25 Things PM Modi Did Not Tell You About the Indian Economy

narendra modi

The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

In a speech last week, Prime Minister Narendra Modi, offered several data points to tell his fellow countrymen, that all is well with the Indian economy. And those who didn’t think so were essentially being needlessly pessimistic, he suggested.

Now only if he had bothered to look at data points beyond those he chose to offer, a totally different situation would have emerged. In this piece, I offer many data points to show that all is not well with the Indian economy.

1) Let’s start with the loans disbursed by banks during the course of this year. Let’s look at non-food credit to start with. These are the loans given out by banks after we have adjusted for food credit or loans given to the Food Corporation of India and other state procurement agencies, for buying rice and wheat directly from farmers at the minimum support price (MSP) for the public distribution system. Take a look at Figure 1.

Figure 1: 

The Figure 1 clearly shows that the total amount of non-food credit given by banks during the course of this year has been in negative territory. This basically means that on the whole banks haven’t given a single rupee of a loan. The situation is the worse it has been in five years. Non-food credit consists of loans given to agriculture, industry, services and retail sectors, respectively.

Let’s take a look at each of these sectors.

2) Let’s take a look at Figure 2, which plots the loans given by banks to agriculture and allied activities.

Figure 2: 

Loans given to agriculture and allied activities are in negative territory during the course of this year. Again, this basically means that on the whole banks haven’t given a single rupee of a loan to agriculture. In technical terms, their loan book to agriculture has shrunk. Is this possibly because of farm loans being waived off by state governments, that only time will tell.

3) Let’s take a look at Figure 3, which plots the loans given banks to industry.

Figure 3: 

Figure 3 makes it clear that loans given to industry by banks continue to shrink. This isn’t surprising given the huge amount of bad loans accumulated by banks on lending to industry. Banks still don’t trust the industry.

4) Let’s take a look at Figure 4, which plots the loans given by banks to the services sector.

Figure 4: 

This comes in as a major surprise, loans given to services have shrunk majorly during this financial year. Services constitute half of the Indian economy. If the firms operating in this sector are not interested in borrowing, then how can the Indian economy possibly be doing well?

5) Let’s take a look at Figure 5, which plots the retail loans given by banks during this financial year.

Figure 5: 

Retail loans are the only loans which have been in positive territory during the course of this year. Nevertheless, they have been more or less at the same level over the last few years.

This, despite the fact that interest rates have come down dramatically. If people are not willing to borrow more even at lower interest rates, how can things be alright with the Indian economy, is a question well worth asking.

Sadly, Prime Minister Modi, did not include any of these data points in his speech and presentation.

6) The latest Consumer Confidence Survey of the Reserve Bank of India (RBI) for September 2017, states: “Households’ current perceptions on the general economic situation remained in the pessimistic zone for four successive quarters, with the outlook worsening… The employment situation has been the biggest cause of worry for respondents, with sentiment plunging further into the pessimistic zone; the outlook on employment has also weakened.”

7) Take a look at Figure 6, which plots the cement production over the years.

Figure 6: 

Cement production is down this year, in comparison to the previous year. This tells us clearly that the construction and the real estate industry continue to be in trouble. These industries are huge employers of people, especially those who have low-skills.

8) The commissioning of new projects has slowed down. As Centre for Monitoring Indian Economy, which tracks this data, points out: “Projects worth Rs 512 billion were commissioned during the quarter ended September 2017. In the coming weeks this estimate is expected to rise. It could reach about Rs 700 billion. Even if this happens, this would be the lowest commissioning of projects during the Modi government’s tenure so far.” 

9) There has been a fall in new investment proposals. As Centre for Monitoring Indian Economy, which tracks this data, points out: “Projects worth Rs.845 billion were proposed during the quarter ended September 2017. This is the lowest level of intentions to invest seen in a quarter during the tenure of the Modi government.”

10) There has been a huge fall in the profit of companies. As Centre for Monitoring Indian Economy points out: “We infer this and other related nuggets of information from the financial statements of 1,127 listed companies… Profit before taxes of these companies fell by 27.9 per cent over their level a year ago.”

11) Take a look at Figure 7, which plots the trade deficit or the difference between exports and imports.

Figure 7: 

The trade deficit has jumped up majorly during the course of this financial year. This as I have explained beforehas primarily been on account of a jump in non-oil non gold non silver imports, in the aftermath of demonetisation. The unseen negative effects of demonetisation continue to impact the economy.

12) The growth in private consumption expenditure is at a six-quarter low. As the RBI Monetary Policy Statement pointed out: “Of the constituents of aggregate demand, growth in private consumption expenditure was at a six-quarter low in Q1 of 2017-18 [April to June 2017].”

13) As the RBI Monetary Policy Statement further pointed out: “India’s export growth continued to be lower than that of other emerging economies such as Brazil, Indonesia, South Korea, Turkey and Vietnam, some of which have benefited from the global commodity price rebound.”

