The Centre itself is facing a financial crisis and a full GST compensation as promised could mean a cut in other discretionary Central assistance to States if the Centre is asked to go beyond cess
The idea of ending fratricidal tax competition among States and creating a common market in India across State borders was mooted by the Bhairon Singh Shekhawat Committee (1995). If sovereign nations of Europe could do it, we could do as well. So the Goods and Services Tax (GST) was implemented from July 2017 with the underlying vision of “one nation, one tax, one nation, one market.” The States had agreed to an all-India common slab for particular items, thereby surrendering the power to tax the items at a rate of their own choice.
GST changed the principle of indirect taxation from originating/producing States to the destination/consuming States. The benefit of GST collection accruing to the State, where the final sale takes place, was seen as a loss by the producing States. The GST took so long to materialise mainly because the States were apprehensive not just about the loss of power to tax but also of revenue. It was challenging to convince all the Governments to agree to a common tax rate on a particular item, superseding multiple Central/State/local taxes like Central Excise Duty, Central Sales Tax, Value Added Tax, Sales Tax, Purchase Tax, Tax on Works Contracts, Entry Tax, Octroi and so on, which were discontinued and subsumed in GST.
To assuage the anxieties about potential loss of revenue, a revenue protection guarantee backed by law was agreed to. The revenue to be protected is calculated by assuming 14 per cent per annum growth over the tax collection in 2015-16 from the taxes subsumed in the GST. Accordingly, the GST (Compensation to States) Act, 2017 mandates the Centre to levy a GST compensation cess over and above the GST. The cess is at present levied on certain luxury and sin goods such as cigarettes and tobacco products, paan masala, caffeinated beverages, high-end passenger vehicles and so on. The guaranteed compensation period is five years from the commencement of GST (July 1, 2017).
In 2018-19, the Centre had collected Rs 4,57,535 crore as Central GST, Rs 28,947 crore as Integrated GST and Rs 95,081 crore as GST compensation cess. For 2019-20, the corresponding figures (all provisional) are Rs 496,699 crore, Rs 9,186 crore and Rs 95,551 crore. A total amount of Rs 81,141 crore was released as compensation to States in 2018-19 but the compensation requirement for 2019-20 has nearly doubled to Rs 1,65,000 crore. GST revenue was already below target even before Covid-19 and the pandemic is set to further enhance the compensation requirement for 2020-21 and beyond. The States’ monthly protected revenue, which was Rs 49,020 crore for 2018-19 and Rs 55,882 crore for 2019-20, has risen to Rs 63,706 crore in 2020-21.
A prolonged lockdown, suspension of train, metro and air services, and subsequent behavioural changes are expected to seriously dent demand for goods and services in various sectors, especially exports, tourism, hospitality and outdoor entertainment. Estimates of likely compression of demand vary widely depending on the observer’s outlook, pessimistic or optimistic.
The Government expects to collect a total GST of over Rs 1,00,000 crore per month but GST collections during April-July have been Rs 32,172 crore, Rs 62,151 crore, Rs 90,917 crore and Rs 87,422 crore. In FY21, GST shortfall left uncovered by existing compensation cess is assessed to be Rs 2,35,000 crore. The scope for an extraordinarily large increase in GST compensation cess to cover the whole GST revenue loss is limited as it may adversely affect sales.
When the States were given a five-year revenue protection guarantee in 2017 with an assured 14 per cent increase, such a large reduction in revenue could not have been foreseen. Hence, it can be argued that Covid-19 is an “Act of God” and the States should not insist on getting fully compensated.
In the law of contracts, the courts refuse to enforce a contract when the performance becomes “impossible” (Section 32 of the Indian Contract Act, 1872). What is impossible is open to judicial interpretation. In the Tsakiroglou vs Noblee Thorl case, defendants had contracted to supply Sudanese peanuts to Hamburg but the Suez Canal was closed, blocking the customary shipping route (In July 1956, the Egyptian government nationalised the Canal earlier owned by UK and France causing a crisis). The defendants sought to renege on supply commitment, citing the canal closure. The House of Lords held that peanuts could have been transported via the Cape of Good Hope, a four-time longer alternative route. It would have become commercially onerous but not impossible! In the Alopi Parshad & Sons, Ltd vs Union of India case, the Supreme Court did not allow a supplier of ghee to wriggle out of his pre-war contract merely because World War II had upset his whole economics. Increased commercial difficulty did not amount to impossibility to perform, the court held.
Most contracts, therefore, have a standard clause of “force majeure” detailing extreme situations of war, natural calamities, change of laws or other governmental actions and so on. But the compensation to States for GST revenue shortfall is not part of any contract and not amenable to examination with the lens of “force majeure.” It is basically a legal commitment arising out of a political settlement to arrive at a common taxation framework in a federal polity. The obligation flows from an Act of Parliament. The Parliament can very well change, prospectively or retrospectively, or even scrap the 2017 Compensation Act. The amended law can reduce 14 per cent assured growth to a lower level or introduce additional fiscal measures to compensate the States.
In the present circumstances, a review of the 2017 Act could theoretically be an option but that can potentially re-open settled issues on GST.
The financial interests of the Centre and States are not adversarial but closely inter-connected. The States’ dependence on Central financial support is significant. Central transfers to States constitute about 20 per cent of total Central government expenditure. In 2017-18, the combined expenditure of Centre and States was about Rs 45 lakh crore — Rs 21 lakh crore by Centre (including transfers to State governments of Rs 4 lakh crore) and Rs 28 lakh crore by the States (including expenditure against transfers from Centre of Rs 4 lakh crore). States realise that the Centre itself is facing financial crunch and insisting on full GST compensation as promised can potentially mean cut in other discretionary Central assistance to States if the Centre is asked to go beyond compensation cess to cover the shortfall.
On August 27, the GST Council discussed the vexed issue of compensation to States for huge loss of GST revenue. States have been given two options to borrow additional money. Borrowing is nothing but deferred taxation. Today’s government borrowing is tomorrow’s tax. May be tomorrow’s tax will become tomorrow’s borrowing and day after tomorrow’s tax and so on. More than 20 per cent of total government expenditure is financed through borrowings. This is how the governments have been piling mountains of debt and there is no visible exit from this trap, not in the immediate future, certainly not in crisis time. Crisis justifies borrowings, to be repaid/serviced in better times.
If GDP at factor cost (proxy for total base of indirect taxes) is assumed to be Rs 160 lakh crore and 60 per cent of this GDP pays average GST of 15 per cent, then the GST revenue should be Rs 1.2 lakh crore per month, almost 10 per cent of GDP. The revenue from taxes subsumed in the GST was about six per cent of GDP in 2016-17. Obviously, GST revenue is below expectation and potential. Strong facilitation and anti-evasion measures can reduce the revenue loss and concomitant compensation requirements.
