AVERTING THE ECONOMIC CATASTROPHE

“On the first day, God created the sun. In response, the Devil created sunburn. On the second day, God created sex. In response, the Devil created marriage. On the third day, God created an economist. This was a tough one for the Devil, but, in the end, and after a lot of thought, he created a second economist.”

Welcome back guys to WP REPUBLIC!

FIRST OF ALL, A BIG THANK YOU TO ALL OF YOU FOR THE APPRECIATION AND SUPPORT YOU ALL HAD SHOWN TO MY FIRST BLOG, and for those who missed it, I would be providing the link in the end. So do read and provide your valuable &constructive feedback.Glad you all came back again. I would like to welcome you all and let you know that I appreciate you, spending time here at the blog, very much.Everyone is so busy, and life moves fast, so I really do appreciate you taking time out of your busy day to check out my blog!   Thanks.

Another thing I will always appreciate is your feedback to the blog. If you have any comments or suggestions, I welcome them and would love to hear them. Always. Not that all criticism is a fun thing, but I think a criticism provided in an honest positive manner is something we can all learn and grow from, if we are open to hearing it. I will always listen to your ideas. So, I welcome your suggestions for the blog, and guys, one more thing that I would like to add is PLEASE DON’T FORGET TO PRESS THE LIKE OR DISLIKE BUTTON.I would like to make sure that the intention behind writing this blog is academic knowledge and bringing clarity to same. Credit Goes to the articles, editorials and lectures of various teachers which I have gone through to have a clarity on this topic.

As we all know that we are the biggest democracy in the world, right? Which simply means that we are POLITICALLY DEMOCRATIC, BUT THE BIGGER QUESTION IS THAT ARE WE ECONOMICALLY DEMOCRATIC??

Let’s first go through India’s GDP growth in the last five years or so.

7.4% – 2014-15

8.2%- 2015-16

8.2%- 2016-17

7.2%- 2017-18

6.8%- 2018-19

India is currently a 2.8trillion$ economy. To reach the goal set by the Modi Government of 5trillion$ mark by 2024, it would require nominal growth in dollar terms of over 12% a year, which simply means our Real GDP rate should be at around 8%.This also means that with nominal rate being at 12% INFLATION SHOULD NOT CROSS 4% (R= N-I).Interesting remark made by Mr. Piyush Goyal was that, “Don’t believe in 12% Mathematics”. Sir Right Now India is just about at the level of lower middle-income countries as far as PPP terms are concerned. Ahead of India are many countries notably China, US,Canada,France,Germany, Japan.Even Sri Lanka looks better than us.

When Mr. Modi started his 2^ndconsecutive tenure as The Prime Minister of India there was an ambitious hope and a very positive and optimistic sentiment regarding strict actions by him to revive the Economy like decreasing Corporate Taxes, Rationalization of G.S.T etc. Initially when he won the election there was a BULL RUN, SENSEX WAS AT THE HIGHEST LEVEL EVER, THERE WERE LOTS OF FOREIGN INVESTMENTS, BANKS HAD MORE MONEY, INFLOW OF DOLLAR HAD INCREASED and so on.

But suddenly we went on a path of slowdown. Global Trade Wars between US & China affected us. The biggest affected section was the automobile industry. You must have heard the news that Renault India Sales volume was hit by the slowdown in automobile industry. Also, RBI’s annual report confirms that pain of economic slowdown may linger for a while. In between there was an interesting statement by our Finance Minister N. Sitharaman. She said that the”MILLENNIAL MINDSET” of relying on taxi services, besides the upcoming stricter emission norms are responsible for the automobile sector slowdown.

Though she was heavily criticized for her statement, if you have an honest perspective you would realize that she was not completely wrong in saying that. There are different sections in the automobile industry which includes the passenger vehicle section and the commercial vehicle sections. The commercial section also got hit and as far as household vehicle sections are concerned, there are multiple reasons for its downfall.