14) Take a look at Figure 8 which plots the investment to GDP ratio.

Figure 8: 

The investment to GDP ratio has improved a little in the period of three months ending June 2017, but it continues to remain very low. As the RBI Monetary Policy Statement pointed out: “The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates.”

15) Now let’s take a look at Figure 9, which plots the growth of the non-government part of the GDP.

Figure 9: 

Figure 9 basically plots the growth of the non-government part of the economy, which typically constitutes 87 to 92 per cent of the economy. The growth of the non-government part of the economy has fallen to around a little over 4 per cent. This extremely important detail did not find a place anywhere in Prime Minister Modi’s speech.

If the non-government part of the economy is growing at such a slow rate, how will jobs for the one million youth entering the workforce every month, ever be created.

16) The situation becomes even more worrisome if we look at Figure 10.

Figure 10: 

As is clear from Figure 10, the growth rate of industry in general and manufacturing and construction in particular is at a five-year low. The manufacturing part of industry grew at 1.17 per cent during April to June 2017, whereas construction grew by 2 per cent during the same period.

This is a big reason to worry simply because manufacturing and construction have the potential to create new jobs. An estimate made by Crisil Research suggests that in construction 12 workers are typically required to create Rs 10 lakh worth of output. In case of manufacturing it is seven workers.

17) Take a look at Figure 11, which basically shows that labour intensive sectors have slowed down between January to June 2017.

Figure 11: 

As Crisil Research points out in a recent research note: “In the past two quarters, three sectors have grown much faster than GDP: 1) Trade, hotels, transport, communication and services related to broadcasting; 2) Electricity, gas, water supply and other utilities, and 3) Public administration, defence and other services. Of these, only the trade, hotels and restaurants sub-sector is labour intensive, requiring about 6 workers to produce Rs 10 lakh worth of output. But the share of this sub-sector in total output is low at ~12%. In contrast, a fast growing sector like public administration, defence and other personal services, despite having a larger share in output, has low labour intensity of only 3. And sectors with higher labour intensity – such as construction (12) and manufacturing (7) – have been undershooting overall GDP growth.”

It needs to be said here that public administration, defence and other personal services sector is basically a proxy for the government. And the government has stopped creating jobs.

18) Take a look at Figure 12.

Figure 12: 

Figure 12 plots the index of industrial production (IIP), a measure of the industrial activity in the country. It also plots manufacturing, which forms more than three-fourths of IIP. The growth of both these measures has been in low single digits for a while now and is clearly a reason to worry.

19) Take a look at Figure 13, which basically plots the consumption of petroleum products, over the years.

Figure 13: 

The consumption of petroleum products has more or less been flat in comparison to the last financial year. This is another good indicator of slowing economic growth.

20) Take a look at Figure 14, which plots the sale of commercial vehicles during the course of this financial year.

Figure 14: 

Commercial vehicle sales, which are a very good indicator of a pick-up in the industrial part of the economy. Commercial vehicle sales this year were lower than they were last year.

21) Take a look at Figure 15. It plots the fiscal deficit ratio of the government over the years.

Figure 15: 

As can be seen from Figure 15, in the first five months of the current financial year, 96 per cent of the annual fiscal deficit has already been crossed. Fiscal deficit is the difference between what a government earns and what it spends. Why is the fiscal deficit during the first five months of the year at such a high level? The answer lies in the fact that the economic growth is slowing down and the government is trying to drive up growth, by spending more.

22) Take a look at Figure 16.

Figure 16: 

It tells us that the increase in government expenditure has been a greater part of the increase in GDP over the last two years. For the period April to June 2015, the increase in government expenditure made up for around 1.3 per cent of the increase in GDP during that period. Since then it has jumped to 39.2 per cent between January to March 2017 and 34.1 per cent between April to June 2017.

So, the government is spending more and more in order to drive economic growth. This again shows that the government in its actions does believe that the economic growth is slowing down, but PM Modi won’t say so in his public posturing.

23) Take a look at Figure 17, it plots the bad loans ratio of public sector banks.

Figure 17: 

Figure 17, basically plots the gross non-performing advances ratio or simply put. the bad loans ratio of public sector banks, over the years. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. There has been a huge jump in bad loans of public sector banks over the last two years.

On October 7, the Reserve Bank of India imposed restrictions on the banking activities of Oriental Bank of Commerce (OBC). OBC was the seventh public sector bank on which restrictions have been placed. Now, one-third of public sector banks have restrictions in place. And all is well with the Indian economy?

24) Take a look at Table 1.

