Covid-19: It is a long haul for India Inc

Business Line Editorial
Nassim Nicholas Taleb gets irritated when people call coronavirus a ‘Black Swan’ event. The celebrated author who coined the term for describing events ‘that lie outside the realm of regular expectations’ but have ‘extreme impact’ in his 2007 book of the same name would rather prefer to call it a ‘White Swan’ event.

After all, people like Bill Gates had clearly warned of an impending pandemic. Whatever its classification, Covid-19 has caught companies across the world by complete surprise.

The resultant shock has upended established business models of many and laid to waste carefully crafted business plans of almost all of them.

After all, it took the virus just three months to infect over 2.6 million people across the world and kill as many as 1.80 lakh and, in the process, locking down half the global population.

The economic impact of the virus, still unravelling, is something the world has not seen before.

Under the circumstances, the question uppermost in the minds of entrepreneurs is ‘how bad will they be hit before normalcy is restored?’ While it is too early to provide a definitive answer, one thing is certain — they have to prepare for the long haul.

This crisis will be far worse than the 2007-08 financial crisis. When the global financial meltdown happened then, India was in the midst of a strong demand growth. Companies were in a better position to handle the shock supported by a banking system that was reasonably healthy. Also, the crisis lasted just six months.

Coronavirus, on the other hand, manifested at the most inappropriate time for India Inc.

Companies were already struggling in the wake of a slowdown in demand which has hurt their margins and stretched their balance-sheets.

In addition, the country’s banking system is in a crisis and government’s fiscal space to revive the economy is limited. What is worse, the effect of the virus could play out for a much longer time as the vaccine is not expected before 12 months.

Severe test ahead
While the impact is expected to vary for different sectors, what is clear is that weaker players will die and even the fittest of them all will be put through severe test. Collapse in demand, supply-side shocks, higher costs, people- and trade-related issues will challenge them.

Demand: The IMF has estimated the Covid-hit global economy to shrink by 3 per cent in 2021. In fact, advanced economies will de-grow by as much as 6 per cent. The WTO has projected that global trade will drop by a third this year. All this will badly hurt India’s export demand. In fact, the top 10 countries affected by Covid-19 accounts for 45 per cent of India’s exports. Both product and services exports are set to see a double-digit fall.

Domestic demand which has often come to the rescue is likely to remain muted this time around. Consumer confidence is set fall from already low levels as people hit by job loss and pay cuts tighten their purse strings and spend only on essentials.

Discretionary spending will certainly take a back seat. Government spending will also be low.

Most State governments have seen sharp fall in revenues (GST and their own taxes from sale of fuel and alcohol).

On top of that they are borrowing way beyond their means to fight the virus and will have no option but to cut back on productive expenditure.

Supply-side shock: Companies will face significant challenges in re-starting their operations as Covid-related restrictions are expected to continue for some time. Their capacity utilisation will be low due to social-distancing norms and restriction on number of workers they can employ at a given time. Bigger players will also face challenges from their supply chain who are typically smaller players.

These players will need additional working capital to even start their operations. Banks don’t offer these without additional collaterals which these entrepreneurs lack. Those depending on imported inputs will face delays and many, who employ migrant labour, will experience shortage of hands. Logistical issues will remain as truck fleet operators are struggling to find drivers.

Cost impact: With zero sales for 40-odd days and significant carrying stock, most companies will see their interest costs rise.

This, despite, fall in interest rates (provided banks pass on the lower rates to them). Even as commodity and fuel prices have come down, the benefit that will accrue to the industry will be marginal as their prices are typically linked to international rates.

Also, the rupee has weakened quite sharply and transportation costs have risen. That apart, low capacity utilisation means their fixed costs margin will be hit. In all, they will have to contend with higher costs.

Looking ahead
Considering the above factors, the next one year could well be hard for India Inc. The first quarter is expected to be almost a washout. Companies expect to ramp up production (demand supporting and Covid permitting) in the second and third quarters, but that will depend entirely on three factors:

Second wave: As the lockdown is eased, risk of a second wave increases. South Korea, China and Singapore are already battling such a scenario. If India sees a sharp increase in cases post-lockdown, restrictions will be have to be reintroduced. That will be a setback.

Strong government stimulus: As things stand today, all the four engines of economic growth — exports, private investments, consumption, government spending — are badly hit.

The economy will easily slip into a recession without a large stimulus to kick-start it. So far, only a welfare package amounting to just one per cent of GDP has been announced. A lot more is needed.

Bank support: A revival will not be possible unless banks give up their reticence to lend. No economy can do well if bank credit grows at less than its nominal rate of growth.

In spite of various measures by the RBI, if banks do not rise to the occasion, it will be driving the last nail into the coffins of a lot of companies — small, medium and large.

Faced with severe challenges to the economy, the government has proved to be clueless and timid

P Chidambaram

The so-called tax concession given to the income tax payer in the lower brackets has cluttered the tax structure and created confusion.

Budget 2020-21 was presented on February 1, 2020. It made the headlines and was the subject of editorials on February 2 but, on the next day, it practically vanished from the front pages of newspapers and from television channels. It was like a movie that bombed on the first day.

The BJP, the Prime Minister and the Finance Minister have to blame themselves. They cannot blame the Chief Economic Adviser (who gave some sound advice in the Economic Survey) or the economists and the businesspersons who met the PM for pre-Budget consultations. There were many ideas on the table. Reflecting the buzz in the markets, I had, in my column of January 26, listed 10 things that the FM could do in the Budget.

If the FM did not heed the advice of the CEA or the economists or yield to the demands of businesspersons, it was because of the following reasons:

1. The government is in denial

The government has not accepted that demonetisation and a flawed GST were monumental mistakes that killed MSMEs and destroyed jobs. It has not acknowledged that the slowdown is due to declining exports, instability in the financial sector, inadequate credit supply, lower household savings and reduced consumption, collapse of mining and manufacturing, and pervasive uncertainty and fear. Unfortunately, the FM made no reference in her speech to these negative features of the economy.

2. The government’s assessment of the state of the economy is hopelessly wrong

The government believes that the slowdown of the economy is due to cyclical factors and the upturn will happen if they do more of the same — scrounge for money, put more money into on-going programmes, and announce new programmes. If the causes of the slowdown are more structural than cyclical — as many economists believe — the government has virtually foreclosed the options it had to revive the economy.

3. The government’s ideological pre-dispositions are obstacles to revival

The government believes in outdated philosophies like protectionism, import substitution, a ‘strong’ rupee etc. It does not believe in the multiple benefits of external trade and seems to have given up the effort to find ways to boost exports. It has embraced the retrograde idea of increasing import tariffs. It also appears reluctant to let the rupee find a more realistic level. Given these pre-dispositions, the government finds itself short of solutions.

4. The government is unwilling to reverse measures that have deepened the distrust between the government and business

The government has criminalised many economic laws. It has conferred extraordinary powers on even the lowest-rung officers of the tax-collecting departments and the investigating agencies. Tax collection has become tax terrorism (remember V G Siddhartha). The process of contesting or paying the taxes that are demanded — the process itself — has become the ultimate harassment. The Charter of Rights of Taxpayers promised by the FM has provoked a cynical reaction — why doesn’t the government simply withdraw the carte blanche given to the authorities and agencies?

5. The government has proved itself to be an incompetent manager

From demonetisation to GST, from Swachh Bharat Mission to electrification of homes, from Ujjwala Yojana to UDAY, every programme has serious shortcomings. Unfortunately, the government lives in an echo chamber and hears only adulatory responses. Hence, while humongous amounts of money have been spent on these programmes, the outcomes have been unsatisfactory. The administrative machinery lacks the capacity to improve the implementation or report the true outcomes.

Therefore, there is no surprise that the FM settled for a lacklustre Budget, modest nominal growth of GDP and misplaced optimism about tax revenues. While nominal GDP is estimated to grow at 10 per cent, gross tax revenues are estimated to grow at 12 per cent — an unlikely outcome. Further, the estimated revenues were distributed among a number of programmes — good and bad — as a result of which there was little scope to allocate more funds to programmes that would have ensured that more money reached the hands of the poor quickly. Funds have been unspent in the current year or slashed in the next year for MGNREGA, the Mid-day Meal Scheme, food subsidy, PM Kisan Samman etc. I do not foresee a rise in rural incomes/wages or household consumption.

The so-called tax concession given to the income tax payer in the lower brackets has cluttered the tax structure and created confusion. The estimated benefit of Rs 40,000 crore is not certain and, any way, too small to be impactful.

