Tag Archives: Indian economy

Maybe they are competent economists but poor in comprehending political and structural transformations

Newsroom24x7 Network

Photo by Burak K on Pexels.com

Arun Kumar, an eminent economist and leading authority on black money, who has taught at the Jawaharlal Nehru University till 2015 has continuously underscored “demonetisation opened the floodgates for earning “black incomes” and affected the unorganised sector so adversely that the overall Indian economy has stagnated and is not growing any more.

The economy has been growing at 1% in the last 3 years, Kumar pointed out in an interview in mid-2019 and said since it’s an unorganised sector that got hit first by demonetisation, followed by GST and the NBFC crisis, it has left an impact on the economy.

Newsroom24x7 is sharing here with our followers an ongoing dialogue on social media. We are only using the initials for those engaged in this dialogue on Arun Kumar’s view point that GST and demonetisation were grand disasters that have brought about the downslide in India’s economy.

RS:
The deadly post-demonetisation, the new GST regime and direct policy impact of select corporates have led to this debacle. Its just not Modi the previous and the present FM and the policy makers within the BJP are responsible for this mess

RL:
There are two different things here. One is that GST, demonetisation, are not measures which will make the economy grow immediately. Rather, they are measures without which the economy will never grow any more than what it had already done. The second is the downturn in the economy. That downturn was bound to happen as India adjusted to more formal, more systematic, ways of working. That will happen because Narendra Modi has effectively liberated the people of India from the clutches of politicians and civil servants.

The GST and demonetisation were both steps in the direction of such liberation. The liberation of banks from the clutches of politicians and bureaucrats too needs to be counted here. These measures will empower those who wish to grow to grow. Earlier only those with contacts could.

The Indian economy which had been liberated in the 1990s, had reached the limits of its growth. The five decades of independence had shown us that no growth was possible for anyone without the active help of politicians and civil servants. Two and a half decades of indifferent growth since the 1990s, at least showed the people that there was a possibility of them growing without kowtowing to politicians and civil servants.

RS:
Demonetisation was a colossal failure. The timing of the GST post-demonetisation was a blunder in the waiting. In politics, the decisions should not be arbitrary even if they claim to be for public good. The rationale for both the decisions had brought India to its knees even before corona. This bet of bringing the unorganised sector or restructuring it by the fiats has brought economic hardship to millions, destroyed small enterprises and has pushed the nation into a poverty trap from which it was barely trying to get out. Unless policies are not nuanced and fine tuned, this reckless arrogance with an authoritarian streak so visible in the present regime will not improve anything whatever might have been their intentions. Unlike you, I don’t credit them with wisdom that you find in them and their half baked ill-conceived schemes(unless you being closer to power centres have more access to the brilliant effort that has gone into this planning and its execution).

RL:
There is this belief in India that such changes that empower the poor, the commoner, come through social consensus. They don’t. The only way to bring changes such as the GST is through fiat. Even the zamindari abolition bills of the 1950s, came about in the face of stiff opposition from many academics, analysts, journalists and of course zamindars. Similarly with the nationalisation of banks and the coal mines and LIC.

The manifestation of consensus is not merely that all political parties, all journalists and all academics support such a measure. If they do, it makes life easier for those bringing in the change. The manifestation of consensus in such issues is also about taking a chance of annoying a lot of people. The Narendra Modi government took that chance.

Also, I know that every government has sought to bring in these changes but has been scared that those in power and authority would find the transformation upsetting. If the Modi government went ahead to still go in for the transformation, it deserves accolades rather than criticism.

The accusation that the present slow-down in the economy is a consequence of introducing GST and demonetisation is merely an unfair accusation.

Even the common public who is claimed by critics to be hurt by these changes does not support these accusations when it comes for them to make a choice: Modi or Congress– and the public has consistently, with ever increasing strength, opted for Modi while rejecting the Congress eco-system.