Table 1:

Gross NPAs (in Rs Crore) Gross Advances Gross non-performing advances ratio
Indian Overseas Bank 35,098 1,40,459 24.99%
IDBI Ltd. 44,753 1,90,826 23.45%
Central Bank of India 27,251 1,39,399 19.55%
UCO Bank 22,541 1,19,724 18.83%
Bank of Maharashtra 17,189 95,515 18.00%
Dena Bank 12,619 72,575 17.39%
United Bank of India 10,952 66,139 16.56%
Oriental Bank of Commerce 22,859 1,57,706 14.49%
Bank of India 52,045 3,66,482 14.20%
Allahabad Bank 20,688 1,50,753 13.72%
Punjab National Bank 55,370 4,19,493 13.20%
Andhra Bank 17,670 1,36,846 12.91%
Corporation Bank 17,045 1,40,357 12.14%
Union Bank of India 33,712 2,86,467 11.77%
Bank of Baroda 42,719 3,83,259 11.15%
Punjab & Sind Bank 6,298 58335 10.80%
Canara Bank 34,202 3,42,009 10.00%

Source: Author calculations on Indian Banks’ Association data.(The table does not include the associate banks of the State Bank of India which were merged into it).

What does Table 1 tell us? It tells us that many public sector banks are in a big mess on the bad loans front. Banks like Indian Overseas Bank and IDBI with bad loans ratio of 24.99 per cent and 23.45 per cent, will pull down the performance of any big bank they are merged with.

Even the big banks like Union Bank of India, Bank of Baroda, Punjab National Bank and Canara Bank, have a bad loans ratio of 10 per cent or more. If and when weaker banks are merged with these banks, their performance will only deteriorate. The question to ask is, why are many of these banks still being allowed to operate?

25) The capacity utilisation of 805 manufacturing companies tracked by the RBI OBICUS survey fell to 71.2 per cent during the period April to June 2017. This is the lowest in seven quarters.

I guess I will stop at this. There are many other economic indicators which can be used to point out that all is not well with the Indian economy. (For more details on how PM Modi cherry picked data to build a positive economic narrative, you can click here and here). Of course, this is not to say that there are no positive economic indicators right now. But the negative indicators far outnumber the positive ones.

As I keep saying, the first step towards solving a problem is recognising that it exists. But that doesn’t seem to be the case with PM Modi. In his world, all is well.

The column originally appeared on Equitymaster on October 9, 2017.

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Can India’s currency ban really curb the black economy?

rupee

On November 8, 2016, in a late-night TV broadcast to the nation, Indian prime minister Narendra Modi, demonetised Rs 500 and Rs 1,000 notes. As of the midnight of November 8, 2016, these notes have been rendered useless.

This decision of the Modi government came as a huge surprise to the media as well as the citizens, given that there were no news leaks before the announcement. Newsreports suggest that the Reserve Bank of India, the Indian central bank, was given close six months to prepare for this eventuality. The government had asked the central bank to print more Rs 50 and Rs 100 notes. Despite the long period taken to prepare for this decision, there were no news leaks.

Further, the Rs 500 and Rs 1,000 notes which have been demonetised, can be deposited in banks as well as post offices up until December 30, 2016. The money will be credited in the account of the individual depositing the money. The notes can also be exchanged up to Rs 4,000.

While Indian cities are full of bank branches, those living in rural areas will find exchanging the demonetised notes a little difficult. Only 27 per cent of Indian villages have a bank within 5 kilometres.

The idea behind this move as per the government is to curb “financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India.”

It is also to hit those who have a massive amount of black money in the form of cash. Black money is essentially money that has been earned through corruption and legal activities, without any tax being paid on it. There are several estimates of the total amount of black money going around in the Indian economy. A World Bank estimate puts the size of the black economy at a little 23.2 per cent of the economy in 2007.

By making high denomination notes worthless overnight, the government hoped that those who have black money in this form, will not be able to convert this money into physical assets like gold. Newsreports suggest that jewellers across the country worked overtime through the night of November 8 and November 9, 2016, to help convert black money held in the form of Rs 500 and Rs 1,000 notes into gold.

Starting November 10, 2016, the government will introduce new Rs 500 and Rs 2,000 notes. Those who have black money in the form of the old Rs 500 and Rs 1,000 notes will try exchanging them with new notes. They can’t go to a bank and deposit all their black money given that it is likely to lead to questions from the income tax department.

Any other way of exchanging notes will take some doing, given that the old denomination notes form more than 86 per cent of notes in circulation by value. Hence, it will not be easy to exchange these notes without leaving audit trails for the income tax department. To incapacitate those who are holding a lot of black money in the form of cash seems to be the major idea behind the move.

Crisil Research expects income tax collections of the government to improve as money earlier unaccounted for, enters the banking system and eventually gets taxed. Inflation is also expected to come down in the short-term as cash transactions come down.

