Economic Indicators-GDP, FD,etc

Aug, 12, 2019

[op-ed snap] India’s economic mobility and its impact on inequality

CONTEXT

There has been a phenomenal rise in economic inequality in India. It is important to measure the extent of economic mobility in India, which reflects the number of people moving up and down the economic ladder over time. 

Facts

  1. A 2018 Oxfam study reports a significant increase in the consumption Gini index in both rural and urban areas from 1993-94 to 2011-12.
  2. According to the Global Wealth Report (GWR) 2017 by the Credit Suisse Research Institute, between 2002 and 2012, the share of the bottom 50% of the population in total wealth declined from 8.1% to only 4.2%. In the same period, the share of the top 1% of the total wealth increased from 15.7% to 25.7%.
  3. A recent survey pointed out that the mobility rate for the population is remarkably low. In 7 years, at least 7 in 10 poor households remain poor or remain in an insecure non-poor state.

Economic mobility

In a mobile economy, the households move more freely throughout the income/consumption distribution.

Importance of mobility

  1. Long-term welfare effects of rising inequality depend crucially on the level of economic mobility.
  2. Economic mobility or the lack of it can accentuate the adverse effects of inequality.
  3. An economy with much economic mobility will result in a more equal distribution of incomes and consumption than an economy with low mobility.

Dimensions of mobility

  1. Muslims are more vulnerable to falling below the poverty line over the seven-year period compared to Hindus or other religious groups.
  2. Compared to upper-caste groups and OBCs, SCs and STs are less likely to escape poverty and more likely to move into poverty.
  3. Between upper castes and OBCs, the latter is more likely to move into poverty and less likely to become secure non-poor.
  4. Rural households are more likely to remain in poverty compared to urban households.
  5. Inequality in India can be characterized as chronic since households belonging to the lower rungs of the economic ladder are likely to find themselves caught in a poverty trap.

Way ahead

  1. Poverty reduction efforts should focus on ways to improve the permanent economic status of households through the acquisition of assets and capabilities, rather than dealing with temporary volatility.
  2. There is also doubt on the efficacy of existing affirmative action and social programs to improve the economic status of marginalized groups in the country.
Jul, 23, 2019

India enters 37-year period of demographic dividend


News

  • Since 2018, India’s working-age population (people between 15 and 64 years of age) has grown larger than the dependant population (defined as children aged 14 or below as well as people above 65 years of age).
  • This bulge in the working-age population is going to last till 2055, or 37 years from its beginning.

Why it matters?

  • In many ways, India’s demographics are the envy of the world.
  • As populations in countries such as China, US, and Japan is getting older, India’s population is getting younger.

What is demographic dividend?

  • Demographic dividend, as defined by the United Nations Population Fund (UNFPA) means the economic growth potential that can result from shifts in a population’s age structure.
  • This happens when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older).
  • In other words it is a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents.
  • It indicates that more people have the potential to be productive and contribute to growth of the economy for a longer period of time.

When this happens?

  • This transition happens largely because of a decrease in the total fertility rate (TFR, which is the number of births per woman) after the increase in life expectancy gets stabilized.

Global Examples

Japan

  • Japan was among the first major economies to experience rapid growth because of changing population structure.
  • The country’s demographic-dividend phase lasted from 1964 to 2004.
  • An analysis of the first 10 years since this phase shows how such a shift in the population structure can propel growth.
  • In five of these years, Japan grew in double digits; the growth rate was above 8% in two years, and a little less than 6% in one.

China

  • China entered this stage in 1994 — 16 years after Deng Xiaoping’s economic reforms started in December 1978.
  • Although its growth accelerated immediately after the reforms, the years of demographic dividend helped sustain this rate for a very long period.
  • In the 16 years between 1978 and 1994 (post-reform, pre-dividend) China saw eight years of double-digit growth.
  • In the 18 years since 1994 there have been only two years when China could not cross the 8% growth mark.

Indian Case

  • In near future India will be the largest individual contributor to the global demographic transition.
  • A 2011 IMF Working Paper found that substantial portion of the growth experienced by India since the 1980s is attributable to the country’s age structure and changing demographics.
  • By 2026 India’s average age would be 29 which is least among the global average.
  • The U.S. Census Bureau recently predicted that India will surpass China as the world’s largest country by 2025, with a large proportion of those in the working age category.
  • Over the next two decades the continuing demographic dividend in India could add about two percentage points per annum to India’s per capita GDP growth.

What next?

  • It is however important to note that this change in population structure alone cannot push growth. There are many other factors.
  • According to research by the RBI this will depend on India addressing its declining labour force participation rate.
  • The UNFPA states that countries can only harness the economic potential of the youth bulge if they are able to provide good health, quality education and decent employment to its entire population.

Harnessing a golden opportunity

  • India’s working-age population is now increasing because of rapidly declining birth and death rates.
  • India’s age dependency ratio, the ratio of dependents (children and the elderly) to the working-age population (14- to 65-year-olds), is expected to only start rising in 2040, as per UN estimates.
  • This presents a golden opportunity for economic growth that could be reaped through higher growth.

Way Forward

  • India needs to pay  special  attention  to  skilling  and  reskilling  its  workforce,  keeping  in  view  the  changing  nature  of  today’s  job
  • There are  serious  gaps  between  what  the  skill  development  institutions  currently  do  and what the industry requires.
  • Improving education and health infrastructure, in terms of both quality and access and  timely  action  in  a  co-ordinated  manner  by  the  Government,  private  sector  and  researchers  is  necessary  to  harness  the  window  of  opportunity  provided by a favourable demography.
Jul, 05, 2019

Explained: Economic Survey 2019 — new ideas to policy prescriptions

News

What is Economic Survey?

  • Each year, a day before the presentation of the full-fledged annual Union Budget, the country Chief Economic Advisor (CEA) releases the Economic Survey.
  • However, notwithstanding the close proximity of its release with the Union Budget, the Economic Survey is not exactly a predictor of the Budget proposals.
  • Still, it is a very important document because it provides an authoritative, detailed and official annual summary of the current state of play in the Indian economy.

What it consists of?

  • Beyond the summary, the ES paints a variety of future scenarios, highlighting likely challenges and pointing to possible solutions.
  • In the past few years, the ES has been presented in two volumes.
  • Volume 1 focussed on research and analysis about the challenges — both contemporary and long-term — facing the Indian economy.
  • Volume 2 provided the more descriptive review of the fiscal year, encompassing all the major sectors of the economy.

Importance of Economic Surveys

  • Apart from providing a comprehensive snapshot of the various sectors of the economy, the ES is also used as a sounding board for introducing new policy ideas and triggering fresh debates.
  • As the years have rolled by, successive CEAs have used every aspect of the Economic Survey to convey some key idea.
  • For instance, the colour of the 2018 Survey’s cover — pink — was chosen “as a symbol of support for the growing movement to end violence against women, which spans continents”.

Key takeaways from Economic Survey 2018-19

Slowest projection of growth

  • The ES has projected that economic growth in the current fiscal year could rise to 7% from the 6.8% in 2018-19 — the slowest rate of growth in five years.

Macroeconomic Indicators

  • The survey has flagged the challenges on the fiscal front following an economic slowdown impacting tax collections amid an expected surge in agri-spending.
  • It has underlined the need for India to shift gears to accelerate and sustain a real GDP growth rate of 8% in order to achieve the target of becoming a $5 trillion economy by 2025.
  • It flags the need for a “virtuous cycle” of savings, investment and exports to be catalyzed and supported by a favorable demographic phase required for sustainable growth.
  • Private investment has been highlighted as a key driver for demand, capacity, labor productivity, new technology, creative destruction and job creation.

Era for behavioral change

  • The Survey lays out an agenda for behavioral change by applying the principles of behavioral economics to several issues.
  • It includes gender equality, a healthy and beautiful India, savings, tax compliance and credit quality.
  • It highlights a transition from ‘Beti Bachao Beti Padhao’ to ‘BADLAV’ (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi), from ‘Swachh Bharat’ to ‘Sundar Bharat’, from ‘Give it up” for the LPG subsidy to ‘Think about the Subsidy’ and from ‘Tax evasion’ to ‘Tax compliance’.

Policy prescriptions

  • The Survey flags the case for intervention in the case of “dwarfs” (firms with less than 100 workers) despite being more than 10 years old, account for more than 50% of all organized firms in manufacturing by number.
  • In this context, it calls for a sunset clause of less than 10 years, with necessary grand-fathering, for all size-based incentives and deregulating labor law restrictions to create significantly more jobs.
  • It calls for a need to ramp up capacity in the lower judiciary, including a focus on delays in dispute resolution.
  • Contract enforcement biggest constraint to improve EODB ranking; much of the problem is concentrated in the lower courts.
  • It also calls for policy changes to lower overall lifetime ownership costs and make electric vehicles an attractive alternative to conventional vehicles.

Problem areas

  • While the investment rate was expected to pick up following improvement in consumer demand and bank lending, the GST, farm schemes will all pose challenges on the fiscal front.
  • Fiscal deficit has been pegged at 3.4% of GDP for 2018-19.
  • There are apprehensions of slowing growth, which will have implications for revenue collections.
  • Crude oil prices are projected to decline in 2019-20, which could push consumption.
  • Flags need to gear up for ageing population; necessitating more healthcare investment, increasing retirement age in a phased manner.
Jul, 03, 2019

[op-ed of the day] Not by wishful thinking

Note- Op-ed of the day is the most important editorial of the day. Aspirants should try to cover at least this editorial on a daily basis to have command over most important issues in news. It will help in enhancing and enriching the content in mains answers. Please do not miss at any cost.

CONTEXT

In early June, at a NITI Aayog meeting, Prime Minister Narendra Modi set a clear and bold economic target — to grow India into a $5 trillion economy by 2024. It is now for ‘Team India’, as the meeting was bannered, to translate this target into a plan and policies and programmes.

How realistic is this dream?

  • It is ₹350,00,000 crore of gross domestic product (GDP) at current prices, at ₹70 to a U.S. dollar exchange rate. India’s (provisional) GDP in 2018-19 at current prices is ₹190,10,164 crore (or $2.7 trillion), which means the annual per capita income is ₹1,42,719, or about ₹11,900 per month.
  • The target implies an output expansion by 84% in five years, or at 13% compound annual growth rate. Assuming an annual price rise of 4%, in line with the Reserve Bank of India’s inflation target, the required growth rate in real, or inflation-adjusted, terms is 9% per year.
  • To get a perspective, India officially grew at 7.1% per year over the last five years, but the annual growth rate never touched 9%. 

Comparison with Asian Countries

China – China, with a historically unprecedented growth record in its best five years, during 2003-07, grew at 11.7%;.

South Korea – South Korea, between 1983 and 1987, grew at 11%.

How to grow at such a fast pace

No country grew at such a pace without mobilising domestic saving and raising fixed investment rates.

1.Savings and investment rates required

  • In the last five years, on average, the domestic saving rate was 30.8% of gross national domestic income (GNDI), and the investment rate (gross capital formation to GDP ratio) was 32.5%.
  • Assuming the underlying technical coefficients remain constant, a 9% annual growth rate calls for 39% of domestic saving rate and 41.2% of investment rate.
  • Correspondingly, shares of private consumption need to shrink to about 50% of GDP from the current level of 59% of GDP at current prices, assuming foreign capital inflow remains at 1.7% of GDP.
  • In other words, India will have to turn into an investment-led economy as it happened during the boom last decade (2003-08) before the financial crisis, or like China since the 1980s.
  • Granting that rapid technical progress or changes in output composition could reduce the required incremental capital-output ratio (ICOR), it nevertheless will call for a nearly 8-9 percentage point boost to saving and investment rates.

The low domestic saving rate

History shows that no country has succeeded in accelerating its growth rate without raising the domestic saving rate to close to 40% of GDP.

FDI is not an alternative – Foreign capital can fill in some vital gaps but is not a substitute for domestic resources.

A decline in savings – The domestic saving rate has declined from 31.4% in 2013-14 to 29.6% in 2016-17; and gross capital formation rate from 33.8% to 30.6% during the same period.

NPA Crisis – The banking sector’s ability to boost credit growth is limited by non-performing assets (NPAs) and the governance crisis in the financial sector.

Baltic Dry Index indications –

  • Export to GDP ratio has declined rapidly, with a looming global trade war on the horizon, as has been indicated by the Baltic Dry Index.
  • The highly regarded leading indicator of global trade, currently trading at 1354 is forecasted to decline to less than 1,000 index points by the year-end (a decline from its historic high of 11,793 points in May 2008, just before the financial crisis set in).

Conclusion

Given the foregoing, the $5 trillion target appears daunting. It may yet be doable, provided policymakers begin with a realistic assessment, by willing to step up domestic saving and investment, and not by the wishful thinking of FDI-led growth accelerations in uncertain economic times.

Jun, 26, 2019

[op-ed snap] The savings dilemma.

Importance of savings

  • Empirical evidence shows that developing economies have a positive long-term correlation between savings and growth.
  • In a fast-growing economy like India, investments generally outpace domestic savings, and the gap gets funded by foreign savings.
  • This shows up as current account deficit.
  • Maintaining adequate domestic savings, therefore, is essential to sound macroeconomic management — more so in today’s challenging global environment.

Unfortunately, Indians have been saving less.

The decline in savings Rate

  • Worse, our rate of savings has fallen sharply.
  • The overall savings rate (households, public sector and private sector), or the proportion of gross domestic savings in the GDP, plunged to 30.5 per cent in fiscal 2018 from a peak of 36.8 per cent in fiscal 2008, rising marginally in the interim.
  • It has been downhill since fiscal 2012.
  • The external shock of the global financial crisis led to a sharp slowdown in public savings in fiscal 2009, with the government resorting to fiscal stimulus.
  • The savings rate recovered marginally in the next three years, only to lose momentum thereafter. This could compound India’s problem of slowing growth.

1. Decline in household savings

  • The largest savers in the economy, household savings, (the government and the corporate sector being the other two categories) fell from 23.1 per cent as a per cent of the GDP in fiscal 2010 to 17.2 per cent in fiscal 2018.
  • That’s a major source of concern because households have been traditionally net suppliers of funds to the private corporate sector as well as the public sector.
  • This means that excess of household sector savings over their investments is used to fund the saving-investment gap of the other two sectors.
  • A continuation of this trend will shrink the pool of savings available to facilitate private investments.