I have said this earlier and will continue to say that academics like Arun Kumar, Prabhat Patnaik, are simply out of their depth when they indulge in criticism of the structural transformations that Modi is bringing in. Maybe they are competent economists, maybe they are not; but they are certainly extremely poor when it comes to comprehending political and structural transformations. And they definitely don’t have the good of India or the people of India in their hearts. Their criticism is mindless. They have no roots on the ground.

Credibility of Indian Economy has been restored during 3 years of NDA rule: Jaitley

Newsroom24x7 Staff

New Delhi: Union Minster of Finance, Defence and Corporate Affairs Arun Jaitley today said that after the present NDA Government came to power at the Centre in May, 2014, it has been able to restore the credibility of the Indian Economy and also the image of the Government, which was at its rock-bottom due to serious charges of corruption, indecisiveness and policy paralysis during the earlier UPA regime.

The Finance Minster said that the three major achievements of the present NDA Government in the last three years include the ability to take decisions -even difficult decisions, drastic changes in the earlier system of governance which led to corruption, and making market mechanism as the basis of the Government decision making and eliminating the Government discretions in the process of decision making and overall governance.

Jaitley was making his Opening Remarks at a Press Conference in the national capital today. The meeting with the press was organized to highlight the key initiatives and achievements of the different Departments of the Ministry of Finance and Defence in the last three years – 2014-15 to 2016-17.

The Finance Minister said that another major contribution of the present Government was clear direction in decision making, creating an atmosphere for the growth of the economy at large so that it could be ensured that the benefits of the growth accrue to the poor and underprivileged section of society in particular.

Another major achievement of the present Government, Jaitley said, was Foreign Direct Investment (FDI) Reforms as a result of which India was the largest recipient of FDI in the world, especially in the last two years, 2015-16 and 2016-17. The Finance Minister said that despite the low private investment, FDI along with public investment played an important role in investment cycle. The Finance Minister said that the present Central Government also took special care to strengthen the State Governments by allocating more funds to them as per the recommendations of 14th Finance Commission.

Jaitley further said that the present NDA Government created a federal institution (GST Council) based on federal taxation i.e. Goods and Services Tax (GST) which is now at the last stage of its implementation. This will be a historical indirect tax reform which will bring transparency, simplicity and efficiency in the tax administration, Jaitley said adding the present Government also implemented JAM (Jandhan, Aadhar Mobile) Trinity based financial inclusion system under which a law relating to Aadhar was enacted so that resources are optimally utilised by plugging the leakages and eliminating the underserved category of beneficiaries.

Underscoring demonetisation as a major decision of the present Government, the Finance Minister said that it has helped the Government in three ways. Firstly by having greater movement towards digitization of transactions, secondly, helped in widening of the tax payers base which contributed to increase in the revenue collections by more than 18% during 2016-17 and thirdly, sending a strong message that it is no longer safe to deal in cash. The Finance Minister said that demonetization has established a ‘new normal’.

Highlighting other achievements of the present Government in the Financial Sector, the Finance Minister spoke about “Operation Clean Money”, constitution of Monetary Policy Committee (MPC) and enactment of Insolvency and Bankruptcy Code among others, He said that these have brought transformational changes in the Indian economy. Jaitley further said that we are conscious of various challenges including resolution of Public Sector Banks’ NPAs, challenge of how to increase private sector investment and the uncertainty in the global economic situation among others.

Jaitley also highlighted the achievements of the present Government in Defence Sector which include implementation of long pending One Rank One Pension (OROP) Scheme for the retired defence personnel, putting New Defence Procurement Policy in place and encouraging Defence Manufacturing within the county, balancing both public and private sector manufacturing in defence sector and Strategic Partnership Policy to supplement FDI among others. Shri Jaitley concluded his Opening Remarks by stating that the manner in which defence acquisitions were cleared during the last three years of the present Government is incomparable to inaction during the previous regime in this regard.