Nor is there any incentive that will boost private investment. The abolition of DDT has merely shifted the burden of the tax from the company to the shareholders. Besides, when capacity utilisation in manufacturing is at about 70 per cent (thermal power generation is at about 55 per cent of installed capacity), there is little scope for new investment.

In sum, the FM has not addressed the needs of a demand-constrained and investment-starved economy. Nor has she appreciated the multiplier effect of boosting exports. She was compelled to rely on one engine — government expenditure — but that engine too is short of fuel and the spectre of fiscal instability looms over the government. She has also ignored the two most pressing issues — massive unemployment and closure of MSMEs.

Faced with the most severe challenges to the economy in recent years, the self-proclaimed strong and decisive government has proved to be clueless and timid.

Eyes wide shut

Ashok V. Desai
We have received the government’s view of the economy in the past week, which is understandably rosy. It did not mention another view, which was made public just before Washington closed down for Christmas: the letter of the International Monetary Fund’s executive board to our government, enclosing what its staff saw when it came to Delhi for its annual consultation.

The government put some fresh capital into its banks, and transferred their bad debts and started suing some bad debtors under its insolvency and bankruptcy code. As a result, banks are a bit better off; the share of bad debts in their loans fell from 11.5 to 9.3 per cent in the year till March 2019. As a result, bank credit growth rose for a while. But non-bank financial institutions were not helped; so their credit shrank. The corporate sector’s profitability and capacity to service debt continued to be below normal.

Unlike in industrial countries, unemployment is estimated only once in four or five years in India. The last estimate is for 2017-18; it is the highest in 45 years. Rural unemployment is normally 3-4 per cent; in 2017-18 it shot up to 8 per cent. Amongst urban women, it is usually 8-10 per cent; it rose to 13 per cent. People can be unemployed only if they have had a job or are seeking one; between 2004-05 and 2017-18, the male participation rate fell from about 85 to 75 per cent, whilst the female participation rate fell from 40 per cent to almost 20 per cent. Participation rate can change with age structure; children and old people do not usually work, and are not regarded by the government as being in the workforce. But that cannot account for the halving of female participation.
The gross domestic product growth in the second quarter of 2019 was 5 per cent — the lowest since 2008. The slowdown is demand-led; headline inflation in 2018-19 was 3.4 per cent, the lowest in eight years. This is new; India has generally maintained an indecent inflation rate of 8 per cent or more.
IMF observers were of the view that the government should concentrate on three policy reforms. First, the governance of government banks should be strengthened, and so should the regulation and oversight of non-bank financial companies. Second, the government must follow the recommendation of the Fiscal Responsibility and Budget Management Review Committee and reduce debt-GDP ratio from the current 70-odd per cent to 60 per cent. Fiscal deficit should be brought down by bringing individuals and households into the income tax net and reducing subsidies. More measures would be needed; the IMF suggested extension of property taxation, higher coal cess, and applying normal income taxation to agricultural income. Finally, land, labour and product markets should be reformed; the distinction between formal and informal sectors should be removed, and the labour market should be made more flexible (that is, the restrictions on dismissal of workers in the formal sector should be removed).
The IMF noted the cyclical downturn, but opposed fiscal stimulus to counter it; it was more important to bring down the ratio of public debt to GDP from its current level of 69 per cent to 60 per cent. From this viewpoint, what matters is not the Centre’s fiscal deficit, but public sector borrowing requirement, which covered fiscal deficits of the Centre and the states plus borrowings of public enterprises. The PSBR-GDP ratio is unlikely to come down in the current financial year; on the contrary, the weak state of the economy may cause tax revenues to decline and PSBR to rise further. The IMF showed that, year after year, the actual fiscal deficit exceeded what the budget forecast: the finance ministry is systematically over-optimistic. The Indian government pays about 5 per cent of GDP in interest; BRICS pays about 3 per cent, and the Asean 2 per cent. Hence fiscal stimulus would be wrong; the IMF favoured fiscal consolidation — a reduction of the PSBR-GDP ratio. It suggested cutting subsidies on food, fuel and fertilizers. The goods and services tax should be streamlined and extended to electricity and petroleum products. Income tax should be levied at a lower income, and its peak rate should be raised. And the government’s habit of not showing all its expenditure in the budget should be given up.
Since there is no room to use fiscal stimulus against the current slowdown, the IMF supported the government’s use of monetary policy — the Reserve Bank of India’s reduction of policy rates by 135 basis points from 6.5 to 5.15 per cent this year, and projected reduction in statutory liquidity ratio to 18 per cent by April this year.
The IMF mildly approved the government’s efforts to help banks recover their non-performing loans, and cryptically noted that 12 major banks continued to be in government ownership — and hence did not have the incentive to make profits. It called for improvement in banks’ risk management. The government should privatize its banks; meanwhile, it should appoint independent boards, and remove RBI people from them. It should set up a specialized institution for liquidating bankrupt banks and introduce deposit insurance and emergency liquidity assistance. The government did not like these suggestions; it is still very happy to own banks and keep them under its thumb.
The National Housing Bank was supposed to regulate housing finance companies; but it slept while they gave unwise loans and went bankrupt. Their supervision has been transferred to the RBI. The IMF approved, but told the RBI to keep their supervision separate from bank supervision. It is important to prevent stress spreading from them to banks; for this, the RBI should start collecting more up-to-date and detailed data.
The IMF noted improvement in India’s corruption perceptions index: it was lower than in emerging markets and developing countries in 2012, and exceeds theirs now; but it is much lower (worse) than in industrial countries. The ease of doing business has also improved; but contract enforcement, land acquisition and insolvency resolution remain problem areas. Faster regulatory approvals, more single-window clearance and greater judicial efficiency would help.
India has reduced import duties, but they are still high and are changed too often. Trade costs and processing times continue to be high. Trade in services continues to be subject to entry restrictions on foreign people and firms, barriers to competition and non-transparent regulation.
The IMF pointed out for the umpteenth time the terrible effects of India’s labour laws which make it impossible to dismiss workers whether they work or not. They have made India’s industry lag in efficiency and lose out in international competitiveness; India has virtually lost out on industrialization. The GST created a chance to make India a single market; but it cannot be because states have different labour laws. The IMF may continue to preach on this for years, but nothing is likely to change.
The IMF staff report also gives the responses of the Indian government, which are mostly defensive and uncooperative. For the Indian government, its laws and practices are holy; it is least likely to reform them on the suggestion of the Fund or the World Bank. But their critique is worthy of attention at a time when domestic dissent is being discouraged.

Budgeting for jobs, skilling and economic revival

Ram Singh
The forthcoming Union Budget will determine whether India’s economic engine gets the steam needed for a rebound, or the current economic situation becomes even worse. Not just the future of the economy, the future of the country’s youth depends on the Budget.

The unemployment rate at 6.1% (Financial Year 2017-2018) is the highest in 45 years. The rate for urban youth in the 15-29 years category is alarmingly high at 22.5%. These figures, however, are just one of the many problems, as pointed out by the Periodic Labour Force Survey. The Labour Force Participation Rate has come down to 46.5% for the ‘15 years and above’ age category. It is down to 37.7% for the urban youth. Even among those employed, a large fraction get low wages and are stuck with ‘employment poverty’.

Structural factors
The prolonged, and ongoing, slowdown, is the main reason behind the depressing employment scenario, though several structural factors have also contributed to the situation. The GDP growth for the second quarter of Financial Year 2019-2020 is 4.5%, the lowest in the last six years, for which a decline in private consumption and investment are the factors primarily responsible. The aggregate investment stands at less than 30% of the GDP, a rate much lower than the 15-year average of 35%. The capacity utilisation in the private sector is down to 70%-75%.

While the structural factors need addressing, in the interim, the Budget should also focus on reviving demand to promote growth and employment. Schemes like PM-KISAN and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are good instruments to boost rural demand. It is really unfortunate that in the current fiscal year, a significant proportion of the budgetary allocation for PM-KISAN will go unutilised. Farmers and landless labourers spend most of their income. This means that income transfers to such groups will immediately increase demand. Further, rural India consumes a wide range of goods and services; so, if allocation and disbursement is raised significantly, most sectors of the economy will benefit. And, the payoff will be immediate.

Besides, rural unemployment can be reduced by raising budgetary allocation for irrigation projects and rural infrastructure like roads, cold storage and logistical chains. These facilities, along with a comprehensive crop insurance scheme, can drastically increase agricultural productivity and farmers’ income. Moreover, by integrating farms with mandis, such investments will reduce wastage of fruits and vegetables, thereby leading to a decrease in the frequency of inflationary shocks and their impact.