What explains the decline in household savings?

Increased Consumption –

  • A part of the answer lies in the consumption trend. National accounts data shows that over the past few years, private consumption as a percentage of the GDP has risen — in a reversal of the trend seen till the early 2000s.
  • Given favourable demographics, households are becoming consumption-centric, and their financial liabilities have been rising, as evidenced in retail credit, which, at 17 per cent annually, is the fastest-growing loans segment in the past five years.
  • This fall in household savings rate is also corroborated by a sharp fall in household saving elasticity (the proportional change in savings to a change in income) since the beginning of this decade.

    2.Government savings

On the other hand, savings of government corporations (departmental and non-departmental enterprises) are largely offset by government dis-saving (as it runs a revenue deficit), which keeps the overall public savings rate low.

3.Private sector Savings

  • But the private corporate sector savings bucked this trend, surging to 11.6 per cent of the GDP in fiscal 2018 from 7.4 per cent about a decade ago.
  • So while private corporate savings surged, household savings declined commensurately.
  • Yet, the rise in private corporate savings is in line with evolving global trends in savings after the global financial crisis.

 

Way Forward

  • In India too, rising corporate savings could be channelled for financing private corporate investment when the opportunity arises.
  • Beyond these domestic sources, an increase in private sector investment will need to be financed by foreign savings, which carries its own set of risks beyond a point.
  • With the election-related uncertainty behind us, a softer monetary policy stance, and the government’s resolve to push growth up, investments are likely to increase in the future.
  • Clearly, it’s time to reignite the virtuous cycle of high savings, investment, and growth so that the country returns to the high-growth trajectory of the past.
  • Pushing up household financial savings would require greater efforts towards financial inclusion, and possibly, incentives for saving.
  • These must be complemented by productivity-enhancing reforms that encourage private sector investments.
Jun, 12, 2019

[op-ed snap] The middle income illusion

CONTEXT

The World Bank has a definition of middle income. It is a range of per capita income between $996 and $12,055, with $996 to $3,895 defined as lower-middle income and $3,895 to $12,055 defined as upper-middle income (the thresholds are often changed, these are 2019 levels).

With a per capita income of around $2,000, India is still a lower-middle income country and $12,055 is a long way off.

The issue with the estimation

Numbers are based on nominal exchange rates

  • These numbers are based on official exchange rates, the so-called nominal per capita GDP or Atlas method figures.
  • But a country’s per capita income is in local currency, that is, rupees.
  • Typically, when economists use the trap idea, they at PPP (purchasing power parity) dollars, using PPP exchange rates, not official exchange rates. India’s PPP per capita income is now around $7,000.
  • The grist to the mill is usually provided by empirical research, documenting the development experience of a diverse range of countries.

Reasons for such a trap

  • On the one hand, as countries attained middle-income status, they would be squeezed out of manufacturing and other dynamic sectors by poorer, lower-cost competitors.
  • On the other hand, they would lack the institutional, human, and technological capital to carve out niches higher up the value-added chain. Thus, pushed from below and unable to grasp the top, they would find themselves doomed to, well, middle-income status.

Faults in this assumption

  • Middle-income countries as a group continued to grow as fast or faster than the convergence standard demanded.”
  • First, a trap cannot be defined without referring to a time-frame.
  • The time series on PPP per capita is a bit more difficult to get than the official rate per capita.
  • With that caveat, take a look at the time series of any relatively more advanced country. Until a few decades ago (a cut-off in 1960 or 1970 will suffice), all these countries were stuck in middle-income traps.
  • Second, the middle-income trap is sometimes defined not with respect to an absolute threshold level of per capita income, but with per capita income expressed as a share of US per capita income.
  • Even if one uses this relative notion, the case of a middle-income trap existing has not been proven.

Conclusion

  • Does this mean there are no issues with the Indian economy? Certainly not. After the elections, with a new government in place, plenty of people have come up with agendas for reform. In most instances, these are not short-term quick fixes, but medium-term changes.
  • Therefore, they can rightly be called structural reforms, and the suggestions should be debated, accepted and implemented.
Jun, 11, 2019

National Data Warehouse

News

Setting up National Data Warehouse

  • The statistical reforms are necessary for ensuring responsiveness to the changing needs of society.
  • The statistics ministry said that it proposes to set up a NDW with a view to leveraging big data analytical tools to further improve the quality of macro-economic aggregates.
  • Here technology will be leveraged for using big data analytical tools for further improving the quality of macro-economic aggregates.
  • Efforts are also on to evolve a legislative framework under which the National Statistical Commission (NSC) may function with independence and give holistic guidance for improving the national statistical system.

Why such move?

  • Over a period of time, there have been increasing demands on the statistical system for the production of relevant and quality statistics.
  • MoSPI has been criticised in some sections for the quality of macro-economic data.
  • The Ministry said revision in GDP estimates occur when data coverage from administrative sources improves over time and these improvements get well documented.
  • Consequently, the initial estimates of GDP tend to be conservative.
  • To improve this, it would require concomitant changes in the sectoral data flows and associated regulatory framework in the data source agencies to facilitate the use of more macro modelling techniques.

Recent initiatives

  • The Ministry has been accommodating these demands by optimizing the available resources and use of technology.
  • The recent step for the merger of CSO and NSSO was aimed at leveraging the strengths of the two organisations so that it can meet the increasing demands, MoSPI said.
Jun, 08, 2019

[op-ed snap] The only mantra

CONTEXT

India’s problem is not unemployment — this has bounced in the low and narrow range of 4-7 per cent for 50 years — but employed poverty. Our traditional labour market shock absorbers — farm employment and self-employment — are dying because kids born after 1991 are unaccepting of self-exploitation and recognise the wage premiums, identity, dignity, soft skills, apprenticeship effect, and financial inclusion of formal jobs.

1.Poor Formalisation –

India’s 6.3 crore enterprises only convert to 12 lakh GST registrants, 10 lakh provident fund payers, and 19,500 companies with a paid up capital of Rs 10 crore or more because of our regulatory cholesterol — 58,000-plus compliances, 3000-plus filing, and 5000-plus changes every year.

2. Facilitating ease of business –

We need massive ease-of-doing business that rationalises (cuts down ministries, compliances, and filings), simplifies (adopts a universal enterprise number and one labour code) and digitises (adopts a paperless, presenceless and cashless process for all employer compliance by shifting from uploads to websites to an API architecture with straight-through-processing).

3. Reverse payroll wedge

  • India’s labour laws have an insane reverse payroll wedge — employers are forced to deduct 40 per cent-plus of gross wages from chithi waali salary (gross wages) for employees with monthly wages up to Rs 25,000.
  • Yet, haath waali salary (net wages) are only 9 per cent lower for employees with monthly wages above Rs 25,000.
  • This wedge murders formalisation and confiscates property from the poor; all wages belong to employees in a cost-to-company world.

Need of competition to fix  Reverse payroll wedge

  • Fixing this wedge needs competition; EPFO is the world’s most expensive government securities mutual fund (300-plus basis points for administration fees) and Employees’ State Insurance (ESI) is the world’s most expensive health insurance programme (less than 50 per cent of contributions are paid out as benefits).
  • The reform agenda is clear — employee contribution must be made optional, employees must choose who handles their employer contributions, and social security programme fees must be capped to their costs.
  • One driver of 20 million new social security payers has been the Pradhan Mantri Rojgar Protsahan Yojna — this partial reimbursement to employers for incremental low-wage employees has incentivised social security enrolment, is easy to verify, and hard to fudge and should be extended for a fixed period of three years.

4.Challenges before skill development

  • Our skill development system faces the difficult trinity of cost, quality and quantity combining with challenging changes to the world of education.
  • In a world where Google knows everything, knowing is not as important as lifelong learning and hard skills become a necessary but not sufficient condition for the wage premium.

Lack of Apprenticeships –

Apprenticeships are the future of learning, yet India only has 5 lakh apprentices instead of 1.5 crore (if we use Germany’s number of 2.7 per cent of the labour force).

Ways to improve Apprenticeship –

  • Changes could include merging the two central government initiatives, Regional Directorates Of Apprenticeship Training (RDAT) and Board of Apprentice Training (BOAT), operate effective online matching platforms and reinforcing the regulatory legitimacy of apprenticeships as classrooms to overcome the trust deficit with employers.
  • Most importantly, we must enable degree-linked apprentices (skill universities await clearance for linking apprentices to degrees via distance and online delivery).
  • There must also be a focus on financialisation reform and sustainable competition.
  • Fairly-priced capital catalyses formalisation, yet India’s credit to GDP ratio is 50 per cent (rich countries are at 100 per cent). Sadly, Arunachal Pradesh is at one per cent and Bihar is 17 per cent.
  • Lowering our cost of money has begun but sustainably targeting a higher credit to GDP ratio needs more bank licences, fixing the governance at nationalised banks, blunting the asset liability mismatch at NBFCs (some irrationally funded 30 per cent of their balance sheet with commercial paper) and restoring the sanctity of the 270-day IBC bankruptcy deadline.
  • More Indian enterprises need formal financial credit — capital investment and working capital availability drive productivity — without replicating the rash lending between 2008 and 2014 that gave us Rs 14 lakh crore worth of bad loans. 

6.Labour as a state subject

We should consider making labour a state subject and must continue the decentralisation of funds, functions and functionaries to states while simultaneously creating accountability, capabilities and resources in city governance.

Conclusion

The 67 per cent-plus turnout in our recent election not only reflect the invisible threads that hold India together but capture an aspiration that breaks with India’s economic past. This dua needs policy to pray to the one god of formal jobs.

Jun, 04, 2019

[op-ed snap] The sum and substance of the jobs data

CONTEXT

The report from the Periodic Labour Force Survey (PLFS) is finally out. In particular, the staggering increase in the unemployment rate, from 1.7% in 2011-12 to 5.8% in 2017-18 for rural men and from 3.0% to 7.1% for urban men, has generated wide ranging hand-wringing.

Three-pointers

  • First, while the unemployment rate is a frequently used measure of poor performance of the economy, under conditions of rising school and college enrolment, it paints an inaccurate picture.
  • Second, the reported unemployment rate is dominated by the experience of younger Indians who face higher employment challenges and exhibit greater willingness to wait for the right job than their older peers.
  • Third, the unemployment challenge is greatest for people with secondary or higher education, and rising education levels inflate unemployment challenges.
  • These three conditions, taken together, suggest that part of India’s unemployment challenge lies in its success in expanding education while not expanding formal sector jobs.

Unemployment rate data

  • Change in education enrollment-  India has seen massive changes in proportion of individuals enrolled in an educational institution over the past decade.
  • For 15-19-year-old rural men, the proportion primarily engaged in studying increased from 64% to 72% between 2011-12 and 2017-18. As a result, while the proportion of the population aged 15-19 that is unemployed doubled from 3% to 6.9%, the unemployment rate tripled from 9% to 27%.

Reasons for high unemployment in this age group –

Contribution from family – Much of the increase in male unemployment is located among ages 15-29. It is important to recognise that in a country dominated by informal sector work, remaining unemployed is possible only for individuals whose families can survive without their immediate contributions.

High for people with higher education – Finally, the unemployment rate has been traditionally high for men with secondary or higher level of education and this is the segment in which most of the increase in unemployment is located.

Educational expansion without employment expansion –

  • Educational expansion affects the unemployment debate by skewing the unemployment statistics and by creating greater competition for well-paid jobs among a rising population of educated youth.
  • Rising prosperity allows young graduates to wait for well-paying jobs, creating an army of educated unemployed, before being forced to accept any work, frequently returning to family farms or starting small shops.

Meeting aspirations

  • After decades of economic stagnation, the 21st century has seen massive growth in aspirations.
  • Parents invest their hearts and souls along with their rising incomes in educating their children.
  • Children hope to make rapid economic progress well beyond the modest gains achieved by their parents’ generation.
  • The unemployment statistics based on PLFS data document the challenges these young people are likely to face.

CONCLUSION

Creating jobs for an increasingly educated workforce and ensuring that the new workers are well equipped to enter the labour force are twin challenges that deserve greatest priority. One hopes that leaders of the present government who made their political debut during the student movement in the 1970s will meet this challenge head-on.

Jun, 03, 2019

[op-ed snap] Slowdown confirmed: on deepening economic crisis

CONTEXT

The first macro data set released under the new Finance Minister, Nirmala Sitharaman’s watch, on Friday, showed an under-performing economy with GDP growth falling to 5.8% in the fourth quarter of 2018-19 and pulling down the overall growth for the fiscal to a five-year low of 6.8%.

Background

  • Growth in gross value added (GVA), which is GDP minus taxes and subsidies, fell to 6.6% in 2018-19, pointing to a serious slowdown.
  • If further confirmation were needed, the growth in core sector output — a set of eight major industrial sectors — fell to 2.6% in April, compared to 4.7% in the same month last year.
  • And finally, unemployment data, controversially suppressed by the Union government so far, showed that joblessness was at a 45-year high of 6.1% in 2017-18.
  • These numbers highlight the challenges ahead for Ms. Sitharaman as she sits down to draft the Budget for 2019-20, to be presented on July 5.

The overall slowdown in the economy

  • The economy is beset by a consumption slowdown as reflected in the falling sales of everything from automobiles to consumer durables, even fast-moving consumer goods.
  • Private investment is not taking off, while government spending, which kept the economy afloat during the last NDA government, was cut back in the last quarter of 2018-19 to meet the fiscal deficit target of 3.4%.
  • The good news is that inflation is undershooting the target and oil prices are on the retreat again.
  • But the rural economy remains in distress, as seen by the 2.9% growth in agriculture last fiscal; the sector needs a good monsoon this year to bounce back.
  • Overall economic growth in the first quarter of this fiscal is likely to remain subdued, and any improvement is unlikely until the late second quarter or the early third.

Way Forward

  • In the near term, she has to boost consumption, which means putting more money in the hands of people.
  • That, in turn, means cutting taxes, which is not easy given the commitment to rein in the fiscal deficit.
  • In the medium term, Ms. Sitharaman has to take measures to boost private investment even as she opens up public spending again.
  • These call for major reforms, starting with land acquisition and labour, corporate taxes by reducing exemptions and dropping rates, and nursing banks back to health.
  • On the table will be options such as further recapitalisation of the ailing banks, and consolidation.