The great federal bargain on GST among governments is facing an acid test. The hard-won political consensus needs to be preserved and nurtured and no cost is big enough to make GST a grand success, by removing the pending irritants, mostly on the implementation side.
(The author is an IAAS officer, superannuated as Special Secretary, Ministry of Commerce and Industry)
At the end of 2019, the total global Foreign Exchange(FX) currency reserves stood at $11.7 trillion, of which $6.7 trillion were in dollars or dollar-denominated assets. Nearly 60% of global trade and 40% issuance of worldwide debt is also denominated in the US Dollar. The dollar’s dominance in FX reserves enables America to borrow large amounts at low interest rates without fear of disruption in flows. A currency becomes globally acceptable and dependable based on the size of the economy and free convertibility on both trade and capital accounts, the country’s education standards and quality of its manpower, the innovation and IPR creating ability, the competitiveness of its businesses, the established and demonstrated rule of law, and a very strong defense capability. In world history (as analysed by Ray Dalio of Bridgewater Associates), nations held the title of “reserve currency of the world” for no more than 50-100 years, and had a recurring boom to bust cycle which led to its rebirth in the form of another currency.
Intertwined history of the dollar and the federal Reserve Between 1781 -1907 the dollar was directly linked to gold and was convertible. In 1913, the Federal Reserve was created.
The USA does not own its Federal Reserve. It is a privately owned body which originally had 300 shareholders with a profit motive. The stockholders were to get a fixed dividend of 6% of profits and 100% of the balance belonged to the US Treasury. By 1919 this 100%REDUCED to 90%, and in 1933 the stockholders delivered a stroke of genius. They made a one-time cash injection to create the US Deposit Insurance Corporation, and in lieu of this they now owned 100% of profits with no share for the US Treasury. In 1947 the Fed realized that a massive outcry was expected in the US Congress, and they pre-empted it by agreeing to pay an annual franchise tax to the Treasury, but the quantum would be decided exclusively by the Board of the Fed (as per reports of the Brookings Institute). The Fed conducts a self-audit and is not subject to US Congress or Senate scrutiny as per media reports.
In 1929, when the economic depression peaked, the Fed reached its currency printing limit. President Roosevelt passed a law making it mandatory for all American citizens to sell their gold to the Fed at $29 an ounce. He bought gold globally at higher prices, and once the targeted quantity was acquired, reset the price at $39 an ounce (upping the value of Fed’s holding and cheating his own citizens!). During World War II, the US lent a lot of money to the Allied nations. In 1944, 44 nations met at Bretton Woods in New Hampshire, and decided that their currencies would be linked to the US Dollar, and the Dollar would be linked to gold. In 1966 multiple countries were concerned that the Fed was printing more cash than the gold they held, and insisted that their USD holdings be repaid in gold. In 1971, President Nixon and the US reneged on their commitment and said that the USD was not linked to gold, would become a Fiat currency i.e. paper which acts as a store of value based on Trust. It signaled that henceforth the US was the “global sheriff” and the work on dismantling its challenger - the USSR started. It took from 1913-1982 for the US national debt to reach 1 Trillion (T), In 2006 it reached $8 T when Ben Bernanke became chairman of the Fed, and in tandem with the Obama years it ended 2016 with $20 T. The reality is that PRE-COVID19, the US Government debt had already hit $25 T, and post CovID19 it could add another $3.5 T for the year. Interestingly since Reagan, every American President has contributed to running up the debt book and mortgaging their future generations.
The US Government pays an approximate $400 Billion (B) annually towards interest costs alone. Then there is the unfunded liability of $45 T on a present value basis of Medicare and Social Security. What could possibly fund this? More debt every year of course!! In any crisis, every politician finds a reason to evade fixing it and thereby defers the problem. As a consequence, using the 1913 USD as a benchmark, the buying power of the 2020 USD is now just 2.7%. So any holder of US Dollar denominated debt has an implicit 2% per annum devaluation built into their holdings as the real value declines due to printing of more and more cash by the Fed.
Who is the US federal Reserve?
The Federal Reserve Board of Governors, the main policymaking body, is appointed by the President of the United States and confirmed by the Senate. However the ownership of the Fed remains in private hands. ”‘Then there are also twelve regional Federal Reserve Banks, whose presidents participate in the committee that sets monetary policy. These Reserve Banks operate as private corporations owned by member banks in their districts, even though they also regulate the same banks. (It is worth noting that their websites have a .org, not a .gov, suffix).
The Question that arises is who then owns the fed and through it controls the Global financial System?
These are excerpts from what Dean Henderson researched and wrote in the Herland Report on 27th March 2020- “Controlling equity (nearly 80% control by eight families- JW Macallister in the Grim Reaper) of the US Federal Reserve resides with- Goldman Sachs, Rockefellers, Lehmans and Kuhn Loebs of New York; the Rothschilds of Paris and London; the Warburgs of Ham- burg; the Lazards of Paris; and the Israel Moses Seifs of Rome. Many of the bank’s stockholders reside in Europe. CPA Thomas D. Schauf corroborates Macallister’s claims, adding that ten banks control all twelve Federal Reserve Bank branches. He names N.M. Rothschild of London, Rothschild Bank of Berlin, Warburg Bank of Hamburg, Warburg Bank of Amsterdam, Lehman Brothers of New York, Lazard Brothers of Paris, Kuhn Loeb Bank of New York, Israel Moses Seif Bank of Italy, Gold- man Sachs of New York and JP Morgan Chase Bank of New York. Schauf lists William Rockefeller, Paul Warburg, Jacob Schiff and James Stillman as individuals who own large shares of the Fed. The Schiffs are insiders at Kuhn Loeb. The Stillmans are Citigroup insiders, who married into the Rockefeller clan at the turn of the century. Eustace Mullins came to the same conclusions in his book The Secrets of the Federal Reserve, in which he displays charts connecting the Fed and its member banks to the families of Rothschild, Warburg, Rockefeller and the others. The control that the families exercise over the global economy cannot be overstated and is quite intentionally shrouded in secrecy. The Four Horsemen of Banking (Bank of America, JP Morgan Chase, Citigroup and Wells Fargo) own the Four Horsemen of Oil (Exxon Mobil, Royal Dutch/ Shell, BP and Chevron Texaco) along with Deutsche Bank, BNP, Barclays and other European old money behemoths. Companies under Rockefeller control include Exxon Mobil, Chevron Texaco, BP Amoco, Marathon oil, Freeport Mc- Moran, Quaker oats, ASARCo, United, Delta, Northwest, ITT, International Harvester, Xerox, Boeing, Westing-house, Hewlett-Packard, Honeywell, International Paper, Pfizer, Motorola, Monsanto, Union Carbide and General Foods. According to company 10K filings to the SEC, the Four Horsemen of Banking are among the top ten stock holders of virtually every Fortune 500 corporation.”
