The Reserve Bank of India (RBI) working paper by Harendra Kumar Behera and RBI deputy governor Michael Debabrata Patra on inflation targeting has waded right into one of the world’s most vibrant policy debates, one between inflation hawks and dis-inflationists. The former believe that easy-money policies pursued after the West’s financial crisis of 2008-09 that have given way to printing money as a path out of the covid crunch will eventually lead to much higher rates of inflation than experienced by the developed world in the last three decades. On the other side are dis-inflationists who believe that the world has undergone a structural change—thanks to demography, technology and globalization—that has caused the ‘Phillips Curve’ to flatten in some economies. By this, they mean that a long-observed trade-off between growth and inflation, under which an accelerative economy would overheat after a ‘speed limit’, has lost its disruptive power. The US Federal Reserve has recently loosened its rules a bit on fighting inflation, but there is no reason for RBI to follow suit.
In their paper, Patra and Behera set out to identify an appropriate inflation target for India, and find that it is still 4%, the central aim of an explicit policy adopted by RBI in 2016 that is due for a review in March. “If it ain’t broke,” they argue, “don’t fix it.” Yes. Take the pre-pandemic record. Retail inflation was in the range of 4.2% from 2014 to 2019, less than half the average over 2007-14. If India’s steady decline in inflation is consistent with a flattening of the Phillips Curve, the paper asks, what must be the right target at this point in time? A target set lower than the trend rate will result in an ‘overkill’ of tighter money that would hurt the economy, say the authors, while a higher aim will expose it to inflationary shocks. It would be best then to target 4%, as before, with elbow room of plus or minus 2 percentage points to give policymakers some flexibility.
It is a different feeling to actually go through difficulty. Reading about the 1930s Depression or watching movies that tell stories of a great crisis and how the human spirit rose up to the occasion and emerged stronger—battle scarred, but better—after it fought back, is very different from facing real danger. It is another thing to actually collectively go through such a crisis. It may not seem so when we plug into the social media groups or even the family and college WhatsApp groups—but the world has actually become a much better place than ever before. Swedish physician, academic, and public speaker Hans Rosling documents this beautifully in his epic book Factfulness: Ten Reasons We’re Wrong About the World—and Why Things Are Better Than You Think. And it took the pandemic for us to discover this.
You get opportunities to hit reset every once in a while. All the major life stages give you that—marriage, childbirth, a job loss, a death in the family. These are events that have in them the potential to make you pause, rethink who you are, rework things that need redoing, and move forward on a new base. Sometimes you need to create a totally new foundation, sometimes just some tinkering is enough. A big shift in who you are is not the easiest to transition through, but all the popular stories we remember are stories of great personal transformation: of battling something within or without and emerging stronger or changed in some way.
This was the year when death came closer to us than ever before, whether we thought about it, saw images of it, or experienced loss firsthand. Each of us is aware of the possibility that this here may be my last day in this body, but we rarely think about it. In the drama of life, this consciousness of death recedes. And it is a pity, because it is the awareness that this embodied life is not permanent that has in it the power to make everyday life much easier to bear.
2 min read. Updated: 22 Dec 2020, 08:35 PM ISTLivemint
The recent suicide of a Hyderabad-based techie who was humiliated when a lender went about calling people on his contact list, the consent for which he had given while taking that loan through an app, has brought into sharp focus the risks of instant app-based lending in India. The country has long been starved of credit, and despite efforts to drive up the efficiency levels of banks, our formal lending structure remains too clunky, time-consuming and costly to satisfy the vast demand in evidence for small unsecured instant loans. Online ventures spotted a big opportunity in this space and have gone all out to reach underserved customers. But this growth has been largely haphazard, while Indian regulators and lawmakers have tended to take only knee-jerk notice of creeping market failures that could end up destroying markets, choice and innovation. The unseemly tactics being used by lenders to recover their dues exemplify a failure that can no longer be ignored. We need much sharper regulation of all such practices.
In July 2020, the Reserve Bank of India (RBI) did put out rules designed to curb the opacity and violation of existing lending norms by digital lenders, but these have done little to improve matters on the ground, where lenders often ask for and get the digital records of borrowers that they have no right to. Clearly, RBI’s stated intent of viewing violations “seriously” has not been taken seriously enough by the market. This is not just India’s problem. Other countries are also taking steps to put rules in place for digital lending. In 2017, China’s regulators had to impose restrictions after a scandal arose of personal pictures being used to humiliate borrowers into repaying loans they could not afford to. In Kenya, its central bank has clamped down hard on predatory rates and recovery practices. India is in need of a policy solution that would neither kill this nascent market—which fulfils a very real need for quick and painless loans to tide people over for short periods—nor deaden the buzz of innovation in the country’s fintech sector, but is able to institute personal data and privacy protections that prevent predatory recovery practices.
It was the technology stocks in the US till a few months back that were getting investors’ attention, but that got trumped more recently by the multi-bagger returns of some cryptocurrencies. There are newspaper front page comparisons of the value of bitcoin with the returns on the Sensex and gold, where the crypto emerges as a multi-bagger, giving better returns than others. There are interviews with crypto exchange owners that talk up the future value of this unregulated decade-old virtual currency. No wonder people feel like they missed the biggest gold rush again.