Boosting urban employment
In urban areas, construction and related activities are a source of employment for more than five crore people; across the country, the sector’s employment figures are second only to those of the agriculture sector. These projects, along with infrastructure, support 200-odd sectors, including core sectors like cement and steel.

However, due to the crisis in the real-estate and infrastructure sectors, construction activities have come to a grinding halt. At present, many real-estate projects are caught up in legal disputes — between home-buyers and developers; between lenders and developers; and between developers and law enforcement agencies like the Enforcement Directorate. The sector has an unsold inventory of homes, worth several lakh crores.

Even worse, multiple authorities — the Real Estate Regulatory Authority (RERA); the National Company Law Tribunal (NCLT); and the many consumer courts — have jurisdiction over disputes. Consequently, restructuring and liquidation of bad projects is very difficult, and in turn, is a main source of the problem of Non-Performing Assets faced by the Non-Banking Financial Companies.

To revive demand for housing, the Budget can raise the limit for availing tax exemption on home loans. The ₹25,000-crore fund set up by the centre to bailout 1,600 housing projects should be put to use immediately. The funds should be used to salvage all projects that are 80% complete and not under liquidation process under the NCLT. Several additional measures can also help. For example, there should be a single adjudication authority.

The multiplier effects of spending on infrastructure and housing in terms of higher growth and employment are large and extensive. Therefore, the ₹102-lakh-crore National Infrastructure Pipeline (NIP) programme is a welcome step. If implemented successfully, it will boost the infrastructure investment over the next five years by 2%-2.5% of the GDP annually.

Private sector’s risk appetite
Here, the problem is that more than 60% of the planned investment is expected from the private sector and the States. The government does not seem to realise that for private investment, regulatory certainty is as important as the cost of capital. Many infrastructure projects are languishing due to regulatory hurdles and contractual disputes between construction companies and government departments. As a result, infrastructure investment has come to be perceived as very risky. This is the major reason behind non-availability of private capital for infrastructure.

In this scenario, where the private sector has very little appetite for risky investments and State finances are shaky due to low GST collection, the onus is on the Centre to ensure that the programme does not come a cropper. The budgetary support to infrastructure will have to be much more than the NIP projection at 1.11% of the GDP.

Bidding and contracting for new roads, highways, railway tracks and urban development projects is a lengthy process. This is also the reason why several infrastructure-linked Ministries like those for civil aviation and roads have not been able to spend money allocated to them in the current fiscal year. Therefore, rather than earmarking budgetary support for new projects, the focus should be on projects that are currently under implementation so as to complete them as soon as possible. That is, funding should be front-loaded. In addition to creating employment, a timely completion of infrastructure projects will help increase competitiveness of the economy.

The distress among Small and Medium Enterprises (SMEs) is another area of concern. For many products produced by these enterprises, the GST rates are higher for inputs than the final goods. Due to this anomaly, around ₹20,000 crore gets stuck with the government annually in the form of input tax credits. This has increased cost of doing business for SMEs, which employ over 11 crore people.

Next, according to some estimates, there are more than 22 lakh vacancies in various government departments. Such dereliction is baffling when the unemployment among youth is very high.

Job openings that arise in the private sector put a premium on practical skills and work experience. Here, popular perception is that a good job requires a college or university degree. This misperception is the result of failure of the governments to provide affordable and good quality vocational training programmes.

To stop the demographic dividend from becoming a national burden, there is a need to invest heavily in skilling of the youth. Besides, the Budget should give tax incentives to companies and industrial units to encourage them to provide internships and on-site vocational training opportunities. This work experience can be supplemented with teaching of relevant theories. at educational centres set up at district levels. Distance education mode can also used for the purpose.

Ram Singh is a Professor at the Delhi School of Economics

Budget 2020: Hope for the best, prepare for the worst

P Chidambaram
Another year has started, another Budget is round the corner, and another fateful year for the Indian economy.

Since 2016-17, every year has brought surprises and tears. 2016-17 was the year of the catastrophic demonetisation. 2017-18 was the year of the flawed GST and its hurried implementation. 2018-19 was the year when the slide began and the growth rate dipped in every quarter (8.0, 7.0. 6.6 and 5.8 per cent). 2019-20 was the wasted year when the government refused to heed warnings and allowed the growth rate to collapse to below 5 per cent.

Extent of Collapse

It is now pretty clear that

* 2019-20, when the final revisions are made, will record a growth rate of less than 5 per cent;

* that the government’s revenues will fall significantly short of the BE (Budget Estimates) under both major heads (net tax revenue and disinvestment);

* that the fiscal deficit will breach the BE target of 3.3 per cent and will be close to 3.8 to 4.0 per cent;

* that both imports and exports of merchandise will record negative growth over the previous year;

* that private sector investment (measured by Gross Fixed Capital Formation), in current prices, will be about Rs 57,42,431 crore (or 28.1 per cent of the GDP), indicating investor risk-aversion and weariness;

* that private consumption remained sluggish throughout the year;

* that the agriculture sector remained under acute stress and will return a growth rate of about 2 per cent;

* that the job-creating sectors like manufacturing, mining and construction shed jobs in 2019-20, leading to a reduction in total employment;

* that credit growth to industry as a whole, and to the SME sector in particular, will be negative over the previous year; and

* that year-end CPI-based inflation will be over 7 per cent (with food inflation at over 10 per cent), adding to the distress caused by rising unemployment and stagnant wages/incomes.

According to Dr Arvind Subramanian, former chief economic adviser, the economy is in the ‘intensive care unit’. According to Nobel Prize winner Dr Abhijit Banerjee, the economy is ‘doing badly’. None of the observations of critics seems to have worried the government, that maintains that the upturn will happen in the ‘next quarter’! Because of its ostrich-like attitude, the government has rejected every correct remedial measure and has, instead, taken the wrong measures. For example, if taxes had to be cut, the government should have cut indirect taxes; instead it gave a bonanza amounting to

Rs 1,45,000 crore to the corporate sector and got nothing in return in terms of higher investment. The government should have boosted demand by putting more money in the hands of the poor; instead it cut back on the outlays (BE) for MGNREGA, Swachh Bharat, White Revolution and Pradhan Mantri Awas Yojana and may actually spend even less.

PM’s budget: What will he do?

When the Prime Minister met with 12 top businesspersons (without Ms Nirmala Sitharaman or aides), it showed nervousness as well as lack of confidence in the Finance Minister. According to sketchy reports in the media and hints dropped by some of the participants, the following are possible in the Budget that will be presented on February 1, 2020:

1. A cut in the income tax rates for individuals earning up to Rs 10 lakh a year.

2. Abolition or reduction of the tax on Long Term Capital Gains realised after holding the security for two years.

3. Reduction of the rate of Dividend Distribution Tax.

4. A promise to introduce the Direct Taxes Code.

5. Selective, short-term reduction of GST for a few sectors like construction.

6. Increase in the PM-KISAN amount from the current level of Rs 6,000 per year and/or extension of the scheme to more categories of beneficiaries.

7. Large increases in the outlays for defence; MGNREGA; SC, ST, OBC and minority scholarships; Ayushman Bharat (health insurance) etc by over-estimating tax revenues or borrowing heavily.

8. Setting up of one or two Developmental Finance Institutions (DFIs) for providing long-term finance to industry in general and SMEs in particular.

9. A massive disinvestment programme and/or asset monetisation programme with the narrow objective of raising resources.

Economy a Drag

All of the above is in line with the thinking of the government that relies heavily on the corporate sector (for funds), on the middle class (for votes) and on the defence of India (for distraction). Its capacity to think of structural reforms is limited. It has no confidence that the banking system will provide credit. Thanks to its protectionist lobby, it has given up on foreign trade as an engine of growth. It does not wish to curtail the exuberance of the stock markets. It cannot define its relationship with the RBI and determine how the two can maintain financial stability, promote growth and contain inflation.

The economy is not the main concern of the BJP government; it is the Hindutva agenda. On the other hand, the people are concerned with issues tied to economic growth such as more jobs, better producer prices, wages and incomes, relative price stability, access to better education and health care, and improved infrastructure.

It is painfully clear that the people have got a government that has turned the Indian economy into a “drag on the world economy”. That is the damning verdict of the IMF.