Based on the above and comments made by former Congressman Dr. Ron Paul and a few US Senators, there are three obvious questions that arise:
Firstly, did the Fed take any business risk in the monetizations related to COVID19 now, or the debt crisis in 2008, while its balance sheet expanded to 7 T dollars? Secondly, does the Fed also act as an instrument of state for the US government and of course get paid in both cases? Lastly, is there a conflict of interest in the ownership of the Federal Reserve and the entities that do business with the Fed and earn fees. The reality is that the Fed and its shareholders smartly push the fiscal risk onto the US taxpayers, and as the US Treasury Secretary stated that all losses related to the COVID19 lending program would be paid out of the national budget.
The “influence” aspect is a very strong stick that they wield giving the US Government and the key stakeholders in the Fed immense coercive power to tame unfriendly governments. The US can print its dollars, but with 60% of trade denominated in it, the world excluding a few well-managed country treasuries is always short of dollars. The US can also bail-out its allies in a crisis by giving them Credit Swap and Currency Swap lines. The Levy Institute actually crawled through over 30,000 documents to discover that post 2008, European Banks were given nearly $ 9 T through this structure to survive. There were no data points available whether this facility needed any formal approval from the US Government or was the US Congress or Senate ever looped in other than the Fed Board of Governors being appointed by the Government, and whether this facility still exists 11 years later or has been wound up. Interestingly, the intended beneficiaries are foreign companies who now have access to USD and can compete with American companies. To stabilize Europe, does America undermine its own competitive advantage, or is it the cost of being the “Reserve Currency? ”
Looking at the intertwined ownership structure of the Fed and the banks through which it operates in markets, the answer to the conundrum is a no brainer. The dominance in global affairs including American politics and trade on the face of it certainly gives an advantage to businesses owned by eight families. It is no surprise that many aspiring countries are wanting to break- out of the dollar hegemony.
The Competition:
China has over the last decade positioned itself as the principal challenger to the US. Its economy is larger in Purchasing Power Parity terms, its aggregate Debt/GDP ratios very similar, its supply line of quality STEM students nearly five times that of the US, its unicorns rival those of the US in number and valuations, its huge investments in Artificial Intelligence, Machine Learning, Education Tech, Fin-Tech are bearing fruit. Its legal and regulatory framework is weak, but has improved substantially and money always loves strong dictatorships. They are the largest gold mining country and export no gold. They have steadily built their gold reserves, and a lot of it may be kept off-book to avoid undue attention. The Chinese are also the “lender of last resort” to countries whose projects get rejected by the World Bank and multi-laterals. They now have a $ 5.5 T portfolio of global investments, though most of them illiquid. Certainly they are the most dominant players in Africa, and emerging very strongly in Europe. Their plans of trying to move their non –US foreign trade out of the USD had been progressing steadily.
However, in the post COVID19 world, the Chinese have very few friends who are significant in global trade. They also have serious territorial disputes with 23 of their neighbours by land and sea. The Chinese RMB is not fully convertible on capital account and China’s capital controls make it difficult for foreigners to hold the onshore version. While this remains the case, the RMB’s share of global FX reserves may continue to be low, and Asian countries may continue to rely more on the yen and the dollar than the RMB. But given their intrinsic strengths as a manufacturing hub, a fast emerging technology hub, and an important military power, the RMB continues to gain market share in world trade, perhaps in a creeping acquisition mode for a few years.
The Euro flattered to deceive! It arrived as a challenger, threatening to take the denomination of the oil trade away from the USD. The Saddam balloon was floated, the US cleverly converted it into a “WMD issue”, took out Iraq and Saddam, and oil was back in the Dollar camp. Even though 20% of global central banks reserves are currently in Euros, the absence of a “safety net” other than Germany, and England’s Brexit have exposed its underbelly and inherent contradictions even more. The 2009 bailout by the US Fed exposed the fragility of Europe’s banks and the ECB. With just the French and Germans to keep the EU afloat, it ceases to be a viable option, and some of this 20% may flow out into other currencies.
The rise of Cryptocurrency
Since US laws forbid anyone from printing currency/money, “Satoshi Nakamoto” created Bitcoin in 2008 out of Amsterdam and then disappeared or changed identity. Bitcoin is a virtual currency, stored/traded on the internet, created on an open-source platform. Hundreds of programmers globally have improved the original software over the last decade. A finite quantity of 21 Million bitcoins were mined/to be mined. All Bitcoins reside in a publicly distributed ledger called Blockchain. Every holder of a bitcoin owns a wallet, the bitcoin ledger is always balanced as every debit/credit is within the system. Each holder accesses their account with their own created unique password, and their money is not retrievable if the password is lost. This is a financial system that replaces middlemen i.e. the banks. A mobile phone with an internet connection becomes a bank. To get mainstream adoption Bitcoin questions whether users are happy using plastic credit/debit cards created by technology companies who collectively add $200 Billion annually in transaction costs. The value proposition being offered is that by eliminating the middlemen the savings would accrue to merchants and consumers.
Till 2016, the Fed treated Bitcoin lightly, as just one more technology experiment, and the traded price of one bitcoin hit USD 20,000 i.e. a monetary system now worth $400 B. They woke up in 2017 and along with China debarred banks from accepting Bitcoins. However now every major player in the Financial Sector has jumped on the Bitcoin gravy train (The Fed’s owners) realizing that making it illegal would just make it move offshore. The Fed by default accepted that every year over $2 T gets laundered and they can’t crack it successfully, therefore fighting Bitcoin would be futile. Today Bitcoin is a contrarian investment, but 5 years hence it might be a “must have” what with people like Antony Pompliano forecasting a price of $100,000 in that time, a ten-fold growth from the current price of $10,000. There are other cryptocurrencies around too, and at a future date the world may collectively be forced to move to a financial reset, or a different format of digital currency backed by a mix of underlying assets.
Conclusion
The dollar is not exhibiting an underlying weakness. Between January 2008 and 2020, the dollar index has strengthened by 30%, from 89.2 to 115. The Corona event strengthened it a further 10%, rising as high as 126.4 on March 23, 2020. A collapse couldn’t occur without a triggering event that destroys confidence in the dollar. Altogether, foreign countries own more than $6.7 trillion in U.S. debt. The two largest are China and Japan. If they dump their holdings of Treasury notes, they could cause a panic leading to a collapse. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, their action would further depress the value of the dollar. So their products, still priced in RMB and yen, would cost relatively more in the United States and hence their economies would suffer. Right now, it’s still in their best interest to hold on to their dollar reserves. China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still their best market in the world, and would remain so unless US citizens start consuming/ importing much less.
