MDAE likes to call it, failed in predicting the exact GDP growth rate of the country during Q3 2016-17. The Indian economy grew at 7% during this quarter as per the Central Statistical Organisation (CSO). Now the CSO does admit that economic activity has been impacted by the note ban with Q3 GVA growth at 6.6%, against 7% last year. Gross Value Added (GVA) is a more suitable number than GDP. The GVA measures the value of output created by different segments of the economy. Indirect taxes (minus subsidies) are added to it, to arrive at the GDP.

CSO’s estimation has been criticised for not showcasing the input of the informal sector, but it can be argued that if the CSO can’t find a way to estimate the quarterly performance of the informal sector despite having access to arguably the most reliable multiple data sources, neither can anyone else. Clearly those macroeconomists with their exact predictions have missed a trick or two. This in no way is a defence of notebandi, I believe the best analysis on the Demonetisation experiment was offered by Lebanese-American essayist and Risk Trader Nassim Nicholas Taleb who concluded that it’s “too early to tell” about the consequences of the monetary experiment.

We’ve seen similar deformities in macroeconomic predictions pertaining to two other significant events around the world last year. The recession forecast produced by the U.K. Treasury ahead of June’s Brexit vote which assumed monetary policy would be unchanged and the prime minister would immediately initiate the process of leaving the European Union was proved wrong; the U.K. economy has  been faring decently well. Similarly in the case of Donald Trump’s election to the White House, the economic and market mayhem that was expected and warned against by several pandits has been missing and rather conspicuously so. .

Nobel Laureate Friedrich Von Hayek can perhaps help us understand the reason behind why despite this hubris, macroeconomists fall flat faced in their predictions. Let’s ask ourselves, what would Hayek say?

In his Nobel Memorial lecture titled the ‘Pretence of Knowledge’, Hayek says that if we truly wish to advance society, we must be modest and realise the limitations of what is possible with social science.

According to him economists can’t provide the kind of exact data that natural scientists are expected to produce as the variables that economists study cannot be summarised or averaged.

Hayek in one of his papers, ‘The Counter-Revolution of Science’ observes that the natural sciences attempt to remove the “human factor” in order to obtain objective, strictly controlled results:

The persistent effort of modern Science has been to get down to “objective facts,” to cease studying what men thought about nature or regarding the given concepts as true images of the real world, and, above all, to discard all theories which pretended to explain phenomena by imputing to them a directing mind like our own. Instead, its main task became to revise and reconstruct the concepts formed from ordinary experience on the basis of a systematic testing of the phenomena, so as to be better able to recognise the particular as an instance of a general rule.

Meanwhile, the social sciences are attempting to measure human action itself.

The social sciences in the narrower sense, i.e., those which used to be described as the moral sciences, are concerned with man’s conscious or reflected action, actions where a person can be said to choose between various courses open to him, and here the situation is essentially different. The external stimulus which may be said to cause or occasion such actions can of course also be defined in purely physical terms. But if we tried to do so for the purposes of explaining human action, we would confine ourselves to less than we know about the situation.

A discipline like economics studies complex structures consisting of individuals with distinguishable identities who are connected with one another through meaningful linkages. Any attempt to summarise or generalize over these ‘subjects’ means losing out on critical information.

Hayek also believes that unlike natural sciences, the variables economists pick to measure may not be the most pertinent ones. This can lead to economists imprecisely emphasising on the few variables that can be measured as they are easier to study and ignoring the other ones by pretending that they are not significant. As he quips:

The study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process will hardly ever be fully known or measurable.

In a recent paper Paul Romer, Chief Economist and Senior Vice President of the World Bank claimed that macroeconomics has been going backwards for more than three decades, with economic modelling succumbing to “mathiness”, an obsession with mathematic laws and equations which bear minimal relation to the real world, ignore the lessons of other disciplines, and are often inconsistent with the inherently unpredictable nature of human behaviour. Another economist in the upper echelons of the profession Andrew G.Haldane, the Chief Economist of the Bank of England recently admitted to the errors in the Brexit forecasting. He acknowledged that his profession is in crisis, having failed to foresee the 2008 financial crash and having misjudged the impact of the Brexit vote. 

Question: why did God create economists? Answer: to make weather forecasters look good!

The only difference being that weather forecasts can’t alter the weather, but economic forecasts can surely change the course of an economy. One might hope that more economists, especially the ones with significant powers to influence policy, both in India and around the world, eat the humble pie more often.

Trust and Investment: What changes after Demonetization?

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Demonetization

Would I invest in my sibling’s venture? Well, if I am sure that he or she is not going to squander it away on a trip to Vegas, why not? Would I invest in the same venture, if it is proposed by a total stranger? Perhaps not.  I would be wary of this opportunity, having no idea who the person is. Now in any real-world economy, the investment decision is much more complex than that, depending not only upon the set of investment alternatives but also on the strategic interaction between the investors.  A simple way to explain this is through a game used by Denise Hazlett in her 2007 paper titled “A Classroom Investment Coordination Experiment”. In this game, there are four firms making simultaneous investment decisions. These firms can either make a high (H) or a low (L) level of investment. If a firm chooses a high level of investment, it can produce more goods. However, unless the other three firms also choose a high level there will be a fall in the national income and households will not be able to afford these goods. Therefore, unless all its fellow firms are investing a high level, a firm is better off investing a low level. The table below describes the payoffs to a firm, depending upon the investment decisions of the other three firms.

Number of other firms choosing H 0 1 2 3
Profits for H 0 1 3 5
Profits for L 2 3 4 4

 

If the firm in question chooses H while the other three firms choose L (Column 1 of the table) then that firm would earn 0 profits; the economy being in recession, a high level of investment does not get translated into higher revenues. On the other hand, when there are three firms choosing a high level of investment (Column 4 of the table), the remaining firm will benefit from investing a high level itself, making use of the expansionary state of the economy.

