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Posted on 10-May-2019 Comments  0

Consumer Demand

Is India seeing clear signs of consumer demand faltering?

During the last couple of weeks, we saw three diverse sets of news that pointed to a similar problem at a macro level. Firstly, there were the quarterly results of HUVR, Britannia and Godrej where the pressure on the top line numbers was clearly visible. Secondly, the auto sales numbers for the month of April were really scary with most sales numbers down by nearly 15-20% and dealer inventories mounting. Finally, we have the YOY airline passenger traffic growth which fell to a multi-year low of just 3.1% in a potentially huge market!

Is it all about rural demand?

To a large extent yes, although not entirely! The FMCG companies that reported weak sales in this quarter saw a clear decline in rural sales. The reason is quite apparent. Farm distress is still quite high and the benefits of a higher MSP have not really percolated to the farmers. Most farmers are still selling their produce well below their MSP and that is showing up in demand. Also, the lag effect of demonetization is still visible in the form of fewer jobs created by the MSME sector, which has been a major employer in the rural areas. Thirdly, many of the large infrastructure projects have not really translated into higher incomes for the rural folks. But we also must appreciate that airline demand comes more from urban and semi urban areas. So the problem is only partially rural. There is a problem with urban demand too!

Liquidity crunch is a reason

While liquidity had been largely addressed through remonetization, the pressure on liquidity still remains. The loss of jobs across MSMEs has taken its toll in a big way. Secondly, for consumer durables the availability of cheap and timely funding is quite critical. In fact, a survey by Credit Suisse had discovered that Indian propensity to postpone the purchase of durables had nearly doubled in the last 1 year. That is also slowing down the demand for white goods as well as two wheelers and four wheelers. People are more willing to put off their purchases to a future date rather than take on liability when the situation is uncertain. The traditional liquidity crunch during election time is also adding to the problem.

Indian consumer anomaly

Over the last many years, Indian consumers have displayed anomalous behavior when it comes to consumption. Their sensitivity to price shifts continues to be very high. For example, when air fares started going up, there was a sharp downturn in aviation demand. Also when the price of petrol and diesel started rising beyond affordable levels, it directly and substantially impacted the demand for automobiles. As much as the Indian consumer size is large, it is also extremely and, at times, irrationally price sensitive. Consumer companies are learning it the hard way now!

Fiscal Deficit

Why the actual fiscal deficit is much higher than 3.4%

Fiscal deficit always has a much larger implication because it shows the extent to which the government needs to borrow to balance its budget. Even since the Fiscal Responsibility Act was passed in 2004, the government has tried hard to keep the fiscal deficit in check. Of course, there have been instances during the UPA regime and the NDA regime; when there have been clear cases of transgressing the limit. The entire issue of fiscal deficit came back to the fore when Jaitley admitted that the actual fiscal deficit may be closer to 3.8%. Why is this important?

Fiscal deficit: 3.8% or more?

For the fiscal year 2018-19, the GST and direct tax revenues fell woefully short. The government had already overshot the fiscal deficit by 20 bps and did not have room for more. The clear loser was the expenditure side. The government actually cut down expenses by Rs.1 trillion to keep the fiscal deficit in shape. That clearly implies that quite a few key areas of allocation like education, health care, defence and infrastructure would have taken a hit. Cutting expenditure, especially with productive and long term externalities, have dual implications. They put off the liability to a future date and understate the fiscal deficit. Also, such a move has its clear implications on national productivity since important items of long term value are being put off to a future date. Fiscal deficit for last year should have been 3.8%, ideally.

What about state deficit?

There are two important reasons why the central deficit of the government may not give a very clear picture. In fact, economists have pointed out time and again that the real risk for the Indian economy could stem from the state deficits, which are now as high as the central fiscal deficit. Let us understand how this comes about. Firstly, the government has been promising farmer write-offs; left, right and centre. This has a direct impact on the fiscal deficit of the states. With farm distress rising, this could become a bigger problem. Secondly, power sector dues of SEBs are now monetized by UDAY bonds. But the liability still rests in the books of the state. One needs to add this to get a clear picture.

Some creative accounting too

There are other indirect accretions to the fiscal deficit that are not recorded. ONGC buying out the government stake in HPCL and making borrowing for the same is fiscal deficit. Similarly, parking food grain dues to the tune of over Rs.1.50 trillion in the books of FCI is also a virtual accretion to the fiscal deficit. Then there is the oil subsidy which tends to be normally passed on partially to the OMCs. If all these are added up, the fiscal deficit of the government would be much higher. It is time to get a real picture of the deficit and tune strategy accordingly!

Trade War

How China could retaliate in the trade war against the US

The verdict is out! The US-China trade talks have failed and the US has gone ahead with its fancied 25% tariffs on $200 billion of Chinese imports. China has threatened to retaliate but not too many are taking the threats seriously. Don’t underestimate China and here are 4 ways they can needle America.

Target US companies in China

One can argue that the US imports $600 billion from China but China only imports $125 billion. But that is off the point. US companies generate $400 bn worth of sales in China. All that China needs to do is to slow down customs clearances, delay visa applications to US citizens, use safety checks to disrupt operations etc. Some of the biggest US companies like Apple, Intel and Boeing use China as a critical hub. Making their China operations cost-ineffective can be one easy way for China. 

Devalue the Yuan

This may not be very easy considering that the Yuan is part of the IMF basket but then China has found ways in the past. It can just widen the range for the Yuan to make it weaker. A weak Yuan will more than make up for the higher tariffs that the US has imposed and help Chinese goods remain competitive. In the last few years, China has shown a greater intent to engage with UK, EU, Japan and India to reduce its overall dependence on the US.

How about selling US bonds

China holds $3.5 trillion in reserves which includes $1.4 trillion in US bonds. Even a small sale by China of US bonds can roil the global bond markets and make investors panic. They can also give hints to the global market by shifting more of their reserve holdings from dollars to gold or to other currencies like the Yen or the Euro. These kinds of signals by a large economy like China are enough to give the jitters to currency markets. China will use this carefully because if bond prices crash then China stands to lose a lot in terms of investment value.

Use diplomatic channels

This is something which China is most likely to use to good effect. Let us not forget that the trade war is not just about tariffs but also a display of who has the upper hand in world trade. China can always indulge in some saber rattling in the South China Sea. For long, the US has accused China of meddling in North Korea. China can just make the job harder for the US. China has already built close relationships with the UK and EU and most of these nations are unhappy with Trump’s arbitrary style of functioning. They would be more than happy to have the support of China. Above all, Russia and Iran are trying to provide a counter-weight to the US and OPEC. China may compound matters by chipping in!




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