India Has 8.4 Crore More Workers in Agriculture Than is Economically Feasible

Farm_Life_Village_India
One of the themes that I have often explored in my columns and discuss in detail in my book India’s Big Government, is that India has way too many people working in agriculture. Or as economists like to put it, we have huge disguised unemployment in agriculture.

A new discussion paper titled Changing Structure of Rural Economy of India Implications for Employment and Growth, authored by Ramesh Chand, SK Srivastava and Jaspal Singh, and published by the NITI Aayog, makes a few interesting points on this front.

As per this discussion paper, the rural economy in 2011-2012, formed 46.9 per cent of India’s economy, though it employed 70.9 per cent of its workforce.

Most people tend to believe that India’s rural economy is primarily concerned only with agriculture. Agriculture contributes around 12-13 per cent of the overall Indian economy.

Given that, the rural economy contributes 46.9 per cent to the overall Indian economy, it basically means that there are other areas that the rural economy is contributing to as well. And some of the findings of this discussion paper may surprise many people. Let’s look at them one by one.

1) One of the misconceptions that prevails is that rural India is totally dependent on agriculture. The discussion paper sets this right. As it points out: “Contrary to the common perception about predominance of agriculture in rural economy, about two third of rural income is now generated in non-agricultural activities.” This was clearly not the case earlier.

2) This is primarily because agriculture as a profession is nowhere as rewarding as it used to be. As the discussion paper points out: “In year 2011-12 per worker income varied from Rs. 33,937 for agricultural labour to Rs.1,71,836 for rural non-farm workers.” The ratio of rural non-farm rural income to income of agricultural labour has increased over the years, though it has fallen in the recent past.

Take a look at Figure 1. It plots the ratio of non-farm rural income to income of agricultural labour over the decades.

Figure 1: 

Take a look at Figure 2. It plots the ratio of average urban income to that of average income of an agricultural labour.

Figure 2: 

Figure 2 clearly explains why people migrate from rural areas to urban areas. As the discussion paper clearly points out: “Between 2001 and 2011, India’s urban population increased by 31.8 per cent as compared to 12.18 per cent increase in the rural population.

Over fifty per cent of the increase in urban population during this period was attributed to the rural-urban migration and re-classification of rural settlements into urban.” There is a clear economic incentive for people to move from rural areas to urban areas.

3) With two-thirds of rural income now being generated from non-agriculture activities, the rural economy as a whole when it comes to income is moving away from agriculture, but that is not true when it comes to employment. This is something that I have been talking about for a while. Indian agriculture employs way too many people in comparison to what it needs.

The discussion paper points out that in 1970-1971, agriculture formed 72.4 per cent of India’s rural economy, and employed 85.5 per cent of the rural workforce. By 2011-2012, the size of agriculture had nearly halved, and it formed 39.2 per cent of India’s rural economy, but it still employed 64.1 per cent of the rural workforce. This data points shows that agriculture continues to employ many more people than it should.

4) Having said that, there is another point that needs to be made here. While, the overall employment in agriculture given its share in the rural economy remains high, it has fallen dramatically between 2004-2005 and 2011-2012. In 2004-2005, agriculture formed 38.9 per cent of India’s rural economy, while employing 72.6 per cent of the country’s rural workforce. By 2011-2012, agriculture formed 39.2 per cent of India’s rural economy, and at the same time employed 64.1 per cent of the rural workforce.

Hence, there has been a fall in the total number of people dependent on agriculture. But is this goods news?

5) As the discussion paper points out: “Sizable occupational shifts in workforce were also observed between 2004-05 and 2011-12. Out of 33 million workers who left agriculture 27 million (81%) were female and 6 million (19%) were male. Further, outgoing workforce from agriculture comprised both cultivators and agricultural labours with their respective shares of 56 per cent and 44 per cent. It is worth mentioning that out of 27 million female workers who left agriculture, only 5 million joined non-farm sectors and rest withdrew from labour-force itself.”

So, the point is that while lesser proportion of the workforce is now dependent on agriculture than was the case in the past, many of the women who have dropped out of agriculture, have stopped working all together. Indeed, this de-feminisation of the workforce, is a very disturbing trend.

6) The takeaway from the NITI Aayog discussion paper is that in 2011-2012, agriculture employed 64 per cent of the rural workforce and produced only around 39 per cent of its economic output. In an ideal world, a sector producing 39 per cent of output, should employ 39 per cent of the workforce.

For something like this to happen, nearly 8.4 crore agricultural workers need to be shifted to sectors other than agriculture. As the discussion paper points out: “This amounted to almost 70 per cent increase in non-farm employment, which looks quite challenging.” It also amounts to around one-fourth of the rural workforce of 34.2 crore as of 2011-2012. Chances are the 8.4 crore number would have grown between 2011-2012 and now.