Another area which is likely to be impacted is real estate. A portion of the payment while buying a house in India is almost always made in the form of cash. With the high denomination notes, having been demonetised it will become very difficult to organise for this payment. Hence, prices are expected to fall. If prices do fall it will be make real estate affordable. At affordable prices, the demand for real estate is likely to go up. This is expected to create low-skilled and unskilled jobs, which the country badly needs, given that one million individuals enter the workforce every month.

Further, the retail as well as the luxury goods businesses where a bulk of transactions are carried out in cash is expected to be impacted negatively, as cash transactions will come down dramatically in the short-term.

In fact, during the period the old notes are withdrawn and new notes make it to the market, the cash transactions are likely to remain down. India is a country where a bulk of transactions are still carried out in cash. A 2012 estimate carried out by the The Fletcher School at the Tufts University estimated that 86.6 per cent of the transactions were carried out in cash. While this figure would have come down since then, it would still be at a very high level.

Another research paper titled The Cost of Cash in India points out that “the ratio of currency to GDP in India (12.2%) is higher than countries such as Russia (11.9%), Brazil (4.1%), and Mexico (5.7%)”. Hence, India is still largely a cash driven economy and given this, Modi government’s move is likely to cause a few problems in the short-term.

Also, if the Modi government is serious about tackling the black money menace, it shouldn’t just leave it at this. As the former RBI governor Raghuram Rajan said in this context: “I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch.”

It is important that the government uses information technology to track down those who are earning money but not paying their share of taxes. As Rajan put it: “I would focus more on tracking data and better tax administration to get at where money is not being declared.”

Further, the government needs to quickly introduce electoral financing reform in the country.

 

The column originally appeared on BBC.com on November 10, 2016.

Yogeshwar Dutt and the Unhappiness of an Olympic Silver Medallist

yogeshwar-dutt-biography3

The wrestler Yogeshwar Dutt came in for a happy surprise recently. The bronze medal that he had won at the London Olympics in 2012, is all set to be upgraded to a silver medal.

This has happened because the silver medal winner Besik Kudukhov’s dope test recently turned out to be positive. Kudukhov died in a car accident in 2013. Nevertheless, his sample from the 2012 London Olympics had been preserved and was tested again, before the recently concluded Olympics in Rio de Janeiro in Brazil.

Coming on back of Dutt’s disappointing performance in Rio, the silver medal would have indeed made the wrestler very happy. But typically the silver medallists at Olympics tend to be an unhappier bunch.

The Olympic bronze medallists tend to be happier in comparison to the silver medallists. Indeed, this is surprising but true. In a research paper titled When Less Is More: Counterfactual Thinking and Satisfaction Among Olympic Medallists, V.H. Medvec, S.F.Madey and T. Gilovich, provide the example of Abel Kiviat, a 1,500 metres silver medallist in the 1912 Olympics, held in Stockholm. Kiviat represented the United States.

The fact that he came second rattled him till almost the end of his life. As Medvec, Madey and Gilovich point out: “Kiviat had the race won until Britain’s Arnold Jackson “came from nowhere” to beat him by one-tenth of a second. “I wake up sometimes and say, ‘What the heck happened to me?’ It’s like a nightmare.” Kiviat was 91 years old when he said this in an interview with the Los Angeles Times.” Not winning the gold medal turned out to be a lifelong regret for Kiviat. It rattled him in his 90s. Kiviat died at the age of 99.

In fact, the authors studied the 1992 Olympics Games in Barcelona and came to the conclusion that those winning bronze medals seemed happier than the ones winning the silver medal. And this went against conventional logic. As they write: “Olympic competition involving bronze and silver medal winners—in which those who perform better nonetheless feel worse. On the surface this result is surprising because an underlying premise of all serious athletic competition is that athletes should strive as hard as they can, and that the higher they finish the better they feel.”

Nevertheless, that is not how things eventually turn out. And this goes against conventional wisdom. But the thing is that the silver medallists are thinking about the gold that could have won whereas the bronze medallists are looking at everyone below them, who did not win anything.

Their reference points are totally different. As Michael Foley writes in The Age of Absurdity—Why Modern Life Makes It Hard To Be Happy: “Little in human psychology is simple…Consider the differentials. Bronze is aware of only the vast gap between itself and the unmedalled many not even close to the podium – whereas silver sees only gold one hateful step up.

In fact, the closer the silver medal winner was to winning the gold the unhappier he or she would feel about it.

And that is why the bronze medallists at the Olympics are happier than the silver ones. Though this seems counterintuitive initially, it makes immense sense after one digs a little more into it.

This does not in any way mean that coming second always leads to lesser satisfaction than coming third. As Medvec, Madey and Gilovich write: “Finishing second is truly a mixed blessing. Performing that well provides a number of direct benefits that increase our well being—recognition from others, boosts to self-esteem, and so on. At the same time, it can indirectly lower satisfaction by the unfortunate contrast with what might have been.”