Hard times for sure

Renu Kohli
The early gross domestic product estimate (GDP) released this month by the national statistical agency assessed India’s growth at 5 per cent this financial year. It is the slowest pace of growth in the last 11 years, the third successive year of deceleration, and the fall in real GDP growth this year is a hefty 1.8 percentage points over last year (6.8 per cent). Still, the official advance GDP numbers were not a

surprise because all forecasters had downgraded much before, as did the central bank last December. In fact, many private analysts expect the growth out-turn to be even lower, below 5 per cent, as consumer spending failed to revive as anticipated in the October-December festival quarter and the steep decline in tax revenues has forced the government to restrict spending to one-fourth of the annual budgeted amounts for various ministries. The real worry is about what lies ahead.

Hard times seem inevitable. As the budget day approaches, all expect the government to respond appropriately to the stretching economic weakness. But rather than taxation and spending changes to stoke demand, it is the reverse or subduing effects of the withdrawal of chunks of expenditure that will play out. A retreat or slower pace of government spending exerts itself through reduced purchases, orders, and contracts whose impact radiates across other segments of the economy. The extent of such drag can be seen by the enormous spending support to growth by the government in recent times: about 45 per cent of the July-September quarter’s 4.5 per cent GDP growth came from such spending that grew an exceptional 16 per cent year-on-year and double its pace in the first quarter of April-June; minus this booster, GDP growth was below 3 per cent. Similarly, government expenditure raced phenomenally at 15 per cent and 9 per cent in the last two years (2017-18 and 2018-19); for 2019-20, estimated growth is a further 10.5 per cent.

Lower this pace and aggregate GDP will feel the pinch. The troubling thought is not only for the remainder of this year, when pressures to make ends meet typically intensify at the end. Government spending is likely to be forced to slow down next year too. This is because of the widening gap in public revenues and expenditures. Spending has expanded significantly in the past two years, especially its current or revenue component; this consists mainly of salaries, interest payments, subsidies and other transfers (for example, schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme, the Pradhan Mantri Kisan Samman Nidhi). At the same time however, tax revenues have trended in the reverse direction, that is, slowed down. This tightens financing of expenditures, the committed component of which is impossible to cut. Tax revenues fell short by Rs 1.65 trillion last year and the deficit is likely to be larger this year — Rs 2.6-3 trillion is the commonly cited range as both direct and goods and services tax collections are hit by the rapid slowing of output. Non-tax sources, that is, divestment and asset sales, have not matched expectations so far. There are frequent reports of frantic dividend revenue-seeking by the government, namely, from oil companies and the Reserve Bank of India; plans of yet another immunity scheme allowing direct taxpayers to declare any additional incomes in the past five-six years without penalty or prosecution, and the recovering of past dues from telecommunication firms for adjusted gross revenue payments, which may be partly paid. The extent of the public revenue shortfall is unlikely to evaporate very fast. At the least, an upswing in activity is essential for higher growth in revenues. But the portents for this are uncertain and underwhelming at this point.

So even as all look towards demand support in the upcoming budget, the government does not have the wherewithal for pleasing booster shots. Over-optimistic revenue projections would erode credibility, as happened last July. Raising taxes in one segment to finance a stimulus for another part will be counter-intuitive in a slowing economic context. Moreover, fresh taxation could invite backlash, further depress sentiment in a replay of last year’s budget. Under these resource-scarce circumstances, public expenditure would have to slow down, which would be a weakening force.

Rising inflation is the next spoiler. The RBI eased policy rates by 135 basis points last year, devoting equal policy attention to ensure that the borrowers benefit from its pass-through via banks and are encouraged to spend more. But the inflationary expectations of households have adjusted quickly to food prices that are rising since mid-2019. Retail food inflation galloped from 3 per cent last August to 14 per cent in December, pushing up overall retail inflation, on which monetary policy is based, to 7.4 per cent. These developments, along with some other factors such as hikes in telecom tariffs, fuels and liquefied petroleum gas, possible fiscal expansion in the forthcoming budget, have injected caution in the otherwise softer interest rate environment. The RBI rested its easing cycle last month, turned more watchful. The bond market has reacted with higher inflation risk premium, keeping the 10-year yield — benchmark for banks’ loan rates elevated.

Many assure the food price rise is temporary; it will pass over, leaving the easier monetary situation unchanged. But matters may not be all that sanguine. If inflationary beliefs of the public get entrenched owing to the persistence of food inflation for several quarters, that

increases the risk of feeding into wages (for example, public servants’ salaries are indexed to retail inflation) and thereon to other prices. This could make things more difficult than at present: high inflation reduces real incomes or purchasing power; instead of additional spending encouraged by lower interest rates, consumers and producers are pulled down by lower disposable incomes and costlier input.

Finally, new or unanticipated risks and shocks surfaced in the past few months from civil disturbances and protests that in turn, elicited disruptive internet shutdowns and prohibitory orders by various state administrations in many parts of India. These hurt consumption and business: for example, several companies explained that their previous quarter sales suffered from store closures, lower footfalls in showrooms and disrupted supplies, last month. Food orders, restaurant visits, e-commerce were affected likewise, according to news reports. Growth in the travel and tourism industry also reduced because of cancellations and cautionary advisories from foreign governments. Output losses caused by internet shutdowns in 2019 (estimated above 100, for about 4,196 hours by Top10VPN, an internet research firm) are calculated about $1.3 billion for 2019, according to The Global Cost of Internet Shutdowns report released earlier this month; this figure is an underestimate, says the report, as the focus was region-wide shutdowns, which tends to exclude many incidents. Further repeats of such shocks cannot be ruled out ahead. It is notable that the influential global risk-assessment consultancy, Eurasia Group, has reportedly placed India as one of 2020’s top geo-political risks.

When growth falls as steeply as it has this year, and the slowing is extended to the medium-term, emerging out of it takes longer and is more difficult because households and firms are more enduringly weakened than in a short-lived, cyclical downswing. And if policymakers lack resources or policy levers to arrest the sliding, a painless recovery is harder to achieve. The current economic situation is precisely at such a confluence — the government can do little by way of fiscal responses, an easing monetary cycle expected to manage the downswing faces uncertain inflationary challenges. Unless fortune unexpectedly smiles, hard times seem inevitable ahead.

Only way is up for interest rates after inflation hits 6-year high

By Paran Balakrishnan

Goodbye interest rate cuts. The leap in headline consumer price inflation to its highest level in nearly six years means the interest-rate cutting cycle is over and that the next interest rate move will be up, say analysts.

While good news for savers, this is the latest piece of bad news for Prime Minister Narendra Modi’s government under whose watch the economy’s been tanking. For finance minister Nirmala Sitharaman, the adverse inflation climate only makes her job of preparing her “pro-people, pro-growth” budget, due to be presented February 1, even tougher.

The government has been pushing for rates to come down further, even though the monetary easing medicine hasn’t had an effect. Financial institutions have been slow to pass on the rate cuts and in any event, businesses are more inclined to hang on to their money and repair balance sheets than make investments when demand’s sluggish. (The extent of how sluggish demand is was highlighted when India’s flagship auto industry reported car sales dropped a record 19 per cent year-on-year in 2019).
Despite a string of cuts in this rate-cutting cycle which began in February last year, economic growth has kept falling with second-quarter growth hitting 4.5 per cent, its lowest in six years. The government now projects Indian economy will expand in the full-fiscal year by 5 per cent, down from 6.8 per cent which would be the lowest pace in 11 years. But privately economists say the growth figure could well be lower with Fitch Ratings, for instance, pegging it at 4.6 per cent, citing “weakening business and consumer confidence.”

Now, throwing a further spanner into the works is accelerating inflation. India looks to be in the embrace of that toxic mix known as stagflation -- defined as slow economic growth, increasing unemployment and rising prices. Traditionally, when an economy is in the doldrums, the remedy is cutting rates. Now, though, it’s virtually certain that the Reserve Bank of India will keep its benchmark policy rates unchanged when it meets next in early February. And inflation could also mean that rate hikes will come earlier than expected.

“The jump in headline CPI (consumer price inflation) to its highest since 2014 almost guarantees that the RBI will leave policy rates on hold at its next meeting in early February. And with core inflation likely to rise over the coming quarters... policy rates will be hiked much sooner than most are expecting,” say Mark Williams, Capital Economics chief Asia economist.

Williams said that the available data for January show that food inflation has yet to ease and, “If we are right in forecasting a rise in global oil prices this year, fuel inflation looks set to rise further as well.” Heading the list of vegetable-inflation drivers are onions (which traditionally make Indian governments weep) Shutterstock

So why does the interest rate-easing party seem to be over? Let’s remember first of all that the central bank’s target for headline inflation is 4 per cent and inflation has only been heading northward of that figure. CPI inflation jumped from 5.5 per cent year-on-year in November to 7.4 per cent year-on-year in December -- a staggering 181 basis-point jump. That is the biggest rise since July 2014.