Over and above this, the bigger challenge is the agriculture workforce lacks skills to do anything else. As per the discussion paper: “Only 1.3 per cent of the rural workforce of the age group 15-59 years possessed technical education. Similarly, only 14.6 per cent of the rural workforce of age group 15-59 years received vocational trainings, which aim to develop competencies (knowledge, skills and attitude) of skilled or semi-skilled workers in various trades.”

These skills cannot be improved overnight and jobs be created. Hence, the fear is that the current generation of Indians still largely dependent on agriculture, are going to lose out in the process. As time goes by, this looks more and more likely.

7) One area which has added to employment is construction. Construction formed 3.5 per cent of the rural economy in 1970-1971. This increased to 10.5 per cent by 2011-2012. The share of the sector in rural employment in 1972-1973 was at 1.4 per cent. This jumped to 10.7 per cent in 2011-2012.

One area where agricultural workers can be nudged towards is construction. As the discussion paper points out: “Rural areas are characterised by poor infrastructure and civic amenities. Similarly, a large per cent of houses are in need of upgradation. These facts indicate considerable scope for growth of construction sector in rural areas.”

Over and above this, the real estate sector in urban areas can be a huge employment generator. But for that to happen, the prices need to fall, and more than a few real estate companies need to go bust.

While the role of the government in India to be able to achieve anything significant is limited, this is something where both the state governments and the central government, can have a major role to play. Road construction is one area where many jobs can be generated. This can then act as a multiplier for the services sector as well. As people earn more they are likely to spend more.

To conclude, the fact that India has way too many people employed in agriculture, is probably the country’s biggest social and economic challenge. The trouble is no one really is even talking about it, let alone working towards a solution. The first step towards solving any problem is acknowledging that it exists.

The column originally appeared in Equitymaster on Dec 13, 2017.

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Using Deposits to Rescue Banks is a Bad Idea; It Needs to Be Nipped in the Bud

Indian_ten_rupee_coin_(2008_Reverse)
I have been travelling for the past two weeks and a question that has been put to me, everywhere I have gone is: “will fixed deposits be used to rescue banks that are in trouble?

People have been getting WhatsApp forwards essentially saying that the Modi government is planning to use their bank deposits to rescue all the banks that are in trouble. As is usually the case with WhatsApp, this is not true. The truth is a lot more nuanced.

Let’s try and understand this in some detail.

Where did the idea of fixed deposits being used to rescue troubled banks come from?
The government had introduced The Financial Resolution and Deposit Insurance(FRDI) Bill, 2017, in August 2017. This Bill is currently being studied in detail by a Joint Committee of members belonging to the Lok Sabha as well as the Rajya Sabha.

The basic idea behind the FRDI Bill is essentially to set up a resolution corporation which will monitor the health of the financial firms like banks, insurance companies, mutual funds, etc., and in case of failure try and resolve them.

The Clause 52 of the FRDI Bill uses a term called “bail-in”. This clause essentially empowers the Resolution Corporation “in consultation with the appropriate regulator, if it is satisfied that it necessary to bail-in a specified service provider to absorb the losses incurred, or reasonably expected to be incurred, by the specified service provider.”

What does this mean in simple English? It basically means that financial firms or a bank on the verge of a failure can be rescued through a bail-in. Typically, the word bailout is used more often and refers to a situation where money is brought in from the outside to rescue a bank. In case of a bail-in, the rescue is carried out internally by restructuring the liabilities of the bank.

Given that banks pay an interest on their deposits, a deposit is a liability for any bank.
The Clause 52 of FRDI essentially allows the resolution corporation to cancel a liability owed by a specified service provider or to modify or change the form of a liability owed by a specified service provider.

What does this mean in simple English? Clause 52 allows the resolution corporation to cancel the repayment of various kinds of deposits. It also allows it to convert deposits into long term bonds or equity for that matter. Haircuts can also be imposed on firms to which the bank owes money. A haircut basically refers to a situation where the borrower negotiates a fresh deal and does not payback the entire amount that it owes to the creditor.

But there are conditions to this…
The bail-in will not impact any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance. This basically means that the bail-in will impact only the amount of deposits above the insured amount. As of now, in case of bank deposits, an amount of up to Rs 1 lakh is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This amount hasn’t been revised since 1993.

Typically, anyone who has deposits in a bank tends to assume that they are 100 per cent guaranteed. But that is clearly not the case. Over the years, the government has prevented the depositors from taking a hit by merging any bank which is in trouble with another bigger bank.

So, to that extent the situation post FRDI Bill is passed, is not very different from the one that prevails currently. It’s just that the government has come to the rescue every time a bank is in trouble and I don’t see any reason for that to change, given the pressure on the government when such a situation arises and the risk of the amount of bad press it would generate, if any government allowed a bank to fail.