So where does that place Yogeshwar Dutt? In fact, it makes him a silver medallist who should be happy about it, given that he had been a bronze medal winner for close to four years. His reference point is different than that of other silver medallists.

The column originally appeared in the Bangalore Mirror on September 7, 2016

Why Lalu Yadav had a change of heart towards Nitish Kumar

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Lalu Prasad Yadav has gulped “poison” but is still alive. As he told reporters yesterday: “I want to assure the secular forces and the people of India that in this battle of Bihar, I am ready to gulp everything. I am ready to consume all types of poison. I am determined to crush the hood of this snake, this cobra of communalism.”

The p-word is essentially a metaphor for Lalu accepting that Nitish Kumar, the current chief minister of Bihar, be projected as the chief ministerial candidate in the assembly elections scheduled in the state later this year. The Rashtriya Janata Dal (RJD) leader had resisted Nitish being projected as the chief ministerial candidate until now.

But with Nitish declaring on June 7 that he no longer wanted an alliance with the RJD for the forthcoming polls, Lalu had no other option but to agree to Nitish being projected as the chief-ministerial candidate.

Mulayam Singh Yadav, the president-designate of the proposed new Janata Party, welcomed this decision of Lalu and said: “I am very happy about the unity of Lalu Prasad and Nitish Kumar. Kumar will be the chief ministerial candidate for Bihar. Laluji has proposed Nitish Kumar’s name for the chief ministership. Laluji said he will campaign.”

Lalu may want us to believe that he drank the poison to crush the cobra of communalism, but that is not really the truth. If Lalu had to continue to stay relevant in the years to come he needed to ally with Nitish. He had no other option.

The electoral numbers of the 2014 Lok Sabha polls give us the answer. Data from the election commission shows that the combine of Bhartiya Janata Party (BJP) and Ram Vilas Paswan’s Lok Janshakti Party (LJP) got 36.36 per cent (BJP = 29.86 per cent + LJP = 6.5 per cent) of the valid votes polled during the Lok Sabha elections last year.

The RJD and the Congress Party which fought the elections together got 20.46 per cent and 8.56 per cent of the valid votes respectively. Nitish’s Janata Dal(United)(JD(U)) which fought the elections separately got 16.04 per cent of the valid votes. Hence, the vote percentage of JD(U) + RJD at 36.5 per cent was slightly more than that of the BJP + LJP at 36.36 per cent. Further, RJD+JD(U)+Congress got more votes than BJP + LJP. Nevertheless, since RJD + Congress and JD(U) were not in alliance, these votes did not translate into Lok Sabha seats.

The RJD won only four seats in the state and its alliance partner the Congress party, won two seats. The JD(U) also won only two seats. The BJP on the other hand won 22 seats whereas its partner LJP won six seats.

As is obvious from the data, the LJP won six seats with 6.5 per cent of the votes polled, whereas the RJD won four seats with 20.46 per cent of the votes polled. This was simply because the LJP got its alliance right.

Obviously Lalu understands this electoral math well enough. And given this, he is ready to let Nitish be projected as the chief-ministerial candidate, his initial reluctance notwithstanding.

Interestingly, in the by-elections that happened for 10 assembly seats in August 2014, the JD(U) came together with the RJD+Congress and took on BJP+LJP. The data from the election commission shows that the RJD+Congress+JD(U) got 45.6 per cent of the total votes polled. The BJP+LJP got 37.9 per cent of the votes polled.

Given that, JD(U) was not fighting the elections separately, the votes polled translated into assembly seats as well, unlike the Lok Sabha polls. The RJD+Congress+JD(U) got six out of the ten Assembly seats. Hence, there is some evidence of the alliance working.

Lalu and Nitish have had an “edgy” relationship for the over four decades that they have known each other. Nitish became the chief minister of Bihar in 2005, after managing to dislodge Lalu, who had ruled directly as well as through proxy (through his wife Rabri) for a period of 15 years and brought the state to the point of an economic collapse.

Ironically, for the first half of his political career, Nitish propped up Lalu, even though he knew that Lalu wasn’t fit to govern. Journalist Sankarshan Thakur put this question to Nitish in his book Single Man: “Why did you promote Lalu Yadav so actively in your early years?” he asked.

And surprisingly, Nitish gave an honest answer. As Thakur writes “‘But where was there ever even the question of promoting Laloo Yadav?’ he mumbled…’We always knew what quality of man he was, utterly unfit to govern, totally lacking vision or focus.'” Given this, what Nitish thinks of Lalu is totally on record.

So why then did Nitish decide to support him? “‘There wasn’t any other choice at that time,’ Nitish countered…’We came from a certain kind of politics. Backward communities had to be given prime space and Laloo belonged to the most powerful section of backwards, politically and numerically.'”