Along with the Union Minister for Finance, Defence and Corporate Affairs Arun Jaitley, the Press Conference was also attended by both the Ministers of State for Finance Santosh Kumar Gangwar and Arjun Ram Meghwal; Finance Secretary Ashok Lavasa; Revenue Secretary Dr. Hasmukh Adhia; Ms. Anjuly Chib Duggal, Secretary (DFS); Tapan Ray, Secretary (Economic Affairs & Corporate Affairs), Neeraj Kumar Gupta, Secretary (DIPAM); A.K. Gupta, Secretary, Defence Production; Dr. Arvind Subramanian, Chief Economic Adviser (CEA) and Ravi Kant, Additional Secretary (Defence) among others.

Click here for more details regardng the key initiatives and achievements of the five different Departments under the Ministry of Finance, Government of India during the last three years (2014-15 to 2016-17), as underscored by the Government

General level of activity in the Indian economy is still very low

Newsroom24x7 Desk

rbi gateMumbai: Ten months after the formation of the Narendra Modi led Central Government, the members who attended the thirty-eighth meeting of the Technical Advisory Committee (TAC) on monetary policy of Reserve Bank of India last month felt that the general level of activity in the Indian economy is still very low and except for railways and power (transmission and distribution), no significant improvement is seen in other sectors.

Members also felt that Agricultural growth may be impacted by unseasonal rains that have damaged rabi crops on the back of an already lowered estimate of foodgrain production. Unlike the new GDP, IIP data seem to be in sync with other key indicators such as credit growth and auto sales. Some Members were of the view that there were signs of recovery, with pick-up in the services sector purchasing managers’ index, capital goods production exhibiting the fastest growth in seven months, and Labour Bureau’s quarterly survey showing improvement in employment. However, Members believed that recovery in growth may gain traction only slowly and improvement in GDP during 2015-16 may not be more than 0.5 per cent over the current level as downside risks to growth are still high.
The meeting of RBI’s TAC, was chaired by Raghuram G. Rajan, the RBI Governor, as a run up to the First Bi-monthly Monetary Policy Review of 2015-16 held on April 7, 2015.

Members noted that global growth remained tepid and divergent. While high frequency indicators point to slowdown in China, growth in the US may face headwinds due to appreciation of the US dollar.

Activity in the Euro area, particularly Germany, is expected to pick-up supported by low oil prices, extension of quantitative easing and depreciation of the euro; the caveat is how Greece will manage its increasingly strained public finances.

The risks to the global outlook are the timing of normalisation of interest rates by the US Fed; larger than expected slowing down of China; concerns on secular stagnation; mounting geopolitical tensions in the middle-east region and reversal of crude oil prices if and when it occurs.

Members deliberated at great length on the GDP series revised by the Indian Central Statistics Office in January 2015 estimating real growth in 2014-15 at 7.5 per cent. Most of the Members concurred that it was a challenge to understand the growth momentum under the revised series as all other indicators being tracked by analysts do not show that promising level of activity. The methodological note on compilation of national accounts was silent on the method of connecting the current series with past data. In the absence of rebased past data they felt constrained in estimating potential level of growth, assessing the state of the business cycle, or making projections. Members said that, given the puzzles posed by the new GDP, one might have to shoot in the dark while recommending anything for monetary policy.

Members derived comfort from the recent broad-based decline in inflation. They assessed that the CPI headline inflation may average 5.5 per cent in 2015-16. Although the near term outlook for inflation remained benign, deriving comfort from soft crude oil prices, monsoon uncertainties may create an upside risk to the inflation path. A Member felt that the level of inflation expectations in the economy is still high.

Members noted that the current account deficit remained below 2 per cent of GDP for six consecutive quarters on account of a low trade deficit and expected that it may fall further with a pick-up in services exports following the US recovery. They expressed concerns about the near-term external outlook as merchandise export growth had been declining for three months in a row and vulnerability in the medium-term was arising from swings in capital inflows in both debt and equity markets. Members felt that though stability of the rupee may be beneficial, the present level of the exchange rate is not attractive and the rupee should be allowed to depreciate. Since the rupee has appreciated significantly against the euro, India’s share of exports in the Euro area may have fallen relative to South Asian countries where currencies have remained fairly stable.