This game has two pure-strategy Nash Equilibria, one where all the firms choose to invest L (LLLL), causing a recession, and one where all the firms choose to invest H (HHHH), causing an expansion. Notice that higher the number of firms choosing H, higher is the combined profits of the firms, the maximum being when all four firms choose H. Not only that, HHHH is the best outcome for an individual firm too as it earns the highest possible profits in that case. What this means is that out of the two NEs, HHHH is Pareto-superior. However, choosing H is risky because the firm cannot be certain of what its counterparts would choose. A firm must believe that everyone else in the group will choose H for its best response to be H (Hazlett, 2007). If the uncertainty related to investment decisions persists, firms will be averse to making high investments and the economy would be closer to, or at, LLLL.

When can a firm be sure of its fellow firms choosing a high level of investment? In a four-firm economy such as above, talking amongst themselves might assure the firms of each other’s decision. As observed in Hazlett’s experiment, direct communication between the players does improve coordination in investment decisions. With more and direct communication, one has fewer reasons to suspect opportunistic behavior from others, making coordination easier. However, any sort of direct communication between investors is implausible to accomplish in a real-world economy.  And even if it was achievable due to some miracle, in order to be absolutely certain, a firm has to truly believe what the other firms are communicating. Or simply put, a firm has to trust the other investing firms.

How is social trust established in an economy? This is where one needs to bring in the distinction made earlier, of trusting a family member against trusting a stranger. The former is the kind of trust that comes naturally, almost instinctively, to us while the latter is the kind of trust that emerges from the intricacies of a society. Countries with high social trust have better governance, a stable political environment, and a binding rule of law, to say the least.

Unfortunately, social trust in India is far from being optimal. People in general are untrusting of the government and the corrupt behavior of politicians and bureaucrats only substantiates the cynicism that prevails. This wariness is further compounded by the long and winding judicial process in the country, the average life of a case being 10-15 years.  As of January, 15th 2017, there are around 2.81 crore cases pending and 5,000 judge posts empty in India.  

As mistrust becomes the new normal, subconsciously or through force of habit, we become more pessimistic. The lack of social trust not only interferes with the routines but also with the investment decisions. This could be one of the reasons why India has been stuck in the low investment equilibrium (LLLL) for about 70 years now.  To push an economy towards a high investment equilibrium (HHHH), the investment climate needs to be made risk-free, optimistic and trusting. India needs a structural reform to overhaul this conception of mistrust in the economy.

While the jury is still out on the overall impact of Demonetization, this move by the incumbent government has infused some level of trust in the people. Politicians in the country are perceived to be self- interested, motivated to undertake policies that will prove useful in the next election. Structural reforms involve long and slow-churning policies with few or no immediate results. Demonetization has signaled that the acting government is not shying away from undertaking these much-needed reforms. Through Demonetization, the Modi government has shown a strong commitment towards the fight against corruption in India and has managed to build social trust in the country.  

Having said that, India still has a long way to go. While Demonetization has nudged the economy out of the low trust equilibrium(LLLL), serious structural reforms are needed to achieve and sustain the High Trust Equilibrium (HHHH). Failing to do so, Demonetization will become nothing but a political stunt in the minds of the people, throwing the country back into the LLLL equilibrium.

Is Financialization the right thing in the right place at the right time?

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Financialization by Purvasha Sinha

“Only about 15% of the money coming from financial institutions goes into business investments, the rest is spent buying and selling existing financial instruments”, says Rana Foroohar in her book Makers and Takers. Her book serves as a great reminder to policymakers and practitioners about the role of financial system in an economy.

Financialization is defined as the “growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns.” The success or failure of the financial sector has had a serious effect on the rest of the economy and most of the returns in this sector have gone to the wealthy, driving the inequality up, says Mike Collins of The Wall Street Journal.

The alarming state that developed countries have entered is unfortunately labelled as ‘Financialization of Capitalism’, heavily researched and analysed by Harry Magdoff and Paul Sweezy. Their series of essays in Monthly Review over the past three decades brought attention to the term ‘financialization’ and its roots which lie in the Marxist theory of capital accumulation and surplus value. Has Capitalism entered a new stage? I don’t think so. In my opinion, what we see today is a version of amplified Capitalism where firms are profiting even without producing. As John Bellamy Fosters says in “Financialization of Capitalism”, the basic problem of accumulation within production remains the crux of Capitalism, thereby making it unreasonable to categorise this as a new stage altogether.

What is the role of financialization? In the past, the primary contribution of the financial system to a region’s growth has been to mobilise large pools of savings which would be then used to finance profitable investment opportunities. The surplus profits earned from these investments would then be re-invested to expand economic activity and further accumulate surplus. However, sooner or later, corporations would barely sell the current level of goods to consumers which limit the absorbing capacity of surplus profits in productive investments. Eventually, the surplus profit earned cannot be reinvested in expanding businesses since the maximum capacity of production is reached and the consumer demand is met. The limitations in real investment opportunities lead to speculative investments in the financial industry, a platform for the capitalists to multiply their money for higher returns by investing in futures, options, derivatives, hedge funds etc. It is, therefore, important to analyse a company’s investment activities, both real and speculative. Has the growth in financial development made productive investment easier or has it simply expanded the pockets of Capitalists? Before demanding financial development of an economy, it is important to first consider the impact of financialization on income inequality, productivity, and economic growth, along with the risk factor associated with it.

When is the right time for financialization? As an economy develops, the dependence on its own banking sector decreases as firms find other sources to raise funds. During the early stages of development, an economy depends upon its banking sector to fund growth in the manufacturing sector and provide heavy capital requirements. However, as the financial sector develops, it becomes more efficient in allocating resources providing alternatives that diversify the sources of raising capital, subsequently diversifying the risk.

Financialization

When it comes to India, its rapidly growing economy has an immediate need for credit to feed its booming investments. As shown in Figure 1, the domestic credit to private sector grew till the financial crisis of 2008-2009 hit the Indian markets, which resulted in the growth to fall below 0.1%. The credit market did bounce back post-crisis but the growth could not be sustained for long, and has been falling since then. Is the pace at which India is growing in sync with the pace at which its dependence on banking sector is decreasing? Since bank credit has been falling, does the Indian financial sector have an alternative source of fund that could complement the banking sector? This financing gap has pushed for the need of promoting different financial institutions that could complement the banking sector and provide funds to the riskier section of the economy with different maturity profiles that banks are unable to provide.