Privatisation

  • The question, though, is where the money will come from.
  • With tax revenues likely to be subdued owing to the slowdown, the Centre will have to look at alternative sources such as disinvestment.
  • There may be little choice but to go big on privatisation. A rate cut by the Reserve Bank of India, widely expected this week, would certainly help boost sentiment.

Conclusion

But it is the Budget that will really set the tone for the economy.

May, 30, 2019

[op-ed snap] Why the integrity of data matters

CONTEXT

The announcement that the government has decided to merge the National Sample Survey Office (NSSO) into and under the Central Statistics Office (CSO) has caused both surprise and concern. ecent attempts to question the veracity of National Sample Survey (NSS) data and the way the issue has been handled have given rise to apprehensions within academia, State governments and the media about the prospect of radical changes in the present system for deciding substantive issues of scope, design, scrutiny and validation of the surveys.

The present system

Under the present system, every year various departments of government send a list of subjects that they would like to be investigated by the NSSO.

Request for investigation are sent to NSC –

The requests are sent to the National Statistical Commission (NSC), which has respected economists, subject matter specialists and statisticians from government, including the head of the CSO and senior officials of the NSSO responsible for technical aspects of design and conduct of field work, as well as representatives of State governments.

The investigation by NSC –

  • Subject matter specialists in particular fields are also brought in. The proposals are discussed at length keeping in view the budget allocations, availability of trained field staff and supervisors.
  • In doing so, the conduct of periodic surveys on important issues is also considered. (It should be noted that budget allocations, and personnel of the NSSO have always been under the Department of Statistics.)
  • After providing for periodic repeat surveys (at quinquennial or decennial intervals) of some important aspects (notably consumer expenditure, employment, social consumption, land holdings, rural savings and investments), the subjects to be covered in a particular year and the scope of the inquiry are decided.
  • The tasks of sampling design, the scope and content of information to be collected, design of schedules and protocols of field work are left to be decided by special working groups.
  • The tabulated results are discussed in detail by the NSC and are published after its approval.

Compromising autonomy

  • The NSSO surveys command wide respect among academics, State governments and non-governmental organisations .
  • The existing institutional arrangement in which the NSC, as a professional body independent of government, has not only functioned smoothly but also commands confidence and respect both within the country and abroad must be maintained.
  • Any attempt or even a suggestion that its substantive work, publication and free dissemination of data are subject to the department’s approval will hugely dent the credibility of the Indian statistical system.

Scope for improvement

  • It is widely recognised that there is scope for improvement in the functioning of the institution and the way data are collected.
  • These problems are well known: the NSSO doesn’t have adequate budgetary allocations; there is an acute shortage of trained field staff; the scale of surveys is un-manageably large mainly because the users demand a degree of detail in content and regional disaggregation of estimates.
  • But there are also serious difficulties inherent in trying to get reliable and complete information through the interview method.

Solutions

  • The solutions call for action by the institutions responsible for gathering data by investing in continuing research on improving sampling design, field survey methods and validation of data.
  • Correcting these deficiencies is entirely in the domain of government.

Conclusion

Increasing the role of CSO officials in running the NSSO will not solve these problems, but they can help by providing funds for specialised research on survey design and methodology. The necessity and importance of such research calls for far greater attention and resources than they receive at present.

May, 29, 2019

[op-ed snap] Government's key agenda must be to accelerate growth

CONTEXT

Accelerating economic growth must be on top of the agenda of the new government. It is only a fast-growing economy that will generate the surpluses which are necessary to address many of our socio-economic problems and to provide social safety nets.

The decline in the investment rate

  • In current prices, the ratio of Gross Fixed Capital Formation to Gross Domestic Product has stayed low at 28.5% between 2015-16 and 2017-18. In 2018-19 it is estimated at 28.9%. In 2007-08, it was as high as 35.8%. In constant prices, the ratio, has, however, shown a smaller decline from the peak.

Reviving investment

  • The bulk of public investment comes from public sector enterprises, including the Railways.
  • What is needed is for the government to interact with all public sector units and prepare a programme of public investment for 2019-20.

Long term view of Public Sector

Public sector units can take a longer-term view than the private sector. A strong public investment programme can be a catalyst of private investment. In a situation such as the present one, it can crowd in private investment.

Industry government participation

Second, there have to be sector- or industry-wise discussions between the government and industrialists to understand the bottlenecks that each industry faces in making investment and take actions to remove them.

  • Banks are under stress and the ratio of non-performing assets (NPAs) has risen.
  • We need to resolve this issue as early as possible so that banks can get back to lending at a significant pace. In the absence of term lending financial institutions, banks provide both working capital and long-term loans.
  • That is why resolving the issue of NPAs is critically important for larger flow of long-term funds.

Jobs and growth

  • The answer to the problem of jobs is only growth. It is faster growth and faster investment which will generate employment.
  • Sectors such as IT and the financial system, which provided attractive employment to young educated entrants to the labour market in the past, have their own problems.
  • But an improvement in the financial system may trigger some new jobs. Ultimately, it is overall growth which is key to more employment.

Rural Demand –

  • The main concern is the slowdown in rural demand, which can affect the off-take of consumer goods.
  • Agrarian distress, which is the cause of the slowdown in demand, needs to be tackled on a priority.
  • Where distress is due to a fall in prices, the best course of action is to resort to limited procurement so that the excess over normal is procured by the government.

Increase in agricultural output –

  • As far as increase in agricultural output in the short run is concerned, the monsoon is a big question mark.
  • Nothing can be done about it except changing the cropping pattern depending on rainfall.
  • Over the medium term, more attention must be paid to increasing agricultural productivity through consolidation of land holdings and spreading better techniques of cultivation.

Goods and services act

  • The government should get tax authorities, industrialists, traders and, particularly, exporters to sort out the issues together.
  • The Insolvency and Bankruptcy Code was another significant step taken in the last few years.
  • Even here there are some bottlenecks and the government must address them.

Land Reforms –

Compulsory acquisition of land is the antithesis of competition and should be resorted to only in limited cases where the public interest is involved.

Labour Reforms – 

  • Labour reforms should wait until the economy has picked up steam and moved to a higher growth path.
  • Only in these circumstances will there be less resistance.

 

Conclusion

To conclude, besides economic factors, non-economic factors are also critically important to revive what are often described as ‘animal spirits’. Investment today is based on expectations of future earnings. Thus it is an act of faith in the future. For this to happen, there must be social and political tranquillity.

May, 17, 2019

[op-ed snap] Trade troubles

CONTEXT

Labour intensive exports remain sluggish, non-oil non-gold imports contract, suggesting weak domestic demand. According to the latest trade data, at the aggregate level, exports grew by a mere 0.64 per cent in April. But, strip away the spurt in petroleum exports, and the remaining exports actually contracted by 3 per cent in April.

Background

  • India’s trade deficit surged to a five-month high of $15.3 billion in April with merchandise export growth slumping to 0.64 per cent — the slowest pace since December 2018.
  • These numbers suggest that the high export growth observed in March may indeed have been an aberration.
  • This subdued performance in April comes after recent data showed that industrial production had contracted by 0.1 per cent in March.
  • With both consumer durables as well as capital goods segments contracting sharply — the latter is a proxy for investment demand — it suggests that the underlying drivers of growth are sputtering.
  • According to the latest trade data, at the aggregate level, exports grew by a mere 0.64 per cent in April.
  • But, strip away the spurt in petroleum exports, and the remaining exports actually contracted by 3 per cent in April.
  • The lacklustre performance can be traced largely to the contraction in exports of engineering goods as well as subdued growth of major labour intensive segments.
  • For instance, gems and jewellery contracted by 13.4 per cent, leather products by 15.25 per cent as did man-made and cotton yarn. Growth of the ready-made garments segment also slumped to 4.4 per cent in April, down from 15 per cent in March.
  • This does not bode well for job creation. On the other hand, imports rose by 4.5 per cent in April, on the back of higher crude and gold shipments.
  • But what is worrisome is that imports, excluding oil and gold, which give a better sense of domestic demand, contracted by 2.2 per cent in April, after contracting by 2.67 per cent in the previous month.

Impact of slow down

  • The near-term prospects for exports appear to be muted. For one, the escalation of trade tensions between the US and China is likely to impact global growth and trade.
  • In fact, last month, the World Trade Organisation (WTO) lowered its projection for global trade growth.
  • It now expects merchandise trade volume growth to fall to 2.6 per cent in 2019, from 3 per cent in 2018.

Conclusion

  • Clearly, the next government has its task cut out. It will have to carefully navigate the intensifying trade war between the US and China while putting in place measures to boost competitiveness and revive exports.
  • Perhaps, easing the compliance burden of the goods and service tax (GST) would be a good starting point.
May, 15, 2019

[op-ed snap] Missing demand: on economic slowdown

CONTEXT

A welter of data collectively and individually point to one worrying conclusion: economic momentum across sectors is slowing in the widening absence of that key ingredient, demand.

Slowdown across the economy

The decline in the automobile sector –

  • Domestic sales of cars, commercial vehicles and two wheelers all contracted in April, from a year earlier, the Society of Indian Automobile Manufacturers (SIAM) has reported.
  • The decline of almost 16% in total automobile industry sales is an indication that consumption demand across markets — urban and rural, institutional and individual — is petering out.
  • While sales of commercial vehicles, a fair proxy for overall economic activity, slid 6% last month, a 16.4% drop in demand for two-wheelers extended the segment’s slump into the new financial year, mirroring the rippling rural distress.
  • The data on passenger vehicles, which saw the steepest drop in almost eight years, add to the gloom.
  • Car sales shrank almost 20% amid a protracted slump that shows no signs of a reversal.

Output decline in various sector

The latest industrial output figures from the government serve to underscore the widespread nature of the demand drought.

The decline in IIP – The Index of Industrial Production (IIP) for March shows output fell 0.1% from a year earlier to a 21-month low, with the use-based classification revealing a weakening that spared none of the six segments.

Shrink in capital Goods sector – The capital goods sector shrank by 8.7% on the back of an 8.9% contraction in the preceding month.

Fall in consumer durables – Output of consumer durables fell 5.1% from a year earlier, and growth in consumer non-durables production slid to 0.3% from the 14.1% pace in March 2018.

Drag in manufacturing – Manufacturing, which has a weight of almost 78% in the index, continues to be the biggest drag, with output contracting by 0.4% after shrinking by a similar extent in February.

Overall, the sector’s growth slowed to 3.5% in the last fiscal, from 4.6% in 2017-18.

Conclusion by data

  • Overly optimistic GDP growth Rate – The composite picture that emerges from all these numbers belies the CSO’s implicit fourth-quarter GDP growth assumption of 6.5%, and paints it as overly optimistic.
  • Unstable global conditions – With global headwinds strengthening in the backdrop of an escalating trade war between the two largest economies, the U.S. and China, and rising tensions in West Asia beginning to push up energy costs from the top oil-exporting region, Indian policymakers have to contend with an external sector that would likely only add to the domestic pressures, most certainly in the near term if not in the longer.
  • Need for a normal monsoon – The distress in the farm sector may just ease marginally if the monsoon does turn out to be “near normal” as forecast last month, and could help spur a demand revival in the rural hinterland.

Conclusion

Still, the new government that emerges after May 23 must spare little time in drawing up appropriate policy measures that not only help reinvigorate demand but also ensure that such a revival is robust, across-the-board and enduring.

May, 15, 2019

[pib] 7th Economic Census 2019


News

  • In the run up to upcoming 7th Edition of Economic Census, a national training workshop of the Master Trainers was organized by the Ministry of Statistics and Program Implementation (MoSPI).
  • The census is to begin in June this year.

7th Economic Census -2019

  • The 7th Economic Census -2019 is being conducted by MoSPI to provide disaggregated information on various operational and structural aspects of all establishments in the country.
  • MoSPI has partnered with Common Service Centres, CSC e-Governance Services India Limited, a Special Purpose Vehicle under the MEITY as the implementing agency for 7th
  • An IT based digital platform for data capture, validation, report generation and dissemination will be used in this Economic Census.

About Economic Censuses

  • In 1976, Government of India launched a plan scheme called Economic Census and Surveys.
  • It is the census of the Indian economy through counting all entrepreneurial units in the country which involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.
  • It provides detailed information on operational and other characteristics such as number of establishments, number of persons employed, source of finance, type of ownership etc.
  • This information used for micro level/ decentralized planning and to assess contribution of various sectors of the economy in the gross domestic product (GDP).

Censuses till date

  • Total Six Economic Censuses (EC) have been conducted till date.
  • In 1977 CSO conducted First economic census in collaboration with the Directorate of Economics & Statistics (DES) in the States/UTs.
  • The Second EC was carried out in 1980 followed by the Third EC in 1990. The fourth edition took place in 1998 while the fifth EC was held in 2005.
  • The Sixth edition of Economic Census was conducted in 2013.
May, 13, 2019

[op-ed snap] Of shells, companies and GDP

CONTEXT

About a third of non-government non-financial companies in the services sector are not traceable is the finding of a National Sample Survey Office (NSSO) survey for 2016-17 that has just been released. Since such entities could be shell/fake/bogus companies included in the MCA-21 database of “active” companies used for estimating the gross domestic product (GDP), the new finding could imply that private corporate sector GDP is being currently overestimated, denting the official growth narrative.

The background

  • Change in the base year – In 2015, the Central Statistics Office (CSO) issued a new GDP series with 2011-12 as the base year, replacing the earlier series with the 2004-05 base-year as a routine matter.
  • Usually, the revision leads to a slight expansion of the absolute GDP in the base year, but its growth rate does not change, implying that the underlying pace of economic expansion in the two series has remained the same.
  • Change in growth rate – This time was different, however. The absolute GDP size — the sum of the value of all (unduplicated) goods and services produced in a year — got diminished slightly in the base year, and its growth rates went up subsequently.
  • Application of global template – Faced with public scrutiny and scepticism, the CSO defended the revision by claiming that it had followed the latest global template (the System of National Accounts 2008), applying improved methodologies to a newer and larger data set.
  • Inclusion of MCA-21 financial returns – In a first, the new series estimated private corporate sector (PCS) GDP directly using the Ministry of Corporate Affairs’ (MCA) statutory filing of financial returns, MCA-21.
  • Effect on industries  – Accounting for over a third of GDP, as the non-financial PCS now spans widely, the revision has affected the estimates of many industries and services. Hence the GDP debate has mostly centred on the PCS.