Over and above this, Clause 55 of the FRDI Bill essentially states that “no creditor of the specified service provider is left in a worse position as a result of application of any method of resolution, than such creditor would have been in the event of its liquidation.” This basically means that no depositors after the bail-in clause is implemented should get an amount of money which is lesser than what he would have got if the firm were to be liquidated and sold lock, stock and barrel.

While, this sounds very simple in theory, it will not be so straightforward to implement this clause.

So why is the government doing this?
In late 2008 and early 2009, governments and taxpayers all over the world bailed out a whole host of financial institutions which were deemed too big to fail. In the process, they ended up creating a huge moral hazard.

As Mohamed A El-Erian writes in The Only Game in Town“[It] is the inclination to take more risk because of the perceived backing of an effective and decisive insurance mechanism.”

If governments and taxpayers keep rescuing banks what is the signal they are sending out to bank managers and borrowers? That it is okay to lend money irresponsibly given that governments and taxpayers will inevitably come to their rescue.

In order to correct for this moral hazard, in November 2008, the G20, of which India is a member, expanded the Financial Stability Forum and created the Financial Stability Board. The Board came up with a proposal titled “Key Attributes of Effective Resolution Regimes for Financial Institutions”. This proposal suggests to “carry out bail-in within resolution as a means to achieve or help achieve continuity of essential functions”. India has endorsed this proposal. Hence, unlike what WhatsApp forwards have been claiming this proposal has been in the works for a while now.

But does this really prevent moral hazard?
A bulk of the banking sector in India is controlled by the government owned public sector banks. As of September 30, 2017, these banks had a bad loans rate of 12.6 per cent (for private banks it is at 4.3 per cent).  Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. The bad loans rate when it comes to lending to industry is even higher. In case of some banks it is close to 40 per cent.

This is primarily because banks over the years, under pressure from politicians and bureaucrats, lent a lot of money to crony capitalists, who either siphoned off this money or overborrowed and are now not in a position to repay. This is a risk that remains unless until the banking sector continues to primarily remain government owned in India.

Also, the rate of recovery of bad loans of banks in 2015-2016, stood at 10.3 per cent.  This does not inspire much confidence. In this scenario, having a clause which allows the resolution corporation to get depositors to pay for the losses that banks incur, is really not fair. The moral hazard does not really go away. The bankers, politicians and crony capitalists, can now look at bank deposits to rescue banks. As of now, the government and the taxpayers have kept rescuing public sector banks, by infusing more and more capital into them. Now the depositors can take over, if FRDI Bill becomes an Act.

It is worth pointing out here that the other G20 countries which have supported this proposal have some sort of a social security system in place, which India lacks. Given this, deposits are the major form of savings and earnings for India’s senior citizens and clearly, they don’t deserve to be a part of any such risk.

While, any government will think twice before using depositor money to rescue a bank, this is not an option that should be made available to governments or bureaucrats in India. It is a bad idea. It needs to be nipped in the bud.

These are my initial thoughts on the issue. Depending on how the situation evolves, I will continue to write on it.

The column originally appeared on Equitymaster on December 11, 2017.

The Javed Akhtar Syndrome in Real Estate

Javed_Aktar_2010

Poets usually write poems on love, breakups, betrayal, friendships, alcohol, the women serving alcohol, the world at large, politics and so on. But very rarely does a poet write a poem or a couplet on the unaffordability of real estate in India. But Javed Akhtar has done that:

sab kā ḳhushī se fāsla ek qadam hai.
har ghar meñ bas 
ek hī kamra kam hai

A loose translation of this in English would be as follows: “Everyone is just one step away from happiness; Every house has just one room less”.

Given the fact that Akhtar has spent a large part of his adult life in Mumbai, the above couplet reflects or rather captures the sensibilities of the city that never sleeps, very beautifully.

Dear Reader, you must be wondering, why am I talking about a couplet written by Javed Akhtar on a rather muggy Tuesday in Mumbai. Allow me to explain.

Over the weekend, I met a friend who wants to sell his one-room-kitchen (a very Mumbai thing) apartment and buy a one-bedroom-hall-kitchen (one BHK) apartment. Basically, he feels his current apartment has one room less and he wants an apartment which has one room more than his current one.

Of course, the transaction cannot be carried out, unless he is able to sell his current apartment. The money generated from that will partly be used to pay off the current home loan. The new apartment will be bought with whatever remains after selling off the current apartment and repaying the home loan; along with this a fresh larger home loan will have to be taken. Over and above this, some financial savings accumulated through investing in mutual funds through the SIP route, will also have to be used.

My friend had bought the apartment for Rs 50 lakh, nearly three years back. He is looking at a price of at least Rs 60 lakh. In fact, more than looking, he is specifically anchored on to that price and won’t sell for anything less than that price.

As Garly Belsky and Thomas Gilovich write in Why Smart People Make Big Money Mistakes and How to Correct Them: “Anchoring is really just a metaphoric term to explain the tendency we all have of latching on to an idea or fact and using it as a reference point for future decisions. Anchoring can be particularly powerful because you often have no idea that such a phenomenon is affecting you.”

