Category: Economy

Seasonally Adjusted Indian GDP Growth Declined Sharply In Q3

The Perils of Using Seasonally Unadjusted Data

Many observers have used a flawed reading of the recent GDP figures to jump to the unwarranted conclusion that the Indian economy was unaffected by the note ban. While the government reveled at this unexpected positive spin, opponents apparently have been reduced to gnashing their teeth and muttering darkly about statistical skulduggery.

The true situation is a bit different. As we have already reported, seasonal adjustment would have shown that the quarterly growth rate has actually declined substantially in Q3, Seasonal adjustment is a commonly used statistical procedure and it has been considered essential practice for more than 50 years by most government statistical agencies around the world.

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The Curious “Strength” of Q3 GDP

Although the quarterly estimate of the Oct-Dec quarter Indian GDP released this week appeared to be positive, a more careful statistical analysis of the data shows that the Q3 figure was actually quite weak and did show negative effects of the note ban.

Most economists expected a significant slowing in Q3, followed perhaps by a rebound in Q4 of 2016-17 and also in Q1 of 2017-18. Instead, it appears as if the Indian economy has suffered almost no negative consequences from the note ban and continued to grow strongly in Q3. This data release has been met with skepticism, even outright disbelief in certain quarters. This is often the reaction of people on both sides of the political spectrum when they are surprised by the data. However, we will see below there is no reason to suspect statistical malfeasance, and the key to this riddle lies in some technical details of the GDP growth rate calculation.

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The Coming Hard Landing of the Chinese Yuan

The Chinese economy is in a bad way and it is unlikely that China is going to be able to continue its current exchange rate policy for much longer in the face of weak economic growth, massive capital flight, and the threat of a trade war. The Chinese yuan and the Chinese economy is due for a hard landing some time soon.

Chinese economic growth has been slowing for several years from the highs attained during the recovery from the 2008 crash. It now stands below 7%, near its 2008 low.

(from Bloomberg)

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Effects of U.S. Protectionism on India

President Donald Trump and his supporters have advocated the use of protectionist strategies to stimulate the U.S. economy and increase U.S. employment. One proposal that has received serious consideration is a “border tax”, or a Destination-Based Cash Flow Tax (DBCFT). As pointed out by trade theorist Paul Krugman here, this will essentially act as a subsidy on the employment of domestic factors of production. In addition to such trade protection measures, Mr. Trump also wants to implement incentives that will lead to the repatriation of dollars held outside the US, especially by US domiciled multinationals.

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The Global War On Corruption

The war on corruption is global. In order to understand it we need to see it in its global context, as part of a worldwide Zeitgeist.

  • The President of Brazil, Dilma Roussef, was impeached and removed from office by the legislature, and a former President, Luiz Inácio Lula da Silva, had his home raided, was detained, and had charges filed against him, in connection with an influence peddling investigation.
  • The President of South Korea, Park Geun-hye, has been impeached and a Constitutional Court is now hearing arguments to decide whether the President should be permanently removed from office.
  • In South Africa, the ruling party, ANC, and the President, Jacob Zuma, has been at the centre of allegations of corruption going back almost ten years.
  • In the just concluded Presidential election in USA, one of the candidates, Hilary Clinton, was perceived as the “most corrupt ever” by some voters and may have lost the election because of this.
  • Christine Lagarde, the former Finance Minister of France, and now the Head of the International Monetary Fund, faced an investigation into a possible misuse of power, but was found guilty only of negligence.
  • In India, corruption has been at the centre of political discourse for several years, and was an issue that was partly responsible for the stunning 2014 victory of Narendra Modi and the BJP over the allegedly corruption ridden INC, led by Sonia Gandhi. The latest chapter of the Indian war on corruption is the demonetisation of 86% of its currency by the government. This unprecedented move has led to major dislocations in the Indian economy, but is nevertheless supported by a significant section of the population as a way to root out corruption and “black money”.

The war against corruption is the latest in a long sequence of wars fought by the global community against various purveyors of evil and wickedness. In order to understand these global wars we need to understand their history and their usefulness in politics. Although the history of just wars goes back at least to the medieval Crusades, the modern era of “good wars” starts with the Napoleonic wars of the 19th century that were fought to bring the enlightened principles of the French Revolution to more benighted nations. Since then we have had the American Civil War, which was fought either to free African slaves and to save the Union, or to save the way of life of the American South and to uphold States’ rights. The Great War of 1914 was fought to defeat the evil designs of the Kaiser, and to save the British way of life and also to uphold the rights of the German nation. And then there was the Second World War, fought to defeat the most evil monster of the modern era, Adolf Hitler and his genocidal campaigns, or to defeat the macabre designs of “International Jewry” to enslave Aryans, if you were in the other side. As soon as that war ended, we seamlessly entered the Cold War era, when freedom loving cigar chomping Western capitalists fought vanguard parties of Russian and Chinese workers and Communist wickedness to a standstill.