The USA now faces very strong pushback from China, Russia, Germany and Iran and on currency issues can only be sure of the UK, Japan, Australia, South Korea and Israel to provide blanket support. Countries like India, Brazil and Saudi Arabia would prefer a currency solution that is neither US or China centric. Today, as nearly 50 Million Americans file for unemployment claims, the Government and US Congress response is to print more cash. This approach is the greatest disservice to any honest, hardworking citizen anywhere in the world who values thrift and saves for the future, as a giant unseen force destroys the value of his/her hard labour by printing even more cash. We are moving forward into an arena of likely financial chaos and uncertainty. Eventually economies and societies survive on the goods and services they produce and sell, not on a race of competitive bankruptcy. I wonder if the US think-tanks have gamed what happens if another 30% of global trade moves out of the dollar into a barter system, and the potential hyperinflation it would unleash in America and what rising interest rates will do to the aggregate American debt? Will the world see a sequel to 1971 WHEN America reneged on its debt to the world and to its citizens? Only time will tell!
(Writer is Managing Partner S&S Associates)
The ailments afflicting PSBs won’t go away so long as majority ownership and control remain with the Government. There is a dire need to unshackle them and grant autonomy to the management
The Reserve Bank of India (RBI) has recommended to the Centre a reduction in shareholding of the latter in six top Public Sector Banks (PSBs), namely the State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), Canara Bank, Union Bank of India (UBI) and Bank of India (BOI) to 51 per cent in the next 12-18 months. At a recent meeting with the Ministry of Finance (MOF), the RBI had argued for reduction in stake to 26 per cent. But, observing that this might not be possible in the near term for now, it has settled for lowering the Government’s shareholding to 51 per cent. Given its precarious financial position and looking for all possible avenues for increasing revenue, the Narendra Modi Government has promptly latched on to the idea. It is aiming to garner about Rs 25,000 crore by shedding its stake in the six banks which could even go up to Rs 43,000 crore (according to an estimate).
The PSBs in question have already started gearing up for this as they have decided not to take any lumpy credit exposure and are taking steps to reduce their non-performing assets (NPAs) by one-third by the end of the current financial year March 31, 2021 — all aimed at improving their valuation and getting a good price from the sale. The Centre (besides, the RBI) is closely monitoring the situation. At the end of the day, it may re-fill its denuded coffers somewhat. But the larger question still remains unanswered.
Is the Modi Government really serious about bringing down its stake in PSBs to as low as 26 per cent? Is it committed to their privatisation? Does it have anything credible to show? The idea was first mooted by the NDA dispensation under the then Prime Minister AB Vajpayee (1999-2004). It had proposed reduction in the Government’s shareholding in PSBs to less than 50 per cent initially and eventually to 33 per cent. That remained on paper.
In 2015, a RBI committee headed by P Nayak made sweeping recommendations to bring about structural reforms of PSBs in sync with the requirements of an economy on an accelerated growth trajectory and to make it globally competitive. It recommended (i) setting up of an autonomous Bank Boards Bureau (BBB) with a mandate to select the top management; (ii) setting up of a bank investment company (BIC) where all Government shares in PSBs will be vested and (iii) divestment of its shareholding in all PSBs to below 50 per cent.
The committee had contemplated the Board as an interim arrangement — to serve as a precursor to the BIC. In 2016, the Government approved the constitution of the BBB as a body of eminent professionals and officials to make recommendations for appointment of whole-time directors and non-executive chairpersons of PSBs and State-owned financial institutions (FIs). The BBB was also mandated to engage with the board of directors of all PSBs to formulate appropriate strategies for their growth and development besides, encouraging them to restructure their business strategy and suggest ways for their consolidation and merger with other banks based on requirement. Initially headed by Vinod Rai, former Comptroller and Auditor-General (CAG) till April 2018, the BBB has been under a part-time chairman (a retired bureaucrat) and other part-time members. Recently, the term of the BBB was extended for a period of two years beyond April 11 or until further orders, whichever is earlier. How much importance does the Government give to the BBB? Being headed by a part-time chairman and part-time members, this by itself conveys a lot. On the other two recommendations, while (ii) is not even on the radar, as regards (iii), the only action seen thus far is the Government’s decision to divest its majority stake in IDBI Bank.
But things didn’t work out as planned and during 2018-19, the Life Insurance Corporation (LIC) was roped in to acquire 51 per cent controlling stake in IDBI Bank. The acquisition was completed on January 21, 2019 with LIC being re-classified as promoter of the bank with management control and the Centre continuing to be the co-promoter without management control. While it is normal to see LIC in the role of a financial investor, for it to be owning and running a business enterprise is anomalous.
Meanwhile, most of the ills that go with majority ownership of the Government continue to afflict PSBs. The political brass appoints the CMD/MD and deputes bureaucrats as its nominee on the bank board. For appointment of directors, until last year, the nomination and remuneration committee (NRC) included the Centre’s nominee. In August, 2019, the RBI tightened the fit-and-proper criteria to exclude him/her. But, this is only cosmetic with CMD and MOF nominee — both handpicked by the Government — calling the shots when it comes to taking policy decisions or even in its day-to-day running.
In the past, meddling in the affairs of the PSBs took the form of what came to be known as the cult of “crony capitalism.” The businessmen patronised by the ruling establishment managed loans on considerations other than merit and got them ever-greened (taking a new loan to pay back the earlier one). Neither the banks insisted on repayment, nor the defaulters had any sense of fear as those who were expected to take action chose not to act. The political brass also rides piggyback on PSBs for absorbing liabilities created by populist policies such as supplying power to farmers and households at subsidised rates (or even free in some States).
Be it a spate of bailout packages given to power distribution companies (four bailouts have been granted so far) or loan waiver given to farmers and now moratorium on loan repayment extended to all and sundry, all have inflicted heavy losses on PSBs.
No wonder the country is grappling with high NPAs. In March 2018, gross NPAs (GNPAs) had reached a high 11.5 per cent (14.5 per cent for PSBs). These declined to 8.5 per cent as of March; courtesy a number of measures, including resolution of accounts under the Insolvency and Bankruptcy Code (IBC). But the ratio may worsen to 12.5 per cent by March 2021 under the optimistic baseline scenario (14.7 per cent under a severely-stressed one). For PSBs, it would be much higher at 15.2 per cent (16.3 per cent under severely-stressed).
The Government has put investigation and prosecution agencies in top gear to nab fraudsters and the Prime Minister is allegedly against “crony capitalism.” But these exhortations and central agencies seen in action mode do not seem to be yielding the desired result. The proof of the pudding is in eating. To get a sense, we only need to look at the value of bank frauds in recent years. During 2014-15 and 2015-16, the value of bank frauds was Rs 17,000 crore each. During 2016-17 and 2017-18, this went up to Rs 20,500 crore and Rs 22,500 crore respectively. Thereafter, the value galloped to Rs 64,000 crore during 2018-19 and further to Rs 110,000 crore during the first six months of 2019-20.