This is not the first time I am discussing the phenomena of anchoring in real estate, nevertheless, this example is interesting and different, because anchoring, as we shall see, is happening at multiple levels.

My friend is anchored on to a price of Rs 60 lakh because he feels that at that price he will be in a situation of no-profit no-loss, while selling his current apartment. The extra Rs 10 lakh, over and above the price he bought the apartment for, should take care of the home loan EMIs and the maintenance charges paid, over the last three years. This is his logic for being anchored on to a price of Rs 60 lakh.

The trouble is that at that the few buyers who have approached him do not want to pay more than Rs 55 lakh, while my friend remains stuck on the Rs 60 lakh figure.

In this case, the transaction is what we can call a relative transaction. The money that my friend gets for selling the current apartment will be used to buy a bigger apartment in the same locality that he lives in.

If he waits too long to get a price of Rs 60 lakh, chances are that the price of the bigger apartment that he wants to buy will also go up. Currently, the bigger apartment is available for a price of around Rs 80 lakh.

I tried explaining this point to him without much success. In fact, after I explained this point to him, my friend told me that he had a buyer who was willing to pay Rs 60 lakh. The trouble was that this prospective buyer needed to sell an apartment in another city to be able to raise the amount.

This buyer, because my friend had become anchored to a price of Rs 60 lakh, was also anchored to that price. Given that he was a senior citizen, he was not in a position to raise a home loan. Hence, he needed someone to pay Rs 60 lakh for his flat to be able to purchase my friend’s flat.

No one was willing to pay Rs 60 lakh for the flat. In this case, the prospective buyers were willing to pay anything in the range of Rs 55-60 lakh. But that was clearly not enough. And given this, the sale of both the flats remained stuck.

This example clearly shows as to how anchoring works at multiple level and not just at one level, as is often believed. This anchoring essentially stops the market from working. The more general conclusion from this example would be that anchoring working at multiple levels, is one of the reasons why the buying and selling of real estate has slowed down majorly.

The sellers (not necessarily the builders) are still expecting prices that their homes were worth until a few years back. But the buyers, who have paid more than their fair share over the years, are currently not willing to pay the price that the sellers want.

Ultimately, this anchoring on to a specific price will break down. It’s just that it won’t happen overnight and will take some time.

Until then writers like me will have enough masala to keep writing on real estate.

Keep watching this space!

The column originally appeared on Equitymaster on November 14, 2017.

The Govt Can’t Do Much, If Restaurants Don’t Pass on Benefits of Lower GST

Dear Reader,

If you are on WhatsApp, I am sure you would have got a forward by now, which basically shows that eating out at a restaurant hasn’t become cheap, after the Goods and Services Tax (GST) was cut to 5 per cent.

In fact, there has been a lot of hungama (for the lack of a better word) around this issue, with people demanding that the government take action against the restaurants. Let’s try and understand this issue in detail.

The GST on restaurant bills was recently cut to 5 per cent. Earlier it was 18 per cent or 12 per cent depending on whether the restaurant was air-conditioned or not. Hence, the expectation was that the cost of eating out will come down, with the rate of tax being slashed. Nevertheless, nothing of that sort has happened in many cases. Hence, people have taken to WhatsApp, Twitter and Facebook to highlight this issue.

Before going further, it is important to understand that there is one basic difference between the new GST rate and the earlier GST rates of eating in a restaurant.

The new rate is a flat tax of 5 per cent (and that makes me wonder as to why is it still called GST). This means that no input tax credit is allowed. In case of earlier rates, the tax was a value added tax i.e. input tax credit was allowed. This basically meant that restaurants could claim a set off for the goods and services tax they had paid on their inputs. The inputs in this could be tax paid on dairy products, meat, vegetables etc.

But input tax credit is not allowed now. Hence, the new 5 per cent GST is not a value added tax. It’s just another tax.

Now with the input tax credit not allowed, some restaurants are claiming that the cost of running their business has gone up. This has meant that the pre-GST price of the food products they sell, needs to go up, and in the process, there is not much of a difference in the end price that the consumer is paying for the food products.

McDonald’s India says that with the input tax credit being withdrawn their operating costs have gone up by 10-12 percent. And after taking this increase in cost into account, the effective tax benefit due the lower tax rate of 5 per cent, “would have been less than a per cent.” As the Business Today magazine puts it: “A few restaurant owners… pegged a spike between 7 per cent and 10 per cent in costs.”

The fact that input tax credit is no longer available, hence, there can’t be much of a difference in the final price paid by the consumer now, as against earlier, is a perfectly valid argument to offer, on parts of the restaurants.

This hasn’t gone down well with many people and they have taken to the social media urging the government to take action. They are not convinced about the validity of the input tax credit argument. They feel that this is just an excuse on part of restaurants not to cut prices and increase their profitability. Hence, the government needs to investigate and take action.

