We have some idea now what happens when stimulus programs are instituted. But what we don’t know and will soon find out is what happens when these programs are ended. No doubt the predictions will be very wrong again
In the story entitled Silver Blaze, the great detective Sherlock Holmes draws attention to "To the curious incident of the dog in the night-time." His companion complains that the dog did nothing in the night, which Holmes points out is the curious incident. This is basically the real question about the world economy in 2013. What was interesting was not what happened, but what didn’t happen.
The prime example is in the US. Last year, weeks before new year, news was saturated with the horror of the so called “fiscal cliff”. The fiscal cliff was the combination of two deadlines that were to occur simultaneously on 1 January 2014. The first was the expiration of certain tax cuts. These tax cuts of the so-called Bush era had been in effect since 2001. During the financial crisis, certain mandatory contributions to the US national pension plan, social security, had been suspended and the suspension was due to end. If dramatic tax rises weren’t enough, an agreement that mandated automatic budget cuts was due to go into effect on the same day. The combination of a tax increase and the beginning of what is basically an austerity package was supposed to be so dramatic, that the impact on the US economy would have been catastrophic.
It didn’t happen. Neither the US economy nor the markets were hurt. In fact it was the beginning of one of the largest rallies of US equities. At the last minute, a deal was worked out that allowed some taxes on the very wealthy to rise while the pension contributions by everyone else were reinstated. The austerity package was put off for three months, but it had no effect. The American economy continued to improve. The predictions were wrong.
The next part of the government drama in the US occurred in October 2013. The Republicans, the opposition party in the US, threatened to shut down the government in an attempt to stop the new universal health care in the US, known generally as Obamacare. They also threatened to allow a default on US debt. Again the forecast was for all sorts of economic chaos.
Sure enough, the Republicans did shut down the government for almost two weeks, but once again there were few, if any, negative effects. The US equity market pulled back for about a day then continued to break new records.
But the issues concerning US fiscal policy were dwarfed by the US monetary policy. The real power behind the global equity market rally was the US Federal Reserve (Fed). Their bond buying program, known as QE, was started in September of 2012. In May, the chairman of the Federal Reserve, Ben Bernanke, suggested that the program would be tapered and eventually end. The markets panicked; equity markets along with several emerging market currencies plunged in June until soothing words from the Fed members were able to calm them for a while.
Again the markets thought that the taper was supposed to start in September. When the Fed surprised the market by putting it off, the markets resumed their rise with the assumption that nothing would happen until March of 2014. But the Fed surprised the markets again by announcing the taper in December 2013.
What didn’t happen after the taper announcement was a market correction. All year on any hint of tapering the markets declined, but after the announcement US markets rallied 3% to all time highs; European markets did the same and the emerging markets didn’t fall apart as they did in June.
Outside of the US, predictions were especially poor for Europe. Earlier in 2013 forecasts for Europe were exceptionally gloomy. There was supposed to be slight growth in France and Germany and a contraction for the Eurozone as a whole. The recession was supposed to hit the peripheral countries like Greece, Spain and Portugal particularly hard. Despite these predictions the Greek stock market is up almost 70% and their bonds have been outstanding performers. Both Spain and Portugal are growing; contrary to the predictions, Italy and France are not.
A perennial favourite over the past few years was gold. The idea was that with central banks printing trillion of dollars, euros, yen and yuan, inflation had to go up. Not so. Gold fell by 30% as interest rates generally rose and inflation remained tame. Commodities also drifted lower by about 5%.
Record prices for equities would seem to indicate record growth in corporate earnings. This has not happened. The forecasts in May were for 5.1% growth for the third quarter. CEOs managed to get those forecasts reduced to 2.1% growth but basically earnings for the third quarter were flat. Also despite the lacklustre growth in the world economy, corporate defaults for US and European junk bonds was just 1% above the average during better economic times between 2005 and 2008.
So what really happened? What went wrong with all of these forecasts? Why all the happiness when the background looked pretty bleak? While pundits, including myself are no more accurate than anyone else, it would seem that the economists and financial analysts might just be able to get somewhere near truth, rather than nowhere close.
There does seem to be on common denominator: massive stimulus programs. The size of these programs, not just in developed countries, but all over the world is unprecedented. In addition, these programs were and still are experimental. Their impact in one country like the US has created some surprising effects. Their impact outside of the US has also been unexpected.
So now we have some idea what happens when these programs are instituted. But what we don’t know and will soon find out is what happens when these programs are ended. No doubt the predictions will be very wrong again.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)
The strategic move by the MoEF should be applauded and hopefully, a number of pending cases of UMPPs will now progress
In a strategic move, which has been long overdue, the Ministry of Environment and Forests (MoEF) has decided that the UMPP (ultra mega power projects) will no longer be linked to obtaining clearances of their captive coal blocks. In the past, mines and power stations were considered a single component for green clearance. This notification appears to have been issued on 31 December 2013, and so, we may as well consider this move as a New Year gift!