The rise was broad based but mainly driven by food inflation -- specifically vegetables which are up a staggering 60.5 per cent year-on year. And heading the list of vegetable-inflation drivers are onions (which traditionally make Indian governments weep). The headline figure is the highest it’s been since July 2014. By the way, this upward move was far bigger than expected by the financial markets which expected the December rate to be around 6.7 per cent. There’s also been shocks from the rise in oil prices.

Core inflation, which excludes the volatile movements of food and fuel, is looking more stable, edging up to 3.75 per cent even after mobile phone companies substantially raised subscriber costs and railway fares rose. But economists believe core inflation will also creep higher to around 4 per cent.

“We expect the central bank to switch to tightening mode much sooner than is generally expected. We are forecasting modest rate hikes in 2021 with the first move possible before,” says Capital Markets’ Williams.

Economists figure it’s already a given that the financially strapped government will have to burst its fiscal deficit target in the budget. Adding to the government’s woes on this score are the lower-than-forecast revenue collections. It all means that the government will likely have to leave out any feel-good, economy-boosting income tax cuts.

“The upcoming budget in February would be closely watched for fiscal stance and sector-specific actions. Even so, our estimates suggest inflation will likely remain above 6.5 per cent in the fourth quarter of 2020 and could constrain a rate cut in February,” financial services firm Edelweiss says.

HDFC Bank Chief Economist Abheek Barua says the government needs to put more attention on the agricultural sector as higher food prices have a big driver of the higher inflation via better food stock management to avoid shortages. But there’s a big unknown with the rabi crop. Economists also say that the 45 per cent weightage of food prices in the consumer consumption basket may be unrealistic and needs to be reassessed.

What’s ahead for prices? Well, economists expect inflation to stay high in January as well but say it could retreat in the second and third quarters to 4.7 per cent or a little lower, and then head sharply south to possibly 2-2.5 per cent in the fourth quarter.

And if all this bad economic news wasn’t enough, the slow growth is now having a “visible impact” on job creation, notes the State Bank of India. In fiscal year 2019, India created 89.7 lakh new jobs. “In fiscal 20, as per currently projected, this number could be at least 15.8 lakh lower, the SBI said on January 13.

The Confederation of Indian Industry in its pre-budget recommendations to the government says, “All engines of growth are showing sluggishness – consumption, investments and exports, placing the burden of kickstarting the economy on government expenditure.” The CII adds that, “a flexible, yet prudent fiscal policy is the need of the hour.” That’s a tall order under the circumstances, especially as the government has its plate full on the political front, struggling to control the after-effects of passage of the Citizenship Act.

Impression that government prioritises non-economic agenda over development must be addressed

Written by Amartya Lahiri India is now well and truly in the middle of a socio-economic upheaval. The economy has been weakening for a couple of years now. The social upheaval is new but its seeds have been fermenting for a while. The danger here is that the social and economic sides of an economy are not divorced from each other. Each influences the other and the current quagmire threatens to unleash the worst type of feedback between the two.

The most dangerous smoldering ember that could erupt due to the interaction between the social and economic sides is unemployment. The rising unemployment in the country has been commented upon widely. Less noted is the fact that rising unemployment disproportionately affects the young. Misfiring European economies like Spain, Greece, and others routinely report youth unemployment rates above 25 per cent. This is a social tinder box for a country like India whose median citizen is in the 30s and which is thrusting 10 million new young people to the job market every year. This dynamic, popularly hailed as India’s demographic dividend, can rapidly turn into a demographic curse if the employment situation doesn’t improve. A massive pool of unemployed youth makes for a huge collection of unhappy people, running high on testosterone and anger, looking to vent.

Along with this volatile pre-existing cocktail, we now have the addition of the state strong-arming youth protesters across the country. Each violent police action begets more resentment, protests, and additions to the ranks of protesters. Unemployed youth are fodder in these situations for all sides. The young can provide volume, sound, and muscle with relatively little concern for self in normal times. Lack of attractive opportunities makes this risk-taking trait more acute. Self-preservation is a predilection that affects the middle-aged more since they have more to protect.

So where will the jobs come from? The job creators are entrepreneurs, conglomerates, and multinationals. It is in their nature to take investment risks as long as the returns are high enough. Investment rates in India fell well below 30 per cent a while back. Clearly, the returns were not compensating entrepreneurs for the risk. The recent social upheaval is only adding to the perceived risk. It can only be dissuading more fence-sitters from investing in the economy until the uncertainty ebbs and the situation calms down. But the more investors adopt a “wait-and-see” approach, the worse the job situation will become. The worse the job situation becomes, the greater will be the ranks of the angry youth. This has all the makings of a devastating feedback loop. For the sceptical, the examples of Brazil (28 per cent youth unemployment) and South Africa (58 per cent youth unemployment) should be salutary examples of emerging economies descending into crime, violence, and crisis due to failing to productively (and respectfully) engage their youth.

The government’s focus on the economy is unclear. Through its personnel decisions in the past few years, the central government has signaled its low priority on economic management. The position of Deputy Governor (Monetary Policy) of the RBI lay vacant since July 2019 when Viral Acharya resigned. Despite the fact that he announced his decision to resign back in May 2019, the government only filled the vacancy this week. In the interim, the Monetary Policy Committee was operating without a key technical specialist for seven months. A previous vacancy for Deputy Governor of the RBI also remained unfilled for 11 months before MK Jain was appointed in June 2018.

This is particularly debilitating for the RBI because the government replaced Governor Urjit Patel with someone whose domain competence does not lie in either banking or finance or markets or macroeconomics or monetary economics. To compound matters, the government has chosen as economic advisors two people whose domain specialisation is in markets, banking and finance. They would be far better used in the RBI rather than the ministry of finance, which requires trained macroeconomists.

The choice of personnel in key ministries has been equally confusing. In the latest garnish to this soup of confusion, the prime minister was accompanied by the home minister during pre-budget consultations about the state of the economy with industrialists and economists. Strangely, the finance minister was not included in these deliberations.

The overarching impression all of this has given is that the government has prioritised its non-economic agenda over the development agenda. This has become more glaring over the last 18 months when the government started running out of the low oil price largesse that financed its welfare spending till 2017. Without the fiscal room for more spending and the political will to enact labour and land reforms, the government seems out of ideas. Its only proactive moves appear to be retrograde ones such as raising import duties. More damagingly, it is seen as trying to control the message by refusing to release data. This just makes things worse because people assume the worst.

A few changes are needed immediately. The government needs to announce a clear plan and timeline for structural reforms. Alongside, it has to start staffing technical positions by prioritising domain competence and empowering these hires with policy relevance. Importantly, it needs to pledge its commitment to the integrity of institutions tasked with the regulation of corporations and banks, monetary policy management, data collection/dissemination and law enforcement.

The government also needs to desist from trying to drown out protesting voices with state muscle power. Protests serve as a pressure cooker valve. They preserve order by allowing people to vent. Hope goes a long way, especially for the young. A climbdown from the arrogance of power would be a good way of generating hope.

This article first appeared in the print edition on January 16, 2020 under the title ‘Reset and refocus’. The writer is Royal Bank Research Professor of Economics, University of British Columbia

A rough patch

Editorial Indian Express
Latest inflation data seems to corroborate fears articulated by the Monetary Policy Committee (MPC) in its December meeting when it refrained from cutting the benchmark repo rate. Retail inflation, as measured by the consumer price index (CPI), has surged to 7.35 per cent in December 2019, up from 5.54 per cent in November, according to data from the National Statistical Office. With headline inflation well above the RBI’s upper bound target of 6 per cent — it is expected to remain elevated in the coming months, may well surpass the RBI’s estimate for the second half of this fiscal year — it reduces the space for further easing of policy rates, even after clarity over the extent of the Centre’s fiscal slippage emerges. The 10-year G-sec yields have reacted sharply to these developments, rising to 6.67 on Tuesday, partially offsetting the impact of the RBI’s recent open market operations. This combination of weak economic activity and higher than expected supply-side inflationary pressures has put the inflation-targeting regime under test.

Much of the rise in the headline inflation number can be traced to higher food prices. Food inflation has risen to a near six-year high of 14.12 per cent in December 2019, up from 10.01 per cent in the previous month. Much of this spurt is due to vegetable prices, which have surged to 60.5 per cent in December, contributing nearly 3.7 percentage points to the headline numbers. Prior to this data, there was an argument for overlooking this spurt in food prices, and easing rates further, as this spike in inflation is likely to be transitory. But the price rise has been much more pronounced. And while vegetable crop cycles tend to be short, and supply-side pressures may ease in the coming months, the stickiness in prices of protein items is likely to provide a floor for food inflation. Put differently, food inflation is unlikely to revert to previous levels in the short term. And as household inflation expectations, a key metric in the MPC’s assessment, are more responsive to food inflation, this uptick will further exert upward pressure on them. Add to that the uncertainty over oil prices on account of hostilities in the Middle East, and the outlook for inflation looks muddled.