The Micro, Small, and Medium Enterprises (MSME) sector in India contributes 45% of the industries’ output and 11.5% of the GDP. This sector has high growth prospects and could bring large revenues to the economy. However, only approximately 33% of this sector has access to bank or formal institutional financing. SIDBI (Small Industries Development Bank of India) has estimated the overall debt finance demand of the MSME to be Rs. 32, 50,000 crores of which merely 22% is financed through formal sector means. Moreover, 85% of those finances come from the banking sector (IFC report), clearly indicating that the niche sectors in India are dependent upon its banking sector.

Lastly, what drives financialization? Of late, regulatory bodies are placing emphasis on the regulatory environment of the financial infrastructure space in an economy. Central Banks in countries are pushing their banks to implement the Basel norms III structure. There are strict regulations on capital requirements for banks such as the capital adequacy ratio and periodic financial system risk assessments reports by the IMF. The idea about the “right place” stresses upon the legal environment which sheds light on the role of property rights, financial institution lending to smaller firms, and promoting a competitive and dynamic business sector.

The experience of developed economies with financialization urges me to take a step back and wonder how, if ever needed, the developing economies can do it in a systematic manner. A policy recommendation that I feel is the need of the hour is a committee like that of Basel Committee of Banking Supervision (BCBS) which would examine real and speculative investment of private companies separately from the banks, also tracking where their borrowing or surplus profit is flowing into.

Peer-to-Peer Lending in India

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peer to peer
Peer-to-peer-lending

This summarizes part of the study on peer-to-peer lending in India conducted by the author during her research internship with Department of Economics and Policy Research at Reserve Bank of India.

Peer-to-peer (P2P) lending is a business model that has captured everyone’s attention globally and is now deepening its roots in India. With the advent of online industry, the financial sector is revolutionized; strongly attracting investors, businesses, customers, analysts as well as the regulators. Concerns over escalating non-performing assets (NPAs) and customer’s shift towards loans from private lenders (like family, friends, etc.) due to rigid collateral requirements and stringent availability of bank credit, coupled with various technological advancements and government initiatives towards cashless and digital economy, are responsible, to some extent, for the evolution of P2P lending.

Peer-to-Peer lending is an innovative form of crowd funding with financial returns. It involves the use of an online platform to bring lenders and borrowers together, thereby mobilizing unsecured finance. The platform enables a preliminary assessment of the borrowers’ creditworthiness and collects the loan repayments. Accordingly, a fee is paid to the platform by both borrowers and lenders for the process. Interest rates on the loan ranges from a flat interest rate fixed by the platform to dynamic interest rates as agreed upon by borrowers and lenders. One of the main advantages of Peer-to-peer lending for borrowers is that the rates are lower than those offered by money lenders or the unorganized sector. On the other hand, the lenders benefit from P2P lending as they enjoy higher returns under this scheme than those obtained from a savings account or from any other investment.

Although there has been significant growth in online lending platforms globally, there is no uniformity in the regulatory stance about this sector across countries. While P2P lending platforms are banned in Japan and Israel, they are regulated as banks in France, Germany and Italy, and are exempt from any regulation in South Korea. Differences in regulatory frameworks for the online lending sector across the world can be traced back to two opposing arguments.  Those who are against regulating this sector believe that any such move might stifle its growth at this nascent a stage. On the other hand, proponents of regulation argue that unchecked growth of this sector may weaken the monetary policy transmission mechanism and breed unhealthy practices by market players which may, in the long run, generate systemic problems given the susceptibility of this sector to attract high-risk borrowers. The balance then lies in developing an appropriate regulatory and supervisory tool-kit that harnesses this sector’s ability to provide an alternative source of credit for the right kind of borrowers, facilitating growth in an orderly manner.

P2P lending in India can be broadly categorized into three types—microfinance, consumer loans and commercial loans. Currently, there are several online P2P lending platforms operating within the country. Some of these have targeted businesses undertaking microfinance activities with stated primary goals of having a social impact and providing easier access of credit to small enterprises. These are largely tech companies registered under the Companies Act.  Presently, there are around 30 P2P lending start-ups in India. These companies have decided to form an association with the intention of self-regulation and are expected to complete their registration process soon. It is estimated that the P2P lending sector in India is worth INR 20 crore and is expected to lend approximately INR 1.25 crore per month in the future.

According to the data available at Faircent’s website, INR 334.9 lakh loan amount has been proposed for high risk interest rates i.e. 22 – 26 percent followed with INR 307.47 Lakh loan amount proposed for Medium risk interest rates (18 – 22 percent). The average rate of interest (27.86 per cent) has been earned under very high-risk bucket (26 – 32 percent) and the highest average loan tenure (24.65 months) has been granted under high- risk and very high-risk bucket. The maximum number of defaults have happened for the short-term loans (6 months) or under very high-risk bucket (4.93 percent).

According to the data available at i-Lend’s website, there is a gap between the number of lenders willing to lend and number of lenders who have lent partial or full amount. The gap also exists in the amount one is willing to lend and that which has been lent. This gap represents the demand-supply gap of the lending market on the platform. The maximum gap is within the interest bracket of 22 -26 percent and the minimum is in 12 – 14 percent. This make sense, as the lenders will always want to earn the highest interest rate and the borrowers will always want to pay the lowest interest rate. Similarly, this gap can also be seen on the borrowers’ side of the market, in terms of number of the borrowers participating and the amount of borrowings.  The maximum gap, again is within the interest bracket of 22 -26 percent while the minimum gap is now within 18- 22 percent. Also, the demand-supply gap on this platform is observed to be maximum for the loan tenure of 12 months followed by that of 18 months. In addition to that, the demand-supply gap is seen to be maximum for loans used for debt consolidation; the second-widest demand-supply gap is noticed in education loans.

P2P lending is driving huge unorganized lending sector in India. Data available on i2ifunding website shows the wide network of P2P lending and how it is connecting borrowers and lenders from across the country, mostly targeting those states that have a persistent alternative source of lending. The maximum number of borrowers on this platform are from Delhi (55.80 percent), followed by NCR (19.48 percent), Maharashtra (6.86 percent, excluding Mumbai), Karnataka (5.71 percent), and UP (4.13 percent).

