Do Numbers Always Tell the Truth?

Nirav_Modi

The writer Gregg Easterbrook once said: “Torture numbers, and they’ll confess to anything.” Allow me to explain with an example, on how numbers can be used to muddle the truth.

Nirav Fraud has defrauded the Punjab National Bank of Rs 12,645.97 crore. This is the loan amount that the diamond merchant has defaulted on. On its own the number sounds like a pretty big number, which it is.

But now let me show, how even a number as big as this, can be made to look small, by someone who is looking to muddle the truth.

The question is how big is Nirav Modi’s fraud vis a vis the accumulated bad loans of Punjab National Bank. His fraud is ultimately going to add to the bad loans of the bank.

Bad loans are loans where the borrower has stopped repaying for 90 days or more. The accumulated bad loans of Punjab National Bank stood at Rs 57,519 crore as on December 31, 2017.

Hence, Nirav Modi’s default will add around 22% more to the bad loans number of Punjab National Bank. At this level, the default still seems big. Let’s go a little further.
Now let’s take a look at the bad loans of all banks (i.e. public sector banks + private banks + foreign banks). This stands at around Rs 9,00,000 crore, as on December 31, 2017. Nirav Modi’s default amounts to just 1.4%, which is very small in the overall scheme of things. A big default number now suddenly seems very small.

Let’s look at this in one final way. The average size of a fraud in the case of Indian banking, where the borrower willfully defaulted, was around Rs 3 crore, between 2012-2013 and 2016-2017, a period of five years. In case of Punjab National Bank, the average size of a fraud amounted to Rs 9.6 crore.

When we compare Nirav Modi’s fraud with these figures, we realise how big his fraud is, in the context of borrowing frauds. And this is how Nirav Modi’s fraud needed to be looked at and which is how, thankfully, it is being looked at.

The context is the most important point when trying to make sense of a number. The good thing is that nobody tried to muddle the truth in this case, and it was clear from day one that Nirav Modi’s fraud was a big fraud, from day one. But that is not always the case.

Few years back, in the days after Nirbhaya was battling for her life, I remember reading a news item which suggested that Sweden had one of the highest incidences of rape in the world. The Indian scenario was much better, the newsreport suggested.

Of course, the newsreport totally missed out on the context and muddled the truth. As Hector Macdonald writes in Truth—How the Many Sides to Every Story Shape Our Reality: “Sweden is said to have the second highest incidence of rape in the world, with more than 60 cases reported per 100,000 inhabitants each year (the rate for India is 2 per 100,000). Yet this reflects not only Sweden’s better reporting of sexual crime but also a broader definition of rape.” In India, other than fewer rape victims coming out in the open, the system also works to protect the rapists in many cases.

Or take the case of rates of kidnapping. As Macdonald writes: “Canada and Australia have the highest rates of kidnapping in the world. Really, it’s true. Not because they are more dangerous than Mexico and Colombia but because their governments include parental disputes over child custody in kidnapping statistics.”

The broader point here is that before believing a number, it is important to look at the overall context in which it is being used. As Macdonald writes: “When someone tries to persuade you that a number is especially significant, the first thing to do is to translate it into a more revealing truth that incorporates relevant context.”

Now that of course is, easier said, than done.

The column originally appeared in Bangalore Mirror and Mumbai Mirror on April 11, 2018.

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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

rupee
“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.

Indians, Be Prepared! Petrol-Diesel Prices Are Likely to Stay High

light-diesel-oil-250x250

The price of petrol in India is at a four-year high. The price of diesel is at an all time.  And from the looks of it, petrol/diesel prices are unlikely to go down any time soon.

Narendra Modi took over as the prime minister of India in May 2014. The average price of the Indian basket of crude oil during the course of the month was $106.85 per barrel. Petrol was sold at Rs 80 per litre in Mumbai and Rs 71.41 per litre in Delhi. Diesel was being sold at Rs 65.21 per litre and Rs 56.71 per litre respectively, in the two cities.

Cut to March 2018. The average price of the Indian basket of crude oil is much lower at $63.80 per barrel. Petrol, as on April 3, 2018, is being sold at Rs 81.84 per litre in Mumbai and Rs 73.99 per litre in Delhi. Diesel is being sold at Rs 69.06 per litre and Rs 64.86 per litre, respectively, in the two cities.

The average price of crude oil in March 2018 was 40.3% lower than it was in May 2014. But the price of petrol and diesel, which are products made out of oil, is higher now than it was in May 2014.

What explains this? One reason lies in the fact that the rupee has depreciated against the dollar. One dollar was worth around Rs 58-59 in May 2014. In March 2018, it is worth Rs 64-65.

This basically means that Indian importers of oil have to pay more in terms of rupees for the dollars that they need, to buy oil. Hence, to that extent petrol and diesel will be costlier. But this still does not explain.