Crypto enthusiasts like to compare bitcoin to gold using analogies of ‘mining’ bitcoin—no matter that only keyboards are tapped and no underground mines are explored. The crypto logo has a shiny gold-like image to emphasize that association, but nobody yet has worn a ring or a necklace made of bitcoin for it is a fully virtual currency that is unregulated.
Not everybody can be a Lakhan Yadav, the 45-year-old Madhya Pradesh farmer, who spent ₹200 on a diamond stake and found a ₹60 lakh winner. And not everyone can be Yadav in the manner in which he is dealing with his win—after a celebratory mobike spend, he will use the fixed deposit (FD) route to park the money and educate his four children. Not everybody finds a jackpot, and fewer still find the equality of mind to deal with the jackpot when it is indeed found.
The search for a jackpot is not restricted to poor farmers leasing diamond mines or those who buy lottery tickets that sustains a ₹50,000-crore-a-year industry, it extends to white-collar professionals who also dream of that one punt that will get them rich overnight. Over the entire lockdown period I would have done at least 30 webinars of groups between 30 and 1,000 people at a time. Many groups were kind enough to fill a small questionnaire that mapped their money worries. The worries were the usual mix of too many goals, too little money, confusing marketplace, trust deficit for older people and too heavy lifestyle costs, and student loans for the younger cohorts. International groups of young adults almost always had issues of credit card loans and very high student loans to repay. While they ticked all the boxes of worrying about goals and spends, some of their questions during the webinar were focused on finding that one great deal or product that would be the winner.
There are times when markets seem fully on their own trip and in no mood to look at what is happening today, as they anticipate a golden tomorrow. As the market hits new highs every day, up an unbelievable 75% from the March 2020 lows, investors are asking the question—how high will markets go and is this rally sustainable?
Other than global liquidity, some reasons for markets being happy are related to the better-than-expected recovery of the Indian economy. The Reserve Bank of India (RBI) has projected a contraction of 7.5% in financial year 2010-21, better than the minus 9.5% projected earlier. The central bank estimates that the first quarter of the next financial year will see a positive growth of 21.9%. The market is also blending in the argument that this recovery is possibly being built on a different base than earlier.
Both bond and stock markets were waiting with bated breath for RBI Governor Shantikanta Das to indicate if inflation was going to be more important or growth on the morning on December 4. While nobody expected policy rates to be reversed, the market was watching every word that could indicate the central bank was turning hawkish – an experience of past pain when earlier RBI governors pulled back just when the economy needed some more continued oxygen of liquidity.
Monetary policy is charged with keeping the flow of the gas of money to the economy at a ‘just right’ reading. Too high a flame will cause irrational exuberance that results in inflation. Too low makes the economy sluggish with growth suffering. Remember, money is the gas that the economy needs to fuel working capital, project finance, retail loans and also government spending and it is the job of the central bank to get this right.
The nephew has just begun to earn. The euphoria of the first salary. The joy of living at home and seeing almost the entire money sit warmly in the bank account. Checking every five minutes to see that indeed the balance reads what it did five minutes ago. But he is Gen Z and is eager to do more with his money than his elders were at his age. He’s seen his aunt all over social media. He’s seen her book at airports. He’s heard some good stuff about making your money work for you. So, he comes calling for advice. People in the financial advisory sector will understand what a moment this is—your own extended family is the absolute last to take you seriously! Evidence of this is in the investments he’s already made, starting SIPs three months ago in a few funds, taking advice from somebody he was referred to.
These are good funds, but there are already two problems. One, the funds don’t have a story to tell. They are just good funds that some well-wisher put him into, they are not aimed at solving any of his concerns. Two, he is using a platform that only gives the option of a regular plan. Nephew is getting his advice for free and is then paying the platform trail commissions for the rest of his life on a growing portfolio for simply being the shop front that vends.
The Reserve Bank of India (RBI) working paper which recommends that manufacturing groups and business houses be allowed bank licences , while mapping global norms against this and disclosing that all but one of the experts consulted were against this, has generated plenty of heat. Like almost everything else right now in India, views on the issue largely depend on which side of the political spectrum you swing on policy matters. Considering the content, disclosures and manner of this idea’s presentation, it looks to me as if this is a kite flown to see what reactions emerge. The Narendra Modi government is unlikely to spend political capital on such a big change if there are enough signals that it would be a vote loser. But since the kite is in the sky, we should use the opportunity to think through the issue of letting manufacturers own banks while trying to keep politics out of it. I will outline three areas to look at this question from different windows.
But first, why do we need manufacturing groups in banking? Because India is capital starved and needs money to grow. Public sector banks (PSBs) have eroded their capital through a mix of poor lending decisions and politically-nudged free money to business cronies for the past many decades. The playbook of funding cronies with the public money of PSBs, then recapitalizing these banks using taxpayers’ money (and by borrowing), and then inflating away the debt, has destroyed the balance sheets and morale of PSBs. Private banks find retail lending more profitable and less risky than corporate lending. The flow of capital that India needs for its next stage of growth is missing. Therefore, the need for letting firms with the deep pockets required into the banking sector at this juncture. But this is a contentious issue, globally. So, how should we look at it?