The message is loud and clear. The ailments afflicting PSBs won’t go away so long as majority ownership and control remain with the Government. There is a dire need to unshackle them and grant autonomy to the management. The RBI’s recommendation that the Government’s stake in six PSBs be reduced to 51 per cent won’t achieve the desired objective. To get the intended results, the Nayak Committee’s prescription should be adopted in totality.
The Government should set up a BIC with eminent professionals as members. While the position of chairman should go to a professional, the member-secretary can be drawn from the bureaucracy. All of the shareholding of the Centre in all PSBs should be transferred to the BIC.
The company should be given necessary authority to take all decisions on behalf of the sovereign Government and allowed to work with full autonomy — at arm’s length from the latter.
The BIC should guide the management of individual banks to improve their working, prepare the roadmap for divestment of majority ownership and control and see through its execution. It should determine the timing of sale so as to realise maximum value. The shares should be so distributed as to avoid concentration in a few hands and ensure greater accountability to the public.
It is also crucial for the RBI to strengthen its “supervision” over banks to guard against irregularities and mismanagement to prevent the fiasco of the kind we have seen in the case of Yes Bank — a private bank. It should maintain strict vigil over the auditors to ensure that they do their job diligently.
(The writer is a New Delhi-based policy analyst)
With Reliance buying out Kishore Biyani, how will the retail market in India play out and compete with online majors?
Say what you will about Mukesh Ambani, one can certainly not accuse India’s richest man of chilling out during the lockdown. While millions of Indians have been contemplating their lives, Mr Ambani has been on an overdrive. First, he got a host of investors onto his Jio telecommunications platform, and now having secured his group’s future in that industry, he is pivoting to retail. By picking up the assets of India’s largest home-grown retail chain, Future Group, Reliance Industries is doubling down on its already ambitious retail play. What will this mean for retail wars in the future? Whether consumers will benefit as more of them choose to buy products online is something that remains to be seen. However, it is the end of a dream that Kishore Biyani had set himself. Saddled with debt and ill-advised expansions over the years, the man, whom business magazines called the “Rajah of Retail”, will use much of the money he gets to pay off his loans.
The Future Group might have brought in the big discount sales on national holidays but unable to pivot to the increasingly online world of consumers, it was swamped by the likes of Amazon, Flipkart (now Walmart) and other start-ups such as BigBasket and Grofers. The question remains if Reliance Industries will be able to make that shift as well or will it need to shop around a little more. Much has slipped between the lip and the cup when it comes to Reliance and its operations, as ground realities and the customer experience seem disconnected from the grand ambition of the promoters and management. The integrated telecommunications and services play that is being aimed for might work on paper but will the notoriously fickle Indian consumer bite? With incomes devastated by the pandemic, the consumer might ditch brand loyalty for the cheapest prices. That said, by buying a ready group with an established front-end network of stores, often in high-footfall areas and a clockwork back-end logistics chain, Reliance Retail has certainly not done itself any disfavour. As for Kishore Biyani, unfortunately he had to sell his kingdom, but he did create a tremendous network and several high-profile brands and left his mark in Indian corporate history.
Courtesy: The Pioneer
After a boom run lasting decades, is Reliance Industries finally admitting that growth is slowing down?
If there is anything like a sure shot on the Indian bourses, it is the Reliance Industries’ scrip. Even after being pummelled by the Coronavirus lockdown and crashing oil prices, its share price has recovered smartly over the past few trading sessions as investors believe that India’s largest private company will emerge from the crisis stronger than before. That faith was redoubled after American technology giant Facebook made an unprecedented $5.7 billion investment into Reliance Jio, the telecommunications arm of the conglomerate. So why is the firm raising Rs 53,125 crore from the markets through the largest rights issue in Indian history? On the face of it, things are not going too bad for the company as despite the negative economic sentiment even before the Coronavirus impact, its consolidated profit was stable and revenues rose by over five per cent.
Well, Mukesh Ambani has stated time and again that he wishes the Reliance Industries reduces its debt load. After the Government first stalled the potential $15 billion investment in Reliance’s uber-profitable oil and gas business by the Saudi Arabian oil major, Aramco, it was speculated that things might not be all kosher between Prime Minister Narendra Modi and Ambani. While that is just speculation, the fact is that today, with a collapse in oil prices, Saudi Aramco may not be able to invest in Reliance in the first place. And while Reliance can raise debts across the world, even in India, with its stellar record of repayment, Ambani realises that it will likely be easier for him to capitalise on his company’s reputation to raise funds much more easily. At the same time, raising money from investors will not increase the debt burden on the company, particularly when the economy will most likely be fragile over the next few quarters. At the same time, Ambani also likely realises that the world is pivoting away from oil and plastics, the two cornerstones of his business. The current pandemic might just be a turning point as to how the public consumes these products. Raising money now will likely keep Reliance’s war chest ready as the company starts new consumer ventures over the next few years and prepares for a new world, a more sustainable one. But what impact will Reliance Industries’ rights issue have on the overall capital market? It will almost certainly reduce the appetite for any new public issue over the next few quarters as it will suck a huge amount of money out of investors’ pockets. That would have been the case in a healthy market, but in this market, it means that any other public offering will probably have to offer a deeper discount than earlier planned to get the public to bite.
(Courtesy: The Pioneer)
Given the region’s rich tradition of innovation and adaptation, we have immense potential to re-tool our cities, surroundings and services
COVID-19 is a direct threat to the health and well-being of all people in the World Health Organisation’s (WHO’s) South-East Asian Region. For as long as the virus spreads, the lives of the region’s nearly two billion people will be at risk, whatever the transmission scenario. The WHO and its member States in the region must continue to dig deep and aggressively minimise transmission, responding to every case, cluster and evidence of community transmission. But to complement such measures, we must also adapt our cities and surroundings, especially as public health and social interventions, including physical distancing, are relaxed or re-applied based on local epidemiological evidence.
The need of the hour is for all to think innovatively and retool our environments to meet the many demands of the new COVID-19 normal. For example, hand hygiene facilities can be installed at the entrance to public or private commercial buildings and at all transport locations. Workplaces can stagger hours, increase ventilation and encourage staff to work from home as much as possible. Plus, we can all take personal measures to minimise the risk of bringing infection home, which is especially important in multi-generational households.
Proactive efforts to protect vulnerable groups, including internal and returning migrants, are especially needed. Challenges associated with inadequate housing and access to water exacerbate the risk of the disease spreading. So does inadequate community engagement and communication. Key WHO guidance on protecting and engaging vulnerable groups can help local authorities implement high-impact measures that are equity-oriented and which can be integrated into emergency planning ahead of the monsoon and flu seasons. Health services, too, should be modified and strengthened, not only to treat COVID-19 but to address the many indirect health impacts the virus has, quite apart from its adverse effect on the provision of essential health services, which the WHO is vigorously supporting member States to minimise.