At Rs 59 to a dollar, one barrel of the Indian basket of crude oil would have cost around Rs 6,304 in May 2014. At Rs 65 to a dollar, one barrel of oil would have cost around Rs 4,147 per barrel in March 2018. Even after adjusting for the depreciation of the rupee against the dollar, oil was around 34.2% cheaper in March 2018 in comparison to May 2014.

So, what explains the fact that petrol and diesel are now costlier than they were when Modi first came to power?

The retail price of petrol and diesel, constitutes taxes collected by the central government, the respective state government where they are being sold, as well as the dealer commission.

Let’s consider the situation in Delhi in May 2014. The retail selling price of one litre of petrol as mentioned above was Rs 71.41 per litre. The price before dealer commission and taxes was Rs 47.12. This meant that Rs 24.29 per litre was collected as dealer commission and taxes. Of this, Rs 2 made for the dealer commission. Rs 10.39 was the tax collected by the central government. Rs 11.9 was the tax collected by the state government. The dealer commission and taxes constituted 34% of the retail selling price of petrol.

Now let’s cut to March 2018. The retail selling price of petrol as on March 19, 2018, in Delhi, was Rs 72.19 per litre (this is the latest data available). The price before dealer commission and taxes worked out to Rs 33.78 per litre. This basically means that Rs 38.41 per litre was collected as dealer commission and taxes. Of this Rs 3.58 was the dealer commission. Rs 19.48 was the tax collected by the central government and Rs 15.35 was the tax collected by the state government. The dealer commission and taxes constituted for around 53% of the retail selling price of petrol.

Basically, between May 2014 and now, the dealer commission and taxes in total have gone up by 58.1% (in Delhi). A similar dynamic has played out in other parts of the country as well. The same logic holds for diesel as well. In fact, dealer commission and taxes made up for 21.5% of the diesel price in Delhi, in May 2014. As on March 19, 2018, it made up for 43.2% of the retail selling price.

What has happened here? The central government and the state government, since 2014, have captured a bulk of the fall in the price of oil, by increasing taxes on petrol and diesel. While the average price of the Indian basket of crude oil was $106.85 per barrel in May 2014, it had fallen to as low as $28.08 per barrel in January 2016. A commiserate fall in petrol and diesel prices did not happen.

One of the major policy decisions of the Modi government when it first came to power was to increase the excise duty on petrol and diesel. Along similar lines, the state governments also quietly raised taxes on petrol and diesel.

In an ideal world, when the consumer did not receive the full benefit of falling oil prices, he should at least be protected a little from high prices of petrol and diesel. But that is unlikely to happen, given that the central government is not making as much money through the Goods and Services Tax (GST), as it expected to.

How is the GST linked to this?

For 2018-2019, the government expects to collect Rs 6,03,900 crore as central GST. This amounts to Rs 50,325 crore per month, on an average. In the month of March 2018, when the collections for February 2018 were made, the central GST collected amounted to Rs 27,085 crore (Rs 14,945 crore  was collected as central GST + Rs 12,140 crore was the central government’s share in the integrated GST). This is way lower than what the government has projected in the annual budget.

Unless, central GST numbers improve, the total revenue collected by the government will be under pressure in 2018-2019.

In this scenario, when the government is already under pressure on the revenue front, it is highly unlikely to decrease taxes on petrol and diesel, and help the end consumer. If it does so, there will other costs that will have to be paid for, right from a rising fiscal deficit to a higher interest rate.

As far as the international price of oil is concerned, there are way too many factors influencing it at any point of time, to make a reasonable prediction about it. Having said that, one factor that needs to be kept in mind is the up-coming initial public offering (IPO) of Saudi Aramco, the biggest oil company in the world.

The IPO is being billed as the biggest IPO in the world and is likely to unveiled by the end of June 2018, newsreports suggests.

In this scenario, it is highly unlikely that Saudi Arabia will allow the price of oil to fall from these levels, until the IPO is pushed through. The Indian basket of crude oil has seen a largely upward trend since June 2017.

Long story short, Indians need to be prepared for a period of high petrol and diesel prices.

The column originally appeared in the Quint on April 3, 2018.

India’s Banking is Getting Privatised Without the Govt

Indian_ten_rupee_coin_(2008_Reverse)
“Should public sector banks be privatised?” is a question that is being thoroughly debated these days. Arguments have been offered from both sides.

Those against the idea of public sector banks being privatised like to say that private sector banks also make bad lending decisions and end up with bad loans. Of course, that is true. In the business of banking, some loans are bound to go bad. A bad loan is essentially a loan on which  the repayment has not been made for 90 days or more.