Policy recommendations:

  1. Make P2P lending reach more citizens: States like Tamil Nadu, Rajasthan, Bihar and Andhra Pradesh have more than 50 percent of outstanding cash debt through non-institutional agencies and almost no presence of P2P lending.

  2. Reduce the demand-supply gap: A persistent gap between demand and supply can push the lending market to fail.  

  3. Cap the borrowings where maximum defaults are recorded: Maximum number of defaults have been observed for short-term loans or under very high-risk bucket.
  4. Introduce Orchard platform for P2P lending:  The interest rates in P2P lending sector are high and increasing, compared to 10-year government yields and other benchmark interest rates, which are relatively low and decreasing.

The Evolution of Measures of Capital Account Openness

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capital account

The Balance of Payments of a country can be divided into current account and capital account flows. The current account balance of a country indicates the difference between exports and imports of a country. The capital account records the inflows and outflows of capital into and from a country that affect its foreign assets and liabilities. Some of these are investments, loans and debt instruments. Any action of the government or the central bank of a country that tightens or relaxes the inflow or outflow of capital in and out of the country can be called a Capital Control Action (CCA).

CCAs have always been used as policy instruments by the governments and the central banks around the world for macroeconomic management. Developing countries have been using CCAs to protect their currency and economy from the shocks of sudden inflow or outflow of foreign capital caused by any internal or external change. The debate on the usage and efficacy of CCAs as an instrument of monetary policy has been going on for quite some time now.

Essentially, a CCA involves relaxation or tightening of capital flows for a particular asset or a group of assets.  While this policy change has been quantified by economists using various methodologies, the source of data on CCAs has largely remained the same, which is the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) published by the IMF. This report contains country-wise information on CCA and has become more detailed over time, providing information pertaining to inflows and outflows of multiple asset categories. Up until 1996, the AREAER database provided very limited information on capital controls. From 1996 onward, it became more comprehensive and started providing disaggregated information on capital controls by asset categories, thereby assisting economists to develop better measures of capital controls.

Quinn in 1997 published a paper where he used the AREAER database to codify the capital controls of 64 countries using a scale of 0 to 14 with 14 being the indicator of least restriction. Quinn’s work was the first instance of quantifying capital controls and can be considered the first generation of quantitative measures for capital account openness.

The second generation of measures for capital account openness came 10 years after Quinn’s work when Chinn and Ito constructed a comprehensive measure of financial openness by deploying dummy variables for the four major indicators in the AREAER database, i.e. presence of multiple exchange rates, current account openness, capital account openness and the requirement to surrender export proceeds. According to them, bringing in current account transactions and exchange rates captures the openness of capital accounts better.

In 2009, Schindler constructed an index to measure the openness or the lack of it on a disaggregated level for multiple asset categories such as money market instruments, shares, bonds and other forms of investment. In 2012, Klein built upon Schindler’s work and proposed an index that considered inflows and outflows separately for each asset category. Klein also made a distinction between controls that are applied to a broad range of assets for a long period (‘walls’) and episodic controls on a narrow range of assets (‘gates’). In 2015, Fernandez along with Schindler and others, fine-tuned the work done by Schindler and Klein and constructed a very comprehensive dataset of capital control measures for 100 countries for 10 categories of assets over a period of 39 years starting from 1975 up until 2013. Schindler, Klein and Fernandez’s work can be called the third generation of measures of capital account openness.

A fundamental flaw with the above measures is that these measures express the openness of capital account or lack of it in binaries, which implies that they do not capture or reflect the degree of openness of a nation’s capital accounts. For example, relaxation of reporting requirements for foreign direct investment while keeping the percentage of investment allowed unchanged is a relaxing action. But this will not be reflected in a measure that expresses itself in binaries of ‘YES’ and ‘NO’ or ‘0’ or ‘1’. Also, all these measures have been derived from the AREAER database which publishes only yearly data, thus limiting the researchers from using their measures to assess the efficacy of CCAs which usually take place more than once a year.

Researchers in India have tried to address this problem. Pandey, Shah, Pasricha and Patnaik in 2016 have constructed a count measure of India’s capital controls by counting the number of CCAs (relaxing or tightening) on a weekly basis, as informed by the Reserve Bank of India through circulars or notifications. This approach appears to be more sensible as it provides information on the progressive tightening or relaxation of capital controls by a country. It is crucial, however, to admit  that even this measure might be susceptible to measurement errors as one CCA can be more intense than a couple of CCAs taken together.

Be that as it may, CCAs will continue to be used as policy instruments for years to come. As data on the announcement and implementation of these actions becomes more accessible, researchers will be able to construct better quantitative measures for assessing the efficacy these actions. Governments and policy makers around the world are bound to benefit from the body of knowledge that these measures will produce.

The World Bank just pledged $1 billion for urban transport & agriculture in Maharashtra

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Here are the Policy and Finance headlines from 1st March 2017.

Policy News

Get all accounts on net banking by 31st March – Govt to banks. 

The ministry of Electronics and Information Technology has asked to get all accounts enabled with Net Banking by March 31st this year. A third of all bank accounts across the country are not linked to the internet yet, the government said. One lakh common service centers launched by the government will help the banks on the move.

During his first Presidential address to the Congress today, US President Donald Trump said, “My job is not to represent the world. My job is to represent the United States of America.” He stated, “America respects the right of all nations to chart their own path,” adding, “But we know that America is better off, when there is less conflict”

Govt notifies law to criminalize possession of banned notes

The government has notified a law that makes the possession of more than 10 scrapped notes by individuals a criminal offence. Having over 25 pieces of old notes for research purposes will also be considered a criminal offence. The law prohibits the holding, transferring or receiving of ₹500 and ₹1,000 notes from December 31, 2016, and imposes fines on offenders.

Compiled by Aayush Makharia

Finance News

CSO estimate: India GDP growth at 7% in Q3, economy bucks the note ban.

– Going by the Q3 India GDP growth rate numbers released by Central Statistics Office (CSO), the impact of demonetization seems to have been negligible on Indian economy.