Firstly, households don’t have enough money after demonetization. Secondly there are also talks about switching from BS-4 to BS-6 because of which the consumers are under confusion as to which vehicle they should buy,even though you can keep BS-6 vehicle for a longer period of time but they are costly also and G.S.T rates are also very high on them. And because of NPA problems, banks are not giving loans easily and the continuous increase in the price of the fuel is also an important and valid reason behind the slowdown of the passenger vehicle section.

As far as I have felt India’s current economic slowdown is due to a combination of two underlying trends. Firstly, long term fall in investments and savings rates and secondly, a significant fall in demands especially for sectors such as automobiles, consumer durables and housing. Also, you must have heard that the RBI had given RECORD SURPLUS to the government of India, so that economy could be revived a bit, as the government had no money in reserve.

The latest economic survey makes it clear that PRIVATE INVESTMENT IS THE KEY DRIVER OF GROWTH AND JOBS. Government should make fewer demands on public savings so that more of it is available for private investment i.e. households in private sector should increase their savings and utilize their savings by investing in the economy, Now this money needs to come in the economy so that the cycle or the economic system runs efficiently. Government should introduce reforms so that the household can save more money,like deduction of taxes, so that more money is available with the consumer in the form of disposable income, as when the net disposable income is low the consumer would like to keep it for their security purposes rather than investing in the economy.

The GFCF relative to GDP at current prices has witnessed a steady fall since 2011-12 when it was 34.3%.By 2017-18 it had fallen by 5.7% to a level of 28.6%.GFCF refersto addition of capital goods by replacing the older ones that are used to produce goods and services. If a country cannot replace capital goods as they reach the end of their useful lives, production declines. So, producing more goods and services can lead to an increase in the level of national income. So basically, accumulation of additional capital requires the state to generate savings and investments from the household or by reforming its policies. We can clearly see that if the rate of HOUSEHOLD SAVINGS is high, it can accumulate funds which could directly lead to produce capitals faster and the government that earns a surplus can invest that surplus in capital goods. History tells us that India had achieved 7.5 to 8% economy because of these factors in the past. I mean to say that during that time households had a lot of money to invest, also the government expanded in various new sectors, which directly lead to production of goods and people had money so they purchased them, helping the economic engine to work efficiently.

Now Sir and Ma’am what happened is that this engine got hit by a break or a storm after demonetization. IT SUCKED ALMOST THE WHOLE OF HOUSEHOLD SAVINGS CAUSING THEIR SAVINGS CAPABILITY TO GET ERODED. Period between 2011-12 to 2015-16 saw the household sector investment rates fall sharply and from 2016-17 to 2017-18 the investment rates of the PRIVATE CORPORATE AND PUBLIC SECTORS FELL MARGINALLY. Giving stress on household savings is important because an economy with low savings rate is unable to fund its investments which is needed domestically, and it may also result in the INCREASE OF FISCAL DEFICIT. Household savings acts as a cushion in times of unemployment, retirement etc. Some were of the opinion that DEMONETIZATION DIDN’T AFFECTED THE SAVINGS AS IT ONLY LED TO THE CHANGE OF STORAGE SPACE i.e. from household to banks. Now question arises that WHY THERE HAS BEEN A FALL IN INVESTMENTS OR ONE COULD SIMPLY ASK THAT WHY THERE IS NO MONEY IN THE PUBLIC SECTOR AND THE PRIVATE SECTOR?

As far as the investments under private sector are concerned sentiment plays an important role. It’s a clear-cut fact that investors invest because of the want for profit. The current scenario suggests that they fear that they will not make enough profit from governmental policies. Investors are pulling out of Indian Economy because general business sentiment in India is getting low. You must have heard about Tax Terrorism. Frankly, there was a decline in the revenue generated by government collections. Now there was a pressure on the government that from where they can get money. They asked the tax authorities to take out more money from the private sector, which resulted in sending of tax notices, payment of advance taxes by offering minute benefits etc. The CCD case can be taken as a good example. This activity of the government miffed the sentiments of the business sector. There is a fear that their money might get trapped, so why should they invest?

