A Sense of Melancholy

I have been trying to write this piece for close to an hour now and haven’t managed to get going. It’s one of those days.

A dull and a dark morning in Mumbai has turned into a dull and dark afternoon, and the words just won’t flow.

A couple of cups of coffee haven’t helped. Neither has a cup of kahwa, which happens to be the only Kashmiri thing in my regular daily life, despite my Kashmiri name.

There is a sense of melancholy that has hit me badly, and I just can’t get rid of it. The fact that I am listening to the film songs sung by Jagjit Singh, while writing this, isn’t exactly helping. (Melancholy is bad for work and the idea of making money for daily wage earners).

Scrolling through my Twitter feed today, a small newsitem caught my eye: “Rita Bhaduri dead”. For those who know their Hindi cinema well, would know that Bhaduri was a character actor who acted in movies (and later TV serials) for more than four decades.

She first became famous for her role in the 1975 release Julie, where she played the role of the heroine’s best friend, and appeared in many roles since then.

Dear Reader, you must be wondering by now, why I am reminiscing a veteran actor who wasn’t really a star in any sense of the term, in a Diary, which is dedicated to writing on finance and economics, on most days. Allow me to explain.

A memory that remains etched in my mind is that of a film-poster I saw, sometime in the mid-1980s, on my way to school. This poster featured Rita Bhaduri, who died yesterday. I saw it in front of the Women’s College (Science Block) in Ranchi, the city that I grew up in.

For some odd reason, this memory has stayed with me since then and I find myself thinking about it, now and then, particularly on rainy nights, which one gets dime a dozen, in the city that I currently live in.

Perhaps it reminds me of life, as it used to be. Simple and straight. No decisions to make. No worries about whether one’s earning enough.

Or whether the landlord will renew the contract this year.

Or whether, this publication that I desperately want to write for, will let me write for them.

It reminds me of a life which had no insecurities.

Life was simple. One got up in the morning. Got ready. Went to school. Pretended to be in class, while dreaming about different things. Got caught talking and was made to stand up on the bench a few times (as my friend Adarsh loves to recall every time we meet).

Waiting for the games period at the end of it. Playing quizzes in the bus back home. Playing cricket with my colony friends, once I was back home.

Coming back home. Pretending to study for an hour, which was followed by dinner in front of the television with one TV channel. And one was in bed by 10pm.

Things were rather straightforward back then.

(The other crazy thing that I remember over and over again, is that of the cricketer Venkatesh Prasad, bowling a slow leg cutter).

Getting back to Rita Bhaduri and the poster that I saw. As I remember it, the poster was for a film called Daku Rani Himmat Waali, in which Bhaduri played the role of a dacoit. It turns out that Bhaduri never acted in a film of that name.

Is my memory playing tricks here? I don’t know. Perhaps it is. We all remember some version of what happened, and not necessarily what happened. The same seems to be happening to me right now as I write this. (If you are the kind who loves to read literature, do try reading The Sense of an Ending by Julian Barnes, which basically deals with this concept).

But Bhaduri did act in a film called Phoolan Devi (in Bangla), which as Wikipedia tells me, released in 1985. It was also released in Hindi with the title Kahani Phoolwati Ki.

On the other hand Daku Rani Himmat Waali, was a film that released in 1984. Perhaps, I am mixing up things here. But that is really not the point.

As we live and grow old, there is a world that gets created around us. Or a world that we create around us. A world of books, cinema, music, poetry, people, friends, relatives, parents, siblings, events and so on. And gradually as time passes, this world that we get used to living in, gradually gets destroyed, as we continue to live in it.

We forget the books we read.

The cinema we liked gets outdated, doesn’t fit the present context (try watching the
Amitabh Bachchan hits from the eighties, films like Coolie, Mard, Inquilab).

The same stands true for a lot of music we grow up hearing. Some of the music I loved in the eighties and the nineties, right from songs like Jumma Chumma De De to the music of movies like Dance Dance and Kasam Paida Karne Waale Ki, I am truly ashamed of now.

But I guess that is a journey one has to take. One cannot start appreciating Akhtari Bai Faizabadi (Begum Akhtar) or Pandit Bhimsen Joshi, from day one. One has to listen to a lot of rubbish before one comes to appreciate their music.

