Daily Financial News Analysis – 14th Feb’20

Table of Contents

Escape Clause

K. Singh-led Fifteenth Finance Commission (FFC) may allow states to invoke an “escape clause”
Escape Clause to breach their mandated fiscal deficit target by half a percentage point.
It will give them flexibility to respond to economic shocks similar to the option available to the Centre.
Under the Fiscal Responsibility and Budget Management (FRBM) Act, states are mandated to keep their fiscal deficit at 3% of gross domestic product.
If accepted by the central government, the change may give states much-needed fiscal space to raise resources by borrowing funds at a time when their revenues have been under pressure.
States’ revenue is under pressure because of reduced avenues for raising taxes and a tepid growth in goods and services tax collections.
Based on the recommendations of a review committee headed by Singh in 2018, the FRBM Act was amended to make debt-to-GDP ratio the principal macroeconomic anchor of fiscal policy for the central government.
The panel also provided for an “escape clause”, for deviations in fiscal deficit up to half a percentage point of GDP to the central government
In a 5 February interview, expenditure secretary V. Somanathan said giving an escape clause option to states could put additional pressure on the bond market.
The problem is we are all borrowing from the same pool of funds.
The FRBM laws of the state are different from the FRBM law at the Centre.

Smaller packs in rural area

Rural Indians are getting more tight-fisted, opting for smaller and cheaper packs of detergents and toothpastes, as shrinking incomes force them to cut back on spending.
Jyothy Laboratories, the seller of Henko detergent and fabric whitener Ujala, said the sale of packs that cost ₹10 has gone up significantly in rural markets.
That goes to say that people are buying only as much as they require—they are not putting extra money in buying large pack sizes.
Companies have been witnessing a slump in growth rates of goods for daily use in both urban and rural markets.
However, the stress is more pronounced in rural that contributes 36% to overall FMCG sales and has historically grown faster than urban markets.
Companies have been taking steps to survive the slowdown by increasing their direct reach in villages, and adding smaller packs for key brands.
Companies are using more targeted marketing and promotional campaigns to boost growth.

Rescue growth in India

India’s economy is far from a recovery in the near future.
Data released on 12 February on industrial output and consumer price inflation
Retail inflation quickened to 6% in January 2020, from 7.35% in December 2019.
Food inflation continues to be in double digits for the third month in succession, with consumer food inflation at 13.63% in January.
While usual suspects such as vegetables, which suffer from seasonal supply shocks, continue to show high inflation at 50%, inflation is now rising for most other food crops as well.
Particularly worrying is the high food-grain inflation, at 3% in January 2020.
It has also spread to other food items such as milk (5.6%), eggs (10.4%) and meat products (10.5%), most of which are not seasonal, but have been pushed up by rising feed prices.
The trend also indicates that food inflation is unlikely to fall in the coming months.
Rising feed prices pushing up prices of non-vegetarian items are a spill-over from cereal prices.
But why are these rising despite record production?
Artificial supply shock created by the government.
It has mopped up almost one-third of all production for its stocks.
Foodgrain stocks in the central pool alone stood at 75 million tonnes on 1 February 2020, and have been the same for the last three months.
With India restricting palm oil imports, edible oil prices have also started rising and will rise further.
Food price inflation is likely to remain elevated along with overall inflation.
Rising inflation, particularly food inflation, at a time when the economy is suffering from low demand, would be an indication of a demand recovery.
The role of the government in pushing inflation through an artificial scarcity in the food grain market and unnecessary import restrictions is a clear pointer that rising inflation is unlikely to be a result of rising demand.
However, direct data on incomes does confirm that, if anything, the economic conditions of most wage workers have worsened.
Data on wages from the Labour Bureau is now available until November 2019.
Real wages of general agricultural labourers have declined by 8% from November 2018, while those of non-agricultural labourers have fallen by 2.1%.
Clearly, while prices are rising faster, there is no evidence of worker incomes rising alongside.
Data on industrial activity from the index of industrial production (IIP) for December 2019 shows a contraction in economic activity by 3% compared to the previous year.
In fact, the cumulative growth in industrial activity for the April-December period shows only a marginal rise of 5%.
Even other leading indicators such as automobile sales, credit growth and so on suggest no recovery.
While there is no evidence of economic recovery, with income data pointing to a worsening of the economic situation, rising inflation is likely to make the process of achieving a turnaround difficult and painful.
The poor are likely to cut back on essential non-food expenditure as household budgets are squeezed due to rising food prices, leading to a further decline in demand.
The best way of reviving the economy lies in helping the poor increase their real income.
At a time when the economy needed the government to spend money on social security schemes and rural infrastructure, the trend in expenditure suggests a government working against it.
While the government was generous in compensating the corporate sector for the loss of economic momentum, it is the poor and middle classes which pay for the generosity of the government through reduced expenditures and subsidies.

New FinMin of UK

Rishi Sunak is now running the world’s fifth largest economy.
Five years ago Britain’s new finance minister Rishi Sunak, the son-in-law of Infosys co-founder R. Narayana Murthy, wasn’t even a member of parliament.
The 39-year-old former Goldman Sachs banker was appointed in dramatic fashion on Thursday when incumbent Sajid Javid unexpectedly quit— in a row over advisers—in what Downing Street has cast as a routine ministerial reshuffle.
Second most powerful position in government
He will have to steer the economy through the turbulence of leaving the European Union and the forging of trade links that will define Britain’s new relationship with the world.
Seen as a smooth media performer and ultra-loyal member of the Conservative Party, Sunak has been used by the government to present and defend its policies in television interviews—a sign of trust from Johnson, who has a fraught relationship with Britain’s media.
“From working in my mum’s tiny chemist shop to my experience building large businesses, I have seen first-hand how politicians should support free enterprise and innovation to ensure our future prosperity,” Sunak says on his website.