Take mental health for instance. The economic uncertainty the pandemic is causing, in addition to the fear of contracting the disease, has increased the prevalence of mental health issues, which may be exacerbated by substance use or difficulties accessing mental health services and psychiatric medicines.To help all people access the mental healthcare they need, health leaders can invest in appropriate services and ensure existing mental health services continue to function. Psychiatric care can be provided over the phone or online. Community support groups can continue to meet in person while observing physical distancing guidance or they can meet virtually. Health facility administrators can ensure that all health workers know where and how to access the care they need to stay mentally well and resilient.
Services for intimate partner violence require similar attention. COVID-19 has increased stress, disrupted social and protective networks and decreased access to services, all of which can exacerbate the risk of intimate partner violence. With families spending more time at home, the likelihood that a woman in an abusive relationship will be exposed to violence has dramatically increased.To help provide the necessary care, health facilities can identify and offer information on locally-available support services such as hotlines, shelters and counselling services. Health workers themselves can make a difference, for example by listening empathetically and without judgement, in addition to providing appropriate medical treatment. Plus, the use of telemedicine to safely address violence against women must be urgently explored.
Nutrition remains a core concern, too. Across the region, broken supply chains, loss of livelihoods and truncated incomes have the potential to severely impede access to healthy diets, rich in whole grains, fruit and vegetables. School closures have resulted in many underprivileged children missing out on school meals. Disruptions to nutrition services — especially those supporting maternal and child health and nutrition — could impact millions of vulnerable people in ways both chronic and acute. It is the duty of all stakeholders in the region to protect the nutritional status of the most vulnerable and to strengthen the health services and programmes on which they rely. Stakeholders can adapt existing nutritional services, for example by providing digital counselling or additional take-home supplies. They can also streamline referral pathways for nutritional services and expand nutrition-sensitive social protection and community programmes. Given the region’s rich tradition of innovation and adaptation, we have immense potential to re-tool our cities, surroundings and services to meet the many demands of our new COVID-19 normal. There is not a moment to lose. The WHO and its member States in the region will continue to strategically respond to the pandemic, fully committed to controlling and suppressing its spread, strengthening and maintaining health services and empowering individuals and communities to stay safe, healthy and well. Our battle continues, as it must.
(The writer is Regional Director, WHO South-East Asia.)
With India having created “air bubbles” with some countries such as France, the UAE and the US and advanced negotiations on with Germany and other nations, it is heartening to see that international commercial air travel is restarting. An “air bubble” is a form of a bilateral air traffic agreement but one that follows the entry rules set by various nations related to registration and quarantine protocols. In India, for example, travellers from abroad are still mandated to undergo one week’s institutional and a week’s home quarantine. The “air bubbles” also prevent direct “sixth freedom” air traffic, a connecting one. International travellers will not, for example, be able to connect through Dubai or Paris airports while coming to India unless specifically allowed by the Indian Government. However, one wonders how an immigration-free zone such as Europe’s “Schengen” area will be managed. The increased flights will hopefully see better utilisation of air fleets and present airlines an opportunity to make some money. However, if experience from India’s domestic flights resuming operations is any indication, the volume of passengers might be minimal after an initial rush as few people have an urgent non-personal reason to travel this time.
So these “air bubbles” could be a start as it remains to be seen whether commercial air traffic can ever re-emerge from the pandemic. For example, many airlines made significant volumes of connecting air traffic but with restrictions as well as the risk-averse nature of most people to deal with another large airport, how will airlines like Emirates and Singapore Airlines cope? Emirates, for example, has already retired the earliest of its A380 superjumbo aircraft and laid off thousands of employees as the Indian air traffic that sustained that carrier has vanished overnight. Even storied airlines like British Airways have announced that they will retire their entire Boeing 747 fleet, joining Australia’s Qantas and Dutch airline KLM in retiring the “Queen of the Skies.” While airlines highlight how safe travel onboard is, drastic reductions in service, thanks to the pandemic, and the lack of passenger confidence have made certain that many of them will not re-emerge from the crisis. Bubbles or not, the aviation industry itself sits on a precarious bubble.
(Courtesy: The Pioneer)
Madhya Pradesh is at a very crucial juncture where it has to focus on the future while living through the present
The word “migrant” in the term migrant workers is not only distressing but also exhibits the hard reality and high level of uncertainty of their lives. Lack of skills in these workers for the kind of opportunities that are available has been a primary concern. It has not only created but has significantly increased the gap between work and the worker.
Irudaya Rajan, one of India’s leading experts in population studies, says: “The one thing that the 2008 global economic crisis taught us was that jobs matter.” As India is battling CoVid-19 and the widespread economic havoc caused by the outbreak, issues related to migrant workers remain to be addressed. Right from the movement to their respective villages, to generation of work opportunities for them post the lockdown, are some of the big challenges that have emerged.
The Government of Madhya Pradesh, under the leadership of Chief Minister Shivraj Singh Chauhan, has become one of the first States to address the post-lockdown challenges with respect to migrant workers. He launched the Shram Siddhi Abhiyan on a virtual platform while interacting with sarpanches and labourers from across the State. Under this scheme, the workers will be categorised into skilled and unskilled, depending upon which the State Government would provide job opportunities. Unskilled workers would be provided with job opportunities under MNREGA whereas skilled labourers would be provided with work according to their ability. Elaborating upon the meaning of the word, sarpanch, Chauhan said, “‘Sa’ means samandarshi (impartial), ‘ra’ means ratna (gem), ‘pa’ means hardworking and ‘ch’ means watchman. The sarpanch plays an important role in protecting the village.” According to Chauhan, these local institutions and their representatives will play a major role in the effective execution of various policies of the scheme and in reaching out to the last man in the village.
The State Government has also decided to provide five months’ free ration to people who don’t have ration cards. This will not only help the poor people tackle present-day challenges but will significantly reduce the burden on supply in rural parts of the State, as the consumption in rural areas would increase with the rise in the number of returnees.
According to the 2011 census, 72.3 per cent of the State’s population is from rural areas. Therefore, the return of around five lakh migrant workers to the State would eventually increase the pressure on the rural economy, which is largely dependent on agriculture. The only way to ease this burden on the rural economy is by creating more jobs through increased investment opportunities in the State.
The State Government recently made 32 amendments in four State laws and 13 Central laws, which not only reduce the regular interference of Government officials but also create a healthy environment for investment in the private sector. Though a part of these reforms have been criticised by various trade unions and associations, the major focus should be on the output that would benefit the labourers as well. A reform does not necessarily mean complete scrapping of the law. Investment would help in creating more job opportunities in the State.
As per data, out of 22,809 gram panchayats in the State, MNREGA projects are going on in 22,695. So far 21,01,600 labourers have found employment. This is almost twice as compared to last year. Not only this, the State Government has also decided to restart the Sambhal Yojna, which was scrapped by the Congress-led Government.