Events that happened become irrelevant (wonder how many of us remember the one day when Shivlings across the country drank milk). Friends move on. Siblings get a life of their own.

And people die, all the time. Our idols die. Our parents die. Our relatives die. And people who gave our lives a sense of life and perhaps even a sense of some meaning, also die. But we carry on living, moving towards the only truth in life.

The world that we live and create around us, is also gradually destroyed around us. This includes the memories of actors, singers, writers, etc., who one has liked and/or remembered over the years. Every time, one of them dies, a part of us is destroyed.

But that’s how things are. Time waits for no one. Things change and things will keep changing. There are no constants in life, even though time and again we are tricked into thinking that this time is different. The trouble is, it never is.

The poet Shahryar put it best when he said: “har mulakat ka anjam judai kyon hai, ab to har waqt yahi baat satati hai hamen.”

PS: For everyone who was expecting yet another column on economics and finance filled with data, my apologies. We will get back to all that and much more, in the next issue of the Diary.

The column was originally published in Equitymaster on July 18, 2018.

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A Humble Request to the Modi Govt: Paper Money Works on Trust, Don’t Destroy It

rupee

Money. Money. Money. It’s so funny. It’s a rich man’s world.

Or so sang the Swedish band Abba, many many years back. Rich man or poor man, money essentially functions on trust.

And the trust in Indian money has been destroyed repeatedly since November 2016, when demonetisation was unleashed on the hapless people of this country.

As we explained last week, demonetisation, the need of the Modi government to portray it as a success, and the lack of currency replacement at the pace it should have been replaced, has been responsible for the current currency shortage in large parts of the country.

Let’s look at Table 1, which basically lists the cash withdrawals made at ATMs using debit cards.

Table 1:Source: State Bank of India 

What does Table 1 tell us? It tells us that more cash is withdrawn from ATMs in the second half of the financial year (i.e. the period between October to March) than in the first half.

There are several reasons for it. The big festivals (Dusshera, Diwali, Christmas, Holi etc.) all fall in the second half of the year. So, does the procurement season for agriculture. This automatically means that the country on the whole withdraws more cash from ATMs in the second half of the year than it does in the first.

Now look at Table 1 carefully. The rate of increase in cash withdrawals has slowed down post 2012-2013. One possible reason for this has been the increase in digital transactions, which have gone up, but are still not big enough.

In 2016-2017, cash withdrawals in the second half of the year fell by 22.1%. This happened because in the aftermath of demonetisation there simply wasn’t enough cash going around in the system.

In 2017-2018, cash withdrawals in the second half of the year, are likely to be 12.2% more than the first half. (We use the term likely because the figure for cash withdrawals for March 2018, is an estimate).

This 12.2% growth is on a much larger base, than 2012-13. The cash withdrawals in the first half of 2012-2013 were around half of the cash withdrawals in 2017-2018.

Why have the cash withdrawals in 2017-2018 been much more? A major reason for this lies around the proposed Financial Resolution and Deposit Insurance Bill. At the core of this Bill, lies the suggestion that the deposits can be used to a rescue a bank or financial firm in trouble. But the truth is a little more complicated than that, as I had explained in a December 2017 piece.

The timing of this Bill coming after demonetisation was all wrong and created suspicions in the minds of people. And after that the university of WhatsApp struck, and many forwards started going around. These forwards wrongly suggested that the government had plans of seizing the money in banks.

But as is wont these days, people tend to believe what they read on their phones than logical and nuanced arguments offered elsewhere.

This fear of the government seizing deposits has to some extent led to people withdrawing more cash from ATMs than they otherwise would. In the four talks that we have given since November 2017 (in Greater Noida, Chennai, Mumbai and Hyderabad), the number one question that we got asked was, will the government seize our money?

This column originally appeared on Equitymaster on April 23, 2018.

This fear has been quite palpable, and the Modi government needs to address it.

 

The paper money that we use these days has no value of its own. It’s not like the money of yore, like gold or silver or tobacco or many other commodities, which had an inherent value of their own.

 

When it comes to paper money, it has value because the government of the day says so and people believe in it. It works purely on trust between the government and the citizens.