Another important issue is of TBS (Twin Balance Sheet Syndrome) and NPA. The loan which the customer fails to pay reflects on the balance sheet of both bank and the customer. So, banks are not giving loans and most importantly they don’t even have the money and because of decreasing demands the private sector is not interested in taking loans. Also, the global trade war as affected investments as far as the private sector is concerned. It might prove beneficial to some small countries which are manufacturing quality goods at lower prices, but this in turn affects the economy of a country like India, who are not able to manufacture quality products, or they are not getting the correct price for the manufactured goods.

As far as public sector is concerned,fiscal deficit (FD) is a serious issue. FD is high as far as India is concerned, even though low FD is required because you need to invest in order to prosper and that is why all developing countries are in FD, because of FRBM ACT OUR REVENUE SOURCE IS LIMITED, THEREFORE DECLINE IN EXPENDITURE. Second important concern is POOR RATIO OF TAX TO GDP. There is shortfall of collections. Now since our tax to GDP ratio is very low, it results in the increase of FISCAL DEFICIT. Total collection of tax is less, only the number of taxpayers has increased i.e. increase in NET TAX. Unfortunately, only 2% of the population pay their tax, surprisingly on which the whole of Indian economy is running.

So, the question is why there has been a decline in tax collection? Primary reason may be high tax rates as far as corporate taxes are concerned. Secondly, we can say that due to demonetization, the government managed to increase the bracket of income tax but on the other hand, it is important to note that the actual tax payment reduced. Thirdly G.S.T which in itself a complex process, its collection also went down,as when the people are in no mood of buying goods, the imposition of GST made very little sense. The status of household investment is also a concerning issue and the primary reason behind its decline is the decline in savings rate and the root cause of this decline is DEMONETIZATION.

Imagine a person earning Rs. 30000 per month. Say after demonetization he was left with 15000,and after paying high income tax he was left with 10000,then on this GST is imposed on every product he buys, so say at the end he is left with 5000.So it would be wiser for him to save this Rs. 5000, all for himself rather than investing in some shares or government policies. IMAGINE his scenario, his income has already worn out, so how can you expect someone like him to make investments? So, I think demonetization has proven to be the WORST EVER AS FAR AS POLICY DECISIONS ARE CONCERNED. Household savings are the largest source of funds for the economy and unfortunately it has severely gone down, and the continuous increase in household liabilities makes the situation worse.

Because of ILFS crisis, there are not enough investments in the stock market, which is also a sentimental issue. Government said we are not getting money from anywhere, so what to do? Now to their rescue came the BIMAL JALAN COMMITTEE. See basically there are 4 funds of RBI which are called Reserves. These are-:

1. CURRENCY&GOLD REVALUATION ACCOUNT(CGRA)
2. CONTINGENCY FUND
3. INVESTMENT REVALUATION ACCOUNT
4. ASSET DEVELOPMENT FUND

