Indian government has started to move aggressively on de-bottlenecking the economy.
Indian government has started to move aggressively on de-bottlenecking the economy. The impediments to sustainable strong growth are many, but if one were to prioritize, then one would classify them as reforms relating to factors to production, power and digitization. As far as factors of production goes: land, labour and capital, government has had a mixed experience. A couple of states have moved on making it easier to hire and fire labour and also transact in land, but much of federal republic remains untouched. Capital market reforms are occurring, thanks to coordinated approach from MoF, RBI and Sebi. However, there is still a lot to be done as far as cleaning up of the public banking system goes. In that light, last week, GOI unveiled the draft of the Indian Bankruptcy Law. These are set of recommendations of the Bankruptcy Law Reforms Committee (BLRC).
BLRC has recommended that creation of an insolvency regulator and setting a time limit of 180 days (which can be 90 days in special cases) to deal with insolvency resolution cases. If 75 percent of the creditors approve the plan, the insolvency resolution process can kick off. If not, the adjudicating authority can order liquidation of the company. The panel has mooted the government as the regulator until the time a permanent regulator is formed. We believe, this a step in the right direction, as speedy resolution of stress and business failure can go a long way in substantially improving the ease of doing business. However, much of the success of the code will depend on how effectively can it be implemented. In India, it takes years to liquidate a firm due to legal hurdles and also lenders end up recovering very little from the process. Therefore, much would depend on how the code handles the judicial interventions.
India’s demographics, whether becomes a dividend or a time bomb, much depends on how quickly we can make progress on making it easier for businesses to form, sustain and even wind down. In an age of automation, India with a vast population of unskilled and semi-skilled workforce, may have to depend a lot on entrepreneurship than old-world vast manufacturing sectors. Therefore, India needs to move fast on reforming the old labour laws as well as on land reforms.
Indian government has also announced a plan to bailout of the power distribution companies. It hopes rejig Rs 4.3 lakh crore debt of the utilities besides introduce measures to cut power thefts and align consumer tariff with cost of generating electricity. The new measures announced appear impressive on print but its success would depend on how effectively it can stop the menace of future losses. A lot may depend on taking on the political vested interest. Without round the clock availability of power, not much of economic activity can occur.
Let us turn our attention to global economy now. The US Jobs report was keenly watched event, as a strong number would bolster the possibility of a hike in rates in December. For the month of October US economy added 271,000 jobs in the non-farm part of the economy, much more than expected. Its unemployment rate declined to 5% and wage growth jumped. However, internals of the data remain unimpressive. But that did not deter traders now pricing in a 70% possibility of hike in December 2015. With that all kinds of bonds got sold, US Dollar rallied and EM stocks sold-off. Rupee too was dumped in the offshore market, quoting 66.20/22 on spot reference.
Let us glance through a graph that highlights where US economy adding jobs are and what we found is that much of the employment growth is happening in the older sections of the society. At the same time, since 2008-09 recessions, US economy has added much more jobs in the low paying category than in the high paying sectors. Since the collapse in commodity prices like crude oil, gas and coal, some of high paying jobs in the natural resource sectors have been lost. All in all heath of the US job market is not as strong as the headline numbers seem to suggest.
Productivity growth remains anemic but unit labour cost is rising, indicating that wage inflation can start impacting over the medium to long term.
Though the US economy may have serious weak links but on a relative basis it is still appears an impressive destination compared with the world. As a result, it is no surprise that US Dollar has once again started to tick higher. We expect Rupee to also weaken along with its peers in the developing world. However, Rupee has to also grapple with the verdict in Bihar Assembly elections, where NDA was defeated. There is now rising risk of further political confrontation between government and opposition, which may slow down policy making. As a result, Rupee can see sustained selling pressure over the medium term. We can see a range of 65.70/66.00 and 67.00 on spot over the rest of the month of November.
Technically USD/INR remains a mean reverting pair, as central bank plays an active role in flanking the moves. We have used standard deviation bands to define the boundary such movements. What we observe is that between 1-1.5 standard deviation below mean level, the pair finds strong demand. At the same time, normal upward moves are capped around 1 standard deviation above mean. Event driven prices spikes have taken prices to 2-2.5 standard deviations above mean. However, such spikes have not sustained for long. Therefore, importers can use decline to 1-1.5 sd below mean to hedge and exporters can start hedging above 1 sd and go overweight on moves above 2 sd. Currently the pair is operating just above mean level of 65.70 levels and the 1 sd level above mean is around 66.30/40 and 2 sd is around 66.90/67.00.
Anindya Banerjee is an analyst at Kotak Securities