As Yuval Noah Harari writes in Sapiens—A Brief History of Humankind: “Money isn’t a material reality—it’s a psychological construct… Money is accordingly a system of mutual trust, and not just any system of mutual trust: money is the most universal and most efficient system of mutual trust ever devised.

 

And it is this trust that makes money go around. As Harari writes: “Because my neighbours believe in them. And my neighbours believe in them because I believe in them. And we all believe in them because our king believes in them and demands them in taxes, and because our priest believes in them and demands them in tithes.”

 

This trust in money was first destroyed during demonetisation, when the government set a last date (December 30, 2016) beyond which it wouldn’t accept Rs 500 and Rs 1,000 notes (For the record, the Bundesbank, the German central bank, still converts deutschemark, the German currency before euro became the currency of the Eurozone, into euros).
This trust continues to be destroyed with all the rumours around the FRDI Bill continuing to go around. These rumours need to be addressed, which they haven’t been.

 

Ultimately, any form of paper money works on trust. And if this trust is destroyed, nothing really is left because ultimately the only difference between a Rs 10 note and a Rs 2,000 note, is the quantity of paper and the ink, used in making these two notes, look different.

 

 

 

 

 

Corporates Will Continue to Default on Bank Loans

rupee

We have extensively written about how corporate loan defaults have screwed up the state of banks in general in India, with public sector banks in particular.

This can be made out from the fact that the aggregate domestic corporate lending non-performing assets (or bad loans) of scheduled commercial banks, as of December 31, 2017, stood at Rs 6,63,877 crore. Bad loans are loans on which repayment has not been made for 90 days or more.

The total domestic bad loans of scheduled commercial banks on December 31, 2017, stood at Rs 8,31,141 crore. This means that the corporate bad loans account for 80% of the overall bad loans of banks.

Having said that, it doesn’t make much sense to paint all the corporates with the same brush. Borrowing is an essential part of corporate growth and that cannot suddenly go out of the equation.

Care Ratings has carried out a very interesting study on corporate borrowing and how the different kinds of borrowers (as per the total amount of borrowing) are placed in their ability to repay bank loans, at this point of time.

Care Ratings took a sample of 2,314 companies, which excludes banks and other finance companies. The total borrowing of these companies stands at Rs 20.02 lakh crore as of March 31, 2017.

The interest coverage ratio of these companies stood at 3.92. Interest coverage ratio is basically obtained by dividing operating profit of a company (or companies) by interest payments that need to be made on outstanding loans, during a particular period. This ratio fell to an almost similar 3.9 for the period April to December 2017.

This tells us that on the whole, the corporates are making enough money to keep servicing the interest that is due on their debt. But averages as usual hide the real story, which starts to change, as soon as we start to dig a little more.

Let’s look at this in detail one by one:

  1. For the period April to December 2017, 578 companies in the sample with an outstanding debt of Rs 4.78 lakh crore, which amounted to 24% of the total debt, had an interest coverage ratio (ICR) of less than 1. This basically means that companies which have taken on one fourth of the corporate debt (as per the sample used) are not earning enough money to keep servicing the interest payments on their debt.

    When the interest coverage ratio is less than one, the operating profit made by the company is less than the interest payment that is due. In such a situation, neither the company, nor the bank is left with many options. If the company’s situation does not improve, it is more than likely to default on the bank loan.

    How has the situation changed when we compare the financial year 2016-2017 with the period April to December 2017? In 2016-2017, 524 companies with total debt amounting to Rs 5.42 lakh crore, had an interest coverage ratio of less than 1.

    What this means is that in April to December 2017, more companies ended up with an interest coverage ratio of less than one. Nevertheless, a smaller amount of money was at stake.

  2. Let’s take a look at Table 1:

    Table 1: Distribution of companies and ICR according to debt sizeTable 1 makes for a very interesting reading. Let’s start with the large companies with a debt of Rs 5,000 crore or more. There are 68 such companies. Their interest coverage ratio has come down from 3.22 to 3.08. But this fall is not huge.

    Further, there are 23 companies with a total debt of Rs 2.82 lakh crore, with an interest coverage ratio of less than one. This basically means that large companies form a bulk of the debt of Rs 4.78 lakh crore of companies, with an interest coverage ratio of less than one.

    This basically means that the banks haven’t seen the last of corporate defaults and more defaults will happen in the time to come.