The trouble is that the capacity of the Indian government to do anything is fairly limited, let alone going around investigating so many restaurants. Also, it has other more important things to do. Given this, it is not in a position to check the books of accounts of the large number of restaurants. And more than that, it should not even try to entertain any thought of doing this.

What I am saying is that if a restaurant chooses not to decrease price now, it can always offer this explanation of lack of availability of input tax credit, and there is no way to contest the explanation. The government cannot go into the accounts of each and every restaurant in the country in order to establish whether the explanation holds in their case or not. Of course, many restaurants obviously will look at this as an opportunity to make more money and which is precisely what they will do. There is no denying that.

So, what is the solution to this? If you as a consumer feel a restaurant is expensive simply don’t go there. If enough people do that the restaurant will automatically have to cut prices. If people continue going, then the higher price doesn’t really matter to them and they shouldn’t be really complaining.

Also, these are the unseen effects of starting with high tax rates. The trouble with bad economic policy (while GST is not bad policy per se, but its implementation clearly is) is that its ill effects are not always clear from the very beginning. This is now starting to come out in case of GST.

The column originally appeared on Equitymaster on November 20, 2017.

Of Falling Real Estate Prices, Dr Arvind Panagariya and the Art of Continuing to Suck Up

220px-Arvind_Panagariya

Dr Arvind Panagariya, the former vice-chairman of the Niti Aayog, today in a column titled Demonetisation: Evaluating the Critics, in the Business Standard, writes: “The second avenue through which demonetisation has directly expunged unaccounted wealth is real estate…Unsurprisingly, an attack on unaccounted cash struck at the heart of this black wealth by cutting real estate prices by a quarter.”

There are multiple questions that this statement raises:

1) What is the source for this data? This isn’t exactly a conversation between two property dealers, or two prospective real estate buyers, who can quote any offhand numbers, while having a conversation. This is a statement being made by someone who was at the top of an economic institution run by the Indian government. This is a statement by an economist working in a top university in the United States.

Also, if real estate prices have fallen by 25 per cent after demonetisation, why isn’t this visible in official data sources. Take the case of Reserve Bank of India’s All India House Price Index, which has been plotted as Figure 1.

Figure 1: 

Figure 1 clearly shows that housing prices across the country have been on their way up. There has “clearly” been no dip, as Dr Panagariya claims. How do things look if we plot one-year return instead of index values? Let’s take a look at Figure 2, which does that.

Figure 2: 

Figure 2 tells us clearly that the one-year return in real estate has been falling over the last six and a half years. This trend started much before demonetisation took place. Also, how have the returns been post demonetisation? Between the end of December 2016 and June 2017 (the latest data available), real estate prices as per the All India House Price Index have gone up by 4.3 per cent. The returns between September 2016 and June 2017, have been 6.9 per cent.

Other than RBI’s All India House Price Index, there is NHB’s Residex. As of now this index has data only up to March 2017. And the one year median return between March 2016 and March 2017, as per this index, across 49 cities, was 2.8 per cent. This is very low. But where is the 25 per cent fall that Dr Panagariya has written about?

2) For a moment let’s assume that Dr Panagariya is right and real estate prices have fallen by 25 per cent. If real estate price all across the country have fallen by 25 per cent on an average, then there will be cities/town/localities where the price has fallen by more than 25 per cent. Which are these places? Can Dr Panagariya provide us with a list? This would make for a super investment right now.

Let’s say there is this town where real estate prices have fallen by 50 per cent post demonetisation. It is worth remembering that a 50 per cent loss wipes off a 100 per gain. (If the price of an asset moves from Rs 50 to Rs 100 that makes for a 100 per cent gain. When it falls back to Rs 50 that is a 50 per cent loss). If there exists such a town, it would make for a great real estate investment right now. Can Dr Panagariya provide us with names of a few such places?

3) Also, if prices have fallen by 25 per cent, why are real estate transactions not happening? Why has the total number of unsold homes of real estate companies, only continued to grow? It is worth remembering here that a 25 per cent fall within a time period of a year, is a huge fall. Falls like these in case of real estate, only happen once in a few decades. And if something like this has happened, as Dr Panagariya claims, then why aren’t people buying? Interest rates on home loans have also fallen post demonetisation.

Take a look at Figure 3. It plots the growth in home loans outstanding with banks.

Figure 3: 

Figure 3 clearly shows that the growth in home loans outstanding has fallen post demonetisation. What this means is that people are not buying as many homes as they were in the past. If prices have fallen by 25 per cent post demonetisation, people would have bought homes and the curve in Figure 3 would slope upwards i.e. people would take on more and more home loans to buy homes.