Screening and setback

  • To redress the shortcoming, the CSO is committed to launching an annual survey of services (on the lines of the ASI).
  • As a first step, the NSSO carried out a survey of non-government and non-financial companies/establishments in 2016-17.
  • The NSSO report says, “About 45% of MCA units were found to be out-of-survey/causality
  • The inference could be that such companies are likely to be shell/fake/spurious entities that remain legally registered (but merely on paper), without actually producing goods and services.

Impact of estimation

  • The survey findings could bring down the growth estimates.
  • However, those knowledgeable have dismissed such an apprehension on two counts:
    • One, shell companies add value to the economy, hence their deletion would underestimate GDP.
    • Two, as all active companies are said to submit their audited accounts at least once in three years, the contribution of shell companies is well captured in the MCA database.
  • Both arguments seem questionable.
    • Shell companies, by definition, do not produce goods and services; they help the promoter/owner to hide profits or evade taxes/regulation.
    • The argument that all active companies under the MCA have filed statutory returns at least once during the last three years is a bureaucratic fiction.

 

Case for scrutiny

  • In sum, the NSSO’s survey of active companies in the services sector discovered that 45% of them could not be traced or misclassified; hence they could represent or be shell/fake/bogus companies.
  • The finding throws into sharp relief the poor quality of the MCA-21 data set, which has formed the backbone of the new GDP series.
  • The NSSO survey results have added more questions about the beleaguered GDP series.

Way forward

As a first step towards dispelling the growing distrust in the new GDP series, the government should put up the MCA-21 data for public scrutiny and lift the opacity of the methodology used in estimating corporate sector output.

Apr, 06, 2019

Asian Development Outlook 2019

News

  • Asian Development Bank has published its flagship report Asian Development Outlook 2019.

Asian Development Outlook 2019

  • ADB, in its report mentioned that recent policy measures by the GoI to improve the investment climate and boost private consumption and investment will help India to lift economic growth in the next two fiscal years.
  • For the entire Asia, the multilateral agency forecasted that growth will soften to 5.7 per cent in 2019 and 5.6 per cent in 2020.
  • India will remain one of the fastest-growing major economies in the world this year given strong household spending and corporate fundamentals said the report.
  • Income support to farmers, hikes in procurement prices for food grains, and tax relief to tax payers earning less than Rs 5 lakh will boost household income.
  • Declining fuel and food prices are also expected to provide an impetus for consumption.
  • An increase in utilization of production capacity by firms, along with falling levels of stressed assets held by banks and easing of credit restrictions on certain banks, is expected to help investment grow at a healthy rate.

About ADB

  • The ADB is a regional development bank established on 19 December 1966 which is headquartered in Philippines.
  • ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty.
  • The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).
  • The ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with members’ capital subscriptions.
  • The president has a term of office lasting five years, and may be reelected.
  • Traditionally, and because Japan is one of the largest shareholders of the bank, the president has always been Japanese.
  • ADB is an official United Nations Observer.
Apr, 06, 2019

Ambitions Beyond Growth Report 2019

News

Ambitions Beyond Growth Report

  • It is a annual report published by UN Economic and Social Commission for Asia and the Pacific (UNESCAP).
  • A comprehensive assessment of the investment needed to reach the SDGs in the region by 2030 estimates an additional $1.5 trillion per year.
  • These “ambitions beyond growth” are largely affordable for most countries in the region, given available public and private resources.
  • Strong development partnerships and regional cooperation are essential to ensure that all countries complete this important journey.
  • Closing this investment gap is within reach for many countries, but the gap is widest in countries which can least afford to narrow it
  • The report says that significant savings could be achieved through greater emphasis on education quality and outcomes.

About UNESCAP

  • The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is the regional development arm of the United Nations for the Asia-Pacific region.
  • It is established in 1947 with its headquarters in Bangkok, Thailand.
  • Parent Organisation: UN ECOSOC
  • India is a founding member of UNESCAP
Mar, 05, 2019

[op-ed snap]Consumption is the key, not easy to stimulate either govt or private spending

Note4Students

Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: GDP.

Mains level: The news-card analyses the recent slowing down of growth and how to revive it.


NEWS

CONTEXT

It won’t be easy to stimulate either govt or private spending.Indeed, even if RBI trims the repo rate by 50 basis points, it won’t have much of an effect since the liquidity in the banking system will probably stay in a deficit with the currency in circulation remaining elevated.

Background

  • As anticipated, much of the slowdown in the economy during Q3FY19—growth came in at just 6.6% year-on-year (y-o-y)—was due to slower government consumption and, to a lesser extent, moderating private consumption.
  • Even this is hard to comprehend given the festive season was one of the dullest ever, resulting in weak sales of durables such as cars.

Distressed Financial Conditions

  • Tighter financial conditions since September 2018, after the crisis in the Non-Banking Financial Companies (NBFC) space, have choked off the flow of credit to consumers.
  • Liquidity will remain tight given the relatively slow growth of deposits, making loans costlier for consumers.
  • Again, much of the consumer credit has been in the form of unsecured loans, and banks will be forced to cut back on these.
  • At least 30% of the sales of consumer durables and staples now emanates from rural India, so these will be impacted by the relatively weak purchasing power in the hinterland.
  • Also, slowing global growth will exacerbate the cyclical slowdown, not just hitting exports but also singeing both manufacturing and investments.
  • That, then, will keep consumption subdued because very few new job opportunities will be created.

Current Efforts to revive Growth

  •  The large amounts of FDI flowing into the e-commerce sector are resulting in jobs—both for the skilled and unskilled.
  •  But that is not enough to keep consumption growth at the current pace. Given much of the local investments are being channeled into buying stressed assets—either via the IBC route or otherwise—no new jobs are being created.
  • Thus, even the limited investments won’t sustain since promoters don’t have unlimited resources, are fairly leveraged and are unlikely to take big bets until the elections are over.
  • Indeed, even if RBI trims the repo rate by 50 basis points, it won’t have much of an effect since the liquidity in the banking system will probably stay in a deficit with the currency in circulation remaining elevated.

Conclusion

  • To be sure, there will some election-related spending on automobiles and other items, but that will taper off in a few months.
  • Unfortunately, government spending which has been holding up consumption in the last couple of years will remain muted since tax revenues have fallen way short of targets.
  • The relatively poor GST collections threaten to crimp government expenditure in 2019-20, too. Also, off-budgetary spends have been uncomfortably high and could be curtailed further, and that will lower spends.

 

 

 

Jan, 28, 2019

Centre’s debt-to-GDP falls, States’ rises

Note4students

Mains Paper 3: Economy| Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the present situation of economy has been tested by UPSC in recent times

Mains level: The news-card analyses Public Debt situation


News

  • While the Centre is moving in the right direction in terms of meeting the N.K. Singh Committee recommendations on public debt, the States are moving in the opposite direction, data released by the government show.

States are lagging

  1. According to the Status Paper on Government Debt for 2017-18, the Centre’s total debt as a percentage of GDP reduced to 46.5% in 2017-18 from 47.5% as of March 31, 2014.
  2. The total debt of the States, however, has been rising over this period, to 24% in 2017-18, and is estimated to be 24.3% in 2018-19.
  3. In absolute terms, the Centre’s total debt from the end of March 2014 to till 2017-18, represents a 45% increase.
  4. The total debt of the States increased up to almost 63%.

Alarming for States

  1. The Central debt has been within control because the government has been trying to stick by-and-large to the fiscal deficit parameters.
  2. The increase in the debt stock at the State level is worrying because they don’t have the other means to service the debt if it goes beyond a certain point.
  3. The report says that the States do have some fiscal space to reduce their borrowing in the coming years due to the large cash surpluses they hold.
  4. State governments as a group have exhibited a tendency to hold large cash surpluses/investments in Cash Balance Investment Account on a consistent basis while at the same time resorting to market borrowings to finance their GFD (Gross Fiscal Deficit).
  5. This indicates scope for reducing the quantum of market borrowings by State governments in case they bring down their cash surpluses (parked as investment in treasury bills of the Central government).

N.K. Singh Recommends

  1. The N.K. Singh-headed FRBM (Fiscal Responsibility and Budget Management) Review Committee report had recommended the ratio to be 40% for the Centre and 20% for the States, respectively, by 2023.
  2. It said that the 60% consolidated Central and State debt limit was consistent with international best practices, and was an essential parameter to attract a better rating from the credit ratings agencies.

Role of UDAY bonds

  1. Outstanding liabilities of States have increased sharply during 2015-16 and 2016-17, following the issuance of UDAY bonds in these two years.
  2. It was reflected in an increase in liability-GDP ratio from 21.7% at end-March 2015 to 23.4% at end-March 2016 and further to 23.8% at end-March 2017.
  3. The total outstanding liabilities as a percentage of GDP stood at 24% as at end-March 2018 and are expected to move upward to 24.3% at end-March 2019.

Implications

  1. The ratings agencies have predicted that the combined fiscal deficit of the States to be 3.2% of GDP in financial year 2020 (higher than the prescribed 3%).
  2. It is unlikely that the States will meet their 20% debt-GDP ratio target by 2023.
Jan, 19, 2019

[op-ed snap] How India’s economy smoothly navigated troubled waters

Note4students

Mains Paper 3: Economy|  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the present situation of Indian economy.

Mains level: The news-card analyses the challenges of Indian Economy and its present situation w.r.t global economic challenges, in a brief manner.


Context

  • According to several economic experts, Indian economy is on a recovery path. However, for several others, the economic outlook is still gloomy.

Positive side of Indian Economy

  • The advance estimates of national income indicate that real gross domestic product (GDP) will grow at 7.2% in FY 2018, up from 6.7% last year.
  • The advance estimates, based on data for the first six months and up to November for some indicators, are a fair assessment of the likely outcome.
  • The earlier projections of the Reserve Bank of India (RBI), the International Monetary Fund (IMF) and the World Bank are also all higher than the advance estimates.
  • Hence, barring any major shock in the next 10 weeks, it is quite likely that the year will end with at least 7% growth.
  • This robust growth is also fairly diversified with more than 8% growth in manufacturing and 9% growth or more in electricity and other utilities, construction, and public services.
  • It is particularly encouraging that the growth upturn is being led by the recovery of investment instead of debt-financed consumption as in the recent past.
  • After stagnating for several years, quarterly growth of gross fixed capital formation (GFCF) has been recovering since the second quarter of FY 2017.
  • It is now estimated to grow by 12.2% in real terms in FY 2018 compared to 7.6% in FY 2017.
  • The investment rate, which had declined to 31%, is now estimated to be back up to 33%.
  • Further, implementation of the 2016 Insolvency and Bankruptcy Code and progress on resolutions under the National Company Law Tribunal are important reforms.

Low Rate of Inflation: Mixed blessing

  • The consumer price index (CPI) inflation rate is now down to only 2.2% and the wholesale price index (WPI) inflation rate is 3.8%.
  • However, the decline in inflation is mainly on account of the decline in food and fuel prices.
  • Fuel prices are unlikely to harden any time soon, unless events in West Asia deliver a political shock. This has been a great boon for oil importing countries such as India.
  • However, whether the decline in food prices, which implies a shift in the terms of trade against agriculture, is an unmixed blessing in the present context of widespread distress among farmers is a question to be pondered over.
  • Also, core inflation (excluding food and fuel prices) is still close to 6%.
  • This presents a dilemma for monetary policy.
  • RBI’s mandate is to contain the CPI inflation rate at around 4%, but can it ignore the stickiness of core inflation around 6%, especially when central and state government spending is likely to pump-prime demand in the run-up to general elections?

Major deterrent to growth

(a)NPA

  • There is still a long way to go in tackling the problem of stressed assets and high levels of non-performing assets in public sector banks which is a major deterrent to growth.
  • There is also a return to discretionary interventions, demonstrated among other things by the arbitrary raising of tariffs in the last budget.
  • These will adversely impact growth in FY 2019.

(b)Elections

  • In the coming few months, experts are of the view that there’s expected surge in pre-election public spending.
  • Combined with a significant shortfall in tax revenues, especially goods and services tax (GST) revenues, this will lead to several fiscal deficit targets of the central and state governments being breached.
  • On the other hand, the past record of political business cycles suggests that there could be a sharp decline in public spending in the post-election period.
  • These swings in public spending can be destabilizing and adversely affect growth in FY 2019.

 

(c)Challenging External Environment

  • Far more worrying than the above discussed domestic issues is a very challenging external environment.
  • 2018 was the year of great decline. Everything declined: inflation, commodity prices, asset prices, growth.
  • While the decline in inflation is welcome, the decline in growth has now raised fears of deflation in advanced economies.
  • The IMF Data Mapper, which maps growth throughout the world, looks pretty scary.
  • More than half the globe is a dark region shrouded in grey (below 3% growth) or black (negative growth).
  • Soothing shades of green, representing robust growth, are seen only in Asia and a few countries in Africa.
  • Emerging markets and developing countries in Asia grew at 6.5% while sub-Saharan Africa grew at 3.1%.
  • Among major economies, growth declined in 2018 and is expected to decline further in 2019 in the US, European Union, Japan and China.
  • Together, they account for almost two-thirds of the world economy.

Underlying these gloomy numbers is the emergence of multiple risks such as:

  • The trade war between Trump-led US and China;
  • Tensions between US and its European allies, Canada and Mexico;
  • Confrontation in West Asia between the Trump-led coalition of the US, Saudi Arabia, Egypt, and the tacit alliance of Iran, Russia, Turkey, and Syria.
  • The potential spike in oil prices if that confrontation escalates and financial outflows from emerging markets in response to political uncertainties and rising US interest rates are the other major risks.

Effect on Indian Economy

  • India stands out for sailing smoothly through these troubled waters so far.
  • It remains the fastest growing major economy in the world.
  • However, being well integrated with the world economy, India cannot continue to grow rapidly as global growth declines.
  • The trade deficit, up from 1.7% of GDP in 2016-17 to 3.0% in 2017-18, is projected to rise further to 3.5% in 2018-19, thereby completely offsetting the expansionary impact of the fiscal deficit.
  • The net reduction of nearly $30 billion in foreign exchange reserves since 1 April 2018 is also a consequence of the gloomy global economic environment.