It was expected that the MPC would lower rates further once clarity over the Centre’s fiscal position emerges after the Union budget. But the current trends in inflation suggest that those expectations are likely to be belied. Space for further easing may now open up only towards the second half of the next fiscal year. Soon, attention will turn to the Union budget. With limited fiscal space for a meaningful stimulus, the finance minister should spell out how the government intends to support the economy during this rough patch, and return growth to a higher trajectory.

റിസർവ് ബാങ്ക് എന്ന ഗോമാതാവ്

ജോർജ്‌ ജോസഫ്‌

സാമ്പത്തികപ്രതിസന്ധി അതിരൂക്ഷമായ സാഹചര്യത്തിൽ റിസർവ് ബാങ്കിന്റെ കരുതൽ ശേഖരത്തിൽ വീണ്ടും കൈയിട്ടുവാരുകയാണ് കേന്ദ്ര സർക്കാർ. ഇടക്കാല ലാഭവിഹിതമായി 40,000 കോടി രൂപ അനുവദിക്കണമെന്നാണ് റിസർവ് ബാങ്കിനോട് കേന്ദ്രം ആവശ്യപ്പെട്ടിരിക്കുന്നത്. രാജ്യത്തിന്റെ സാമ്പത്തികവളർച്ച താഴോട്ടായ സാഹചര്യത്തിൽ ,‘അസാധാരണമായ' ഒരു വർഷം എന്ന സ്ഥിതി പരിഗണിച്ച്, പണം അനുവദിക്കണമെന്നാണ് ആവശ്യം.

സാധാരണഗതിയിൽ ആർബിഐ ഇടക്കാല ലാഭവിഹിതം അനുവദിക്കുന്ന പതിവില്ല. എന്നാൽ, കഴിഞ്ഞ മൂന്ന് സാമ്പത്തിക വർഷങ്ങളിൽ തുടർച്ചയായി ഇടക്കാല ഡിവിഡന്റ് നൽകുന്നതിന് സർക്കാർ നിർബന്ധിക്കുകയും റിസർവ് ബാങ്ക് അത് അനുവദിക്കുകയും ചെയ്തു. ഏതാനും മാസങ്ങൾക്ക് മുമ്പാണ് 1 .76 ലക്ഷം കോടി രൂപ ഈ ഇനത്തിൽ സർക്കാരിന് കൈമാറിയത്. ഇതിൽ 1.48 ലക്ഷം കോടിയും നടപ്പ് സാമ്പത്തികവർഷത്തിൽ മുൻകൂറായി നൽകിയതാണ്. ഇതിനു പുറമെയാണ് 40,000 കോടി കൂടി നൽകണമെന്ന് ആവശ്യപ്പെട്ടിരിക്കുന്നത്.
നികുതിവരുമാനം ഉൾപ്പെടെയുള്ള ധനാഗമ മാർഗങ്ങളിൽ വലിയ തോതിൽ ഇടിവുണ്ടായിരിക്കുന്ന സാഹചര്യത്തിലാണ് സർക്കാർ റിസർവ് ബാങ്കിനെ പിഴിയുന്നത്. പരോക്ഷനികുതിയിൽ, പ്രത്യേകിച്ച് ജി എസ്ടിയിൽ നിന്നുള്ള വരുമാനത്തിലെ ഗണ്യമായ ചോർച്ച ധനകമ്മി രൂക്ഷമാക്കി. ധനകമ്മി പ്രതീക്ഷിച്ചിരുന്നതിനേക്കാൾ 115 ശതമാനം അധികമാകുമെന്നാണ് ഇപ്പോൾ കണക്കാക്കപ്പെട്ടിരിക്കുന്നത്. ഫെബ്രുവരി ഒന്നിന് നിർമല സീതാരാമൻ അവതരിപ്പിക്കുന്ന ബജറ്റിൽ ആദായനികുതി ഇളവ് ഉൾപ്പെടെയുള്ള ചില ജനപ്രിയപ്രഖ്യാപനങ്ങൾ പ്രതീക്ഷിക്കുന്നുണ്ട്. ഇത് ചെലവുകൾ കുത്തനെ ഉയർത്തും. ഇത്തരത്തിൽ സാമ്പത്തികപ്രതിസന്ധി അതിസങ്കീർണമാകുകയും അത് പരിഹരിക്കുന്നതിന് സർക്കാരിന് മുന്നിൽ പോംവഴികൾ കുറഞ്ഞതുമാണ് വീണ്ടും റിസർവ് ബാങ്കിനെ സമീപിക്കുന്നതിന് കാരണം. ക്യാപിറ്റൽ റിസർവ് എന്ന രീതിയിൽ ഇത്ര വലിയ ശേഖരം ആവശ്യമില്ല എന്ന നിലപാടാണ് കേന്ദ്ര സർക്കാരിനുള്ളത്. അതുകൊണ്ട് മൂന്ന് ലക്ഷം കോടി രൂപയെങ്കിലും സർക്കാർ ഖജനാവിലേക്ക് കൈമാറണമെന്ന് ഒന്നാം മോഡി സർക്കാർ റിസർവ് ബാങ്കിന് മുന്നിൽ നിർദേശം സമർപ്പിച്ചിരുന്നു. രാജ്യത്തിന്റെ സമ്പദ്‌വ്യവസ്ഥയെ അസ്ഥിരപ്പെടുത്തുന്നതും ആർബിഐയുടെ സ്വയംഭരണ അവകാശങ്ങളിലേക്ക് നേരിട്ടുള്ള കടന്നുകയറ്റവുമായ ഇതിനെ അന്നത്തെ ഗവർണർ ഉർജിത് പട്ടേൽ ഉൾപ്പെടെയുള്ളവർ എതിർത്തു. എന്നാൽ, തങ്ങളുടെ ഇംഗിതം ഒരു വിദഗ്ധസമിതിയുടെ റിപ്പോർട്ടായി കൊണ്ടുവന്ന്, അത് റിസർവ് ബാങ്കിന്റെ ഡയറക്ടർ ബോർഡിനെ കൊണ്ട് അംഗീകരിപ്പിച്ചാണ് കേന്ദ്രസർക്കാർ തീരുമാനം നടപ്പാക്കിയത്. തുടർന്ന് റിസർവ് ബാങ്കിന്റെ ചരിത്രത്തിൽ രാജിവയ്‌ക്കേണ്ടിവരുന്ന അഞ്ചാമത്തെ ഗവർണറായി ഉർജിത് പട്ടേലിന് മാറേണ്ടി വന്നു. പകരം ഒരു പാവ ഗവർണറെ അവരോധിക്കുകയും അദ്ദേഹവും ഡയറക്ടർ ബോർഡും മോഡി–-അമിത് ഷാ കൂട്ടുകെട്ടിന്റെ താളത്തിന് തുള്ളുന്നതുമാണ് ഇപ്പോൾ ആർബിഐയിൽ നടക്കുന്നത്. വിയോജിപ്പ് തുറന്ന് പ്രകടമാക്കിയ ഡെപ്യൂട്ടി ഗവർണർ വിരൽ ആചാര്യയും കേന്ദ്ര ബാങ്കിന്റെ പടിയിറങ്ങി.