Nevertheless, the more important point is what proportion of the loans have gone bad. As of March 31, 2017, the total bad loans of public sector banks stood at Rs 6,41,057 crore. In comparison, the total bad loans of private sector banks stood at Rs 73,842 crore.
Hence, the bad loans of private sector banks amounted to around 11.5% of bad loans of public sector banks. But just looking at bad loans in isolation isn’t really the correct way.
We also need to look at the total advances or loans of these banks.

As of March 31, 2017, the total advances of public sector banks stood at Rs 55,57,232 crore. The total advances of private sector banks stood at Rs 22,19,563 crore, or around 40% of advances of public sector banks.

If the private sector banks were doing as badly as public sector banks on the bad loans front, there bad loans should also have been around 40% of the total bad loans of public sector banks. But that as we saw is clearly not the case. The bad loans of private sector banks are at 11.5% of the bad loans of public sector banks.

This basically means that the private sector banks operate much more efficiently than public sector banks. Hence, the argument that public sector banks should not be privatised because private sector banks also accumulate bad loans, doesn’t really hold.

But that isn’t the major point that I wanted to make in this column. What people who suggest that public sector banks should not be privatised do not realise is that the banking sector in India is getting privatised on its own, even though the government continues to own 21 public sector banks. Take a look at Table 1.

Table 1:

Total advances As on March 31 Public Sector Banks Private Sector Banks Ratio (Total advances by private sector banks to total advances by public sector banks) (in %)
2012 38,77,307.31 9,66,402.95 24.92%
2013 44,72,844.65 11,43,248.58 25.56%
2014 51,01,053.95 13,42,934.61 26.33%
2015 54,76,249.54 15,84,311.86 28.93%
2016 55,93,576.78 19,39,339.43 34.67%
2017 55,57,231.63 22,19,563.01 39.94%

Source: Author calculations based on data from Indian Banks’ Association

 

Now what does Table 1 tell us? As on March 31, 2012, the total advances of private sector banks were around a fourth of the total advances of public sector banks. By March 31, 2017, this ratio had increased to 40%.

This basically means that as public sector banks go slow on lending because of their bad loans, the total loans given out by private sector banks are growing at a much faster pace. Hence, as far as the overall banking sector is concerned, it is getting privatised, irrespective of what the experts and the government think about privatising public sector banks.

In fact, the situation is not very different from other sectors which the government has opened up for private companies over the years. Take a look at what happened to the airlines sector. Air India and Indian Airlines (before they were merged) had 100% of the market (along with Vayudoot, another government owned entity). Now Air India (in which the erstwhile Indian Airlines has been merged) has 13.8% of the market share. This has benefitted the consumers tremendously.

Similar stories of privatisation, without  the government privatising public sector enterprises, have played out in the telecom and pharmaceutical sectors, respectively, and even in education, to some extent.

The telecom sector had two players BSNL and MTNL. Over the years, the market share of these two government owned companies, has come down dramatically, while the government continues to own them.

Over the years, various ministers have referred to public sector enterprises as family jewels. The trouble is that in sector after sector, these family jewels have lost their lustre and a tremendous amount of value has been destroyed.

Along similar lines, public sector banks have reached a stage where it will be difficult to find buyers for many of these banks, even if the government makes a decision to privatize them (which in the first place seems very difficult).

The 1997 Committee on Banking Sector Reforms (better known as the second Narasimham Committee) had recommended that the government reduce its holdings in PSBs to 33 per cent and, in the process, give increased autonomy to these banks. The Committee had also recommended no further recapitalisation of public sector banks by the government. But that is not how things have eventually turned out.

And more than two decades later, now we have reached a stage where most of the public sector banks are as dead as a dodo.

 

The column was originally published on Firstpost on April 2, 2018.
 

GST — 9 Months Later

The Goods and Services Tax (GST) has been in existence for close to nine months now. By now, we have sufficient data and other evidence to figure out, how well the nation has taken to this new tax.

Let’s first start with how the GST collections have been between July 2017 and February 2018. Take a look at Table 1.

 

Table 1: GST collections

(Amount in Rs Crores) Month Collection
August, 2017 93,590
September, 2017 93,029
October, 2017 95,132
November, 2017 85,931
December, 2017 83,716
January, 2018 88,929
February, 2018* 85,174

Source: Lok Sabha Unstarred Question Number 4809 and www.pib.nic.in
* Up to March 26, 2018.

As can be seen from Table 1, the GST collections have fallen over the months, after having peaked in October 2017. Let’s dig into the numbers in a little more detail. The total GST collections for the month of February 2018 stand at Rs 85,174 crore. Out of this the central GST amounts to Rs 14,945 crore. In the month of January 2018, the total central GST collected had amounted to Rs 14,233 crore.