  3. The companies with a debt of Rs 2,500-5,000 crore are in the worst possible space. The interest coverage has fallen from 2.26 for 2016-2017 and to 1.73 during the period April to December 2017, respectively. Clearly the positon of these companies on their ability to keep paying interest on their debt has come down.

    There are 56 companies in this bracket. Of these 22 companies have an interest coverage ratio of less than one. These companies have a total debt of around Rs 75,000 crore. These companies (along with large companies with an interest coverage ratio of less than one) primarily operate in the steel, engineering and textiles sector. Take a look at Table 2.

    Table 2:

  4. Interestingly, companies with lower levels of debt seem to be better placed on the interest coverage ratio front.
  5. The study further shows that the companies with higher levels of outstanding debt have seen sharper declines in their interest coverage ratio during April to December 2017, in comparison to 2016-2017. As Madan Sabnavis and Rucha Ranadive, the authors of this report put it: “A combination of declining interest coverage ratio and interest coverage ratio less than 1 is a good signal to identify debt service failure.”

To conclude, what these data points tell us for sure is that the banks haven’t seen the last of corporate defaults. There is more to come.

This column originally appeared on Equitymaster on April 17, 2018.

Why 2.8 Crore Indians Applied for 90,000 Jobs in Indian Railways

indian flag
The Indian Railways recently got 2.8 crore applications for around 90,000 jobs it had advertised for.

This basically means that the ratio of number of applicants to the number of jobs stands at 311:1. Further, it means that 18.7% of India’s youth workforce (people in the age group 18-29) applied for it. Or to put it a little more simplistically, every one in five individuals who are a part of India’s youth workforce, applied for these jobs.

This is even without taking any education qualifications into account. If we do that (i.e. people who have at least passed the tenth standard or some such parameter), the proportion of India’s youth workforce which applied for these jobs in the Indian Railways would go up even further.

If this is not an indication of India’s massive jobs crisis, we don’t know what is.

The argument being offered against this is that just because someone has applied for a government job, does not mean he or she is unemployed. Of course, this is a fair argument, but an incomplete one. Allow me to explain.

Let’s us look at Table 1, a table we have used multiple times before.

Table 1: 

Table 1 clearly tells us that only 60.6% of India’s workforce which is looking for a job all through the year, is able to find one. So, yes Indians may not be unemployed, but they are terribly underemployed. Hence, nearly 40% of Indians looking for a job all through the year are unable to find one. Or two in five Indians who are looking for a job all through the year are unable to find one.

Further, this underemployment translates into low levels of income, as can be seen from Table 2.

Table 2: Self-employed/Regular wage salaried/Contract/Casual Workers
according to Average Monthly Earnings (in %) 

Table 2 shows us the income levels of India’s workforce. As far as the self-employed and the contract workers are concerned, nearly two-thirds of them make up to Rs 7,500 per month or Rs 90,000 per year. In case of contract workers, more than 84% of contract workers earn up to Rs 7,500 per month or Rs 90,000 per year.

The per capita income in 2015-2016 was at Rs 1.07 lakh. This basically means that a bulk of India’s non-salaried workforce, earns a significantly lower income than the per capita income.

The non-salaried workforce works largely in the informal sector, which forms a bulk of India’s economy (as high as 92% as per one estimate). As the Economic Survey of 2015-2016, points out: “By most measures, informal sector jobs are much worse than formal sector ones-wages are, on average, more than 20 times higher in the formal sector.”

Given these low levels of income primarily because of huge underemployment, so many people tend to apply for government jobs in general, and the recent vacancies in Indian Railways are no exception to this. People are looking for a regular and stable source of monthly income. They want to get rid of the irregularity of payment that they have to regularly deal with in the informal sector.

The Indian government is a good paymaster, especially at lower levels. As the Report of the Seventh Pay Commission points out: “To obtain a comparative picture of the salaries paid in the government with that in the private sector enterprises the Commission engaged the Indian Institute of Management, Ahmedabad to conduct a study. According to the study the total emoluments of a General Helper, who is the lowest ranked employee in the government is Rs 22,579, more than two times the emoluments of a General Helper in the private sector organizations surveyed at Rs 8,000-9,500.”

Hence, the IIM Ahmedabad study “on comparing job families between the government and private/public sector has brought out the fact that…at lower levels salaries are much lower in the private sector as compared to government jobs.”