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The Recession of 2017: An Update

We have previously suggested that the cash crunch caused by the Indian demonetisation is likely to cause a recession in 2017. Our analysis was based on estimates of demand contraction caused by cash shortages. However, the effect of cash shortages on demand will be partly mitigated by informal credit arrangements, and there are few credible estimates of the strength of this mitigation. It is possible that the effects of demonetisation on GDP would turn out to be much more muted or much stronger than we have expected, once we start to see the actual data. Here we update our views in light of the data that has become available since we published our last post.

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The Rise Of Chatbots And The End Of Call Centres

Chatbots are software entities that can carry on a conversation with a human, using voice or text. They have started to replace many call centre functions, and current technological projections suggest that human-staffed call centres will soon become a thing of the past.

Traditional chatbots use pattern matching, i.e., they look up phrases from a database that match keywords from the input. The recent excitement is over the development of much more powerful machine learning methods that allow chatbots to actually understand conversation using natural language processing, and get progressively better at doing so. The new chatbots can use both text and voice, and have built in functions for information lookup and fault diagnostics. These new chatbots have already been widely deployed in customer service functions, as frontline systems for telephone or web based ordering, grievance address and technical help systems. They have already been deployed by Taco Bell, Amtrak, Aetna, Mattel, Disney, and many other companies.

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Indian Equities Modestly Lower, Suggest No Recession

Indian equities have declined since Nov 8, although as we reported earlier, much of the down move has coincided with a worldwide move from emerging markets to U.S. equities. In addition to the global emerging market decline, there is a modest down move specific to India, but it is not nearly enough to suggest a recession in 2017.

niftyem

As the chart above shows, the Nifty 500 Index of Indian stocks has declined relative to the Global Emerging Markets Index since Nov 8. However, the net decline is only about 5% from the high, and about 2% from Nov 8. The absolute decline in the Nifty 500 Index since Nov 8 is about 5%. These are modest declines, in line with a moderate slowing in growth. Since the interest rate decline is probably going to be limited to about 50 basis points, the Dividend Growth Model suggests that the growth slowdown expected by the stock market is about 75-100 basis points.

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Did Four Trillion Rupees Drop From The Sky?

Where do bank notes come from? Do they drop from the sky?

According to figures published by the RBI, currency in circulation increased by Rs. 8 trillion in Nov, but only Rs. 4 trillion was withdrawn or exchanged from banks and ATMs by the public. Where did the remaining Rs. 4 trillion come from? How did it get into circulation?

The value of 500 and 1000 rupee banknotes in circulation was Rs. 12.2 trillion in Mar 2015 and Rs 14.2 trillion in Mar 2016, according to the RBI’s Annual Reports available here and here. It is a reasonable guess that their value increased by about Rs 1 trillion and stood at about Rs. 15.2 trillion on Nov 8, when their status as legal tender was withdrawn. This implies that currency in circulation fell by 15 trillion on Nov 8.

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A Contrary Interpretation Of The Surprise RBI Pause

In a surprise move, the Monetary Policy Committee of the Reserve Bank of India left interest rates unchanged in Dec, dashing widespread hopes of a 25 or even a 50 basis point rate cut. This has been praised as a bold and independent step, but but an analysis of the RBI statement shows that its reading of demonetisation is entirely in line with the government’s thinking on the matter.

The statement released by the RBI yesterday provides several surprises:

  1. The RBI is still worried about food price inflation and does not think that “withdrawal of specified bank notes (SBN)” would cause a major reduction of overall inflation beyond a slight transitory effect. Indeed, they feel that the risks to its inflation forecast are on the up side!
  2. The RBI’s estimate of the effect of “SBN withdrawal” on growth is quite low, of the order of half percent, with evenly balanced risks! That means, as Chart 2 in RBI’s statement shows, that FY-2017 growth is as likely to exceed 8% as it is to decline below 6%.
  3. The RBI remains more worried about overshooting its inflation target than about any growth slowdown caused by SBN withdrawal. This is why it has decided to pause.
  4. Another major surprise that emerged at the Press Conference was Governor Patel ruling out of any “demonetisation dividend”. While it had become clear that this was unlikely anyway, and as we have pointed out, the government has backtracked on this from the very outset, now official confirmation has come that this will not happen.

Overall, the statement and the post-policy conference shows that the RBI is convinced that the effect of demonetisation on both inflation and growth would be minor and transitory, and does not merit even a 25 point rate cut. The growth slowdown estimates are at the very mild end of the range and significantly milder than our own extremely dire outlook.. This is very much in line with the government’s thinking, and therefore we should see this rate decision not as a bold defiance of the government, but rather the opposite, i.e., further evidence that the RBI is entirely in agreement with the government on the demonetisation decision and its aftermath.

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