If this trend of central GST collected continues in the months to come, the central government might get into some major trouble on the revenue front. The question is why? In 2018-2019, the central government expects to collect a total of Rs 6,03,900 crore, as central GST. This amounts to Rs 50,325 crore per month, on an average.

The current central GST collections are nowhere near this number.

In comparison, in February 2018, Rs 42,456 crore was collected as integrated GST, which is split between central and state governments. In January 2018, the total integrated GST collected had been at Rs 43,794 crore.

Further, Rs. 12,140 crores is being transferred from integrated GST to central GST account for February 2018. Thus, the total central GST collection for the month will be at Rs 27,085 crore (Rs 14,945 crore + Rs 12,140 crore). This is nowhere near the Rs 50,325 crore that the central government expects to collect every month through central GST.

If this trend continues in 2018-2019, the revenue expected to be earned from GST, will be way short of what has been projected, unless central GST collections improve significantly from their current level.

Clearly, there is a problem here.

Around 1.05 crore taxpayers have been registered under GST up until now. Out of this number 86.37 lakh taxpayers are required to file a monthly return, the rest come under the composition scheme and are required to file the GST return quarterly.

Of the 86.37 lakh taxpayers who need to file their returns monthly, 59.51 lakh filed their return for the month of February 2018, up until March 25, 2018. This basically means that only 69% of taxpayers who are required to file a monthly return, did so. So, nearly a third of the taxpayers who are supposed to be filing tax returns, aren’t doing that currently.

The question is why is this happening? The GST network carried out a survey in October and November 2017, and the answers it got are fairly interesting. Let’s take a look:

1) There were gaps in general understanding of the electronic processes for complying on GST Portal (Specific technical Issues like Digital signature related problems etc.)

2) Helpdesk is not able to respond to problems effectively.

3) Mistakes in return cannot be corrected.

4) Site performance being slow and has multiple problems.

5) Contextual help not available. Errors are generic and non-intuitive.

6) It is extremely difficult to reach helpdesk. It takes a long time to respond to issues escalated.

In fact, almost all the issues raised above could have been tackled if the government hadn’t launched GST in a hurry and come up with a simpler system design. Also, system design isn’t really a strong point with the Indian government. This clearly comes out in the answers to the survey. Anyone who has filed his income tax return would vouch for this.

Over and above what the survey found out, the World Bank in a recent report provided evidence regarding the complexity of the Indian GST system. As the World Bank said: “The Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28 percent)… Most countries around the World have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only 5 countries including India use four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST rates in the world.”

The Indian politicians may have their reasons for doing this, but multiple rates, do complicate things for those who need to follow the GST system (remember self-assessment is at the heart of this system).

Take a look at Figure 1.

Figure 1:Other than having too many rates of tax, India also has one of the highest GST rates in the world. As the World Bank pointed out: “Comparing the design of India’s GST system with those prevailing internationally, we note that the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28 percent, which is the second highest among a sample of 115 countries which have a GST (VAT) system and for which data is available.”

Take a look at Figure 2.

Figure 2:Basically, there are too many design issues with India’s GST, making the system essentially complicated for people to follow. To this criticism, people have pointed out that the earlier system of multiple tax rates with no input credit was even more complicated. This is true. But people making this criticism do not get two points.

First, their criticism is valid for the indirect tax system that prevailed on the sale and movement of goods. It is not valid for services. The service tax system was inherently simpler than the current GST, even though no input tax credit was available (but then the rate tax was also lower at 15%). And 50% of the Indian economy is services, is a point which is worth remembering. Also, the service tax had to be paid after it had been collected from the customer. Now, GST needs to be paid, after the invoice is raised, irrespective of whether the GST has been paid or not.

This has led to many a small entrepreneur facing working capital issues, and in the process financing big corporations, which take their own sweet time to make the payment. As a freelance writer, we have been facing this problem at our small level as well. And it’s not a great place to be in.

Second, the entire idea behind GST was to expand the tax base and get more people to pay tax. A complicated system of filing returns goes against this entire idea. In July 2017, the total number of taxpayers who were required to file tax returns stood at 59.57 lakhs. This has since then increased to 1.05 crore. Nevertheless, the total tax collected has fallen from Rs.92,283 crore to Rs 85,174 crore. What explains this increase in number of taxpayers and falling tax collections? The complicatedness of the GST system.

The GST council is handling this in a very piecemeal manner, where they keep coming up with new rules every month, and create a bigger headache for those who have to follow the system. Instead, what is needed is the simplification of the entire system of following and filing the GST. And that is easier said than done because among other things it would mean admitting to having screwed up, which politicians don’t like to do.

Of course, it is unfair to just blame the system design. Tax evasion, as always, continues. But that was always a given. A simpler system would have clearly helped in tackling this.

The column was originally published on April 2, 2018, on Equitymaster