Issue was that,RBI said that you would not get any money from THE CONTIGENCY FUND, and from CGRA you would be getting limited funding, the then RBI governor said that RBI has nothing to do with it.This might have not gone well with the government and MR SHAKTIKANTA DAS was appointed as the new RBI Governor. Playing It politically they appointed the BIMAL JALAN COMMITTEE, so that the direct involvement of Mr. Das could be avoided. The Bimal Jalan Panel recommended that the CF should be maintained within the range of 6.5% to 5.5% of the RBI’s balance sheet which was currently being maintained at 6.8%.So the money which had gone from CF was 52637 crores approx. which is equivalent to maintaining 5.5%,which means they had gone with the minimum threshold. Also the Range of CGRA as decided by the committee was 24.5% to 20% which was previously maintained at 23.3%.So on the recommendation of the Bimal Jalan Committee RBI decided to transfer Rs 1.76 lakh crores record surplus to the Central Government from its own reserves.so that this money could be used for Governmental Expenditures. After giving its recommendations The Bimal Jalan Panel quoted that UTILIZING RBI’S REVALUATION BALANCES A MORAL HAZARD.BIG! BIG! BIG! IRONY SIR! If it was a moral hazard then why guys recommended it? The main Point Is that this find should be used in capital formation or capital expenditure, which would eventually lead to generation of new Capital which could help in reviving the Indian Economy. One needs to understand the difference between the Consumer Goods and the Capital Goods. Let’s say for example if you are buying a property, you are investing in Capital Goods as you would be using that for generating more money. On the other hand, cars or vehicles come under Depreciating Asset as you would be anyway selling it at a loss. So, the most concerning point here is Decline in Investments as far as investments in GROSS FIXED CAPITAL FORMATION ARE CONCERNED. The Fiscal Deficit in absolute terms at the end of quarter 1 was Rs 4.2 lakh crores, Super! Amdani Atthanni Kharcha Rupaiya!

Also, you must have heard that coronavirus is pushing the world into a recession and of course India cannot be immune to it.The global economy appears to be headed for uncharted&troubled territory thanks to the second wave of the coronavirus that has now spread to countries as far apart as Nigeria and New Zealand. The virus has crippled global supply chains, hit air travel and convulsed markets as it appears all set to adversely impact the U.S. economy, the global economic engine. This, when the Chinese economy is already in deep trouble due to the impact of the virus. A slowdown or worse, recession, in the two global economic engines is bad news for the world economy, which may well tilt into recession. Markets reflected these concerns last week as indices plunged and investors stampeded for the exit, dumping stocks. Big money moved to the relative safety of government bonds, pushing prices up and yields down. The U.S. markets experienced their worst week since the 2008 global financial crisis as the Dow Jones Industrial Average and the S&P 500 fell by over 12%. Interestingly, investors seemed to boycott even that ultimate refuge during troubled times, gold, whose prices also fell during the week. They seemed to place greater faith in the sovereign guarantee of the U.S. government reflected in its Treasury bills.

Now the Question is What to do next? What are your options? And the BIGGEST Question of them all is CAN INDIA REACH THE 5TRILLION$ MARK BY 2024 AS PROMISED BY THE MODI GOVERNMENT? See guys frankly speaking government needs to come outwith some drastic steps in order to achieve this. Let’s have a look at the opportunities and measures to achieve the 5trillion$ economy. Our main aim should be on improving the position of primary and secondary sectors of the Indian economy i.e. AGRICULTURE AND MANUFACTURING SECTOR. The Government of India has set a target of doubling of farmer’s income by the year 2022, which seems a little unrealistic target as Average Farm Growth Rate was halved in the first four years of the NDA Government compared to preceding 4 years i.e. from 5.2 to 2.5%. So, in my point of view in order to achieve the target of doubling farmer’s income,there is a need to improve crop productivity using technology and extension. You should also reduce cost of cultivation, while diversification to farm,non-farm activities and remunerative prices to farmers would also help in achieving this goal. Also, the problem is that at the current 35 growth rate it would take 25 years to double farmers’income. Also 50% of labor in India are in agriculture which is a surplus, so 25% of the employment can be moved to the manufacturing sector so that they can contribute in the growth of manufacturing sector, so basically the GFCF IN AGRICULTURE HAS TO INCREASED.

India is the 2nd largest producer of the fisheries in the world. Just imagine that despite having a coastline of 7500 km, India is so much ahead as far as the fisheries sector is concerned. So, we can say that India has a lot of potential as far the fishing export goes. Therefore, related to this, operation Blue Revolution has been started which is a flagship scheme. Consequently, this would help for an alternative source of income. Also,rationalization of fertilizers is important. Additionally, from my perspective The Minimum Support Price (MSP) should be rationalized for big and small farmers.