– CSO’s estimate of real gross domestic product (GDP) for the December quarter came in at a robust 7%, while growth in gross value added (GVA) was 6.6%.

– These numbers suggest that the impact of demonetization, which had resulted in the withdrawal of a huge portion of currency in circulation, was negligible.

(Source: Livemint)

2) World Bank pledges $1 billion for urban transport, agriculture in Maharashtra.

– World Bank Chief Executive Officer (CEO) Kristalina Georgieva, who is on a visit to Mumbai, has agreed to lend $1 billion to Maharashtra for two projects in the areas of urban transport and climate change.

-This is the highest assistance that World Bank has committed to any Indian state.

– The lending would be extended at Libor-plus rate for a period of 18 to 20 years.

– The assistance would be used to fund the third phase of Mumbai Urban Transport Project (MUTP), and a climate resilient agriculture programme in dry-land regions of Vidarbha and Marathwada.

– Over the last five years, the World Bank has invested over $1.4 billion in Maharashtra in the areas of urban transport, rural water supply, and agriculture.

– Apart from the direct assistance of $1 billion, the organization would also help Maharashtra draw in funding from other multilateral lending agencies and private sector.

(Source: Livemint)

3) SEBI’s charge – from U K Sinha to Ajay Tyagi.

– U.K. Sinha’s six-year term (with two extensions) as head of the Securities and Exchange Board of India (SEBI) ends on 2 March.

– The 1976-batch Indian Administrative Service (IAS) officer from the Bihar cadre leaves behind a stellar legacy with incredible results in all markets under the supervision of the regulator.

– Ajay Tyagi, ex-Finance Ministry official, will replace him as the Chairman.

– The new Chairman will be have to deal with old issues like refunding the Sahara investors as well as new challenges like high-frequency trading.

(Source: Livemint)

4) China’s Central Bank faces a delicate balancing act.

– China’s central bank faces a dilemma: whether to raise borrowing costs and potentially undermine the nascent economic recovery, or hold firm and risk spurring capital outflows.

– The People’s Bank of China is trying to take the middle road, boosting money-market rates as well as increasing capital controls.

(Source: Bloomberg)

5) Sydney home prices surge at fastest annual pace since 2002.

– Despite tighter lending restrictions aimed at discouraging speculative buying by landlords, the runaway housing market shows few signs of easing.

– Housing values in Australia’s largest city Sydney have risen at the fastest annual pace in 14-years in February as record-low interest rates outweighed regulatory efforts to avert a housing bubble.

(Source: Bloomberg)

Compiled by Pradnya Nerkar

Livemint talks about the Economics of Illegal Immigration

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Machine Learning For Cyber-security Not Cyber-crime

Cyber-criminals have yet to adopt machine learning for offensive attack strategies and they probably won’t for a long time.

The cyber-security industry has always been under constant strain from cyber-criminals and malware. With increasing integration of hardware, software and services being built into every aspect of our lives, the task of keeping data secure has become even more difficult.

The arsenal of tools that cyber-criminals now have at their disposal has raised concerns for security companies, and turned the criminals into threat actors who can create, disseminate and penetrate a target’s defences using custom-built and never-before-seen malware. The security industry has had to adopt a new way of dealing with the unknown by leveraging the powerful capabilities of machine learning algorithms.

Threats To Secure Cloud Operations Are Evolving

John Howie, former COO of the Cloud Security Alliance, says secure providers aren’t enough; threats to users are evolving fast.

Confidence in the way the cloud providers manage security has risen as the sun sets on the first decade of cloud computing. If concern over cloud security has taken a step or two to the rear, it remains just off center stage, showing up in surveys as a diminished but still present concern.

And, a broadcast by a former chief operating officer of the Cloud Security Alliance explains why cloud security has yet to move offstage in the IT manager’s consciousness. John Howie, chief privacy officer and head of cyber-security at the Hauwei Consumer Business Group, said new threats are evolving with the cloud in webinar broadcast by IEEE Jan. 24. Howie was COO of the Cloud Security Alliance from 2012 to 2014 and is a principal of Howie Consulting Inc.

AI Technology Takes Center Stage At Retail Convention

Artificial intelligence (AI) and other leading-edge technologies will be highlights of this year’s National Retail Federation (NRF) Big Show in New York, but many retailers are still struggling with more rudimentary analytics.

Many retailers continue to struggle to keep up with the disruptions that digital natives have brought to the industry. Companies such as Amazon introduced recommendation engines and rating systems. And in the last decade, the iPhone and Android mobile devices have put even more power into consumers’ pockets. Shoppers can be in one physical retail location and search for a better deal elsewhere using their smart phones.

The world is shifting underneath retailers’ feet. And more is yet to come. At the National Retail Federation event in New York (January 15 through 17) technology vendors are be showcasing some of the most cutting edge technologies for retailers, including chatbots, artificial intelligence, augmented and virtual reality, and more. Are retailers ready?

It depends. There’s really a range of experiences across companies. Analytics can offer retailers value across many aspects of their businesses, from supply chain optimization to workforce management to understanding consumer behavior.

Compiled by Shreyansh Surana

Policy Updates. In today’s policy updates, I give highlights of the Economic Survey released by India’s CEA Arvind Subramaniam.

The Economic Survey projects the GDP growth in 2017-18 to be between 6.75 per cent to 7.5 per cent post-demonetisation. For the current fiscal, the growth is projected to fall to 7.1 per cent from 7.6 per cent last fiscal.

Good fiscal performance by States should be incentivised to keep the overall fiscal performance on track

The Survey has highlighted the need for fiscal prudence both by the Centre as well as the States in order to maintain overall fiscal health of the economy.

It elaborates that as the fiscal challenges mount for the states because of the Pay Commission recommendations, and mounting payments from the UDAY bonds, there is a need to review how fiscal performance can be kept on track. Greater reliance will need to be placed on incentivising good fiscal performance, not least because states are gradually repaying their obligations to the Centre, removing its ability to impose a hard budget constraint on them says the Economic Survey. Above all, however, incentivising good performance by the States will require the Centre to be an exemplar of sound fiscal management itself.