It is now Lalu’s turn to return the favour to Nitish. Also, Lalu knows that with the alliance of three parties, his party will have as many seats in the Bihar assembly as Nitish’s JD(U) or probably even more. This will allow him to extract his pound of flesh on the pretext of allowing the alliance to survive. And that is what he is interested in. Hence, what Lalu has drank is an ‘elixir’ and not poison, as he would like us to believe.

The column originally appeared on DailyO on June 9,2015 

Arghhh, Mr Jaitley it’s still not about cutting interest rates

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
The finance minister Arun Jaitley is at it again. A recent report in the Business Standard suggests that Jaitley is scheduled to meet public sector banking chiefs on this Friday i.e. June 12, 2015, and ask them why they haven’t cut interest rates in line with the Reserve Bank of India (RBI) cutting the repo rate.
The RBI has cut the repo rate by 75 basis points (one basis point is one hundredth of a percentage) to 7.25% since the beginning of this year. Repo rate is the rate at which RBI lends to banks. In response banks have cut their lending rates by only 30 basis points.
The finance minister wants to know why banks have not matched the RBI rate cut when it comes to their lending rates even though they have cut their deposit rates by close to 100 basis points over the last one year.
The finance minister believes that at a lower interest rate people and companies will borrow more, and banks will lend more. But as I have often said in the past this is a very simplistic assumption to make.
First and foremost a cut in the repo rate does not bring down the legacy borrowing costs of banks. Hence, lending rates cannot always fall at the same speed as the repo rate. Further, data from the RBI shows that as on May 15, 2015, nearly 29.9% of aggregate deposits of banks were invested in government securities. This when the statutory liquidity ratio or the proportion of deposits that should be invested in government securities, stands at 21.5%.
So what does this mean? Banks have way too much investment in government securities. In fact, as on May 15, 2015, the total aggregate deposits of banks stood at Rs 87,39,610 crore. Of this amount around 29.9% or Rs 26,14,770 crore is invested in government securities.
As things currently stand, banks investing Rs 18,79,016 crore in government securities would have been suffice to meet the regulatory requirement of 21.5%. What this means that banks have invested Rs 7,35,754 crore more than what is required in government securities.
Why is that the case? The answer could be lazy banking or the lack of decent loan giving opportunities going around. Clarity on this front can only come from banks doing the necessary explaining.
There are other things that Jaitley needs to consider as well. The bad loans or gross non-performing assets of banks have been going up. As on March 31, 2014, they had stood at 3.9% of their total advances. By March 31, 2015, the number had shot up to 4.3% of the total advances.
The situation is worse in case of public sector banks. As on March 31, 2015, the stressed asset ratio of public sector banks stood at 13.2%. The stressed assets ratio of public sector banks as on March 31, 2014, was at 11.7%. The stressed asset ratio of the overall banking system was at 10.9% as on March 31, 2015 and 9.8% as on March 31, 2014.
The stressed asset ratio is the sum of gross non performing assets(or bad loans) plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate. Hence, a stressed assets ratio of 13.2% essentially means that for every Rs 100 given out as a loan, Rs 13.2 has either been defaulted on or has been restructured.
What this clearly tells us is that the situation of the public sector banks has gone from bad to worse, over the last one year. In this situation it is hardly surprising that the banks have cut their fixed deposit rates but haven’t cut their lending rates by a similar amount.
With increased bad loans, they need to earn a higher margin on their good loans, to maintain or increase the level of profits. This scenario has arisen primarily because many corporates have been unable to repay the loans they had taken on.
Banks have not been able to recover these loans. A newsreport in The Economic Times yesterday, pointed out that the RBI is mulling a new rule that will give lenders a 51% equity control in a company, which fails to repay a loan even after its loan conditions have been restructured. Whether this happens remains to be seen. Further, many companies which failed to repay loans belong to crony capitalists who continue to be close to politicians.
Also, it needs to be pointed out that the corporate profits as a share of the gross domestic product is at 4.3% of the GDP, which is the lowest since 2004-2005. (I would like to thank Anindya Banerjee who works with Kotak Securities for bringing this to my notice).
What this tells us is that corporates as a whole are still not earning enough to be able to repay any fresh bank loans that they may take on. In this scenario insisting that the banks cut interest rates and lend is not the most suitable suggestion to make.
The Economic Survey released earlier this year had a very interesting table, which I have reproduced here.

Top Reasons for stalling across ownership

Source : CMIE

What the table clearly shows is that a lack of funds is not one of the main reasons for the 585 stalled projects in the private sector. In case of the 161 stalled government projects, the lack of funds is the third major reason. Hence, there are other reasons which the government needs to tackle, in order to get these projects going again. Lack of finance is clearly not a main reason.
Further, the high interest rates on post office savings schemes put a floor on the level to which banks can cut their fixed deposit rates and in the process their lending rates. This is something that the public sector banks can do nothing about.
To conclude, what all these reasons clearly suggest is that Arun Jaitley and this country would be better off if we got rid our fixation for lower interest rates being a solution to reigniting economic growth. There are other bigger things that need to be sorted out first.