This scheme primarily used to focus on workers employed in the informal sector but now it will be extended to migrant workers, too. Monetary help will be provided to the workers, right from the birth of a child to the death of a labourer. This not only highlights the proactive approach of the State Government in addressing futuristic challenges but also underlines the importance of social development for the deprived classes. Therefore, recent amendments to the labour laws and introduction of schemes like Shram Siddhi Abhiyan would collectively address the challenges faced by the migrant workers and unemployed population of the State in the post-CoVid phase.
Like the rest of the country, Madhya Pradesh, too, is at a very important juncture where it has to focus on the future and live through the present. So far, bringing the migrant workers home has proved to be one of the greatest efforts by the State Government. But the major challenge lies in effective implementation of policies. That depends on the systematic coordination between the executives and the locally-elected representatives. It would not only benefit the migrant and unemployed workers but also provide a sense of social security to them. Eventually, it would also revive the rural economy. As is often said, “The greatest opportunities lie in the most difficult challenge.”
(Writer: Rohit Kumar; Courtesy: The Pioneer)
To emerge stronger in the medical devices sector, we need to collaborate with the global med-tech industry for its R&D-driven approach
The outbreak of the pandemic has considerably highlighted the need for India to redefine its goals and priorities for the future. It has paved the way for necessary amendments required in the country’s health infrastructure at the primary and secondary level. It is often said that the experiences and lessons of the past shape our future. One relevant question to be raised in the status quo would be how much a country like India, that houses a population of 1.3 billion, has learnt from the outbreak? And what measures is it taking to battle the ongoing crisis at a time when the world order seems to be away from the normal?
With the push for “Vocal for local” gaining momentum in the country, many experts have time and again pointed out the gradual shift in global supply chains, highlighting India as one of the most favoured destinations for investment and growth in the world. However, one question remains unanswered. Will India be able to provide a stable business environment to drive future investments in manufacturing and other services, without being willing to provide market access to global firms? Also, is the Indian health technology sector sufficient to cater to the needs of the domestic market?
The answer to this question remains ambiguous. As per Invest India, the medical device and equipment market in India is only worth $5.5 billion, further highlighting the nascent stage it is in. While the domestic industry has the capacity to manufacture and export low-risk medical devices and equipment, India still lacks an adequate supplier ecosystem and thus the capacity to manufacture high-risk, life-saving, critical care medical devices and equipment. At a time when India imports nearly 80 per cent of its medical devices and has an unstable policy environment, it is important for the country to build capacity within the existing subsets of the health infrastructure, rather than just focussing on becoming self-reliant by adopting a one-sided approach.
The Government, in its action plan to fight Covid-19, recently announced an exemption on basic customs duty and health cess on the import of select medical equipment. This includes surgical masks, ventilators, personal protection equipment and Coronavirus-related test kits till September 30. This comes at a time when the Government in its 2020-21 Union Budget had claimed that the intention to impose a five per cent health cess was to boost the growth of the domestic industry and generate resources for health services. With an additional health cess in place, many health experts speculated that companies would pass on the additional burden to patients with an expected pressure of three-five per cent on pricing.
Another pressing concern is whether India needed a pandemic as a wake-up call to understand the need for adequate medical equipment in the country. It is not a hidden fact that the medical devices sector has always been the backbone of the health infrastructure. The med-tech sector has always shown its commitment towards public health and has ensured uninterrupted supply of medical devices despite numerous challenges. Therefore, it may prove to be disastrous for India’s public health if the Government were to adopt an inward-looking approach and only boost domestic manufacturers. This, even after being well-aware of how most of the domestic industry players are not even close to their global counterparts when it comes to research and development (R&D) facilities, manufacturing units and matching up to the universal quality and safety standards.
To emerge stronger in the medical devices sector, India needs to globally collaborate with the med-tech industry for its innovation and research-driven approach. Considering the nascent stage the Indian medical devices industry is in, it becomes important to look beyond the surface and understand how investment from trusted players can help the small and medium industries of the country to contribute to R&D so that they can do value-addition to their medical devices. India cannot aim to achieve its goal of becoming self-reliant overnight with no significant presence of local manufacturers and products that measure up to global quality and innovation standards.
Although the Government is doing everything it can to strengthen its resolve to make affordable healthcare available to its citizens, the approach to solve the affordability issue without laying emphasis on quality healthcare is not the right way forward. What India needs right now is better access to quality healthcare, with an innovation-driven approach. Just like the Government exempted customs duty on Covid-19-related medical equipment, it should also consider removing the additional cess from high-risk and critical care medical devices so that there is no supply issue in the country at large. With the progress India is making, it would not be wrong to say that with the right long-term vision, there is no stopping it from becoming self-reliant. However, till then, India should take one step at a time, starting from focussing on bridging the gaps in its existing healthcare infrastructure and drawing inspiration from what the global med-tech sector has to offer.
(Writer: Tanu priya; Courtesy: The Pioneer)
The Railway Ministry wants to run private trains by 2023 but why will any operator bid?
The Ministry of Railways wants private operators to run a few long-distance express trains in India. Last week, it expressed its intent to invite participation for 109 pairs of routes for a project that would entail private sector investment of about Rs 30,000 crore. The announcement has brought out the usual suspects, both for and mainly against the proposal. But this offer could be stillborn simply because it makes no sense for any private operator. The railways has put a cascade of conditions without any iota of responsibility. This proposal is as silly as the railways’ ill-fated idea that shifted to an airline pricing algorithm, minus any proper maths, which would have allowed for prices below average as well.
The problem is quite simply that Indians have tasted cheap airfares on long distance routes. And while rail fares could still be fractionally cheaper, travelling by train will only be an option for those going to places that are far removed from the aviation map. How can one justify the 17 hours taken to travel between Delhi and Mumbai on a train when an aircraft takes just two hours and a couple more to get home for more or less the same price? The value of time has certainly hit train travel across the country. It is doubtful that the Railways will recover anytime soon. However, private train operators could manage interesting high-end luxury travel concepts where the value of time is less than that of the travel experience. It is unlikely that new private operators will be allowed on India’s new high speed line. So it is curious why the Railway Ministry thinks it has a product that others will want to buy. Luxury is the only way. Train operators across large countries in the world are doing just that: Moving from being mass transport operators to becoming purveyors of luxury. Sure, limited passenger operations might remain but railways are moving to being commuter options in urban areas or moving the whole hog to high-speed. This idea might be praised or criticised but the realities of the world mean that it is an idea whose time passed a decade ago.
(Courtesy: The Pioneer)
In the deflationary pressure induced by the pandemic, what remains inexplicable is the hoarding of funds by the Government, which creates a suffocating liquidity trap in the market
As the Indian economy witnesses a major downturn, predictably a negative growth, the dichotomy between monetary and fiscal policy becomes an irritant. Monetary management by allowing for a nearly Rs 13 trillion loan to the corporate, MSME, agriculture and other sectors of the economy is a huge release of capital stuck in the banking and non-banking sector. Arguably this would have turned the wheels of industrial production but COVID-19, with its multiple slowdown effects, won’t allow it to happen. Critics have pointed out that the absence of open chest financing of Government debt and securities, as well as no last- resort cash support to about 14 crore jobless migrant workers, have depressed the economy both in the short and long-term. This impacts productive activity negatively in the secondary and tertiary sectors of the economy with falling demand.