The Corporate Sector of India suffers from a low capacity utilization which is barely 70 to 72%, therefore it is unlikely that the companies will invest in new capacity creation unless and until it is increased to around 80 to 85%.One alternative to increase the capacity utilization is by doing greenfield investments in areas such as defense manufacturing which practically do not exist in the country. Focusing on new sectors could help in triggering a revival in investment cycle. FDI push would also be appreciated, and the government had also taken a step forward in this scheme by FII tax removal. The government should focus on improving sentiments like decline in tax terrorism, sending digital notices etc. It should also focus on timely GST refunds. They should focus more on capital investment, as when the private sector will see that even the government is investing on capital development and not wasting money in subsidies, it would give a boost to them to invest. The government should try to make revenue deficit zero. The government should focus on formation of a counter cyclic policy which should increase growth rate to its correct potential of 7%-7.5%,and then structural reforms should raise the potential growth itself to above 8.5%.

As far as short term measure goes the capital expenditure should be increased in both public and private sector. But if we keep long term measures in mind then structural reformation looks the best option. They are needed to push the economy onto a sustained high growth path. We also need to have a good look at the fiscal responsibility and budget management act (FRBM ACT). The government should move towards reducing the revenue deficit to zero, as it makes 60% of the fiscal deficit. Improving business sentiment, solving the NPA and TBS issue is also a good solution. A welcome step has been taken by government of India by sending computerized income tax notices for the sake of records. To address the NPA issue,the finance ministry of India has announced that 70000 crores would be inserted in public sector banks. The Government should also focus on reduction of corporate taxes, so that there is an increase in disposable income which may result in more investment in the economy. The finance ministry also announced that there is a measure of increasing depreciation on vehicle, which would basically boost new purchase.

YES BANK CRISIS-

The crisis of Yes bank is an important issue as far as the Indian economy is concerned. Yes bank limited is an Indian private sector bank founded by Rana Kapoor and Ashok Kapur in 2004.It primarily operated as a corporate bank, with retail banking and asset management as subsidiary function. It is India’s 4th largest private bank. It is in the middle of a crisis as the RBI has taken over its affairs and placed strict limits on its operation. Many companies are directly dependent on Yes bank as far as UPI transactions are concerned, in fact 35%of all UPI transactions were done through Yes bank, therefore one can say that there is a chance of massive collateral damage. Yes bank’s financial position has been undergoing a steady decline largely due to its inability to raise capital. It has experienced serious governance issues and practices in recent years.

Since 2014, banks have been facing this crisis and many of them failed to survive. Yes, bank has had its share of bad luck when it decided to invest in some companies that went on to fail, such as Jet Airways, Cox & Kings Dewan housing, Reliance Infra etc. It has struggled to raise capital it needs to stay regulatory requirements as it battles high levels of bad loans. Rana Kapoor was aggressively giving loans at high interest to those clients from where chances of repayment of loans were very less, i.e. playing a very high-risk game. Also, a 2015 report by global financial services firm UBS had pointed out that Yes Bank had strongest growth in loans to potentially stressed companies. Also, in 2017 RBI found 5 times more NPA than the bank revealed. Its ratings started to fall. Moody’s downgraded Yes bank’s ratings. Interestingly Mr. Rana Kapoor in 2018 tweeted that, “Even after a demit office as MD and CEO of Yes bank, I will never sell my Yes bank shares. Diamonds are Forever: My promoter shares of Yes bank are invaluable to me.” But sadly in 2019, Mr. Kapoor sold almost his entire Yes bank stake worth Rs 142 crores. In December 2019 Moody’s trimmed Yes Bank’s credit ratings and in January it highlighted that the bank’s standalone viability is getting increasingly challenged by its slowness in raising new capitals. On 8th March 2020 ED arrests Rana Kapoor under money laundering charges.

