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Good morning. In today's edition —  Sanjay Malhotra, the new governor of India’s central bank, the Reserve Bank of India spoke of economic stability, but it’s the government that needs to act on it; why individuals in India need to be empowered; and a conversation with economist Prachi Mishra on what ails the economy of Bihar, India’s poorest state.

THE TAKE

RBI Governor Spoke Of Policy Stability, But It’s The Govt That Needs To Do It 

Sanjay Malhotra, the incoming governor of India's central bank, the Reserve Bank of India (RBI), unwittingly showed that he is only one day old in his new position as he addressed the media at the RBI headquarters in Mumbai on Wednesday.

He was careful not to say anything that could be construed as a forward looking policy statement and rock the markets in the coming days. Malhotra was even more wise in avoiding a question and answer session with the media that had gathered, itching to ask pointed questions including on cutting interest rates.

Interestingly, he spoke of policy stability and stability in general several times. While that applies to the RBI in general, it would actually apply in specific to his previous job at the Ministry of Finance where he was revenue secretary. 

It is likely that as someone who learned about his appointment as RBI governor only a couple of days before the public announcement, Malhotra focused more on stability in economic policy than on monetary policy.

RBI’s Policies Too Stable

If anything, RBI’s monetary policy has been too stable. Interest rates have been locked for 11 consecutive monetary policies while most major central banks in the world have cut rates in recent months and quite sharply at that.

India need not follow the same global path but this time around expectations were high because economic growth had slowed sharply to 5.4% in the previous quarter against RBI’s projection of 7%. 

Remember the rumour mills have been buzzing with the somewhat unlikely suggestion that one reason outgoing governor Shaktikanta Das did not get an extension after a six-year term was because he did not lower interest rates.

The Grouse About Economic Policies

On the contrary, when it comes to stability, in all my conversations with tax experts and businesses they have expressed their biggest grouse to be the lack of stability on policies. Tax is a classic example and let's take the most recent cases.

Last week, it emerged that the government was looking at raising goods and service tax on a wide variety of products including ready made garments to between 18 and 28%.

The Clothing Manufacturers Association of India erupted in protest saying that not only would such a move benefit those who don’t pay tax or encourage others not to but also lead to 100,000 jobs being lost because of the jump in prices.

That may be a trifle dramatic but there is no denying that the tax slab suggestion came out of the blue for the industry.

In August 2023, the government said it was going to license imports of laptops and tablets. Following a severe backlash, it flipped and flopped, backpedalled several steps and finally said a few months later it would not impose import restrictions. 

Companies like Apple and HP heaved sighs of relief because they could continue to import laptops. That sword continues to hang over the industry though and could fall again since the government would like these laptops being made in India.

When it comes to taxes, both direct and indirect, the list of grievances is so long that it will require a year-long special series of columns just to address them. It should suffice to say that on taxes and overall policy, India has not been able to deliver stability that investors, whether domestic or international, press for.

In one of his few public appearances ahead of Monday’s announcement, Malhotra told tax officials to keep economic growth in mind and avoid saddling businesses with overly large tax demands. 

“Revenue comes in only when there is some income,” he told officers at the Directorate of Revenue Intelligence, according to local media reports. “Therefore, we have to be very cautious so that we do not, as they say, kill the golden goose.”

The Union Budget 2025 is expected to see, among other things, an attempt at reducing the sheer onerousness of the current Income Tax Act. Work is on for this and suggestions have been taken for several months now.

While the RBI has welcomed its new governor in the form of the self professed technology oriented Sanjay Malhotra, the Ministry of Finance also has a somewhat sudden hole which will not be easy to fill, as Business Standard editorial director Ashok K Bhattacharya has argued on The Core Report on Wednesday.

Right now, the government needs more stability of economic policy and the RBI needs less stability of monetary policy, at least in the context of interest rates..

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CO:RELATION

Empowering Individual Investors

For the first time in India's capital markets history, individual investors are probably the most significant shareholder group after promoters. If you look at the latest stock ownership data of companies listed on the National Stock Exchange, individuals now directly and indirectly own nearly 20% of the $5.6 trillion market value through mutual funds. That is much higher than foreign portfolio investors, who control more than 17% of the market. If you calculate the free float (non-promoter shareholding freely available for trading and investing), individuals control nearly 20% directly and another 20% through active and passive mutual funds. FPIs control 36% of the free-float equity. In terms of influence, FPIs have a stronger voice than individuals.