Way Forward

  • These adverse external factors, combined with the domestic challenges mentioned earlier, will pull growth down to less than 7% in FY 2019.
  • It could decline further in the event of a major negative shock such as a failed monsoon or a spike in global geopolitical tensions.
Nov, 30, 2018

[op-ed snap] Number theory: on lowering UPA-era GDP growth rate

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From the UPSC perspective, the following things are important:

Prelims level: GDP calculation, Base year, CSO, United Nations System of National Accounts

Mains level: Controversy related to GDP revision and why a robust methodology is necessary for calculating growth


Context

Revised GDP data

  1. The release of the new GDP back series data shows that the economy grew at an average of 6.7 per cent between 2005-06 to 2008-09 as well as between 2009-10 to 2013-14
  2. This is lower than the earlier estimates of 8.1 per cent and 7 per cent average growth respectively going by the earlier 2004-05 base
  3. The biggest of learning is that India never really decoupled from the global economy during the years of the financial crisis (2008-10), unlike what was earlier believed

Revisions of figures not new

  1. Backcasting, or reworking past national accounts statistics based on the latest base year, is a regular exercise that governments carry out
  2. Mainly done to enable precise comparison and analysis, it is a difficult exercise prone to contestation as it involves the inclusion of newer data sources, exclusion of outdated ones and making some subjective assumptions in the process

Spat over economic data

  1. In January 2015, when the government switched to a new series with 2011-12 as the base year, and subsequently after the report of the Committee on Real Sector Statistics which was mandated by the National Statistical Commission to work out a robust methodology under the new series a few months ago, there was a controversy, with agencies such as the IMF besides the RBI flagging their concerns
  2. The release of the data under the new series in 2015, and also later, had led to sceptics questioning the validity of growth figures

Reliability of the data

  1. Any criticism of the data has to take into account the fact that it has been generated by a thoroughly professional organisation, the CSO, and the methods have been scrutinised by experts, including past chief statisticians, and the Advisory Committee on National Accounts Statistics
  2. Certainly, the release of the back series by the Niti Aayog goes against convention and is bad in optics
  3. But this should not be the reason to contest its integrity
  4. The method of computation reflects the latest United Nations System of National Accounts
  5. It also captures changes in the economy since 2004-05
  6. Data sources have also been updated. Experts had testified to the robustness of the method when it was introduced in 2015

Way forward

  1. There is little doubt that India needs to invest more in data collection and integration and do informal sector surveys more frequently
  2. Robust, updated data are, in fact, insurance against politicians hijacking what is essentially an economic exercise
  3. Revisions in economic growth data are not uncommon elsewhere but what political parties ought to keep in mind is the potential damage to the credibility and its impact on investors, both global and domestic, who rely on the quality, reliability and consistency of data when they pump in money and on informed policy-making

With inputs from the article: Back and forth

Nov, 29, 2018

Nations increasing wealth at the expense of environment, shows Inclusive Wealth Report

Note4students

Mains Paper 3: Economy | Inclusive growth & issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: Inclusive Wealth Report 2018

Mains level: Inclusive growth and GDP as measure of growth


News

  • The Inclusive Wealth Report 2018 shows that while overall global wealth is rising, the increase for many countries comes at the expense of environmental assets, such as water, clean air, forests and biodiversity.

Inclusive Wealth Report 2018

  1. A country’s inclusive wealth is the social value (not dollar price) of all its capital assets, including natural capital, human capital and produced capital.
  2. The IWR 2018 builds on previous versions of the report (IWR2012 and IWR 2014) and advances methods of measuring the base of economy- capital of all types.
  3. It covers the period from 1990 to 2014, which is 25 years, which provides us with a picture of the changes in capital assets over almost a generation.
  4. It is biennially released by UNEP, that seeks to evaluate and report on a country’s wealth and wellbeing.
  5. IWI is a tool assessing a nation’s ability to look after its wealth in a way that is sustainable and safeguards its future generations.

Highlights of the report

  1. The Inclusive wealth (IW) in 135 countries was higher in 2014 compared to the level in 1990 and the global growth rate of IW was 44% over the indicated period.
  2. This implies an average growth rate of 1.8% per year.
  3. However, during the same period the global GDP growth per year was 3.4%, which is close to twofold of the annual growth rate of growth in IW.
  4. The global level growth of each of the three capitals over the study period indicate that produced capital was growing at an average rate of 3.8% per year and health and education induced human capital was growing at 2.1%.
  5. Contrary, natural capital was decreasing at a rate of 0.7% per annum.
  6. The structure of capital at the global scale as of 2014 has composed of produced capital (21%), human capital (59% of which 26% education induced human capital and 33% is health induced human capital), and natural capital (20%).

Inclusive wealth over GDP

  1. By this measure, 44 of the 140 countries – more than a third – ranked in the report’s Inclusive Wealth Index have declined in inclusive wealth per head since 1998, even though GDP has increased in many of them.
  2. The report explores alternatives to using Gross Domestic Product (GDP) as a measure of a country’s wealth.
  3. It says that GDP measures the size of a country’s economy but not its underlying asset base.
  4. Instead, it uses inclusive wealth, which focuses on stocks of manufactured, human and natural capital.

Way Forward

  1. The health of an economy must be drawn from the health of the environment.
  2. To make the right choices that will keep us on a sustainable path, we have to be able to properly measure our progress.
  3. This report will equip policy-makers with the right numbers, so that they can make the right decisions to deliver results for generations to come.

With inputs from: UN Environment

Oct, 31, 2018

India, Japan sign $75 billion currency swap agreement

Note4students

Mains Paper 2: IR | Bilateral, regional & global groupings & agreements involving India &/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: Particulars of the BSA

Mains level: India-Japan economic relations


News

Context

  • India and Japan Monday concluded a $75 billion Bilateral Swap Arrangement (BSA), a move that will help in bringing greater stability in foreign exchange and capital markets in the country.

Bilateral Swap Arrangement (BSA)

Why Currency Swap?

  1. RBI’s foreign currency reserves have shrunk from over $426 billion in April
  2. The rupee has depreciated the most among Asian currencies amid emerging market volatility triggered by rising US interest rates, pricier crude, geopolitical concerns and intensifying protectionism and trade wars.
  3. It has fallen over 13% since start of 2018, having recovered from 74.48 to the dollar earlier this month to close at 73.41.
  4. The arrangement will be used only when required, and will help meet short-term liquidity mismatches.
  5. India has taken several steps to contain its current account deficit, which could swell to an estimated 2.8% of GDP, and is seen as the root cause of rupee volatility.
  6. Conversely, Japan can also seek dollars from India in exchange for yen.

Other measures to keep CAD

  1. Some of the measures taken by the government to attract foreign capital include the review of certain restrictions on FPI investment in debt.
  2. It is promoting exports through hike in customs duty to curtail imports of non-essential items, relaxations in the policy for external borrowings and issuance of offshore rupee bonds (Masala Bonds) etc.

What it means for India?

  1. The BSA will allow India to pay for any loans that it borrows from Japan in Indian rupees, rather than borrowing a third-party acceptable currency like the US dollar.
  2. It will also allow the country to make any interest or principal payments in domestic currency.
  3. This, in turn, will increase the demand for the national currency in the forex market, making it more valuable, and stabilizing the rupee-to-dollar ratio.

Benefits of Currency Swap

  1. The BSA will aid in bringing greater stability to foreign exchange and capital markets in India
  2. This facility will enable the agreed amount of foreign capital being available to India for use as and when need arises.
Oct, 13, 2018

Estimates panel wants GDP norms changed

Note4Students

Mains Paper 3: Economy | Growth

From UPSC perspectives following things are important:

Prelims level: GDP, GVA and factors affecting growth

Mains level: Issues with current GDP measurement in India


News

Context

  1. The current manner in which GDP is measured needs an overhaul as it provides an incomplete estimation of economic activity a/c to a report by the Estimates Committee of Parliament.
  2. The current GDP and Gross Value Added measures have also been questioned by all stakeholders alike.

Why revamp GDP norms?

  1. The report said the current measure of GDP did not incorporate the economic contributions of women in running households and maintaining accounts.
  2. Nor did it have any measure of whether an increase in GDP resulted in an increase in happiness.
  3. Whereas any rise in GDP growth requires utilization of natural resources, their utilization and depletion is not taken into account while measuring GDP.
  4. The Committee strongly recommends evolving indicators/parameters to gauge the environmental resource decay and replenishment.

New avenues for GDP

  1. The report highlighted that the current GDP measure, doesn’t take into account the increase in production due to other factors such as the change in quality of the output due to improvements in technology like artificial intelligence.
  2. It noted that there was no mechanism to measure whether increase in GDP added to happiness, specifically, whether leisure helped in increasing GDP or vice versa.
  3. The Committee strongly recommends the government to have mechanisms by coming up with new measures of GDP estimation and statistical measurement of other socio-economic factors.

Back2Basics

Gross Value Added

  1. GVA it is a measure of total output and income in the economy.
  2. It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
  3. It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
  4. While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
  5. Both measures need not match because of the difference in treatment of net taxes.
  6. GDP = GVA + taxes on products – subsidies on products
Aug, 10, 2018

[op-ed snap] Time for economic policy vigilance

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Issues being faced by Indian economy and what can be done to maintain growth momentum


Context

Growth in economy picking up

  1. The Indian economy is gaining momentum
  2. The annual assessment recently released by the International Monetary Fund (IMF) showed that it expects the Indian economy to grow at 7.3% in the current, and 7.5% in the next, fiscal
  3. India is contributing 15% to global growth
  4. Some of the recent structural reforms, such as the implementation of the goods and services tax (GST) and Insolvency and Bankruptcy Code (IBC), along with liberalization of foreign direct investment and improvement in the ease of doing business, will help improve economic activity

Risks being faced by the economy

1. External Sector

  • On the external front, there are risks such as high crude prices and the tightening of global financial conditions
  • India’s current account deficit widened to 1.9% of the gross domestic product (GDP) in 2017-18 and is expected to go up to 2.6% of GDP in the current year
  • The widening of the current account deficit is getting reflected in the depreciation of the rupee, which has fallen over 7% since the beginning of the year
  • External sector risks are getting amplified by the tightening of financial conditions in global markets

2. Domestic front

  • On the domestic front, there are risks such as the delay in addressing the twin balance sheet issue and possible revenue shortfall owing to GST implementation issues
  • The resolution of the twin balance sheet problem is a real challenge
  • Resolution or liquidation of distressed assets could result in large haircuts for banks
  • This will possibly increase the capital requirement of public sector banks and the government, with fiscal constraints, may find it difficult to spare resources
  • While the collection from GST is improving, it is still running below the desired rate of ₹1 trillion per month
  • Any compression in capital expenditure as a result of revenue shortfall will affect growth

Further measures required

  1. Even as important reforms have been implemented, more will be needed in areas like land and labour
  2. Labour market reforms could complement the GST in terms of promoting the formal economy and creating fiscal space for needed social and infrastructure spending
  3. Factor market reforms and greater formalization of the economy will push growth and generate higher tax revenue
  4. For now, the government should work on smoothening the IBC and GST and not allow electoral compulsions to affect fiscal management
Aug, 09, 2018

[op-ed snap] The urgent need for states to get fiscally fit

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Deteriorating condition of state finances and need for reforms in economic planning


Context

RBI state finances report

  1. The recent report, “State Finances: A Study of State Budgets 2018” by the Reserve Bank of India (RBI) confirms that the state of state finances is in “deep trouble” territory
  2. Even as the levers of India’s development increasingly shift to states, there has been a sharp and swift reversal of the assiduous fiscal consolidation by states over the previous decade

Rising problems of the states due to increased spending

  1. The share of states in development expenditure rose from about half of all development spending by the Centre and states in FY11 to over two-thirds by FY16
  2. Revenue deficit of states was up by 50%, from ₹40,500 crore in FY17 to ₹61,100 crore in FY18
  3. The 3% GFD/GSDP (gross state domestic product) threshold has been breached for three years in a row, with 19 states crossing the threshold in FY18
  4. Overall liabilities sans guarantees grew to 24% of GDP in FY18, the highest in the last five years, driven by the issuance of Ujwal Discom Assurance Yojana (Uday) bonds in FY16 and FY17, farm loan waivers and pay commission awards

Actions needed

1. Continued efforts to make the goods and services tax (GST) buoyant

  • Corrective actions since the GST was launched seem to be showing results, as reflected in an uptick in revenue recently
  • GST remains a work-in-progress and relentless attention is required to make good the promise of a simple, and distortion-free indirect tax regime for states to reap revenue buoyancy benefits sustainably

2. Unlocking resources for infra-spending through asset monetization

  • Earlier, CRISIL Advisory had pegged India’s infrastructure investment needs during FY18 and FY22 at ₹50 trillion, with states having to account for 35-40% of this
  • Asset monetization in sectors including state highways and power transmission could possibly help recycle capital into newer infrastructure spending without adding incremental debt
  • It will also crowd-in long-term private capital and bring efficiencies in management

3. Empowering city governments and public utilities

  • Municipal bonds have made a comeback with Pune, Hyderabad, and Indore tapping capital markets successfully
  • States should do more to empower cities to translate their economic potential into resource mobilization
  • The vicious cycle of low tariffs, poor services and institutional incapacitation needs to be tackled head-on
  • Differentiated tariffs, directed subsidy and universal services access ought to replace flat tariffs, universal handouts and poor services

4. Engendering a vibrant investment climate

  • While some strides have been made on the “doing business” front over the years, the bar needs to be raised beyond the promise of “single-window” clearance and red carpet to large investors
  • Expediting structural reforms to enable timely clearances, fair and effective land acquisition, and flexible labour markets will help sustainably scale-up sluggish private investment, which is showing early signs of a pick-up
  • A recalibrated public-private partnership programme with judicious risk allocation, contract enforceability, and consistent policy regime can further augment resources for infrastructure creation

5. Redressing agrarian stress durably through wholesome reforms

  • Loan waivers announced by states since 2014 amount to ₹1.69 trillion or roughly 14% of all incremental market borrowings by state governments during this period
  • The RBI attributes 40% of slippage in consolidated revenue expenditure in FY18 vis-à-vis budget to loan waivers
  • Durable transformation in agriculture calls for progressive policies for stable prices and market linkages, farm-level support, including on crop insurance, farm inputs, soil and crop advice, and investments in logistics, irrigation, and food processing

Way Forward

  1. Financially empowered and fiscally sound state governments are a prerequisite to lift India’s growth trajectory sustainably
  2. States will need to tackle the headwinds with speed, resolve and responsibility
  3. The time for states to get their act together on the fiscal front is now
Jul, 27, 2018

[pib] Invest India

Note4students

From UPSC perspective, the following things are important:

Prelims level: Invest India

Mains level: Not Much


News

Context

  1. Invest India and Business France has signed a MoU to promote investment facilitation and cooperation between startups of India and France.
  2. The goal will be to facilitate direct foreign investment by providing practical investment information to enterprises and support the companies pursuing those opportunities which contribute positively to economic growth of the two countries.