4) Further, if real estate prices have fallen by 25 per cent, as claimed by Dr Panagariya, it is time that the state governments cut the ready reckoner rates on which stamp duty needs to be paid, by a similar proportion. This should be fairly easy given that BJP governments govern most of the big states across India and a direction from the PMO should be suffice to get them to do the needful. But nothing of that sort has happened. Why hasn’t this been done till date, is a question that only Dr Panagariya can answer.

5) To conclude, it is safe to say that Dr Panagariya has just made up this data, in order to justify demonetisation. It’s a sad day today, when an Indian economist, working in one of the best American universities has had to fudge data in order to please his former political bosses.

The irony is that Dr Panagariya is no longer a part of the government. And he doesn’t really need to say things which do not hold up against data, unless, he is looking for another stint with the Modi government. That changes things.

The column originally appeared on November 13, 2017.

The Real Brave-hearts are Those Who Still Have Deposits in IDBI Bank

IDBI-Bank-Careers-Mumbai-3
IDBI Bank is the worst performing public sector bank when it comes to its gross non-performing advances or bad loans. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more.

As on September 30, 2017, the bad loans rate of the bank stood at 24.98 per cent. This basically means that the borrowers have defaulted on nearly one-fourth of the loans given by the bank. Now take a look at Figure 1. It plots the bad loans of IDBI Bank over the last three years.

Figure 1: 

The bad loans rate of IDBI Bank has jumped from around 5 per cent to around 25 per cent, over a period of just three years. What is happening here? What this tells us is that initially the bank did not recognise bad loans as bad loans. It probably did that by restructuring loans (i.e. giving the borrowers more time to repay or decreasing their interest rate or by simply postponing their repayment) or by issuing fresh loans to borrowers in a weak position, so that they could repay the loans that were maturing. In the process, the recognition of bad loans as bad loans was avoided.

Of course, any bank can’t perpetually keep kicking the can down the road, and after a point of time must do the right thing. IDBI Bank is now doing the right thing of recognising bad loans as bad loans and given this it has such a high bad loans rate. Given that, one-fourth of the loans advanced by the bank have been defaulted on, it is worth asking whether this bank should be in the business of banking at all.

Nevertheless, the more important issue here is how do depositors view this bank. The best way to find this out is to look at the total amount of deposits the bank still has. Take a look at Figure 2, which plots that.

Figure 2: 

What does Figure 2 tell us? The total deposits of the bank have fallen after peaking in December 2016. Nevertheless, the total deposits with IDBI Bank are still higher than they were three years back. Hence, the conclusion that we can draw here is that while bad loans of the bank have gone up from 5 per cent to 25 per cent over a period of three years, the total deposits with the bank are still at the level they were.

Why is this the case? Why would you continue banking with such a bank? First and foremost, this faith comes from the great faith in the government. The government will not allow any bank to go bust. Fair enough. But why wait for that to happen? Typically, when a bank lands up in major trouble, the government tends to merge it with a bigger bank and thus the depositors continue to be safe. Nevertheless, such a merger is never smooth and there might be a brief time period when the full money deposited in the bank cannot be withdrawn. Hence, liquidity can become an issue.

Also, it is worth remembering here that IDBI Bank is not a small bank. It is a relatively big bank and had total assets of close to Rs 3,61,768 crore, as on March 31, 2017. This means that if the government were to decide to merge it with another bank, the balance sheet and the profit and loss account of the combined entity, will be another big mess.

Secondly, many people are simply unaware of how badly the bank is placed. This lack of knowledge about their financial activities is a general trend among many people in this country. We spend more time gossiping and worrying about the state of the nation, than the state of our own finances.

Thirdly, many people locked in their fixed deposits at high interest rates, a few years back. In the aftermath of demonetisation, interest rates have crashed as banks have been flush with funds that were deposited and at the same time their lending has crashed. Given this, even if some individuals understand the riskiness of the situation, they really can’t do much about it. In case they were to break their fixed deposits and move it to other banks, they would earn a much lower rate of interest.

And at that lower rate of interest, they would simply not be in a situation to meet their monthly expenses. This is another negative impact of demonetisation at play, with people having to continue to bank with risky public sector banks, which includes IDBI Bank.

While, some people are simply stuck with IDBI Bank, there are others who can easily move their money to other public sector banks, like State Bank of India, Vijaya Bank, Indian Bank, Syndicate Bank etc., which are in a comparatively much better position.

But given that they have chosen not to, they are the real brave-hearts.

The column originally appeared on November 6, 2017.

Will Narendra Modi Win 2019?

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.

I am writing this on Sunday, October 22, 2017. The prime minister Narendra Modi will visit Gujarat the third time this month. In the runup to the state assembly elections, he will inaugurate and lay the foundation stones to a number of projects.

The prime minister’s multiple visits to Gujarat have led to the question—is the BJP on a weak wicket in Gujarat? A strong anti-Bhartiya Janata Party (BJP) front seems to be emerging in the state. The leader of the other backward classes(OBCs) Alpesh Thakor is expected to join the Congress on October 23, 2017. Hardik Patel, the leader of the Patidar Patels, through his tweets seems to have indicated his preference for the Congress, though some of his aides have joined the BJP. Also, Patel currently is not old enough to fight elections.