In this scenario, it isn’t surprising that so many people apply for government jobs in India. The employment opportunities in the informal sector are irregular and simply don’t pay enough. India’s huge underemployment gets reflected in the number of people applying for government jobs.

And at the end of the day, underemployment is also a representation of unemployment and the huge jobs crisis that India is facing. There simply aren’t enough jobs/employment opportunities which will keep individuals occupied for the full year, going around, for everyone who is a part of India’s burgeoning workforce.

Indeed, that is something to worry about. And what is even worrying is that the Modi government is not worrying about this huge issue.

Postscript: Dear Reader, you must be wondering why are we still using 2015-2016 data even in 2018-2019. The Labour Bureau carried out six household-based Annual Employment-Unemployment Surveys (EUS) between 2010 and 2016. Of these, reports of five rounds have been released till date. The last report was released in September 2016. The question is, why has the report for the sixth round of the Survey not been released till date.

Recently, in an answer to a question raised in Parliament, the government said, “On the recommendations of the Task Force on Employment, however, this survey has been discontinued.” Basically, a survey that brought bad news in the form of huge underemployment that India has been facing, has been discontinued, and then the government goes around talking about lack of data.

The column was originally published on Equitymaster on April 16, 2018.

Under Current Terms Only LIC is Likely to Buy Air India

LIC

India’s three main airlines, IndiGo, Jet Airways and SpiceJet, have made it clear that they are not interested in buying Air India, in the current form it is being offered in. (As I finished writing this column, a Reuters journalist tweeted to suggest that the Tatas are also unlikely to bid for Air India, as well. Guess, nostalgia, doesn’t always work). The government of India wants to:

A) Sell 76% of Air India.

B) 100% of Air India Express, the low-cost arm of Air India.

C) 50% of SATS, a gateway solution and food services provider. Against this sale, the government, wants the buyer:

a) To take on two-thirds of the debt of Air India. As on March 31, 2017, the total debt of the company was at Rs 48,447.37 crore. Two-thirds of this works out to Rs 32,298 crore.

b) The buyer also needs to give a guarantee that none of the permanent employees of the airline will be sacked for a year. After that the buyer can offer them a voluntary retirement scheme.

In return, the buyer, along with the aircrafts of Air India, will also get 2,543 international landing slots negotiated with many countries, over the years. The landing slots is for what any airline will want to buy Air India. The real estate of Air India, which includes the famous Air India building in Nariman Point, will continue to remain with the government.

What also works for the prospective buyer is that Air India has 12% market share in the domestic market in India. While, this has fallen from a 100% market share once upon a time, when private airlines were not allowed to operate in India, it needs to be taken into account that only 3% of Indians have travelled by air. Hence, the potential is immense. India is one of the last big airline markets that remains untapped.

Also, the airline has a 17% share in flights in and out of India.

All these factors work for the buyer. But there are other factors which don’t. As mentioned earlier, the airline had a debt of close to Rs 48,447 crore as on March 31, 2017. Two-thirds of this debt has to be picked up by the buyer.

The working capital loans constitute Rs 31,088 crore of this debt. This is a little lower than the amount of debt that the government wants the prospective buyer of Air India to pick up. It is worth asking how has this debt accumulated over the years? The airline loses money every year and in order to continue operating it needs to borrow.

The banks lend money to the airline because it is ultimately deemed to be lending to the government and a government doesn’t usually default. A private enterprise in the place of Air India, would have had to shut down by now.

The larger point is that by asking a prospective buyer to take on two-thirds of the debt, the government basically wants the buyer to take on the overall accumulated inefficiency of the airline.

Rs 33,298 crore is a lot of money and is basically a deal breaker as far as the sale of Air India is concerned. This kind of debt it could even bring down the airline that decides to buy Air India. (In fact, we had said the same thing in a column which appeared on January 15, earlier this year).

Other than the working capital loans of Rs 31,088 crore, the remaining Rs 17,360 crore is basically loans that have been taken for buying aircrafts. If this portion of the loan is passed on to the buyer, there is at least some justification given that there are airplanes that were bought using the loan.

Also, any prospective buyer will adjust for these loans before deciding on the price it wants to buy for Air India. But on the whole, the debt will drive away most prospective buyers.