Invest India

  1. Invest India is the National Investment Promotion and Facilitation Agency of India and acts as the first point of reference for investors in India.
  2. It is set up as a nonprofit venture under the Department of Industrial Policy and Promotion, Ministry of Commerce and Industries, Government of India.
  3. Operationalized in early 2010, Invest India is set up as a joint venture company between the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry (35% equity), Federation of Indian Chambers of Commerce and Industry (FICCI) (51% equity), and State Governments of India (0.5% each).
  4. Thus, essentially, Invest India is a private company, unlike India Brand Equity Foundation – another investment promotion agency in India set up by the same Ministry – Ministry of Commerce & Industry.
  5. Invest India’s specialists provide multiple forms of support such as market entry strategies, deep dive industry analysis, partner search and location assessment, and policy advocacy with decision makers.
  6. Functions:
  • The core mandate of Invest India is investment promotion and facilitation.
  • It provides sector-specific and state-specific information to a foreign investor, assists in expediting regulatory approvals, and offers hand-holding services.
  • Its mandate also includes assisting Indian investors to make informed choices about investment opportunities overseas.
  • Its experts, specializing across different countries, Indian states and sectors, handhold investors through their investment lifecycle ⎯ from pre-investment to after-care.
Jul, 13, 2018

Rescuing the rupee: A peek into the RBI’s arsenal

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Fall of the rupee in recent times and factors affecting its value


News

Rupee may slump further

  1. With the current-account deficit set to widen, thanks to higher oil prices and outflows from stocks and bonds, the rupee could be in for some more weakness
  2. Increasing the interest rate and burning billions in foreign reserves have done little to reverse the rupee’s standing as Asia’s worst-performing currency this year
  3. India could turn to other weapons in its arsenal if things deteriorate further

Factors affecting rupee

  1. Trade wars
  2. Sanctions on Iran
  3. Oil prices
  4. The US Fed rate decisions

Tools available with RBI

1 Raising rates

  • The Reserve Bank of India (RBI)hiked rates for the first time in four years in June and is likely to follow through in the coming months
  • Part of the reason behind a rate hike is to maintain stability on the rupee front
  • The central bank doesn’t target the exchange rate and attributes any rate moves to its goal of containing rising prices

2 Intervention

  • The RBI is suspected to have intervened regularly in the foreign exchange market
  • India’s foreign exchange reserves fall to $406 billion
  • Of these nearly $100 billion are in short-term debt, assets which the RBI considers are hot money and can leave the country anytime

Higher tariffs

  • The trade war is a new weapon in town
  • India, with its past experience of relying on higher duties to curtail imports, could use it to curb current-account deficit
  • In the aftermath of taper-tantrums in 2013, India hiked import duty on gold bullion and jewellery. That saw inflows shrink, helping narrow the current-account gap

Tap non-residents

  • One of the last resorts will be to turn to wealthy non-resident Indians to replenish precious foreign currency reserves
  • India has that option and also a sovereign bond issuance

Fight panic

  • Verbal intervention is always an option
  • RBI officer had said that India has sufficient “firepower” to deal with the rupee’s decline
Jul, 13, 2018

India became third largest economy in 2011: World Bank

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: International Comparison Program (ICP)

Mains level: India’s status in world trade and future prospects


News

Largest economy tag

  1. In a matter of six years, India emerged as the world’s third-largest economy in 2011 from being the tenth largest in 2005
  2. This data was released by the International Comparison Program (ICP), hosted by the Development Data Group at the World Bank Group

Major findings

  1. According to the ICP, six of the world’s 12 largest economies were in the middle-income category (based on the World Bank’s definition)
  2. The 12 largest economies accounted for two-thirds of the world economy and 59 per cent of the population
  3. The six largest middle-income economies — China, India, Russia, Brazil, Indonesia and Mexico — account for 32.3 per cent of world GDP, whereas the six largest high-income economies — US, Japan, Germany, France, UK and Italy — account for 32.9 per cent

Back2Basics

International Comparison Program (ICP)

  1. ICP is a partnership of various statistical administrations of up to 199 countries guided by the World Bank
  2. The main partners of this program are the World Bank, IMF, UN, ADB, OECD, CISSTAT, Eurostat, AfDB ESCWA, ECLAC, DFID, ABS, IDB, NMoFA who are also all part of the executive board
  3. The Program produces internationally comparable price and volume measures for gross domestic product (GDP)
  4. Its component expenditures are based on purchasing power parities (PPP’s)
  5. The International Comparison Program holds surveys collecting price and expenditure data for the entire range of final goods and services at intervals of some few years (the last two were separated by six years)
  6. The ICP tries to make different countries GDPs comparable by calculating them in PPP both currency converters and spatial price deflators
  7. The ICP has published its PPP results eight times so far – the first time for 1970 (a preliminary study for 1967 was also carried out) and the latest for 2011
Jul, 13, 2018

RBI flags States’ fiscal stress

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: FRBM targets

Mains level: The continuous cycle of Farm loan waivers and its detrimental effect on economy


News

Risk of higher expenditure

  1. The Reserve Bank of India (RBI) has pointed to the fiscal stress that States are facing due to several factors including farm loan waivers
  2. In a report ‘State Finances: A Study of Budgets of 2017-18 and 2018-19,’ the central bank noted that States’ consolidated gross fiscal deficit (GFD) overshot the budget estimates in 2017-18 due to shortfalls in own tax revenues and higher revenue expenditure

What could this mean?

  1. Since the combined GFP to GDP was at 6.4% as compared with the Fiscal Responsibility and Budget Management Committee’s (FRBM) medium-term target of 5%, there is a risk that private investment gets crowded out of the finite pool of financial resources
  2. Risks are also likely to emanate from possible higher pre-election expenditure in more than 10 States and implementation of the balance pay commission awards
  3. With States continuing announcements and roll-out of farm loan waivers, the budgeted GFD could be at risk, and additional borrowing requirement could produce a concomitant impact on the already elevated borrowing yields

Effect of farm loan waivers

  1. These have a dampening impact on rural credit institutions
  2. Waivers impact credit discipline
  3. They vitiate credit culture and dis-incentivise borrowers to repay loans, thus engendering moral hazard
Jul, 12, 2018

[pib] Andhra Pradesh, Telangana and Haryana Top Rankers in Ease of Doing Business

Note4Students

Mains Paper3: Indian Economy | Issues relating growth and development.

The following things are important from UPSC perspective:

Prelims: Ease of Doing Business

Mains level: Read the attached story


News

State Reform Exercise

  1. The State reform exercise under Ease of Doing Business in India is creating a lot of interest in other countries like Brazil, South Africa and Indonesia which proves that such reforms are imperative for improving the business and regulatory environment.
  2. Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, released the final rankings of States in Ease of Doing Business.

Rankings

  1. The top rankers are Andhra Pradesh, Telangana and Haryana.
  2. Jharkhand and Gujarat stood fourth and fifth respectively.

Feedback system to monitor the reach

  1. It is for the first time that DIPP has introduced taking feedback to ensure that the reforms have actually reached ground level.
  2. The feedback was collected through face-to-face interviews of actual users selected from more than 50,000 users of the services provided by the State and UT governments.
  3. DIPP organised numerous outreach programmes including 30 workshops and periodic video conferences with States and UTs.
  4. Another practice introduced in the current reform exercise was handholding support provided by the higher scoring States.

Business Reform Action Plan (BRAP)

  1. DIPP, Ministry of Commerce and Industry in collaboration with the World Bank conducted an annual reform exercise for all States and UTs under the Business Reform Action Plan (BRAP).
  2. The aim of this exercise is to improve delivery of various Central Government regulatory functions and services in an efficient, effective and transparent manner.
  3. States and UTs have conducted reforms to ease their regulations and systems in areas such as labour, environmental clearances, single window system, construction permits, contract enforcement, registering property and inspections.
  4. States and UTs have also enacted the Public Service Delivery Guarantee Act to enforce the timelines on registrations and approvals.
  5. The current assessment under the BRAP 2017 is based on a combined score consisting of Reform evidence score that is based on evidence uploaded by the States and UTs and Feedback score that is based on the feedback garnered from the actual users of the services provided to the businesses.
Jun, 30, 2018

IMF suggests India three steps to sustain high growth rate

Note4students

Mains Paper 2: IR | Important International institutions, agencies & fora, their structure, mandate

From UPSC perspective, the following things are important:

Prelims level: International Monetary Fund

Mains level: Steps that need to be taken to sustain high growth momentum in India


News

Projections for India

  1. The International Monetary Fund suggested India can sustain high growth rate by carrying out banking sector reforms, simplifying and streamline GST, and renewing impetus on reforms
  2. Growth is projected at 7.4% in FY 2018-19 and 7.8 percent in FY 19-20, respectively

Suggested measures

To revive a bank credit and enhance the efficiency of credit provision

  • by accelerating the cleanup of the bank and corporate balance sheets and enhancing the governance of public sector banks

To continue fiscal consolidation and to lower elevated public debt levels

  • This needs to be supported by simplifying and streamlining the goods and services tax (GST) structure

Over the medium-term, renew impetus to reforms of key markets

  • Labor and land, as well as improving the overall business climate would be crucial to improving competitiveness maintaining high level of growth in India
Jun, 30, 2018

RBI steps in as rupee hits record low

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: RBI tools for maintaining the value of rupee, current vs capital account convertibility

Mains level: Impact of global factors on the price of Indian currency & overall economy


News

Rupee hits a record low

  1. The rupee breached the 69-a-dollar mark for the first time ever in early trade
  2. This prompted the central bank to intervene in the currency market that enabled the domestic unit to cut losses
  3. It is estimated to have sold dollars about $700-800 million through state-owned banks

Reasons for fall of rupee

  1. Rising crude oil prices
  2. Looming trade war fears
  3. Capital outflows from the emerging markets
  4. Markets were partly under pressure due to the derivatives expiry

RBI intervention

  1. India’s $ 413 billion foreign exchange reserves act as a cushion
  2. RBI intervenes to cut volatility in currency prices

Back2Basics

Read more about Capital & Current account convertibility here:

Capital and Current Account Convertibility in India

Jun, 22, 2018

[op-ed snap] Tighter is better

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Current account deficit, Fiscal profligacy

Mains level: Risks associated with India’s CAD and factors affecting it


Context

Sudden reversal of capital flows

  1. Since April, emerging markets (EMs) have been rudely shocked by the sudden reversal of capital flows without any apparent change in economic fundamentals
  2. Financial buffers in EM are much stronger today than they were before the 2013 taper tantrum

Which economies are under pressure?

  1. The ones with large current account deficits and, in turn, high foreign borrowing
  2. Why? There has been a steady decline in policy space because of loose fiscal and, in some cases, monetary policy
  3. Without adequate policy space, the buffers have turned ineffective

Factors influencing Capital inflows

  1. The growth differential with developed markets (DM)
  2. The strength of the US dollar
  • Higher EM-DM growth differential increases inflow, a stronger US dollar lowers it
  • Why? Investing in EM is riskier, higher growth will compensate the risk
  • A stronger dollar raises the cost of funding and therefore investors scale back investment

What happened in April 2018?

  1. Incoming data from the Euro Area and Japan pointed to growth disappointment, but above par growth in the US
  2. The altered dynamics forced the market to reprice US interest rates and the dollar
  3. The consequent tightening of global financial conditions caught investors off guard
  4. Capital outflows from EM ensued and their currencies depreciated

Why are economies struggling even after having buffers?

  1. Along with buffers, Foreign exchange liabilities have also risen and there are limits to the use of reserves
  2. In several, if not all, vulnerable economies, the current account deficit is rising because of growing fiscal and quasi-fiscal deficits
  3. Fiscal profligacy is restraining the space for the economies to grow without increasing foreign borrowing

What needs to be done?

  1. If an EM economy is to maintain or widen the growth differential with DM, it needs to grow faster, requiring more funding
  2. If the government does not reduce its deficit to provide the additional funds, the private sector is forced to borrow more externally, that is, the current account deficit has to widen
  3. The way out is to tighten fiscal policy, even when it might not have been part of the problem so that the private sector has the domestic space to grow

Risks for India

  1. India’s overall fiscal deficit (Centre plus state) has remained virtually constant, around 7 percent of GDP since 2013-14
  2. This year also, both the Centre and state deficits are likely to be under pressure with GST collections running below the budgeted run rate
  3. A continued decline in private investment in last 4 years provided the excess domestic savings needed to keep the current account deficit (foreign borrowing) contained at around 1 percent
  4. With the higher budgeted fiscal deficit, even the hint of a recovery in private investment is raising fears of the current account deficit rising sharply

Way forward

  1. Loose fiscal and monetary policies pushed India to the brink of crisis in 2013
  2. If India doesn’t tighten fiscal and monetary policies early and sufficiently, then it too could be heading down the path of its peers
Jun, 06, 2018

[op-ed snap] Has the Indian economy caught the Dutch disease?

Note4students

Mains Paper 3: Economy | Indian Economy

From UPSC perspective, the following things are important:

Prelims level: “Dutch Disease”, Trends in CAD, Fragile Five

Mains level: Impact of rising crude oil prices on CAD, fiscal deficit, etc.


Context

Rising crude oil prices

  1. Crude Oil Prices are 50% up over the last nine months.
  2. With India particularly sensitive to oil, the combination of higher oil and global turbulence has inevitably raised questions about India’s preparedness to deal with global stress. This raises following questions:
  • How much more insulated is India?
  • Is there any risk of a 2013 repeat, when India was part of the “Fragile Five”?