On the flip side, Gujarat (unlike many other Indian states) has always been a two-horse race between the BJP and the Congress. And in this race, the Congress has gone nowhere in the recent decades. It’s vote share has moved between 33-38 per cent of the votes polled and hence, India’s grand old party has not managed to displace the BJP. The extra 5 per cent vote that the Congress would need to give tough competition to the BJP, have never really come.

How will things turn out this time around? Honestly, I am not a political analyst and don’t know the answer to this. But what I do know is that the BJP has built a formidable election management system under its president, Amit Shah.

Prashant Jha in his new book How the BJP Wins—Inside India’s Greatest Election Machine describes this election management system in detail. And after reading this book I can say with reasonable confidence that displacing BJP at the state level (in the various assembly elections scheduled up to 2019) and in the Lok Sabha elections scheduled in 2019, will be no cakewalk.

This, despite the fact, that the Modi government has managed to screw up the economy big time through the disastrous decision to demonetise Rs 500 and Rs 1,000 notes, and a terrible implementation of the Goods and Services Tax.

I will not get into the details of the election management system of the BJP that Jha writes about in his book, given that a single Letter cannot do justice to it. Hence, dear reader, if you do have the time and the inclination, do check out the book.

Nevertheless, in this Letter I will talk about the factors that go in favour of the BJP and Modi, and the factors that go against them, when they fight an election in the days to come and this includes the Lok Sabha elections of 2019. Let’s look at these factors one by one.

1) Let’s start with the performance on the economic front. The promised acche din are nowhere in sight. In fact, the informal part of the economy which forms around 40 per cent of the GDP and employs more than three-fourths of the labour force, has collapsed. Economic growth has collapsed from more than 9 per cent to now less than six per cent. As far as the non-government part of the economy is concerned, which forms close to 90 per cent of the economy, it is now growing at just 4.3 per cent. So, there clearly are issues on the economic front. Having said that the government has time up until 2019 to set it right.

2) Also, more importantly does economic performance of the nation, really matter to the core supporters of Modi and the BJP. Or are they simply happy with the stand that the government is taking on the Ram temple in Ayodhya and all the rhetoric that surrounds the protection of the cow.

This will be a really important factor in any election. It remains difficult to figure out to what portion of the voters are these issues important. Not surprisingly, a narrative is already being built around these issues, for the core support base. And as May 2019 approaches, things could get murkier on this front.

As Evan Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About It: “Like-minded groups of individuals share a narrative about many things… These narratives are sometimes true, sometimes not, but they are often like stereotypes… Once embedded in our minds though, they can easily gain excessive traction and trample over truth as willing believers put too much weight on propositions that conform to their narrative without looking for evidence in support of them.

3) Further, it is worth asking whether voters vote based on the economic policy being practiced by the government. As Davis writes: [The] argument that who you are matters more than the substantive point you are making is especially true about politicians. Voters focus on character rather than policy partly because they are better able to judge character and are relatively uninformed on policy… So, for a politician, having a good reputation is worth a hundred quick victories in specific arguments.”

Modi’s personal brand still remains strong, though it may have been battered a bit. Over and above this, his brand will always be compared to those he is competing against and on that Modi wins hands down.

4) Expanding on the third point, the question is who will be the leader of the opposition parties. Will it be Rahul Gandhi? Or will it be a leader like Mamata Banerjee? As Jha writes in How the BJP Wins: “Will Rahul Gandhi accept a regional leader? Will a powerful regional leader like Mamata Banerjee accept a Rahul Gandhi?

It will be imperative for the united opposition (if anything like that emerges) to have a consensus candidate and fight their elections under him, because a presidential style contest is likely to emerge, in the fight against Modi.

5) Other than choosing the right candidate, the opposition parties will have to build a credible narrative around him and what they have to offer. The narrative will be necessary to expand the core base. Just saying that we are there to displace Modi is unlikely to work. As Jha writes: “If ‘remove Modi’ is the only message, and the glue that binds them together, then they have a problem. Modi will project it, much like Indira Gandhi did, as a battle between him – a man committed to removing India’s poverty, man committed to India’s vikas – against a conglomeration of small, scattered, disparate units – united only by their hatred for him.”

6) Also, do these parties have the organisational muscle to take on the organisational muscle of the BJP and the Rashtriya Swayemsevak Sangh (RSS). The BJP always had access to the organisational muscle of the RSS, but the Sangh in the past, has not always deployed those resources totally, to help the BJP. That has changed now because of the personal relationship that Modi shares with the Sangh boss Mohan Bhagwat.
Narendra Modi was practically brought up in the RSS. And as Jha writes: “To top it all, Modi’s mentor in the Sangh happened to be Bhagwat’s father.” How do you tackle an equation like this?