The column originally appeared on The Daily Reckoning on June 9, 2015

Why Jairam Ramesh’s new book on land acquisition is a must read for Rahul Gandhi

Jairam_ramesh

Jairam Ramesh was the minister of rural development between July 2011 and May 2014. He was instrumental in getting the new land acquisition law drafted and passed in 2013. And now he has written a book documenting this experience.
The book is titled
Legislating for Justice—The Making of the 2013 Land Acquisition Law. Ramesh has co-authored this book along with Muhammad Ali Khan, who worked with Ramesh as an officer on special duty in the rural development ministry.
The book goes into great detail on why India needed a new land acquisition law. And given this, it is a must read for Rahul Gandhi, the vice-president of the Congress party, who has recently been ranting against the changes that the Narendra Modi government is trying to bring to the land acquisition law passed in 2013.
Before the 2013 land acquisition law was passed, land acquisition in India was governed by the Land Acquisition Act 1894—a law from the time when the British ruled India. And rather surprisingly it survived for close to 66 years after India achieved independence from the British in 1947.
The 1894 Act was loaded totally in favour of the government and made it very easy for the government to acquire land as and when it wanted to. This wasn’t surprising given that it was drafted in 1894, when the British ruled India and the rights of Indians were not really top of the British agenda. As Ramesh and Khan write: “The 1894 Act was a comparatively short legislation that left much to the discretion of the acquiring authorities.”
Take the case of the phrase “public purpose,” which is the basic reason why any government acquires (or at least should acquire) land from its citizens. It is very important to define the term properly. Nevertheless, as Ramesh and Khan write: “’Public Purpose’ which was the raison d’etre for any acquisition initiated was drafted in such wide terms that essentially any activity could be constituted as public purpose, as long as the Collector [of the district where the land was being acquired] felt it did…’Public Purpose’ became what ever the Government or acquiring authority defined it to include.”
In fact, in a 1984 amendment expanded the government’s ability to “acquire lands for a public purpose ‘or for a private company’”. Yes, you read that right. And which party was in power in 1984? The Congress party. This amendment allowed the government to acquire land from farmers at cheap rates and then sell it on to private companies at a significantly higher price.
The ‘Yamuna Expressway’ is a very good example of this, where the land was acquired by the Uttar Pradesh from farmers and then sold on to private parties at multiple times the price the farmers had been paid for it.
The 1894 Act also had an ‘urgency’ clause. As Ramesh and Khan write: “Section 17 of the Land Acquisition Act, 1894 was used to forcibly disposes people of their land in a frequent and brutal fashion by suspending the requirement for due process…Section 5A…allowed for a hearing of objections to be made but put no responsibility on the Collector to take those claims into consideration.”
So people could complain, but it was up to the Collector whether he wanted to listen to them or not. Further, like was the case with the definition of public purpose, the definition of urgency was also left “to the authority carrying out the acquisition.”
This clause allowed the collector to “take possession of the land within fifteen days of giving notice”. He could take possession of a building within 48 hours of giving notice. “The Outer Ring Road Project of Hyderabad and the Expressway in Uttar Pradesh are both striking(and recent) examples of acquisitions where large tracts fell pray to the urgency clause,” write Ramesh and Khan.
Further, land acquisition displaced many people over the decades and most of them were not resettled and left to fend for themselves. “While there is no comprehensive record of how many individuals have actually been displaced by land acquisition post-independence, estimates put forth by credible studies find that close to 60 million individuals have been displaced since independence. Worse still, only about a third of these have actually seen some measure of resettlement and rehabilitation,” write Ramesh and Khan. Further, the studies that Ramesh and Khan refer to are more than a decade old. Hence, the number of displaced is likely to be higher than 60 million.
The question is who is to be blamed for this? The Congress party, which ruled the country in every decade after independence. Why did it take them more than 60 years to wake up to this and do something about it. The only possible explanation is that the Congress politicians ‘privately’ gained from the law as it was.
And given this, Rahul Gandhi’s recent holier than thou attitude on “land acquisition,” doesn’t cut any ice. The Congress party is responsible for the land acquisition mess that prevails in this country as of today.
Getting back to the land acquisition law of 2013, it is only fair to say that India needed a proper land acquisition law which wasn’t loaded totally in favour of the government. The trouble is now we have a law which makes land acquisition extremely complicated and next to impossible. A reading of Ramesh and Khan’s book makes that extremely clear.
In fact, the authors even write: “The law was drafted with the intention to discourage land acquisition. It was drafted so that land acquisition would become a route of last resort.”
For a country which has nearly 13 million people entering the workforce every year and which has aspirations of “making things,” a law which discourages acquisition of land really cannot hold. No country has
gone from being developing to being developed without the expansion and success of its manufacturing sector.
As Cambridge University economist Ha-Joon Chang writes in 
Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”
And in the long run the ease of land acquisition remains an important input for the manufacturing sector to take off. It also remains a very important area if the physical infrastructure in this country needs to improve. Having said that, it does not mean that land should be taken over on a platter.
In fact, as the Economic Survey points out “land acquisition” was a top reason for 161 stalled government projects. The Survey also pointed out: “
India’s recent PPP[public-private partnership] experience has demonstrated that given weak institutions, the private sector taking on project implementation risks involves costs (delays in land acquisition, environmental clearances, and variability of input supplies, etc.).”
Hence, we need to take a middle path on land acquisition.