Universal Basic Income (UBI) Scheme an alternative to plethora of State subsidies for poverty alleviation

The Survey has advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty.

The Survey says the UBI, based on the principles of universality, unconditionality and agency, is a conceptually appealing idea but with a number of implementation challenges lying ahead especially the risk that it would become an add-on to, rather than a replacement of, current anti-poverty and social programmes, which would make it fiscally unaffordable.

Based on a survey on misallocation of resources for the six largest Central Sector and Centrally Sponsored Sub-Schemes (except PDS and fertilizer subsidy) across districts, the Economic Survey points out that the districts where the needs are greatest are precisely the ones where State capacity is the weakest. This suggests that a more efficient way to help the poor would be to provide them resources directly, through a UBI.

Exploring the principles and prerequisites for successful implementation of UBI, the Survey points out that the two prerequisites for a successful UBI are: (a) functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary and (b) Centre-State negotiations on cost sharing for the programme.

The Survey says that a UBI that reduces poverty to 0.5 percent would cost between 4-5 percent of GDP, assuming that those in the top 25 percent income bracket do not participate. On the other hand, the existing middle class subsidies and food, petroleum and fertilizer subsidies cost about 3 percent of GDP.

Property Tax can be tapped to generate Additional Revenue at City Level

Urban Local Bodies (ULBs), having primary responsibility for the development and service provisioning of cities, face major and inextricably linked problems: large infrastructure deficits, inadequate finances, and poor governance capacities.

Currently, tax revenues are not constrained by inadequate taxation powers of ULBs. One promising source is property tax. The study done for the Survey shows that property tax potential is large and can be tapped to generate additional revenue at city level. Satellite imagery can be a useful tool for improving urban governance by facilitating better property tax compliance.

Apparel and Leather industry key to generation of formal and productive jobs

The Survey recommends:

An FTA with EU and UK in the case of apparel will offset an existing disadvantage by India’s competitors- Bangladesh, Vietnam and Ethiopia. In the case of leather and footwear, the FTA might give India an advantage relative to competitors. In both cases, the incremental impact would be positive.
The introduction of the GST offers an excellent opportunity to rationalize domestic indirect taxes so that they do not discriminate in the case of apparels against the production of clothing that uses man-made fibers; and in the case of footwear against the production of non-leather based footwear.
A number of labor law reforms would encourage employment creation in these two sectors.

Labour migration in India increasing at an accelerating rate

Policy actions to sustain and maximise the benefits of migration include: ensuring portability of food security benefits, providing healthcare and a basic social security framework for migrants – potentially through an inter-state self-registration process.

Redistributive Resource Transfers (RRT) should be significantly linked to fiscal and governance efforts on the part of the states

Redistributive Resource Transfer or RRT to a state (from the Centre) is defined as gross devolution to the state adjusted for the respective state’s share in aggregate Gross Domestic Product (GDP). The top 10 recipients are: Sikkim, Arunachal Pradesh, Mizoram, Nagaland, Manipur, Meghalaya, Tripura, Jammu and Kashmir, Himachal Pradesh and Assam.

The Economic Survey 2016-17 points out that there is no evidence of a positive relationship between the transfers and various economic outcomes. Instead, there is a suggestive evidence of a negative relationship. For example, larger RRT flows seem to negatively affect fiscal effort (defined as the share of own tax revenue to GSDP). These trends are robust to alternative definitions of RRT.

In this context, the question is whether RRT, in future, can be linked more saliently to fiscal and governance efforts on the part of the States.

The Economic Survey 2016-2017, also suggests providing a part of the RRTs or to redistribute the gains from resource use as a Universal Basic Income (UBI) directly to households in relevant states which  receive large RRT flows and are more reliant on natural resource revenues.

Fiscal activism embraced by advanced economies not relevant for India

Since the 2008-09 Global Financial Crisis (GFC), internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimising concerns about sustainability of the stocks (debt). But India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns. India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction. In, short it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM.

Suggests setting up of a centralised Public Sector Asset Rehabilitation Agency

The Survey reaches to the conclusion that it may be necessary because

Public discussion of the bad loan problem has focused on bank capital. But far more problematic is finding a way to resolve the bad debts in the first place.
Some debt repayment problems have been caused by diversion of funds. But the vast majority has been caused by unexpected changes in the economic environment after the Global Financial Crisis, which caused timetables, exchange rates, and growth rate assumptions to go seriously wrong.

This concentration creates a challenge since large cases are difficult to resolve, but also an opportunity since TBS could be overcome by solving a relatively small number of cases.
Restoring them to financial health will require large write-downs.
Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. And they find it hard –financially and politically—to grant them sizeable debt reductions, or to take them over and sell them.

It increases the costs to the government since bad debts of the state banks keep rising, and increases the costs to the economy, by hindering credit, investment, and therefore growth.
Since, private run Asset Reconstruction Companies (ARCs) have not been successful either in resolving bad debts, though international experience (especially that of East Asian economies) shows that a professionally run central agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.

Source: Swarajya Magazine

In other important Developments, Livemint talks about the Economics of Illegal Immigration. 

US President Donald Trump’s first steps to tighten American border policy have, unsurprisingly, courted controversy. His executive order clamping down on immigration from seven predominantly Muslim nations is aimed at bolstering national security. The issue that had dominated his campaign trail and much of the first week of his presidency—stopping illegal immigration from Mexico—is a different matter. The driving impulse here, even if obfuscated by unfortunate rhetoric and a border wall solution that is essentially a boondoggle, is economic. That impulse is more complicated than it may initially seem.

An Indian firm has launched an analytics application that can converse with you

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analytics
Web analytics concept - Multicolor version

Macroeconomics

Italy tries to skirt a populist revolt: With Paolo Gentiloni named as the new Prime Minister and changes in the country’s electoral law (a one stage election with bonus seats being available only to a party that receives more than 40% of votes) it may seem that Italy is safeguarding itself from the rise of a populist government. However, Italy may not be wholly insulated. The possibility of a coalition government formed by the 5 star government cannot be ruled out – owing to a growing nationalist sentiment across the globe. While a break out of an Italian banking crisis now seems to have been evaded, questions around how the government will deploy its $ 21.4 billion fund to support the banking system, whether a state rescue of Monte dei Paschi is consistent with EU rules and whether Brussels will give its approval on terms of compensation offered to investors who may have been inappropriately sold junior bonds still remain. Two smaller banks need another capital injection after being rescued last year by Atlante, a private sector industry-funded bank rescue vehicle. Whether these funds will be allocated by Atlante or whether the banks will be eligible for a state bailout is also unclear.