7) In many states, like Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh and Karnataka, any election will be a direct contest between the Congress and the BJP. Does the                Congress have the organisational strength to take on BJP and the RSS?

The bigger problem for the Congress is that it does not have full time politicians at the top. Narendra Modi and Amit Shah are full time politicians. They don’t have any other interests in life. The same cannot be said about the Congress leadership. Whatever people might say about the recent revival of Rahul Gandhi, he just doesn’t inspire enough confidence. I am just waiting for him to take his next holiday at a point of time, when he should be in the country.

The Congress Party for the last many years has always been led by a Gandhi. The Gandhis brought in the votes. But now that is no longer the case. So, the question that is being asked can a non-Gandhi lead the Congress. For a moment, let’s assume that the Gandhis take a backseat. Will the other leaders of the Congress be ready to work under the leadership of a non-Gandhi? I don’t think so. Without, the Gandhis at the top, the glue that holds the party together, the party is likely to break up and if not that the factionalism is bound to increase dramatically.

8) A big advantage that the Modi government has, and which the opposition doesn’t, is that it can use the official machinery in its favour. Recently, the Election Commission announced the election dates for the assembly elections in Himachal Pradesh, but did not do so for the assembly elections in Gujarat and offered a very flimsy reason for it. This gave Modi and the BJP more time to launch more new projects in the state and offer more sops to the voters, something they wouldn’t have been able to do, if the election dates would have been announced.

Over and above this, the government (like the previous governments) can continue using taxpayers’ money to keep building their brand. They can also announce waive offs closer to the election date. I have a feeling that sometime in late 2018, early 2019, a big Mudra loan waive off is on its way. More than 9 crore Mudra loans have been distributed till date. And any waive off of these loans, will give a huge push to the electoral chances of the BJP in 2010, given that it will impact 45 crore individuals in total (assuming a family of 5 per household) are likely to be impacted by the move.

9) Up until now, I have offered reasons which go for the BJP. Now that doesn’t mean that all is well with the BJP. The section of the population is clearly not happy with the economy not doing well. A million youth are entering the workforce every month and the job scene continues to remain bad. The trouble is that the government is simply unwilling to recognise this problem and keeps talking about self-employment opportunities that it has created. These claims are rarely based on any data. The problem with trying to be too clever all the time is that ultimately you get found out. This something that the BJP leaders need to seriously think about.

So, it remains to be seen whether this issue emerges as a strong political issue. It further remains to be seen whether the opposition parties are able to tap into the frustration of the youth who are entering the workforce and not been able to find decent jobs.
Many land owning communities like Marathas, Jats, Patidar Patels and Kapus, have launched protests in the recent past, demanding reservations in government jobs. This remains a tricky issue to handle.

10) In states like Uttar Pradesh, where the BJP has done well, it has built a broad coalition of castes. In Uttar Pradesh, along with the support of upper castes, the BJP was able to reach out to backwards particularly those who did not like the rise of the Yadavs under the previous regime, and the Dalits, particularly those who did not like the rise of the Jatavs under Mayawati. The trouble is that the any government has only so many resources to share and distribute.

As Jha writes: “Caste groups end up competing with each other for state patronage, resources, access to power. There are limited opportunities available and so certain caste groups and, within the caste groups, certain individuals end up cornering more than their share of positions… A road is constructed or schemes are more effectively implemented depending on whether the constituents of that village are supporters of the regime in power. Given weak institutions, access to political power often determines if a person of a specific caste has access to the local police station.”

If sabka saath sabka vikaas has to become a reality, then the current governance structures will have to be changed. Local police officials need to respond to various complaints, irrespective of the caste of the individual making the complaint.  This remains very difficult to implement.

Already, in Uttar Pradesh there are accusations of Thakurs, the caste to which chief minister Yogi Adityanath belongs to, taking over the police administration.

11) For a very long time, the BJP was a party supported by the upper castes and the business castes. Under Modi and Shah, the support base of the party has expanded and includes a large section of the poor as well. While, this has benefitted the party tremendously, the party organisation hasn’t changed to reflect this new reality. As a top BJP leader told Jha: “The party organisation has still not transformed itself. At the moment the party’s character and the PM’s support base may slowly diverge. You cannot have an SUV driving rich contractor as your district president if your target is the poor voter.”
This can lead to a situation where the party’s political messaging is neither here nor there.

To conclude, these are the factors which will matter in the runup to the 2019 elections. While, BJP is on weaker wicket in comparison to 2014, a small industry seems to have emerged in writing off the electoral chances of BJP in 2019, on the basis of a few recent losses in assembly, Lok Sabha, and a few other smallish elections. But they are really jumping the gun, on the basis of very little evidence.

The BJP’s election machinery is very strong, and it will take on these defeats in its stride.

The column was originally published in Equitymaster on Nov 1, 2017.