In the absence of fiscal stimuli, distressed and risk assets in the market stand in the way of any attempt at recovery. Monetary stimuli in the absence of effective demand cannot boost the business cycle. A huge shortfall in revenue, from both tax and non-tax sources, has only created a spurt in public debt and the consequent rate cut for controlling debt has created a precarious imbalance between real output and interest rates. Failing interest rates create a vicious cycle of inducing stress in asset-based funds that now have to look for stimuli from financial institutions to survive from debt. In effect, resources of the Reserve Bank of India (RBI) and the available Government funds for loans run the risk of turning into NPAs even in the short-term. So circulation of higher liquidity in situations of Corona-induced insolvency presents a slippery slope for the management of the macroeconomic policy.
The stimulus package of Rs 20 lakh crore for macroeconomic management has not shown signs of much-needed neutralisation of the liquidity trap by raising demand for credit. The package establishes that there is no liquidity crunch and indeed India’s foreign reserve reaches a peak of over $500 billion, covering much of its import bill. In such a situation, the demand for Government securities and bonds should have gone higher but the demand situation is such that it prods the investors to hold back such securities. In contrast, the Reliance JIO deal, by raising funds through rights issues in the stock market, received a preferential treatment from the Ministry of Corporate Affairs to only offset its huge debt without corresponding expansion of the credit market, which could have helped the banks to offset the situation of a liquidity trap. Had the Government issued new bonds and securities using the cut in the rate and generated some additional funds like its blue-eyed boy Reliance, that would have probably eased excess liquidity. Instead, given the increasing rate of macroeconomic unemployment, almost at 14 per cent, the need for additional funds for employment generating activities by way of stimulus packages announced by the Government got immobile in the widening liquidity trap. The Government has already printed currency notes worth Rs 1.6 lakh crore and only succeeded in creating a good accounting ratio between its income, expenditure and debt instead of flinching itself out of the liquidity trap.
What can extricate the economy from the liquidity trap is the generation of demand, demand and more demand. Significantly, two correlated and yet highly-fluctuating monetary instruments, like India’s foreign reserve touching a record $500 billion as external trade falls and the Government’s internal borrowings from the market plummeting only to pull down repo rates, present a hard picture of control of fund flows. It is not clear how the RBI shall channelise reinvestment of cheaper borrowings into production, while such investments in the stock market at present do not ensure gains. It is in this grim scenario that the Centre’s declaration of flexibility in tax slabs to industries, as part of the stimulus package, only helps the businesses to keep afloat. Deflationary pressure continues unchecked in the product market as the Government scampers for attracting investment through floating rate bonds.
The recent increase of employment in agriculture with the Centre’s Rs 1.5 trillion package has generated some demand, yet it does not show signs of revival. Reverse migration from cities to rural areas is an immediate cause of such increased demand but last-mile delivery issues do not allow it to be an impact of the Government’s Rs 1.5 lakh crore package. In effect, if one combines a stalemate in foreign trade and piling reserve with falling rates of investment and profit, the stimulus on the demand side cannot overcome this simultaneous fall in both supply and demand. Restarting the economy to offset the slump in income and demand, combined with fresh doses of investment in greenfield areas through stocks, are still to gather much momentum against the early signs of a recession. Recessionary trends in the manufacturing sector combined with a deflationary fall in the Wholesale Price Index produce a cascade of compression in the economy, making rating agencies predict negative GDP growth for at least the next two years.
A very paradoxical question to ask is, does a programmatic infusion of demand as the stimulus package enforce austerity and fund crunch arising out of an inherited fiscal deficit at the level of nearly five per cent of the present GDP? The question could be further teetered by asking whether recessionary trends at the macroeconomic level require an open chest funding for every sector of the economy, starting with the most distressed. The behaviour of risk assets such as Franklin Templeton and DHFL withdrawing $25 billion from the Indian stock market further depresses the already sluggish demand. Does this recessionary symptom cause a decrease in the capacity of the State and the Government to respond to the chain of fiscal demands without saving its back by generation of additional income through revenue and extra-revenue routes?
Possibly this question brings out the reason why the Centre is raising the prices of petrol, diesel and other fuels when crude prices are at the lowest. Could this be the only means to generate extra revenue so that fiscal deficit can be covered up and profits made by oil companies could be used for funding a longer crisis? Given the lockdown-induced loss of capacity, the Government is adopting this easy route in spite of its deleterious impact on the prices of essential goods. The situation returns to the same vicious cycle as fall in income, investment, interest, wage and demand make it impossible to revive the economy despite good supply side management in terms of monetary policy. Post lockdown, the economy then looks like a quicksand that eats up the stimulus without the desired impact. The economy continues to move in the trajectory of decline in real GDP and rates of profit. This lies beyond the scope of monetary and fiscal readjustments as the Centre struggles to maintain the fundamentals of the economy.
Nothing could have been more treacherous than the Chinese aggression at this time of crisis. Though the Government is able to make large payments for defence purchases such as Rs 3 billion to the US, Rs 2.1 billion to Israel, Rs 16 billion to Russia, yet there is a seeming lack of funds for medical preparedness to fight COVID-19 and defence preparedness to fight China. With a heady mix of growing income inequality, falling consumption and revenue and stressed assets in money markets, a Government with its hands full of funds does not have many options to spend. As a result, the much- needed panacea of Direct Cash Transfer to 25 crore migrant workers and other rural labourers has not been taken up by an internally and externally-shaken Government.
One requires a proper framework to understand such a dysfunctional state of the economy. Economist Thomas Piketty’s famous thesis on India’s growth story, in terms of the falling contribution of people at the bottom and an artificial attempt by the Government to keep rate of interest lower than the rate of return from capital, seems to dominate the money market. The absence of an appropriate scheme for re-distribution of profit and income for social good turns advantages in the money market ineffective as prognosticated by Piketty and Paul Krugman.
In the deflationary pressure induced by the pandemic, what remains inexplicable is the hoarding of funds, which creates a suffocating liquidity trap in the market. Piketty’s suggestion that India should initiate a universal basic income scheme could have balanced out this excess liquidity in favour of increased demand had the Government succeeded in kicking off the economy at the level of pre-lockdown productivity.
Instead, the Government’s austere move to curtail public expenditure due to revenue shortfall is in sync with the existing recessionary trend in the economy. The Chinese perception of this economic recession is the salient factor that prompts China to create a war-like situation with India in the interest of augmenting its own internal demands.
(Writer: Prasenjit biswas; Courtesy: The Pioneer)
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