Opposition has claimed that many names on the defaulter’s list, share a close relationship with PM Modi. A Gujarat firm withdrew INR 265 crores hours before RBI restriction. Adani group also had discontinued their services as far as Yes bank was concerned. Therefore, one could question that was it just a coincidence or the people closer to the Government knew about this beforehand. The Finance Minister hit back at the opposition by saying, “Loans on phone to chacha-bhatija, behind Yes bank fall.” Taking the blame game forward, she blamed the UPA government for the mess. There are also questions as far as the role of the RBI is concerned, like why were bad loans given despite RBI monitoring? “On being the banking sector regulator, RBI cannot be unaware of the on goings in Yes bank”- quoted one of the top leaders of AIEBA. Bank employees’ union leader remarked that, “RBI is answerable for Yes bank fiasco. Many asked the central government to bring RBI under Prompt Corrective Action (PCA).

Nevertheless the RBI has unveiled a reconstruction scheme that suggested a clear possibility of the SBI, India’s largest bank, acquiring a 49% equity stake, with a 3 year period lock, which cannot be reduced below 26%.  The acquisition cost is likely to be around INR 11760 crores as per the face value of Yes Bank share fixed by RBI. SBI has also been authorized to pick other members of consortium in the plan approved by the government. Also, Yes bank’s authorized capital is to be altered to Rs 5,000 crores. SBI immediately invested Rs 2450 crores to acquire 49% stake in Yes Bank. Is it good to use Taxpayer Money to save private banks? Well the NPL ratio and the Recovery rate, is the biggest problem our economy is facing today.

As far as the money of depositors is concerned, I personally think it is somewhat safe, as being the 4th largest bank, the government will fire on all cylinders to secure the bank.

CONCLUSION–

If India achieves an average real GDP growth rate of 7 to 7.5% per annum until 2025 and inflation stays on 4% range, then we can say that India’s 5 trillion aim is hardly a stretch target. But the problem is, this growth rate, which should be ranging around 7 to 7.5%, has gone down to 5%. India must ensure that the real GDP stays closer to 8% or so by reviving consumptions which will directly TRIGGER the PRIVATE INVESTMENT CYCLE.

Therefore, we can say that India’s GDP to reach 5 trillion$ in 5 years would be far more challenging than achievable. India is currently a 2.8 trillion$ economy, and to reach the 5 trillion mark by 2024, the economy would require nominal growth in dollar terms of over 12% a year. To put this in context to the last quarter for which data is available, India grew slower that 6% in real terms, and if India does very little -a “BUSINESS AS USUAL” scenario- it will continue to grow. Growth, if the skeptics are right would be moderate by Indian standards. If it grows closer to 6% a year in dollar terms, then THE INDIAN ECONOMY WOULD ONLY HIT 5 TRILLION IN OUTPUT A DECADE FROM NOW. India climbed 23 places in world bank’s rankings as far as ease of doing business is concerned. This made half of us very happy. Prime Minister Modi also launched major labor reform schemes. But just focusing on ease of doing business rankings would not help us Sir! Because as far as these rankings go, we are performing good in some indicators, but we are also performing pathetic as far as other indicators go. Also, the Public Private Partnerships are quite essential for addressing infrastructure gaps in the country. There is a need for establishing an institutional mechanism to deal with time bound resolution of disputes in infrastructural sectors, and as I have said earlier, focusing on Agriculture and the manufacturing sector is must, as we cannot just focus on car manufacturing. WE NEED TO DIVERSIFY THE BASKET BECAUSE THERE ARE TONS OF GLOBAL CHALLENGES IN THE CURRENT SCENARIO AS FAR AS INDIA IS CONCERNED.

“INDIA HAS SLID FROM BEING A GLOBAL SHOWCASE OF LIBERAL DEMOCRACY TO A MAJORITARIAN STATE IN ECONOMIC DESPAIR”- Dr MANMOHAN SINGH (Ex-PRIME MIISTER OF INDIA)

Archit Srivastava

Student

Indian&World Politics