Further, it is worth remembering that airline has lost a lot of money over the years and it continues to lose money. The airline lost Rs 41,657 crore between 2010-2011 and 2016-2017. These losses have continued in 2017-2018 (for the period between April to December 2017). Take a look at Table 1.

Table 1:

Domestic (Rs. in lakh) International (Rs. in lakh)
Traffic Revenue 505,964 1,044,676
Total Cost 676,231 1,334,296

Source: Loksabha Questions PDF 

Table 1 tells us that between April to December 2017, the airline lost a further Rs 4,599 crore. This basically means that the accumulated losses of the airline between April 2010 and December 2017, stand at Rs 46,256 crore.

Now that’s a lot of money. Other than the airline borrowing money to keep itself going, the government has also pumped in money into the airline over the years. Take a look at Table 2.

Table 2:

Year Equity Infused Rs. in (crore)
2011-12 1.200
2012-13 6,000
2013-14 6,000
2014-15 5,780
2015-16 2,500
2016-17 1,713
2017-18 (till date) 1,800
Total Cost 26,545.21

Source: Loksabha Questions PDF 

This infusion is a part of a restructuring plan which provides Rs 30,231 crore of equity infusion from the government into the airline, until 2021. It is clear that the restructuring plan is not working given that the airline continues to lose more than what the government has invested in it, over the last few years.

This isn’t surprising given that the cost of operation of the airline is very high. As a recent report by Kotak Institutional Equities points out, the operational costs of Air India are Rs 4.74 per available seat kilometre, in comparison to Rs 4.33 for Jet Airways, Rs 3.6 for SpiceJet and Rs 3.16 for IndiGo.

The airline also has a huge number of employees, backed by powerful trade unions which can be a huge nuisance. As on January 1, 2017, the airline had 18,049 employees. In comparison, IndiGo had 14,576 employees as on March 31,2017. IndiGo also employed 8,225 employees on a temporary/contractual/casual basis. Indigo has 40% share in India’s domestic airline business. Air India has 12%.

Also, 37.6% of Air India’s employees are retiring over the next five years. The trouble is that no prospective buyer will be willing to wait for five years, so that the airline can then have the right number of employees. Any quick turnaround will only happen if the buyer is allowed to fire employees.

The larger point here is that the airline is clearly not a family jewel that the government considers it to be (like all other public sector enterprises). It is basically a dangerous wound which has been bleeding the government and continues to bleed it. This bleeding needs to be stopped and it can only be stopped if the government decides to be a lot more flexible about the terms on which it is willing to sell the airline.

In fact, the government is more likely to attract bidders if it tries selling different parts of the airline, separately. For starters, the domestic business and the international business of Air India, need to be offered separately. In fact, even Air India Express, which primarily has flights to the middle east should also be offered separately. This might attract different buyers.

Further, the buyer should be allowed the flexibility of the doing what he deems fit to run the airline. The government cannot sell the airline and then want to continue running it through the backseat, by implementing terms and conditions.

Also, if this means that a few thousand Air India employees lose their jobs, then so be it. They have had a good time at the expense of the taxpayer, for many years now. This is as good a time, as any, to end it. If the government continues to run the airline, it will have to continue pumping money into it. This is money that is taken away from many other important areas like education, defence, health and agriculture. Further, the debt that the airline takes on will also eventually end up in the books of the government.

Under the current terms, the only institution that is likely to buy Air India, is the Life Insurance Corporation(LIC) of India. Given its past record under different governments in buying public sector enterprises, it won’t be surprising if the financial institution is forced to come to the rescue of the government and pick up a stake in the beleaguered airline. Funnier things have happened.

The column originally appeared on Equitymaster on April 11, 2018.

Mr Jaitley, One Thing Direct Tax Collections Show is That Acche Din are Here for CAs

A little over a week back, the numbers for the direct tax collections for 2017-2018, were released. The net direct tax collections have improved by around 17.1% to Rs 9.95 lakh crore. The direct tax collections consist of corporate tax, personal income tax and other direct taxes. This is the gross direct tax collection. After, refunds are deducted from it, what remains are the net direct tax collections.

The finance minister attributed this increase in net direct tax collections to demonetisation and Goods and Services Tax, which had resulted in a higher formalisation of the economy. The interpretation being that with increased formalisation people paid more tax.