Emerging pressures

  1. India’s current account deficit (CAD) is on course to triple to 2% of gross domestic product (GDP) in 2017-18—even though crude prices averaged just $57 per barrel last fiscal—affected by underperforming exports and over-performing imports.
  2. Now, if crude prices were to average $75 per barrel in 2018-19, we estimate the CAD would widen towards 3% of GDP or $80 billion
  3. Over the last five years, even as oil prices collapsed and India’s fiscal reaped a large windfall, the consolidated deficit has not witnessed any meaningful reduction
  4. While the Centre has reduced its deficit, states have increased theirs, such that the consolidated deficit has only inched down from 6.9% to 6.5% over the last five years

Rise in Crude Oil Prices: Implications on India’s CAD

  1. The collapse in oil prices in 2014 served as a large, positive terms-of-trade shock for India.
  2. India witnessed large gains from the collapse in oil prices (3.1% of GDP across two years, of which two-thirds was estimated to have been spent).
  3. So the collapse in oil prices should have put upward pressure on actual and equilibrium real exchange rates.
  4. The only choice policymakers had was whether to accommodate this real appreciation through nominal appreciation or relatively higher inflation.
  5. Operationally, this manifested itself in a collapse of the CAD (because of oil) and therefore a larger balance of payments surplus that was putting upward pressure on the rupee.
  6. This was compounded by foreign direct investment flows almost doubling after this government came to the power. All this exacerbated the rupee appreciation pressures.

What is Dutch Disease?

  1. The 20% real appreciation between 2014 and 2017— reflecting this positive terms-of-trade shock—has impinged on the competitiveness of India’s manufacturing sector (exports and import competitors) and therefore contributed to the deterioration of underlying balances.
  2. India likely caught the “Dutch disease”—a term that describes the Netherlands in the 1960s where a discovery of gas deposits in the North Sea and the income boom that followed, led to a real appreciation of the exchange rate that crowded out manufacturing exports.
  3. In India’s case, the analogy is the collapse in oil prices resulted in a large, positive terms-of-trade shock that was largely spent, drove up the actual and equilibrium real exchange rate which, in turn, has affected the competitiveness of India’s tradable sector.

Policy Implications

  1. Firstly, policymakers should not fight this real depreciation since it’s an equilibrium phenomenon, but simply use reserves to ensure the new equilibrium is reached in a gradual manner, so as to avoid self-fulfilling panic and overshooting.
  2. Second, there are bound to be inflationary consequences of the rupee depreciation. Under the new inflation-targeting framework, this will need to be countered by monetary tightening.
  3. So, external stress will need to be buffered through a weaker currency and higher rates, as is being witnessed all around the world.
  4. Third, it is crucial that fiscal policy (at the Central and states) does not slip again.
  5. The more expansive the fiscal policy, the more it will offset the real depreciation that will occur from the positive terms-of-trade shock reversing, and thereby hurt the competitiveness of the tradable sector.
  6. Fourth, policymakers need to continue working on improving underlying trade competitiveness, apart from exchange rate, by boosting infrastructure, total factor productivity and assimilating into global value chains.

The Way Forward

  1. India is much more fortified than in 2013, but that should not mask the fact that underlying, external imbalances have widened.
  2. The recent rise in crude prices and the real depreciation that it will induce may well be a blessing in disguise, because it may help improve underlying competitiveness.
  3. But the scale of what needs to be done to improve trade competitiveness, more fundamentally, remains daunting and should be underestimated only at our own peril.

Back2Basics

Fragile Five

  1. Fragile Five is a term coined in August 2013 by a financial analyst at Morgan Stanley to represent emerging market economies that have become too dependent on unreliable foreign investment to finance their growth ambitions.
  2. The acronym follows a long line of analyst acronyms that have caught on over the years, including Jim O’Neill’s BRICS and MINTS acronyms.
  3. As capital flows out of emerging markets to developed markets, many of their currencies experienced significant weakness and made it difficult to finance current account deficits.
  4. The lack of new investment also made it impossible to finance many growth projects, which contributed to a slowdown in their respective economies. This created a potential issue for certain vulnerable economies.
  5. The five members of the Fragile Five include:
  • Turkey
  • Brazil
  • India
  • South Africa
  • Indonesia
Jun, 05, 2018

Centre to start measuring ‘green GDP’ of States

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspectives, following things are important:

Prelims level: Green GDP, Particulars of the Initiative

Mains level: Importance of sustainable development


News

Green GDP calculation for States

  1. India’s environmental diversity and riches are universally recognised but have never been quantified.
  2. Starting this year, the government will begin a five-year exercise to compute district-level data of the country’s environmental wealth.
  3. The numbers will eventually be used to calculate every State’s ‘green’ Gross Domestic Product (GDP).
  4. The metric will help with a range of policy decisions, such as compensation to be paid during land acquisition, calculation of funds required for climate mitigation, and so on.

What’s so special?

  1. This is the first time such a national environment survey is being undertaken.
  2. A pilot project is set to begin this September in 54 districts.
  3. The land will be demarcated into “grids” with about 15-20 grids per district.
  4. These will capture the diversity in the State’s geography, farmland, wildlife, and emissions pattern, and will be used to compute a value.
  5. For instance, there’s a no-go zone, we need to calculate what its economic impact.
  6. Much of the data required for the inventory would be sourced from datasets that already exist with other government ministries.

Launching “Green Skilling Programme”

  1. The government has also launched a ‘green skilling’ programme under which youth, particularly school dropouts, would be trained in a range of ‘green jobs’— as operators of scientific instruments used to measure environmental quality, as field staff in nature parks, and as tourist guides.
  2. Some of the labour required for the survey would also be sourced from the green-skilled workforce.

Back2Basics

Green GDP

  1. Green GDP is a term used for expressing GDP after adjusting for environment degradations.
  2. Green GDP is an attempt to measure the growth of an economy by subtracting the costs of environmental damages and ecological degradations from the GDP
  3. The concept was first initiated through a System of National Accounts.
  4. The System of National Accounts (SNA) is an accounting framework for measuring the economic activities of production, consumption and accumulation of wealth in an economy during a period of time.
  5. When information on economy’s use of the natural environment is integrated into the system of national accounts, it becomes green national accounts or environmental accounting.
  6. The process of environmental accounting involves three steps viz. Physical accounting; Monetary valuation; and integration with national Income/wealth Accounts:
  • Physical accounting determines the state of the resources, types, and extent (qualitative and quantitative) in spatial and temporal terms.
  • Monetary valuation is done to determine its tangible and intangible components.
  • Thereafter, the net change in natural resources in monetary terms is integrated into the Gross Domestic Product in order to reach the value of Green GDP
Apr, 28, 2018

Fitch maintains India sovereign rating with stable outlook

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Sovereign rating

Mains level: India’s fiscal consolidation targets and their impact on sovereign rating and economy


News

No change in rating

  1. Global rating agency Fitch Ratings has not upgraded India’s sovereign rating
  2. Agency maintained its lowest investment grade rating at BBB-, with a stable outlook

Why status quo?

  1. It blamed weak fiscal finances and some lagging structural factors, including governance standards and a still difficult, but improving, business environment for its rating action

What needs to be done for rating upgrade?

  1. India can expect a rating upgrade if it reduces general government debt over the medium term to a level closer to that of rated peers at 41% of GDP and maintains higher sustained investment and growth rates without the creation of macro imbalances

Other ratings

  1. Last year, Moody’s Investors Service raised India’s sovereign rating from the lowest investment grade of Baa3 to Baa2 and changed the outlook to stable from positive
  2. Standard and Poor’s kept its India rating unchanged at the lowest investment grade of BBB-, with a stable outlook

Back2Basics

Sovereign rating

  1. A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting
  2. A sovereign credit rating is the credit rating of a sovereign entity, such as a national government
  3. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk
  4. Obtaining a good sovereign credit rating is usually essential for developing countries in order to access funding in international bond markets
Apr, 18, 2018

‘India expected to grow at 7.4% in 2018’

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: International Monetary Fund (IMF), World Economic Outlook (WEO)

Mains level: India’s growth rate in recent years and factors affecting it


News

IMF forecast

  1. The International Monetary Fund (IMF), in the latest World Economic Outlook (WEO), has projected India to grow at 7.4% in 2018 and 7.8% in 2019
  2. The latest IMF growth rate projection remains unchanged since the last one in October

Inclusiveness challenge

  1. An important challenge for India is to enhance inclusiveness
  2. India’s high public debt and recent failure to achieve the budget’s deficit target, calls for continued fiscal consolidation into the medium term to further strengthen fiscal policy credibility
  3. The main priorities for lifting constraints on job creation and ensuring that the demographic dividend is not wasted are to ease labour market rigidities, reduce infrastructure bottlenecks, and improve educational outcomes
Mar, 27, 2018

[op-ed snap] Is the Indian economy prepared for the next global shock?

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Fragile Five, Current account deficit, NPA, external commercial borrowings

Mains level: State of Indian economy


Context

The 2013 rupee shock

  1. The rupee tumbled after the US Federal Reserve indicated in May 2013 that it would soon begin to cut back on monetary expansion
  2. India was then hobbled with an overvalued exchange rate, inadequate foreign exchange reserves, a record current account deficit, runaway inflation, and a massive fiscal deficit
  3. This placed India in ‘Fragile Five’ group along with Brazil, Turkey, South Africa and Indonesia

India is now not fragile but still vulnerable

There are three main risks to economic stability right now

  1. Interest rate normalization in the US
  • Quantitative tightening would send US bond yields shooting up
  • US monetary tightening usually reduces capital flows into emerging markets
  • The Indian current account deficit has also begun to widen
  • But RBI has record foreign exchange reserves built through several years of intervention in the currency market to defend the rupee in case there is a run on the Indian currency

2. Headwinds from China’s slowing growth

  • The clampdown on smoke and the move towards clean energy is hampering the Chinese manufacturing sector
  • The upsurge in producer price inflation that bolstered the profits of state-owned enterprises last year is deteriorating
  • Countries exposed to a China growth slowdown (through exports) may face a huge blow
  • Exports from India to China and Hong Kong constitute about 10% of the total Indian exports, so India may not see a drastic impact despite the sputtering of China’s growth engines

3. Escalating trade war

  • Retaliatory moves by big countries could hurt the exports of countries that participate in the sophisticated system of global value chains
  • The US accounts for only around 10% of India’s steel and aluminum exports, which limits the material impact of such a tariff on India’s trade

Four worries for the Indian economy

  1. Widening CAD
  • Current account deficit is likely to widen up to 2% of gross domestic product (GDP) in 2018, from 1.7% in 2017
  • A higher current account deficit could make the economy vulnerable to sudden capital stops

2. Banking crisis

  • The sluggish pace of bad debt resolution and the growing cases of bank frauds make the economy susceptible to confidence loops
  • India could be entering a freshly brewed cycle of NPAs
  • This would necessitate larger-than-earmarked capital infusion, consequently leading to a further pushing back of fiscal consolidation goals

3. Increasing foreign liabilities

  • Most of the rise in long-term external debt is because of the increase in external commercial borrowings by companies
  • There are limits to how much the Indian central bank can intervene to absorb these capital flows, given the risks that India could then be tagged a currency manipulator by the US
  • Heavy currency intervention could increase the risk of trade sanctions from the US

4. Political risks

  • Important state elections are scheduled in 2018 followed by a national election in 2019
  • There could be strong incentives to abandon macro stability in favor of spending programmes that lead to a deterioration in public finances

Way forward

  1. The Indian economy seems to be better placed to deal with global shocks than it was in July 2013
  2. There may be no reason to panic but policymakers should stay on guard
Feb, 12, 2018

Why the fuss about fiscal deficit?

Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, Nominal GDP, CSO, FRBM Act,

Mains level: Fiscal consolidation roadmap and constraints in its implementation


News

Why is fiscal deficit so important?

  1. It is quite difficult to comprehend why all hell must break loose, if the fiscal deficit turns out to be 3.5% for the year, instead of 3.2%
  2. The fiscal deficit paints a more complimentary picture of government finances than necessary because it counts both one-off receipts (from asset sales, recovery of loans etc) and recurring items (taxes) as part of the government’s ‘income’

Expenses overshoot

  1. In FY18, the Centre’s total income (as per the revised estimates) from taxes, non-tax revenues, and capital items is estimated at ₹16.23 lakh crore
  2. But it expects to incur a total expenditure of ₹22.17 lakh crore
  3. Expenditure will thus overshoot income by about 36.5%, leaving a shortfall of ₹5.94 lakh crore
  4. This ₹5.94 lakh crore shortfall is euphemistically termed as the fiscal deficit

How is it measured in terms of GDP?

  1. When it is expressed as a percentage of India’s nominal GDP (₹167 lakh crore as per latest CSO estimates), it appears at 3.5%
  2. A 30-basis point overshoot in the deficit means a ₹50,000 crore hole in the Budget
  3. This tells that why even a minor slippage in the fiscal deficit is so keenly watched
  4. This is indeed why there’s a Fiscal Responsibility and Budget Management (FRBM) Act which enjoins the government to steadily tighten its fiscal and revenue deficits over the years while reining in its debt-GDP ratio

Effect on various sectors

  1. When the Centre ends up spending more than it earns, it takes recourse to market borrowings to bridge the gap
  2. The borrowing target for the year is closely watched by the bond market because the larger the government’s loan-taking, the less room for other borrowers
  3. The bulk of the expenditure each year is absorbed by just three recurring items — interest payments, pensions, and subsidies

What needs to be done?

  1. For India’s government to be really able to launch bold new schemes or make a difference to citizens’ welfare, it needs to clean up its finances first
  2. It needs to pare down debt, save on interest payouts, reduce pensions and subsidies and raise asset creation
  3. It must also ensure that its receipts grow at a far faster pace than expenses in future so that the debt can be paid down

Back2Basics

Fiscal Responsibility and Budget Management (FRBM) Act

  1. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government
  2. FRBM became an Act in 2003
  3. FRBM Act provides a legal-institutional framework for fiscal consolidation
  4. The FRBM rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government
  5. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09
  6. It is the responsibility of the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of a breach
  7. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify
  8. The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy
Feb, 05, 2018

Plan on revenue deficit seen as shift towards consumption spending

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Revenue deficit, FRBM framework, N.K. Singh Committee

Mains level: Fiscal consolidation roadmap of India


News

Targets on revenue deficit not to be set

  1. The Union budget has proposed to stop setting targets on revenue deficit reduction from next year
  2. This will be done through an amendment in the Fiscal Responsibility and Budget Management (FRBM) framework

What might this lead to?