Individual shareholders need to be represented better in the future, as their life savings are linked to the fortunes of the listed companies. It may be a good idea for the market regulator, the Securities and Exchange Board of India, to strengthen corporate boards' independence further. Individual shareholder interests must be protected, and independent directors on corporate boards should be genuinely independent. They must not let corporate actions benefit only large shareholders.

CORE NUMBER

$3 billion

This figure represents the total value of equity purchases made by Foreign Institutional Investors (FIIs) in India's equity markets in the first 10 days of December. This significant investment marks a reversal of the trend seen in November when FIIs sold off $2.5 billion in equities. According to an Economic Times report, this influx of foreign capital has contributed to a 2% rise in the Nifty this month. However, Ridham Desai, Morgan Stanley's Head of India Research, highlighted the challenges and opportunities in India's investment landscape. "With strong earnings, macro stability, and domestic flows, it is hard to argue against India's investment case," he noted. "That said, potential global growth risks plus a bunching up of IPOs and near-term growth concerns present challenges."

FROM THE PERIPHERY

—🥤 The ​​Jubilant Bhartia Group has bought a 40% stake in its Indian bottling unit Hindustan Coca-Cola Beverages, the Coca-Cola Company announced. Months in the making, this will reportedly be part of the beverage company’s strategy to be asset-heavy. While Coca-Cola is among the leading beverage companies in the world, including in India, columnist George Skaria had pointed out that India’s soft drinks market wasn’t an easy one to crack. While it’s a high-profile industry, the soft drinks market in India has only seen modest growth with younger and health-conscious consumers moving from the traditional fizzy drinks. Skaria wrote that India’s homegrown soft drink players will have to find the right balance between profitability and profile to find success. Read the full column here. 

—✈️ Travelling can be good for your health and mind, but it isn’t for global emissions. A study published in Nature.com on Tuesday found that tourism “outpaced growth of the global economy, rising from US$3.5 trillion in 2009 to US$6.0 trillion in 2019 (US$5.1 trillion, constant price 2009)”. The only thing that drove down tourism was the 2020 Covid-19 pandemic. The study revealed that global tourism emissions increased by 40% between 2009 and 2019. The study looked at both residence-based accounting (RBA) for emissions to the countries of visitor origin and destination-based accounting (DBA) for countries where tourism expenditures take place. The United States, China and India ranked first, second and third in both metrics. 

—💲 Around $40 billion of investments are expected over the next 5-6 years for the development of Electric Vehicles (EV) & related industries in India, said a report published by investment management firm Colliers on Wednesday. However, deploying these funds will rely upon the successful implementation of government policies, charging infrastructure ramp-up, and domestic manufacturing capacity scale-up, the report said. A breakdown of the planned investments shows that 67% is allocated for Lithium Battery manufacturing, 23% for EV and original equipment manufacturing, and 10% for other EV products and services. Colliers also estimate that to achieve the 2030 targets for the number of EVs on the road, there will need to be a 4X growth in Heavy Vehicles, 6X growth in Three-wheelers, 6X growth in Two-wheelers, and 9X growth in Four-wheelers. 

—🧑‍⚖️ The Central Delhi District Consumer Dispute Redressal Commission on Wednesday fined personal care major Emami Ltd Rs 15 lakh for unfair trade practices related to its Fair and Handsome fairness cream. The ruling originates from a 2013 complaint which alleged that the product's advertising was misleading, as the cream failed to produce the promised skin-lightening effect despite regular use. Emami Ltd, however, had argued in court that the complainant could not prove adherence to instructions and emphasized factors like diet and lifestyle, not mentioned on the label, as influencing outcomes. 

HOW INDIA’S ECONOMY WORKS

Spotlight On Bihar: Understanding India’s Poorest State With Economist Prachi Mishra

India’s poorest state Bihar faces an array of economic challenges ranging from effects of historical policies like the Freight Equalisation Scheme to the migration patterns driven by low wages. 

Prachi Mishra, economist, professor of Economics, director and head of the Isaac Center for Public Policy at Ashoka University, said the factors that influence people to move out of Bihar include low income within the state and the lure of a higher income outside. “If I'm a migrant, I would evaluate whether the earnings differential is enough to cover the migration costs and importantly to also send remittances back.” 

Mishra pointed out that Bihar accounted for 9% of India's population with the lowest per capita income in the country; it also has one of the highest fertility rates in the country. “Meaning that Bihar's population will continue to grow at a fast pace, compounding Bihar's challenges,” Mishra said in a conversation with journalist Puja Mehra. 

What are some of the policies that led to the economic disparities in Bihar? 

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