The trouble with looking at just the absolute direct tax collections is that they do not take into account the fact that the size of the economy has also grown. Hence, any tax collection, should always be looked at as a proportion of the gross domestic product. How do things look when we look at the direct tax to the GDP ratio?

Take a look at Figure 1, which plots that.

Figure 1: 

Source: https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdf.
For 2017-2018, the figure has been arrived at using data from http://pib.nic.in/PressReleseDetail.aspx?PRID=1527290
and http://pib.nic.in/PressReleseDetail.aspx?PRID=1522059.

What does Figure 1 tell us? It tells us that the direct tax to GDP ratio in 2017-2018 is likely to be at 5.94%. We use the word likely because right now what we have is a GDP estimate for 2017-2018, which will change when the actual numbers come out, later this year.

The direct tax to GDP ratio in 2016-2017 was at 5.6%. Hence, there is an improvement of 34 basis points (one basis point is one hundredth of a percentage), year on year. If we look at historical data, such a jump happened almost every year between 2001-2002 and 2007-2008. And no demonetisation or GST happened back then.

In 2007-2008, the direct taxes to GDP ratio peaked to 6.3%. The stock market was rallying big time back then. Once it crashed, the direct taxes to GDP ratio fell over the next few years. What this basically means is that when the stock market is doing well, the investors pay a lot more short-term capital gains tax than they do otherwise. And this improves the direct taxes to the GDP ratio of the government.

This is a factor that needs to be taken into account for the jump in direct tax collections as 2017-2018 as well. The stock market has been rallying over the last few years, and there is bound to have been some jump in the short-term capital gains tax collections. Given that an exact breakdown of different kinds of taxes is not available in the public domain as of now, we cannot adjust for it. These gains need to be adjusted for simply because they are temporary in nature.

But, we are sure, the mandarins at the finance ministry have this data, they can very well adjust for it and then tell us, what has been the real growth in direct tax collections.

There is another factor which makes the data look a lot better than it perhaps actually is. The net direct tax collections as mentioned earlier are arrived at by subtracting refunds from gross direct collections. Let’s take a look at Figure 2.

Figure 2: 

Source: Author calculations on data from https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Time-Series-Data-2016-17.pdfhttp://pib.nic.in/PressReleseDetail.aspx?PRID=1527290
and http://pib.nic.in/PressReleseDetail.aspx?PRID=1522059.

The refunds have fallen from 1.07% of the GDP in 2016-2017, to 0.89% of the GDP in 2017-2018. This is the second biggest fall in refunds between 2000-2001 and 2017-2018. It will be interesting to see what portion of the returns filed still remain to be processed. The larger point being that the direct tax collections data does not pass this basic smell test.

Further, if we look at GDP growth, 2017-2018 has seen slowest GDP growth (in nominal terms without adjusting for inflation) since 2011-2012. The government collecting higher taxes while the overall economy is slowing down, is not something to be proud of.

Let’s look at another data point that the Modi government keeps tom-tomming about at any given opportunity. That the number of tax returns being filed has been going up at a rapid pace. As the press release accompanying the announcement of direct tax numbers pointed out: “During FY 2017-18, 6.84 crore Income Tax Returns (ITRs) were filed with the Income Tax Department as compared to 5.43 crore ITRs filed during FY 2016-17, showing a growth of 26%. There has been a sustained increase in the number of ITRs filed in the last four financial years. As compared to 3.79 crore ITRs filed in F.Y. 2013-14, the number of ITRs filed during F.Y. 2017-18 (6.84 crore) has increased by 80.5%.”

Between 2013-2014 and 2017-2018, the number of income tax returns being filed has gone up 80.5%. During the same period the direct taxes to GDP ratio has gone up from 5.62% to 5.94%, by around 32 basis points.

What does this tell us? It tells us that more and more income tax returns are being filed, without any tax being paid. Why? Simply because the taxable income is not enough to be taxed.

The Economic Survey of 2017-2018 acknowledges this: “Analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs. 2.5 lakhs.”

The Survey believes that “as income growth over time pushes many of the new tax filers over the threshold, the revenue dividends should increase robustly.”