(The column appeared originally on Firstpost on May 26, 2015)

The black money recovery skills of IT dept are nothing to write home about


The finance minister Arun Jaitley spoke to income tax officials yesterday. News-reports suggest that
he told them: “You have the responsibility to recover every rupee which is due to the government…A tax is either payable or not payable, if it is not payable, then no attempt has to be made to recover it, but if it is payable, then there is no scope for any collateral consideration why it must not be recovered for the government.”

The statement goes totally against the data on the total amount of black money that the Income Tax department has managed to recover over the years. Black money is essentially money which has been earned but on which taxes have not been paid.
The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.”

The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption,” the white paper goes on to suggest.

Of course this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”

Getting back to Jaitley’s statement, the Annual Report of the ministry of finance throws up some interesting data in this regard. As the report for the last financial year points out: “During the financial year 2014-15 (upto 30.11.2014), 2068 (provisional) search warrants were executed leading to the seizure of assets worth Rs 538.23 Crore (provisional). During the financial year (upto 30.11.2014), 1174 surveys (provisional) were conducted which yielded a disclosure of undisclosed income of Rs 4673.11 Crore (provisional).”

Now how does this number compare to the total amount of black money within the country? Jaitley had told the Rajya Sabha that the previous government had asked three institutes, the National Institute of Public Finance and Policy (NIPFP), National Council of Applied Economic Research (NCAER) and National Institute of Financial Management (NIFM), to make an estimate of the black money within India and that which had left the shores. “Reports received from these institutes are under examination of the government,” he had told the Rajya Sabha.

In fact, none of these reports are currently in the public domain. Nevertheless, The Hindu newspaper had accessed the NIPFP report in August 2014. The NIPFP puts the size of the black money economy at around 75% of the gross domestic product(GDP).

What this clearly tells us is that the black money recovered by the Income Tax department in comparison to the total size of the black money economy in the country is not even peanuts. Having said that, I don’t think it is fair to compare the two numbers given that the Income Tax department simply does not have enough resources (or incentives for that matter) to go after the massive amount of black money in this country.

Nevertheless, there is another comparison that can be made. How has the performance of the department been over the years, is a question worth asking. As the annual report of the ministry of finance for the year 2013-2014 points out: “During the financial year 2013-14 (upto December, 2013), 3069 (provisional) search warrants were executed leading to the seizure of assets worth Rs 559.04 Crore (provisional). During the financial year (upto December, 2013), 3263 surveys (provisional) were conducted which yielded a disclosure of undisclosed income of Rs 6968.82 Crore (provisional).”

So, the Income Tax department performed better when it came to seizing assets and identifying undisclosed income in 2013-2014 than it did in 2014-2015. In 2013-2014 it seized assets worth Rs 559.04 crore. In comparison it managed to seize assets worth only Rs 538.23 crore in 2014-2015. It identified a total undisclosed income of Rs 6989.82 crore in 2013-2014. This number fell to Rs 4673.11 crore in 2013-2014.
How was the performance of the Income Tax department in the years prior to these two financial years? The accompanying table shows that clearly:

 

inancial year

Seized assets (in Rs crore)

Undisclosed income (in Rs crore)

2014-2015

532.23

4,673.11

2013-2014

559.04

6,989.82

2012-2013

450.18

8,254.41

2011-2012

Data not available

Data not available

2010-2011

716.66

2,700.59

2009-2010

602.34

1,832.00

Source: Annual reports, ministry of finance

The above table makes for a very interesting read. The value of seized assets was significantly higher in the 2009-2010 and 2010-2011. The undisclosed income identified peaked in 2012-2013 and then fell dramatically. What this clearly tells us is that the record of the Income Tax department in going after black money over the last few years has been very weak.

One possible explanation for this is the fact that corruption in the second term of the United Progressive Alliance peaked, the Income Tax department stopped going after people with a serious amount of black money and i has still not managed to get out of it.

While we may keep thinking of reasons, what this data clearly tells us is that Jaitley was being overtly optimistic regarding the black money recovery skills of the Income Tax department. And that clearly is not good news for all the black money recovery plans that the government has.

The column originally appeared on The Daily Reckoning on May 26, 2015