While these systemic risks need to be addressed urgently, there is a bigger structural risk that Italy faces – a high public debt burden. Italy has faced challenges of operating in an open, global economy with its SMEs being heavily dependent on bank lending and too resistant to outside capital that critically impacts the boost to growth and productivity in Italy. An inefficient judicial system, inflexible labour laws and pervasive corruption are telling indicators of the need for far reaching reforms in Italy. Continue reading.

German pride shifting to frustration in role as motor of Europe: A jump in inflation to 1.7% in December, has made German economists and monetary officials wary of economic challenges facing the country ahead. While German monetary officials are urging the ECB to do away with the monetary stimulus, officials at ECB believe that German inflation is an indicator of faster German growth and that core inflation of 1% is still quite under the tolerance threshold. They further challenged a debate of a spiralling inflation by pointing out that German companies are only partially passing on higher costs to clients and that Germans haven’t noticed a significant rise in the price level. Wage growth is also subdued and does not indicate an upward pressure to core inflation. More here.

Euro zone bailout fund – Greek public debt is manageable: The euro zone bail out fund has declared Greece’s debt crisis to be manageable although IMF has estimated the Greek debt burden to reach 175% of GDP by 2020, 164% by 2022 and thereafter explode to 275% of GDP by 2060. However, a spokesman from the Eurpoean Stability Mechanism has assured that the euro zone has promised to offer Greece additional debt relief subject to it delivering on all its reform promises. However, Germany – facing elections – is strongly opposing any additional relief until 2018 when Athens finally delivers on its promises. Euro zone governments are also hesitant on providing additional support to Greece. Read more.

Facing unemployment, austerity and scandal, Brazil struggles to keep it togetherWith Brazil struggling to fight a recession owing to a slowdown in China, falling commodity prices and a fiscal consolidation programme by Dilma Rousseff, each passing day seems to be a challenge for the country. A country already having lost faith in its political system due to a widely criticised and under investigation political scandal, the new government under Temer seems to be taking some harsh and controversial steps – freezing of the fiscal budget for the next two decades in real terms at the 2016 level, adopting of certain controversial pension and labour reforms – to deal with its fiscal deficit. The result is a general discontent in Brazilian society that shows signs of a political turmoil in the near future. What is more unnerving is the growing support for Congressman Jair Bolsonaro who is seen openly associating Brazil’s ‘good old days’ to its military dictatorship.

Compiled by Swara Dharmaraj

Data Analytics

 

Data analytics firm Manthan has launched an artificial intelligence-powered conversational analytics application, as its new offering within the range of analytics capabilities.The product that can answer complex business queries in natural language using company’s data available on Manthan’s analytics suite cost the Bengaluru-based company over $7.5 million in R&D cost.

It allows a voice assistant like Amazon’s Alexa or Apple’s Siri to be one’s most-trusted employee if they are a large business owner and use Manthan’s new capability Maya. Moving beyond personal assistance tasks like sending emails or giving weather updates, voice-based assistants – integrated with Maya’s information system – can now answer business queries to a CXO looking for last month’s profit report or wanting to know why the company’s sales was down last weekend. More about Manthan here.

This editorial charts out the growth forecasts for the data analytics sector, while mentioning some applications that are slated to see a spike such as Coca Cola’s Freestyle dispensers which allow users to specify mixtures of flavors from the brand for a custom drink. The company captures information on what drinks are dispensed and at what time of day, among other data elements. This data is used to fine-tune stocking and inventory even for non-Freestyle vending machines.

A TechCrunch article details the vagaries of big data. It claims that companies can only harness their true potential through applications of predictive algorithms since their beauty lies in the fact that they don’t need to understand the cause and effect behind statistical relationships in order to work incredibly well in practice. “For an enterprise to glean the benefits of prediction, it must first give up trying to deduce why things are a certain way, and start trusting the lines of code which tell us that they are”, it says.

Big data stands to transform economic measurement in substantial ways. The volume and precision of data available allows economists to revisit the foundational assumptions underpinning common indexes. This column presents a new empirical methodology that leverages big data to translate nominal numbers into real output or welfare. ‘The unified approach’ nests major price indexes and addresses implicit biases in these measures. An examination with barcode data suggests that standard methods of measuring welfare overstate cost of living increases by ignoring new products and demand shifts.

Compiled by Reshu Natani

IMF Director Says Trump’s Fiscal Plans Likely to Boost U.S. Economy

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Macroeconomics

Oil Falls as U.S. Drillers Replace Barrels Lost in OPEC-Led Cuts
Oil dropped from a three-week high amid speculation that increased U.S. drilling will boost output, offsetting cuts by OPEC and other producers.

Futures fell 1.1 percent in New York after failing to extend Thursday’s 2 percent rally. Rigs targeting crude in the U.S. rose this week by 15 to 566, the highest since November 2015, according to Baker Hughes Inc. data reported Friday. American crude output is the highest level since April, government data show. Oil supplies from OPEC are plunging this month, according to tanker-tracker Petro-Logistics SA.Last month’s pact between the Organization of Petroleum Exporting Countries and 11 other nations gave hope to a market stuck in a 2 1/2 year slump. While Saudi Arabia says more than 80 percent of the agreed cuts have been implemented, analysts and investors are waiting for data to gauge the extent of the decrease. The International Energy Agency says rising prices will spur U.S. shale output, and drillers are adding more rigs.

West Texas Intermediate for March delivery fell 61 cents to $53.17 a barrel on the New York Mercantile Exchange on Friday. Total volume traded was about 25 percent below the 100-day average.Brent for March settlement dropped 72 cents, or 1.3 percent, to $55.52 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $2.35 premium to WTI.