ലാഭവിഹിതം അവകാശമല്ല
കേന്ദ്രസർക്കാരിന് ഇങ്ങനെ ലാഭവീതം ആവശ്യപ്പെടാൻ അധികാരമോ, അവകാശമോ ഇല്ല എന്നതാണ് നിയമവും കീഴ്‌വഴക്കങ്ങളും ഇതഃപര്യന്തമുള്ള പ്രവർത്തനരീതിയും വ്യക്തമാക്കുന്നത്. കമ്പനി നിയമങ്ങൾ പ്രകാരം ഡിവിഡന്റ് നൽകുക സാധാരണമാണ്. എന്നാൽ, അത് ഒരിക്കലും ഓഹരി ഉടമയുടെ അല്ലെങ്കിൽ ഉടമകളുടെ അവകാശമല്ല. ഒരു കമ്പനിയുടെ ഓഹരികൾ കൈവശമുള്ള ഒരു വ്യക്തിക്ക് എനിക്ക് ലാഭവിഹിതം തരണം എന്ന് ആവശ്യപ്പെട്ട് കോടതിയെ സമീപിക്കാൻ കഴിയില്ല. അത് നിയമപരമായ ഒരു അവകാശമല്ല. കമ്പനി മെച്ചപ്പെട്ട അറ്റാദായം നേടുമ്പോൾ ഓഹരി ഉടമകൾക്ക് അവരുടെ നിക്ഷേപത്തിനുള്ള പ്രതിഫലം എന്ന നിലയിലാണ് ഡിവിഡന്റ് അനുവദിക്കുക. സാധാരണരീതിയിൽ ഇത് കമ്പനിയുടെ ഡയറക്ടർ ബോർഡ് ശുപാർശചെയ്യുകയും ഓഹരി ഉടമകളുടെ വാർഷിക പൊതുയോഗം അതിന് അംഗീകാരം നൽകുകയും ചെയ്യുന്നതോടെയാണ് ഇതിനുള്ള നടപടിക്രമം പൂർത്തിയാകുന്നത്. അത് എത്ര ശതമാനം വേണം, എപ്പോൾ നൽകണം തുടങ്ങിയ കാര്യങ്ങൾ കമ്പനിയുടെമാത്രം അധികാരത്തിൽ വരുന്ന വിഷയങ്ങളാണ്. സാമ്പത്തികവർഷത്തെ ത്രൈമാസഫലങ്ങൾ വിലയിരുത്തി മികച്ച പ്രവർത്തനം കാഴ്ചവയ്ക്കുന്നു എന്ന് വ്യക്തമായാൽ ഇടക്കാല ലാഭവിഹിതവും നൽകാറുണ്ട്. ഇത് മൂലധന നിക്ഷേപ രംഗത്തെ പ്രവർത്തനരീതിയാണ്. എന്നാൽ, ഇത് ഒരിക്കലും ഓഹരി ഉടമകളുടെ നിയമപരമായ അവകാശമായി മാറുന്നില്ല. ഒരു കമ്പനിക്ക് അവരുടെ ലാഭം പല രീതിയിൽ സൂക്ഷിക്കുന്നതിനുള്ള അവകാശ - അധികാരങ്ങളുണ്ട്.

അതുകൊണ്ടാണ് റിസർവ് ബാങ്കിനോട് ലാഭവിഹിതം ചോദിക്കുന്നത് അതിന്റെ സ്വയംഭരണ അവകാശങ്ങളിലുള്ള പ്രത്യക്ഷ ഇടപെടലായി മാറുന്നത്. അത് സ്വാഭാവികമായി കൈമാറുന്ന ഒരു കാര്യമാണ്. റിസർവ് ബാങ്കിനെ സംബന്ധിച്ചിടത്തോളം സാധാരണ കമ്പനികളെ പോലെ ലാഭ നഷ്ട അടിസ്ഥാനത്തിൽ മാത്രമല്ല പ്രവർത്തനം. അതിന്റെ പ്രവർത്തനങ്ങളിൽനിന്ന് ലഭിക്കുന്നസാമ്പത്തികനേട്ടത്തെ ലാഭം എന്ന് പോലും വിശേഷിപ്പിക്കാറില്ല. സർപ്ലസ് അഥവാ മിച്ചം എന്ന വാക്കാണ് ഇവിടെ പൊതുവെ ഉപയോഗിക്കാറ്. ആർബിഐയുടെ പ്രവർത്തനത്തിനും അടിയന്തര സാഹചര്യങ്ങൾക്കാവശ്യമായ ഫണ്ടുകളും നീക്കിവയ്ക്കുന്നത് ഈ മിച്ചത്തിൽനിന്നാണ്. റിസർവ് ബാങ്കിന്റെ ഓഹരി ഉടമകൾ കേന്ദ്ര സർക്കാരാണ്. സ്വാഭാവികമായും കേന്ദ്രത്തിന് ലാഭവിഹിതം നൽകേണ്ടത് അവരുടെ ബാധ്യതയുമാണ്. എന്നാൽ, തങ്ങൾക്ക് ഇത്ര തുക ഈ ഇനത്തിൽ നൽകണം, ക്യാപ്പിറ്റൽ റിസർവുകളായി ഇത്ര തുക സൂക്ഷിക്കുന്നതെന്തിനാണ്, ഞങ്ങൾ ആവശ്യപ്പെടുമ്പോഴെല്ലാം പറയുന്ന തുക ഇടക്കാല ലാഭവിഹിതമായി നൽകണം എന്നെല്ലാം നിർദേശിക്കുന്നത് അതിന്റെ സ്വയംഭരണ അവകാശത്തെ ഹനിക്കലാണ്, പ്രവർത്തനത്തിൽ നേരിട്ട് ഇടപെടുന്നതിന് തുല്യവുമാണ്. മാത്രവുമല്ല, ഇത് റെഗുലേറ്റർക്കുമേൽ അസാധാരണമായ സമ്മർദം ഉണ്ടാക്കുകയും ചെയ്യുന്നു. ഉർജിത് പട്ടേൽ രാജിവയ്ക്കാൻ ഇത്തരം സമ്മർദം ഒരു കാരണമായിരുന്നു.

വിത്തെടുത്ത്‌ കുത്തുന്നു
സ്വയംഭരണസ്ഥാപനങ്ങളിൽ ഏറെ പ്രത്യേകതയുള്ള ഒന്നാണ് റിസർവ് ബാങ്ക്. രാജ്യത്തിന്റെ സാമ്പത്തികഘടനയുടെ അസ്‌തിവാരം എന്ന് പറയുന്നത് കേന്ദ്ര ബാങ്കും അത് സൂക്ഷിക്കുന്ന റിസർവുകളുമാണ്. സമ്പദ്ഘടനയുടെ നിലവാരവും കറൻസിയുടെ മൂല്യവുംമറ്റും ഇതിനെ ആധാരപ്പെടുത്തിയാണിരിക്കുന്നത് . കേന്ദ്ര സർക്കാരിന്റെ ആജ്ഞ അനുസരിക്കുന്ന ഒരു സംവിധാനമല്ല കേന്ദ്ര ബാങ്ക്. രാജഭരണം നിലവിലുള്ളതുൾപ്പെടെ ഒരു രാജ്യത്തും അത് അങ്ങനെയല്ല. ഇന്നത്തെ രീതിയിലല്ലെങ്കിലും ഇന്ത്യയിൽ നാട്ടുരാജാക്കന്മാർ ഭരിച്ചിരുന്ന കാലത്തും ഇത്തരത്തിൽ സമ്പത്ത് സൂക്ഷിക്കുന്നതിന് കാണിച്ചിരുന്ന വ്യഗ്രതയുടെ ഒരു ഉത്തമദൃഷ്ടാന്തമാണ് ശ്രീപത്മനാഭസ്വാമി ക്ഷേത്രത്തിൽ സൂക്ഷിച്ചിരുന്ന നിധിശേഖരം. ആ വിത്തെടുത്ത് കുത്താൻ രാജഭരണംപോലും ശ്രമിച്ചിരുന്നില്ല. അതുകൊണ്ട് റിസർവ് ബാങ്കിന്റെ അധികാരത്തിന്മേൽ കടന്നുകയറുന്നത് വിപൽക്കരമായ നീക്കമാണ്‌. സർക്കാരിന്റെ സാമ്പത്തികപ്രതിസന്ധി പരിഹരിക്കലല്ല റിസർവ് ബാങ്കിന്റെ കടമ. അത് രാജ്യത്തെ പണവ്യവസ്ഥയുടെ സൂക്ഷിപ്പുകാരനാണ്. വിപണിയിലേക്കുള്ള പണത്തിന്റെ ഒഴുക്ക് ക്രമീകരിച്ച് സാമ്പത്തികവ്യവസ്ഥയുടെ സുസ്ഥിരത സൂക്ഷിക്കേണ്ട സ്ഥാപനമാണ് . അല്ലാതെ സ്വയം കുഴിച്ച കുഴിയിൽ വീണ് കൈകാലിട്ടടിക്കുന്ന മോഡിയെയും അമിത്‌ ‌ഷായെയും സാമ്പത്തികമെന്നാൽ ആട്ടിൻകാഷ്‌ഠമാണോ, കൂർക്കക്കിഴങ്ങാണോ എന്നുപോലും തിരിച്ചറിയാൻ കഴിയാത്ത നിർമല സീതാരാമൻ ഉൾപ്പെടെയുള്ളവരെയും രക്ഷിച്ചെടുക്കലല്ല ആർബിഐയുടെ ജോലി. ഇവിടെ ഒരു കറവപ്പശുവിനെ എന്ന പോലെ റിസർവ് ബാങ്കിനെ ഉപയോഗിക്കുകയാണ് കേന്ദ്രഭരണത്തിലുള്ളവർ. കറന്ന് കറന്ന് അകിടിൽനിന്ന് ചോരവരെ പിഴിഞ്ഞെടുക്കുന്നത് സാമ്പത്തിക മേഖലയിൽ വൻ പ്രത്യാഘാതം സൃഷ്ടിക്കും. ഈ ഓർമകൾ ഉണ്ടായിരിക്കേണ്ടവർ രാജ്യത്തെ എല്ലാ സ്വത്തിന്റെയും ആത്യന്തിക ഉടമകളായ ജനങ്ങളാണ്.

