A query on a column by Ajit Ranade

Shashank Patil, enthusiastic asker (it is my blog, and I say that it is a word) of questions, sends in this article, and asks the following questions:

  1. What are the possible difficulties with this?
  2. How does this weigh in with any other choice?

This promises to be a fairly long post, and for the sake of knowing where we are at any point of time, I am going to divide it into three major sections:

  1. The need for the stimulus
  2. Show me the money!
  3. What is the best choice out of all the options available?

The need for the stimulus

There’s four things that go into adding up our GDP: consumption, investment, government expenditure, and net exports (net simply means we deduct the rupee value of all of our imports from the rupee value of all of our exports, over one accounting year). But be careful, calculating GDP is surprisingly complicated!

During these times, good luck getting C, I and NX to be anything remotely related to good news, and so we’re almost certain to not have great GDP growth, or even growth at all. Unless el sarkar steps in. So when we ask for a fiscal stimulus, we’re basically saying the other components of GDP are near comatose, so government spending will have to take up the slack.

Maybe the government can build out way better health infrastructure than we have at present, like Andy Mukherjee says. Maybe we can provide clean drinking water, along with a whole list of excellent suggestions made by Shankkar Aiyyar. Direct money transfers to the poor is another idea. But for all of this to happen, we need to start at the basics: where is the money?

The government didn’t have enough money before the pandemic hit (that’s what a fiscal deficit means), and the problem is way worse now: much more money needs to be spent, and not enough money is coming in by way of tax revenue.

Ergo, all of the columns about how to raise the money that will need to be spent.

Show me the money!

There’s three ideas that I have liked so far:

  • Deepak Shenoy talks about a realignment of the liabilities side of the balance sheet of the RBI unlocking about INR 400,000 crores (thinking about numbers as big as this is an invitation to a migraine, but this is 4 trillion, unless I am mistaken. Please let me know if I am!). Let’s call this the DS method.
  • Andy Mukherjee talks about the government selling stakes in PSE’s (that’s Public Sector Enterprises). The details matter in this case: the sale will be to an SPV (Special Purpose Vehicle), which will finance the purchase by issuing bonds. When markets recover, sell the stake, and redeem the bonds. Method AM.
  • And finally, Ajit Ranade offers a pani puri instead of a puchka. That is to say, the same idea as Andy Mukherjee, but with a twist. Instead of the government stakes in PSU’s (undertaking, instead of enterprises) being sold to an SPV, he suggests selling it to the RBI as a repo transaction. That is, sarkar sells to RBI and gets money, but also gets to buy back the shares at the same amount plus an annualized interest rate of around 3%. That’s where the name repo comes from: short for repurchase. And yes, method AR.

What is the best choice?

So maybe this is just me getting old, and therefore more conservative, but I’d rank Deepak Shenoy’s suggestion third. There are two main reasons, although there are others. First, the RBI already gave out some cash last year (and Deepak Shenoy himself has a most excellent article about it. Link 3 in this post, and the others are worth reading too, especially number 5.  Bookmark CapitalMind.in if you haven’t already!). Second, maybe it makes sense to keep some of our powder dry, for who knows what other horrors wait for us in the future? If, god forbid, two years down the line we need more help, it would be better to use the DS method then – because good luck trying to convince folks of the value of PSU stakes after more two years of this.

Let me be clear: I am not saying that this will continue for two years. I’m saying we should be prepared.

Now, in a straight fight between AM and AR, well, which self-respecting Maharashtrian will pick puchkas over pani-puri? I’d plump for Ajit Ranade’s method, and for the following reasons:

  1. A repo transaction is likely to withstand market volatility better than being dependent on an SPV, especially one that may be exposed to currency risk.
  2. This sounds way more operationally feasible than the AM method. Launching an SPV might be possible right now, and you may even get a decent response because god knows markets will be looking to park funds right now – but like I said, I’m getting old, and would prefer a more conservative route.

And so Shashank, the answer to your question is that Ajit Ranade seems to be onto a pretty good idea, in my opinion. Which is not to say that the others aren’t, of course – but hey, if I didn’t force myself to choose, and write about my choice, how else to fill out a lockdown afternoon?