On policy action, four Members recommended reduction in the policy repo rate. Of them, two Members suggested a 50 basis points cut along with forward guidance of no further decline. According to these two Members, the current monetary policy stance was tight, causing deceleration in real private consumption demand. Indicators such as weak IIP growth, low capacity utilisation and stressed profitability of the corporate sector indicate that high interest rates are choking demand in interest-sensitive sectors such as automobiles, housing, retail and real estate, while the real appreciation of the rupee is adversely affecting globally connected corporates. They were of the view that a decrease in interest rates would stimulate the interest-sensitive sectors of the economy and enable depreciation of the exchange rate, thereby helping the globally connected sectors. The two Members who recommended a decrease in the policy repo rate by 25 basis points felt that the inflation excluding food and fuel has declined. Moreover, there has been a substantial drop in inflation expectations, and the current food induced inflation is temporary, warranting a policy rate reduction. However, given the uncertainties regarding the path of the fiscal deficit, the monsoon, and the way the US Fed will announce increases in its policy rate, the policy rate reduction ought to be by 25 basis points and not 50 basis points. They were of the opinion that front-loading of policy rate cuts would remove some of the expected asset appreciation that is driving in large debt flows.

Three Members recommended no change in the policy repo rate. They were of the view that until the two 25 basis points cuts in the repo rate, in January and March 2015 are transmitted into lending rates, no further cut is desirable. They emphasised that simultaneous monetary and fiscal easing was a major risk and found the desire of some Members to frontload cuts rather puzzling. The third cut in the interest rate may wait at least till August after the monsoon impact is known. They wanted that the centrality of inflation in a flexible inflation targeting framework be recognised in the Reserve Bank’s forward guidance. The current level of the repo rate at 7.5 per cent is near neutral (assuming neutral real rate of 2 per cent and likely inflation of about 5.5 per cent), leaving little room for easing. As growth picks up, the neutral rate may increase, which would provide less space for a rate cut unless inflation declines further. One Member stated that to the extent aggregate demand is assessed to be weak, it would be more effective, at present, to ensure a modest real depreciation of the rupee, which would both improve the external trade balance and increase aggregate demand. One of the Members who recommended no change in the policy repo rate suggested that the statutory liquidity ratio (SLR) be reduced by 50 basis points.

Besides Dr. Raghuram G. Rajan, the TAC meeting was attended by Internal members Urjit R. Patel (Vice-Chairman), Harun R. Khan, R. Gandhi, and S.S. Mundra, Deputy Governors; and external Members Y.H. Malegam, Shankar Acharya, Arvind Virmani, Indira Rajaraman, Errol D’Souza, Ashima Goyal, and Chetan Ghate. Officials of the Reserve Bank present at the meeting were Michael D. Patra, B.K. Bhoi and Himanshu Joshi.

Modi Government’s reform agenda has brought dynamism back to Indian economy

Newsroom24x7 Desk

dynamic economyHong Kong: Fitch Ratings has affirmed India’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-‘. The issue ratings on India’s senior unsecured foreign and local currency bonds are also affirmed at ‘BBB-‘. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘BBB-‘ and the Short-Term Foreign Currency IDR at ‘F3’.

Affirmation of India’s IDRs reflects the following key rating drivers:

According to Fitch, the Narendra Modi government’s broad-based structural reform agenda has brought dynamism back to the Indian economy, after a couple of years of limited progress on the structural front. Fitch expects the policy initiatives to bring the investment climate in India closer in line with its peers’. India’s relatively weak business environment and standards of governance, as well as widespread infrastructure bottlenecks, will not change overnight, but there is ample room for improvement. Translation of the reforms into higher real GDP growth depends on the actual implementation.