Energy shares slipped after Chevron Corp. posted its first annual loss since at least 1980, signaling the difficulties faced by the world’s biggest oil companies as they struggle to emerge from the worst collapse in a generation. The S&P Oil & Gas Exploration and Production Select Industry index fell 1 percent.U.S. crude output climbed by 17,000 barrels a day to 8.96 million in the week ended Jan. 20, according to an Energy Information Administration report on Wednesday. Rigs targeting crude have risen by 250 to 566 since touching a seven-year low in May, according to Baker Hughes data. Read more.

Rural Wage Growth Defies Demonetisation, Rises To 7.3%: Nomura
Defying demonetisation, nominal rural agricultural wages growth rose to 7.3 percent in November on year-on-year basis, largely owing to hike in minimum wages announced by the government in September last year, financial services major Nomura said in a report.
Interestingly, the report said that the steady wage growth suggests a likely release of pent up demand after remonetisation.

“Nominal rural agricultural wages growth rose to 7.3 percent year-on-year in November 2016 (the month demonetisation was announced) from 6.9 percent in October, remaining well above the previous 12-month average of 4.8 percent,” Nomura said in the report.
Demonetisation of Rs 500 and Rs 1,000 currency notes came into effect from November 9, 2016.

According to the financial services major, rural wages may have defied this demonetisation effect because of the hike in minimum wages announced by the government in September 2016.

“The resilience of nominal rural wage growth, despite demonetisation and amid lower inflation ( that is higher real wages), suggests that the current slowdown in rural demand is transitory and could give way to a sharp release of pent up demand once the economy is sufficiently remonetised, which we expect by end-March,” the report said.
Rural wage growth has only recently started to trend higher, after almost two years of stabilisation, it noted. Continue reading.

Abe Open to Bilateral Trade Deal With U.S. After Trump Exits TPP
Japanese Prime Minister Shinzo Abe signalled that he’s open to a bilateral trade deal with the U.S. after Donald Trump formally withdrew from a 12-nation Asia-Pacific accord this week in one of his first acts as president.

One-on-one talks with the U.S. on a trade deal are “not absolutely impossible,” Abe told lawmakers on Thursday in Tokyo, adding that he’s finalizing negotiations for a summit with Trump. The leaders are set to have a phone conversation in the coming days before meeting in Washington on Feb. 10, the Yomiuri newspaper reported on Thursday.
Abe, a key proponent of the Trans-Pacific Partnership regional trade agreement, is seeking ways to boost economic relations with Japan’s only military ally. Trump prefers to negotiate bilateral trade deals and has warned that he might withdraw U.S. troops from South Korea and Japan if allies did not pay more for their services.

Asked in parliament about the potential fate of Japan’s sensitive agricultural sector in any bilateral talks, Abe vowed to “protect what must be protected.”

Abe said he wanted the Washington summit to show that the alliance between the two nations is “unshakable,” adding that he planned to discuss the East China Sea and the South China Sea. Japan relies on the U.S. for a “nuclear umbrella” to protect against regional threats including North Korea and China.

Asked by his former Defense Minister Itsunori Onodera to comment on bolstering Japan’s own defenses to enable pre-emptive strikes on missile bases, Abe said this was legally possible, but there was no plan to gain such capabilities.

“I want to strengthen the deterrent power of the entire U.S.-Japan alliance,” Abe said. “We must think about our own deterrence in the context of our defense-only policy and within the framework of the alliance.”

The first visit to Japan by a Trump administration official will be made by U.S. Defense Secretary James Mattis on Feb. 3. Defense Minister Tomomi Inada told parliament she welcomed the visit as a sign of America’s interest in Asia. Continue reading.

Lagarde Says Trump’s Fiscal Plans Likely to Boost U.S. Economy
President Donald Trump’s plans to overhaul the U.S. tax system and increase infrastructure spending should accelerate growth in the world’s biggest economy over the next two years, said International Monetary Fund Managing Director Christine Lagarde.

In an economic update last week, the IMF bumped up its forecast for U.S. growth by 0.1 percentage point this year and 0.4 point for 2018. The U.S. economy will expand by 2.3 percent in 2017 before accelerating to a 2.5 percent rate in 2018, the fund said.

While Trump has promised to cut taxes and boost infrastructure spending, he’s also threatened to impose tariffs on trade partners such as China and Mexico. Lagarde said it’s too early to predict how Trump’s other policies may impact the economy. More here.

Compiled by Sharayu S Pawar

Finance

Nifty50 is overbought, expect volatility in a wide range; protect profit at higher levels 

The Nifty50 is overbought by now, but it continued to post gains for the fourth day in a row and ended the week with a gain of 290 points, or 3.50 per cent. The ending of the week threw up extremely divergent signals on the daily and weekly charts.

We expect a modest opening for the market on Monday. Not only is the Nifty50 showing overbought conditions on the daily charts, it faces pressure from external technical factors like a  potential rise in the US Dollar Index and a spike in US bond yields. Continue reading here.

 

Sensex up 10% from December lows; investors should stay put despite B-Day volatility 

The market began the week with a gap down reacting to Trump’s ‘Make in USA and hire in USA’ rhetoric after the inauguration, but the inherent strength of the market was so strong that such noise was shrugged off immediately and market bounced back quickly thus setting tone of bullish outlook for the whole week ahead.

Not surprisingly, in such bullish undertones, the negatives quarterly results were disregarded and stock prices defied all logic to inch higher. More here.

 

Oil prices fall as data suggests drill ramp up in US

Oil prices slipped on Friday, extending losses after data suggested drilling is ramping up in the United States, prompting investor concern about how effective the Organisation of the Petroleum Exporting Countries (Opec) and other producers will be at supporting prices by cutting supplies.

US crude futures for March delivery settled down 61 cents, or 1.1 per cent, at $53.17 a barrel.

Brent was down 72 cents at $55.52 a barrel.The US weekly oil and gas rig count from Baker Hughes showed that US drillers added 15 oil rigs in the week, the 12th gain in 13 weeks. That brought the total count to 566, the most since November 2015.Prices had risen during Asian trading, though activity was thin due to the start of the Lunar New Year holiday in much of that region, including China and Singapore.

Compiled by Beverley Dias