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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!
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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!
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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.
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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
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.
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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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