Government must choose between tax reductions and increasing rural spending

Written by Suvodeep Rakshit
The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20 — the slowest since the global financial crisis of 2008. While one may quibble over whether the actual print may be lower or higher, the cause of the slowdown can be attributed to subdued private consumption and investment activity. And given the current trend of high frequency indicators, not much upside to growth is expected.

The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical factors. Despite largely stagnant incomes, private consumption, which is the largest driver of growth, has been financed over the past few years through progressively lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led payouts. The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13. And after the recent NBFC crisis, overall credit in the system has dried up as incremental resources from NBFCs to commercial sector were at (-) Rs1.3 trillion in the first half of FY20 compared to Rs 0.9 tn in first half of last year.

The rural economy has been reeling from low wage growth and largely stagnant farmers’ incomes. Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent. The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past with lower private sector investments and a weak real estate sector.

Looking at the key drivers of growth in the short term, there is limited scope for a sharp recovery. The slowdown in private consumption is a structural issue linked to low household income growth. That in turn is linked to the basic problems of low job creation, and stagnant farm incomes. None of these factors are likely to change immediately. Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households. And government consumption, which has been supporting growth over the past few years, remains under stress. The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP. Along with an additional 2.0-2.5 per cent of GDP of central PSE borrowings, the public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.

The government to its credit has shown a clear preference to rely on supply-side measures to support growth. Yet, expectations will be high that the upcoming Union budget addresses the demand side concerns as well. To this end, the government will possibly need to choose between income tax rate reductions, and substantially increasing allocation to the rural sector. Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people. Based on filings for the assessment year 2019, out of around 58 million tax filers, only 15 million tax filers had a return income above Rs 0.5 million. Further, the impact on consumption would vary widely depending on the relative gains across income brackets. On the other hand, spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can help alleviate some of the pain in rural areas.

The recovery will depend on the utilisation of the fiscal space, and also the health of the financial sector, especially that of NBFCs. The PSU banks are being nursed back to health, but credit flow from NBFCs to certain segments such as MSMEs needs to pick up.

Addressing India’s long term growth concerns and to push the country into the middle-income group of economies requires a broad-basing of the income and consumption profile. Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers. The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.

Further, given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.

In four key areas of infrastructure — electricity (generation, transmission, and distribution), transport (airports, roads, railways, metros), telecom, and water (irrigation, sanitation, sewage, water supply) — the private sector’s involvement is largely restricted to generation in electricity, inter-city roads, airports in transport, and telecom. The rest are largely in the hands of the Centre, state, and local governments. Policies need to focus on ownership (which is largely government dominated) and pricing (which provides the private sector with a remunerable internal rate of return). It is important to note that creating an enabling environment is to a large extent in the purview of the state and local governments.

Given the degree and nature of the growth slowdown, policymakers should continue to focus on measures that raise the potential growth of the economy. Reforms which increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services, and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus. After all, why let a crisis go waste.


(This article first appeared in the print edition on January 10, 2020 under the title ‘Limited scope for sharp recovery’. The writer is Vice-President and Senior Economist in Kotak Institutional Equities.)

How are the fundamentals of the Indian economy?

Udit Misra
On Thursday, after a two-hour-long meeting with a whole host of economists, sectoral experts and entrepreneurs, Prime Minister Narendra Modi sounded sanguine about the Indian economy recovering from hitting a 42-year low in terms of nominal gross domestic product growth rate.

“The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back,” he said adding sectors like tourism, urban development, infrastructure, and agri-based industry have a great potential to take forward the economy and for employment generation.

The PM’s meeting and his statement on Thursday were significant not only because they happen in the run-up to the Union Budget, which will be presented on February 1, but also because, once again, the Indian economy is being seen to be faltering.

The first advance estimates of national income for the current financial year, released earlier in the week, found that nominal GDP was expected to grow at just 7.5% in 2019-20. This is the lowest since 1978. Real GDP is calculated after deducting the rate of inflation from the nominal GDP growth rate. So, if for argument sake, the inflation for this financial year is 4%, then the real GDP growth would be just 3.5%.

Just for perspective, the Union Budget presented in July 2019 expected a real GDP growth of 8% to 8.5% and a nominal GDP growth of 12% to 12.5%, with a 4% inflation level.

What is the significance of the phrase ‘fundamentals of the economy are strong’?

The PM has reiterated a phrase of reassurance — underscoring the strong fundamentals of the Indian economy — that has been often used by policymakers in the past when the economy is seen to be faltering.

For instance, in October 2017, then Finance Minister Arun Jaitley brushed aside queries of the strains on economic growth by repeating this phrase. Earlier, during the sharp dip in GDP growth rate in 2013, both Prime Minister Manmohan Singh and Finance Minister P Chidambaram reiterated that the same phrase.

Globally, too, this phrase is a boilerplate.

One of the most infamous use of this phrase happened when on the morning of September 15, 2008 — the day Lehman Brothers (one of the most well-respected Wall Street brokerage firms) collapsed and unequivocally declared the Great Financial Crisis — then Republican Presidential candidate, Late John McCain reportedly stated that the fundamentals of the US economy are strong.

Roughly a year before that, in December 2007, then US President George W Bush told Reuters that “the country’s economic fundamentals were strong despite ‘headwinds’ from a weaker housing market, and he voiced confidence in a plan to ease the subprime mortgage crisis”.

So, what are the ‘fundamentals of an economy’?

When one talks about the fundamentals of an economy, one wants to look at economy-wide variables such as the overall GDP growth (real and or nominal), the overall unemployment rate, the level of fiscal deficit, the valuation of a country’s currency against the US dollar, the savings and investment rates in an economy, the rate of inflation, the current account balance, the trade balance etc.

There is intuitive wisdom in looking at these “fundamentals” of an economy when it goes through a tough phase. Such an analysis, when done honestly, can give a sense of how deep the strain in an economy run. It can answer the question whether the current crisis just an exaggerated response to a sectoral problem or is there something more “fundamentally” wrong with the economy that needs urgent attention and “structural” reform.

A spike in a 30-stock index, such as the BSE Sensex, could be misleading if it is out of tune with the GDP rate. Looking at a broader stock index, say a BSE500, may add to the picture. Similarly, comparing the growth of high-end cars to the slump in demand for cheap biscuit packets is also of limited analytical value. That’s because these high and lows may largely be due to some sector-specific factor, not an economy-wide factor.

To be sure about the broader health of the economy, one must look at the broader variables. That way, one reduces the chances of getting the diagnosis wrong.

So, what is the current state of the fundamentals of the Indian economy?

The data on most variables that one may call as fundamentals of the Indian economy are struggling.

Growth rate — both nominal and real — has decelerated sharply; now trending at multi-decade lows. Gross Value Added, which maps economic growth by looking at the incomes-generated is even lower; and its weakness in across most of the sectors that traditionally generated high levels of employment.

Inflation is up but the consolation is that the spike is largely due to transient factors. However, a US-Iran type of conflagration could result is a sharp hike in oil prices and, as such, domestic inflation may rise in the medium term.

Unemployment is also at the highest in several decades. According to some calculations, between 2012 and 2018, India witnessed a decline in the absolute number of employed people — the first instance in India’s history.

Fiscal deficit, which is proxy for the health of government finances, is on paper within reasonable bounds but over the years, the credibility of this number has come into question. Many, including the CAG, has opined that the actual fiscal deficit is much higher than what is officially accepted.

Bucking the trend, the current account deficit, is in a much better state but trade weakness continues as do the weakness of the rupee against the dollar; although on the rupee-dollar issue, a case can be made that the rupee is still overvalued and thus hurting India’s exports.

Similarly, while the benchmark stock indices have run up, and grabbed all attention, the broader stock indices like the BSE500 have struggled.