It may be remembered that the power plants could not apply for environmental approvals till the time they got their coal block stage I (forest clearance). This is expected to speed up many pending cases.
In the case of Odisha power project, it is entirely dependent upon getting domestic supplies of coal, unlike its counterpart at Cheyyur in Tamil Nadu, which will be fired with domestic coal. It is an entirely different and difficult issue of overseas coal imports, when the country has substantial proven coal reserves, as Coal India (CIL), the sole supplier has too many problems on hand, including fall in production in the year.
It is interesting to note that, recently, while speaking at the Ravi Mathai Memorial Lecture, Arvind Kumar, joint secretary, in the Ministry of Finance, is reported to have stated that about 400 projects, worth an estimated Rs17.68 lakh crore covering power, steel coal, mining and petroleum industries were pending with the Cabinet Committee on Investments, for clearance. He further stated that "there is an urgent need to ease the logjam, improve quality of infrastructure to get commissioned and financed projects going". This is a tall order under the present circumstances, but, with some effort, it is not an impossible task to overcome.
It appears that KV Kamath, who appears to have attended the above meet, also felt that "the economy was given a wrong medicine in the form of increasing interest rates" and that "the there has been a significant drop in the financing of infrastructure projects at the ICICI bank in the past two years".
Reverting back to the Odisha UMPP 4000 MW (mega watt) power project at Bedabahal, it may be remembered that the Ministry of Coal had allocated three coal blocks (Meenakshi, Meenakshi B and dip side of Meenakshi) on 13 September 2006. Due to the apparent lack of adequate progress, now, the Ministry of Coal has issued a show cause notice to Power Finance Corporation, on 24 December 2013, seeking an explanation for the slow progress. It would be interesting to know why the Ministry has taken so long in following up the matter.
PFC (Power Finance Corporation) has invited the bids and expects to finalise the winner, who promises to generate electricity at the cheapest rate, bearing in mind that Odisha UMPP will solely depend upon domestic coal. The nine bidders are JSPL, NTPC, Adani Power, JSW, Sterlite Inventure, CLP India, NHPC and Larsen & Toubro. If the past performance is any criterion, India has awarded four UMPPs, out of which, only Tata Power has a fully operational power plant at Mundra, in Gujarat, while three others, awarded to Reliance Power, are in various stages of construction.
It now remains to be seen that, with the new change and notification of policy, all concerned officials and departments will expeditiously clear pending issues, so that project clearances are no longer the impediments in completion. Likewise, it is hoped that work will also move at a faster pace in the case of Tilaiya UMPP 3960 MW project, which Reliance Power bagged in 2009, and which has been unable to make much headway due to land acquisition problems.
According to the UMPP model, the government is obliged to extend all support for expeditious "clearances", and the contractual obligation actually to start when the required land is handed over for the main plant area. In the case of Tilaiya, for instance, Stage I (obtained in February 2010) and Stage II (November 2010) clearances have been obtained by the contractor, but the state government has yet to approve the transfer of possession of land to the project. The central government must be able to give a directive for doing the needful, because, ultimately, it is the nation that suffers.
Recently, a prime minister-headed panel had discussions on land issues with the power ministry, when the later wanted the later wanted the investment panel to advice the MoEF "to treat all UMPPs as central government undertaking projects as far as compensatory afforestation was concerned". Such a move would help the successful bidder of the UMPP to simply deposit the cost of land with the state government, under the Forest Conservation Act, and move on with the work. In the case of Reliance project at Tilaiya, MoEF took a stand that Reliance Power "is not a central government Undertaking". In this case, MoEF is certainly right in their standing, but we need to move on with the work and they need to work out a compromise formula so that any further delay can be avoided.
This strategic move by the MoEF should be applauded and hopefully, a number of pending cases will now, hopefully, progress.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
The Reserve Bank of India (RBI) has cautioned users, holders and traders of virtual currencies (VC) like Bitcoin, Litecoin, BBQcoin and Dogecoin and is examining the legal and regulatory framework of VCs. In a press release, RBI stated that Bitcoin and other VCs are exposed to potential financial, operational, legal, customer protection and security related risks.
RBI said, “The creation, trading or usage of VC including Bitcoin, as a medium for payment, are not authorised by any central bank or monetary authority. No regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.”
Bitcoin was created to solve the mathematical solution to double-counting but it grew into an alternate currency system altogether; its value has skyrocketed as more and more people, investors and enthusiasts jumped onto the bandwagon and started transacting in the virtual currency. Moneylife had published (Issue 17 April 2013), in detail, a primer on Bitcoin.