But on a more serious note, the “how” doesn’t  really matter as much as the when. And the correct answer to that question is “yesterday”.

 

 

 

Links for 22nd April, 2019

  1. “It all comes down to money, and in this case, MCAS was the way for both Boeing and its customers to keep the money flowing in the right direction. The necessity to insist that the 737 Max was no different in flying characteristics, no different in systems, from any other 737 was the key to the 737 Max’s fleet fungibility. That’s probably also the reason why the documentation about the MCAS system was kept on the down-low.Put in a change with too much visibility, particularly a change to the aircraft’s operating handbook or to pilot training, and someone—probably a pilot—would have piped up and said, “Hey. This doesn’t look like a 737 anymore.” And then the money would flow the wrong way.”
    ..
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    The most readable account I have read about what went wrong with the 737 Max. I do not know if it is correct or not, in the sense that I do not have the ability to judge the technical “correctness” of the piece – but I did understand whatever was written. A sobering read about checks and balances gone wrong in many, many ways.
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  2. “Hardly sounds plausible. But there it is: Donald Fagen and Walter Becker—two super-fans of the genres they creatively appropriated—made some incredible, snarling, cynical, viciously groovy easy listening music, and it has more than held up over the decades since they released their debut album Can’t Buy a Thrill in 1972. Despite decades of critical praise and hit after hit, they also remain a profoundly misunderstood band.”
    ..
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    The article doesn’t actually deconstruct Steely Dan as much as they might have, but if you haven’t heard of the band, this is a good place to start to learn more about them, and then maybe listen to their music. But also a good way to learn about the benefits of non-conformity, and doing what you really like without worrying too much about the consequences – a powerful lesson!
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  3. “The iPad was not in the basket. Ollie, it turns out, had got hold of it and gone to town on the passcode, trying one idea after another, with the fury and focus of Alan Turing trying to beat the Nazis. It’s not clear how many codes Ollie tried, but, by the time he gave up, the screen said “iPad is disabled, try again in 25,536,442 minutes.” That works out to about forty-eight years. I took a picture of it with my phone, wrote a tweet asking if anyone knew how to fix it, and went downstairs to dinner.”
    ..
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    A short read from the New Yorker about, ostensibly, a toddler and an iPad, but also about empathy, technology, stuff going viral. Interesting because it is short, and we can all feel the pain.
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  4. “News floods the investment landscape about something strange in the land of debt funds. It turns out that:a) Kotak Mutual Fund has an FMP maturing April 8, and they won’t be able to pay the full maturity amount. They will pay some now, and the remaining “later”.

    b) HDFC Mutual Fund also has an FMP maturing soon. They will postpone the maturity of the fund if you so choose, by one year. But if you don’t vote to postpone, you will get the maturity value but a lesser amount than the NAV tells you.

    Whoa, you think. How can I be paid lesser than NAV? Isn’t that the very concept of an NAV? Isn’t it supposed to reflect what I’m supposed to be paid when I exit?

    Of course it is. And that’s why the mutual funds have had to take it on the chin for pretending it is not. Or rather, for ensuring it is not. But before that, let’s understand what the drama is all about.”
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    Deepak Shenoy warns us at the very outset that this is a long post, and he isn’t kidding. But that being said, it is a wonderful way of helping us understand what exactly went wrong with the FMP saga.
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  5. “Anticipating this discomfiting development long ago, Parliament passed an amendment during the Emergency years in 1976, freezing all delimitation as per the 1971 census, up to the census of 2001. Also, even after the redrawing of constituency boundaries, the total number of MPs per state was kept frozen. In 2000, another amendment postponed the day of reckoning to 2026. Thus, only after 2026 will we consider changing the number of seats in Parliament. Till then, everything is frozen as per the 1971 census. Remember, in 1971, India’s population was 548 million, and by 2031, the first census after 2026, it may well be close to 1.4 billion. The great apprehension is that redrawing boundaries and distributing the existing 550 MPs might mean that the south will lose a lot of seats to the north. Even if more members are added to the Lok Sabha, that incremental gain will mostly go to the northern states.”
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    This was written a year ago, but this is a problem that we should think more and more about in the years to come. Changing the shape of our Lok Sabha needs to happen by 2026. How is an extremely interesting question.