Following recent revisions to the GDP data, Fitch raised its forecasts for real GDP growth to 8.0% in the financial year ending 31 March 2016 (FY16) and 8.3% in FY17, compared with 7.4% GDP growth in FY15. Fitch’s earlier forecasts for FY16 and FY17 were 6.5% and 6.8%, respectively, based on the old series of data. The significantly higher official real GDP growth numbers after the revision by the Central Statistical Office suggest the data include more economic activity than is actually taking place. While the aim to produce GDP data more in line with international standards is commendable, these new GDP growth levels and the pick-up from as early as mid-2013 are difficult to reconcile with indicators and anecdotal evidence that show low investment levels, weak corporate balance sheets and a rise in banks’ non-performing loans.

While in recent years consumer price inflation has on average been high in India compared with peers, the greater focus by both the Reserve Bank of India (RBI) and the government on lowering inflation since 2014 represents a significant change from the past. The new IDRs based on inflation targeting seems to show the government and RBI’s strong resolve to structurally lower inflation. Both the RBI’s monetary policy and the government’s policies that affect food prices, including the setting of minimum support prices for agricultural products, will strongly influence whether the target will be reached.

Implementation of the government’s structural reform agenda and structurally lower inflation would improve the sovereign credit profile, as both would improve the investment climate and benefit real GDP growth. However, India’s sovereign ratings are constrained by limited improvement in India’s fiscal position, which is a longstanding key weakness.

India’s fiscal Achilles’ heel is evident in both the general budget deficit of 7.2% of GDP for the combined central and state governments, and gross general government debt of 64.7% of GDP, which are much higher than ‘BBB’ category medians of 2.7% of GDP and 41.4% of GDP, respectively. The central government seems to have met its fiscal deficit target of 4.1% of GDP for FY15 despite disappointing revenues. The budget, presented on 28 February 2015, also contained more plausible revenue targets for FY16 than in the previous budget. But the budget lacks initiatives to significantly increase government revenue. The government has chosen to increase capital expenditures, at the expense of fiscal consolidation. Greater tax devolution gives the states more discretionary spending power in areas for which they are responsible and are important for development, although the actual impact will depend on the administrative capacity in the individual states.

The external balances contain some strong elements, including a high level of foreign exchange reserves of USD341bn, or 6.7 months of current account receipts cover (compared with the ‘BBB’ peer median of 5.2 months), low net external debt of 3.3% of GDP (compared with a 7.9% ‘BBB’ peer median), and limited dependence of commodity exports. Moreover, the current account deficit has been contained by gold import curbs and lower international oil prices. These leave India less vulnerable than a number of its peers to renewed emerging market pressures, including from the coming normalisation of monetary policy in the U.S.

The Indian economy is less developed on a number of metrics than a number of its peers. Its ranking on the United Nations Human Development Index indicates relatively low basic human development, while average per capita income remains low at USD1,633 in 2014 compared with the ‘BBB’ range median of USD10,552.

The performance of the banking sector will likely remain weak for some time, although the pace of deterioration in asset quality has eased at a few large banks. State banks remain particularly affected, accounting for around 90% of the system’s stressed assets while suffering from sharply reduced earnings and weak capitalisation. The government’s ability to provide substantial financial support to the banking system in a potential crisis is limited given the already high government debt burden.

Rating sensitivities

The Stable Outlook reflects Fitch’s view that upside and downside risks to the ratings are balanced. The main factors that individually or collectively could lead to positive rating action are:

  • Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected
  • An improved business environment resulting from implemented reforms and structurally lower inflation levels, which would support higher investment and real GDP growth

The main factors that individually or collectively could lead to negative rating action are:

  • Deviation from the fiscal consolidation path, leading to persistence of the high public debt burden, or greater-than-expected deterioration in the banking sector’s asset quality that would prompt large-scale financial support from the sovereign
  • Loose macroeconomic policy settings that cause a return of persistently high inflation levels and a widening current account deficit, which would increase the risk of external funding stress

Key assumptions

  • The global economy evolves broadly in line with the projections in Fitch’s Global Economic Outlook, and the eventual rise in U.S. interest rates does not prompt a general crisis in emerging markets
  • Economic activity will not be seriously disrupted by materialising political risk, for instance related to social unrest, separatist movements, terrorism or insurgent groups like the Naxalites