Basically, what the Economic Survey is saying that a bulk of new tax filers are close to the income threshold of Rs 2.5 lakh. Income tax needs to be paid by individuals only if taxable income is more than Rs 2.5 lakh. The Economic Survey believes that as these people earn more, cross the Rs 2.5 lakh limit and pay tax. But the assumption here is that the Rs 2.5 lakh limit will continue to be the same.

Logically, it will have to go up in the years to come, simply because inflation needs to be taken into account. Hence, this argument doesn’t quite hold.

To conclude, the chartered accountants (CAs) in the business of filing returns are basically having the last laugh. The good thing at least someone is seeing the promised acche din.

The column originally appeared on Equitymaster on April 10th, 2018.

89% of Bad Loans Written Off by Public Sector Banks are Not Recovered

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“You don’t get bored writing about bad loans of public sector banks?” asked a friend, a few days back.

We honestly told them, we don’t, simply because new details keep coming out, and we keep writing about them. And most of these new details show how messy the situation has become.

Yesterday, while digging through the questions raised by MPs in the Rajya Sabha, we came across another interesting data point, which again shows how messy the bad loans problem of public sector banks actually is and why it is not going to end anytime soon, irrespective of what analysts and politicians have to say about it.

Bad loans are essentially loans which have not been repaid for a period of 90 days or more.

After a point banks need to write-off bad loans. These are loans which banks are having a difficult time to recover.

When banks write-off bad loans, the total bad loans of the banks come down. At the same time, these bad loans are written-off against the operating profits of banks.

In an answer to a question raised in the Rajya Sabha, the government gave out the details of the total amount of bad loans which have been written off by public sector banks, over the last few years.

Take a look at Table 1:
Table 1:

Year Loans written off (in Rs Crore)
2014-2015 49,018.00
2015-2016 57,585.00
2016-2017 81,683.00
2017-2018* 84,272.00
Total 2,72,558.00
* Up to December 31, 2017

 

Source: RAJYA SABHA

UNSTARRED QUESTION NO: 3600

TO BE ANSWERED ON THE 27th MARCH, 2018

Table 1 tells us that between April 1, 2014 and December 31, 2017, the public sector banks wrote off loans worth Rs 2,72,558 crore. Hence, the profits of the bank have been impacted to that extent and so have the dividends that these banks give to the government every year.

Nevertheless, this is a point that we have made in the past. In this column, we hope to make a new point. While the loans that are written off are those that are deemed to be difficult to recover, there is still a certain chance that these loans may be recovered by the bank (given that loans are made against a collateral). How do the numbers stack up on this front? Take a look at Table 2.

Table 2:

Year Loans recovered(in Rs Crore)
2014-2015 5,461.00
2015-2016 8,096.00
2016-2017 8,680.00
2017-2018* 7,106.00
Total 29,343.00
* Up to December 31, 2017
 

Source: RAJYA SABHA

UNSTARRED QUESTION NO: 3600

TO BE ANSWERED ON THE 27th MARCH, 2018

 

From Table 1 and Table 2 we can conclude that over the last four years, Rs 29,343 crore of the bad loans that have been written off (Rs 2,72,558 crore) have been recovered by public sector banks. This basically means that the rate of recovery is 10.8%. Or 89.2% of the bad loans which are written off are not recovered.

Hence, technically there might be a difference between a write off and a waive off, but in real life, there isn’t. A write off is as good as a waive off with the banks failing to recover a bulk of the bad loans. Also, in case of a waive off, the government compensates banks to that extent.

As we have mentioned in the past
, loans to industry amount to 73% of the overall bad loans of public sector banks, whereas loans to the services sector amounts to another 13%. This basically means that corporates are responsible for more than 80% of bad loans of banks. And this explains why public sector banks have a tough time trying to recovering the bad loans they have written off.

A bulk of these bad loans are because of corporates who have access to the best lawyers as well as politicians and banks find it difficult to recover these bad loans by selling the collateral against which these loans have been made.

While, public sector banks have written off loans worth Rs 2,72,558 crore over the last four years, the total bad loans outstanding of public sector banks stood at Rs Rs. 7,77,280 crore, as of December 31, 2017. So, public sector banks aren’t done writing off bad loans as yet. There is more to come.

Stay tuned!

The column was originally published on Equitymaster on April 3, 2018.