  1. This may sway government’s expenditure more towards consumption spending away from more productive capital expenditure
  2. FRBM Act was to force government from switching from consumption to capital expenditure
  3. This will have serious implication not only on GDP growth but also on achieving public debt target

N.K. Singh Committee recommendations

  1. There was extensive discussion on whether to target revenue deficit or not
  2. Majority of members agreed that revenue deficit needed to be brought down gradually
  3. It recommended reduction of revenue deficit by 25 basis points every year to bring it down to 0.8% by 2023-24 without eliminating it completely

Why this recommendation?

  1. Borrowing for expenditures that are to be incurred year after year is neither desirable nor sustainable
  2. These should be tax-financed
  3. This is the basis of the commonly known as the golden rule of fiscal policy

Back2Basics

Deficits

  1. The revenue deficit broadly measures the extent of borrowings used for revenue expenditure
  2. Fiscal deficit measures the overall borrowing to finance both revenue account deficit as well as capital account deficit
  3. Effective revenue deficit measures the revenue deficit minus grants to states for the creation of capital assets
Jan, 30, 2018

The Economic Survey: an overview

Image source

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Big data, GST, EPFO, ESIC

Mains level: Important findings from Economic survey


News

Big Data mined to shed light on the economy

  1. The Economic survey has used Big data to get some epiphanic understanding of economy
  2. The data from the implementation of the GST was combined with the availability of detailed new data from the Employees’ Provident Fund Organization (EPFO) and the Employees’ State Insurance Corporation (ESIC)
  3. This gave insights about external and internal trade in the aggregate and state-wise manner
  4. Also, the size and distribution of the tax net, and levels of formality and informality

Supporting end of violence against women

  1. The colour of this year’s survey cover was chosen as a symbol of support for the growing movement to end violence against women
  2. There is a deep societal meta-preference in favour of sons
  3. Empowering women with education and reproductive and economic agency are critical challenges for the Indian economy

Important questions raised by Economic survey

  1. Can we expect the current investment slowdown to reverse quickly based on an understanding other countries’ experience?
  2. Do second and third tiers of government collect the direct taxes that they are empowered to?
  3. Why should we focus on the sex ratio of the last child?
  4. Under what conditions, to what extent, and where will the agricultural impact of climate change be most felt?
  5. Should the government and judiciary agree to a cooperative separation of powers like the Centre and states do in the form of cooperative federalism to improve the conditions of doing business?
  6. Should there be a number of science and technology missions to propel India to the ranks of the world’s top knowledge producers?

Back2Basics

Big Data

  1. Big data is data sets that are so voluminous and complex that traditional data processing application software are inadequate to deal with them
  2. Lately, the term “big data” tends to refer to the use of predictive analytics, user behaviour analytics, or certain other advanced data analytics methods that extract value from data
  3. Analysis of data sets can find new correlations to “spot business trends, prevent diseases, combat crime and so on
  4. Big Data philosophy encompasses unstructured, semi-structured and structured data, however the main focus is on unstructured data
  5. Multidimensional big data can also be represented as tensors, which can be more efficiently handled by tensor-based computation
Jan, 17, 2018

Budget 2018: Govt may assume 12% nominal GDP growth rate for 2018-19

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Nominal GDP, Fiscal deficit, Central Statistics Office (CSO), goods and services tax (GST), fiscal consolidation roadmap, N.K. Singh committee, 15th Finance Commission

Mains level: India’s fiscal consolidation path and challenges in achieving the desired results


News

High growth rate to be assumed

  1. The finance ministry may assume a much higher nominal gross domestic product (GDP) growth rate—around 12%—for 2018-19
  2. This may help it project a rosier fiscal deficit number in the budget
  3. The figure compares with a nominal GDP growth rate of 9.5% estimated by the Central Statistics Office (CSO) for 2017-18

Estimates for present fiscal year

  1. FM had assumed nominal GDP growth of 11.75% for the 2017-18 fiscal year in his last budget
  2. Estimates put out by the Central Statistics Office showed nominal GDP may grow only by 9.5% during the year

Why fiscal deficit may widen?

  1. The lower-than-anticipated nominal GDP growth will lead to “marginal slippage” in the fiscal deficit target for 2017-18
  2. The government has increased its spending through supplementary demands for grants and has communicated that it may borrow Rs50,000 crore more by 31 March, the actual fiscal slippage could be more
  3. Indirect tax revenue has taken a hit as collections under the goods and services tax (GST) have been less than anticipated

New fiscal consolidation roadmap to be deferred

  1. The finance ministry has signalled that it may defer implementing the new fiscal consolidation roadmap recommended by the N.K. Singh committee by two years
  2. Ministry has tasked the 15th Finance Commission to dwell on the matter
  3. The Committee’s recommendations on fiscal discipline were supposed to come into force in the next fiscal year starting April
  4. The 15th Finance Commission’s recommendations will be implemented starting April 2020

Back2Basics

Nominal GDP

  1. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period
  2. Nominal GDP is gross domestic product (GDP) evaluated at current market prices
  3. The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not
  4. As a result, nominal GDP will often appear higher than real GDP
  5. Nominal GDP is used as the base to calculate key fiscal indicators such as the fiscal deficit, revenue deficit and debt-to-GDP ratio that are used to gauge fiscal health
Jan, 06, 2018

GDP growth seen slowing to 4-year low of 6.5% in 2017-18

Image source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: GDP, Gross Value Added (GVA), Central Statistics Office (CSO), Purchasing Managers’ Index

Mains level: Factors affecting economic growth


News

GDP growth decelerating

  1. The Central Statistics Office (CSO) forecast that GDP growth in the current financial year ending March 31 will slow to a four-year low of 6.5%
  2. This will be down from the provisional 7.1% pace seen in 2016-17
  3. Growth will be dragged down by deceleration in the agriculture and manufacturing sectors

Advance estimates for National Income

  1. According to the first advance estimates of national income by CSO for 2017-18 Gross Value Added (GVA) was also projected to expand by 6.1% in 2017-18, slowing from 6.6% in the preceding fiscal year
  2. The CSO’s GVA full-year growth estimate of 6.1%, compares with a 6.7% pace that the Reserve Bank of India had forecast at its December policy meeting
  3. The central bank had at the time flagged rising oil prices and “shortfalls in kharif production and rabi sowing” as posing downside risks to the outlook for GVA growth
  4. The GVA growth rate for ‘agriculture, forestry, and fishing’ is expected to slow sharply to 2.1%, compared with the previous year’s 4.9% pace

Base effect in agriculture

  1. It is a base effect in agriculture because last year saw a very high growth rate as it followed two years of drought
  2. The Base effect relates to inflation in the corresponding period of the previous year
  3. If the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index will arithmetically give a high rate of inflation now

GDP growth will become more robust in 2018-19

  1. The optimism is due to  the momentum seen in the core sector growth, PMI indices and developed world economies
  2. The manufacturing PMI (Purchasing Managers’ Index) has been showing an uptick in manufacturing and now has a reading at a five-year high of 54
  3. Further wearing off of the demonetization related residual effects as well as progressively stabilizing the transitionary effects of GST is likely to support the higher growth rate estimates
Dec, 28, 2017

Govt. to borrow more; fiscal deficit may widen

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, government bonds, treasury bills, fiscal consolidation

Mains level: Effects of fiscal slippage on overall economy


News

Centre plans to raise additional ₹50,000 cr.

  1. The Centre has decided to borrow an additional ₹50,000 crore in the last three months of this financial year
  2. This move could result in the government missing its budgeted fiscal deficit target of 3.2% of GDP

Offset of T-Bills

  1. The Government will raise additional market borrowings of ₹50,000 crore only in fiscal FY18 through dated government securities
  2. The additional borrowing, which would be done through government bonds would be offset by trimming T-Bills (treasury bills) from ₹86,203 crore to ₹25,006 crore
  3. The Government will thus, between now and March 2018, not be raising any net additional borrowing (T-Bills will be run down by ₹61,203 crore and additional G-Sec borrowing will be ₹50,000 crore)

Effects of fiscal slippage

  1. Given the uncertainties on the external front, GST collection, revenue collection etc, 3.5% fiscal deficit looks imminent
  2. Any slippage from the fiscal deficit target this year could have a knock-on effect on the overall fiscal consolidation efforts

Back2Basics

Treasury bills

  1. These are government bonds or debt securities with a maturity of less than a year
  2. T- bills are issued to meet short-term mismatches in receipts and expenditure
  3. Bonds of longer maturity are called dated securities
Dec, 02, 2017

No room for fiscal boost for rest of the year

Image source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Capital and revenue expenditure, Fiscal and revenue deficit

Mains level: Fiscal consolidation by government and challenges in meeting its targets


News

Government expenditure outpacing revenue

  1. The central government stepped up its capital spending in October 2017, with the result that its total capex this year till end-October was Rs1.6 trillion, compared to Rs1.2 trillion in the same period last year
  2. The boost to revenue expenditure is even more this fiscal year; till end-October it is Rs1 trillion more than last year
  3. The fiscal deficit was higher by Rs1 trillion compared to last year and is 96.1% of this year’s budgeted amount
  4. The revenue deficit is 124.7% of the budgeted amount

What do these figures indicate?

  1. The government has already given a substantial boost to the economy
  2. The government must either curb its expenditure or miss its fiscal deficit target
  3. There’s no question of the central government providing a fiscal boost in the remaining part of the fiscal year
  4. The private sector will therefore have to pick up the slack

Back2Basics

Read more about government budget and deficits here: Click2read

Nov, 29, 2017

Govt may delay implementation of N.K. Singh’s FRBM report

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Fiscal consolidation, 15th Finance Commission, debt-to-GDP ratio, FRBM Act, fiscal council

Mains level: Fiscal consolidation path taken by India and its effects


News

Delay in implementing the new fiscal consolidation roadmap 

  1. The finance ministry may have pushed back implementing the new fiscal consolidation roadmap recommended by the N.K. Singh committee by two years
  2. It asked the 15th Finance Commission to dwell on the same matter
  3. This could mean putting off meeting the fiscal deficit target of 3% of GDP for 2018-19 by a year or two

New timeline

  1. The N.K. Singh committee recommendations on fiscal discipline were supposed to come into force in the next fiscal starting April 2018
  2. The 15th Finance Commission recommendations will be implemented starting April 2020

Terms of reference of 15th Finance Commission

  1. The Commission shall review the current status of the finance, deficit, debt levels, cash balances and fiscal discipline efforts of the Union and the states
  2. It will recommend a fiscal consolidation road map for sound fiscal management
  3. This will be done by taking into account the responsibility of the central government and state governments to adhere to appropriate levels of general and consolidated government debt and deficit levels

Recommendations of FRBM Committee

  1. The fiscal responsibility and budget management (FRBM) review committee had recommended a fundamental shift in fiscal consolidation by targeting overall government (states+centre) debt, which the rating agencies track rather than the current practice of focusing on the centre’s fiscal deficit
  2. The FRBM review committee had recommended a debt-to-GDP ratio of 38.7% for the central government, 20% for the state governments together and a fiscal deficit of 2.5% of GDP, by financial year 2022-23
  3. The FRBM review panel had also recommended enacting a new Debt and Fiscal Responsibility Act after repealing the existing Fiscal Responsibility and Budget Management (FRBM) Act
  4. And creating a fiscal council that would monitor the government’s fiscal announcements for any year, provide its own forecasts and analysis, and advise the ministry on when to trigger the escape clause provision

Meeting the fiscal deficit target is a challenge

  1. Due to the structural reforms such as implementation of the goods and services tax (GST)
  2. There could be a shortfall in non-tax revenue collection due to lower dividend transferred by the Reserve Bank of India (RBI) and lower telecom spectrum proceeds
Nov, 18, 2017

After Moody’s, all eyes on S&P, Fitch Ratings

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Various rating agencies, debt-to-GDP ratio, fiscal deficit

Mains level: Various measures being taken by government to improve ease of doing business as well as improve India’s fiscal position


News

India’s rating upgrade by Moody’s

  1. Rating agency Moody’s upgraded India’s sovereign rating after a gap of almost 14 years
  2. The attention is now on the other two global rating agencies, Standard & Poor’s and Fitch Ratings

Chief Economic Advisor’s views

  1. Chief Economic Adviser Arvind Subramanian hopes that rating agencies might not be inconsistent amongst each other
  2. Dr. Subramanian had earlier observed that ratings agencies followed inconsistent policies while rating India as opposed to awarding ratings to China

S&P’s view about the upgrade

  1. In October, S&P had said the country needed to improve its fiscal position for a rating upgrade
  2. For an upgrade, India would have to address its weak fiscal balance sheet and weak fiscal performance
  3. India has one of the highest general government debt-to-GDP levels (68%) among emerging market sovereigns
  4. A potential rating upgrade is likely to come from improved fiscal performance

Government’s limitations

  1. Year after year, the fiscal deficit remains relatively large with the interest burden and subsidies taking a big chunk of government spending
  2. So there’s not a lot of room for the government to maneuver, despite pressing infrastructure needs
Nov, 01, 2017

Fiscal deficit hits 91.3% of FY18 target in 6 months

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, Controller General of Accounts

Mains level: Impact of GST and demonetization on economy


News

Data released by the Controller General of Accounts (CAG)

  1. In the first six months of the current financial year, the country’s fiscal deficit touched 91.3 percent of the full-year budget estimate
  2. During the same period in the previous fiscal year, this figure was 83.9 percent
  3. In addition to the annual deficit, the national debt – the accumulation of past deficits and interest due to lenders to the Treasury – now exceeds trillion

Slippage of Fiscal deficit target might occur

This will be due to lower-than-budgeted revenues, which are because of

  1. uncertainty related to the buoyancy of indirect taxes post-GST, revenues from telecom and disinvestment flows
  2. lower surplus transferred by the RBI

Back2Basics

Fiscal Deficit and Primary Deficit

Oct, 23, 2017

India's GVA growth may rise to 6.3 pc in Sep quarter: Nomura

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: GDP, GVA, Monetary policy

Mains level: Effect of demonetization as well as remonetization on economy


News

Rebound expected in the Indian economy

  1. The Indian economy is expected to see a rebound in the July-September quarter of this year
  2. GVA growth rate would be 6.3 percent, says a Nomura report

Recovery underway

  1. Nomura’s proprietary indices suggest that growth bottomed out in the second quarter
  2. A recovery is underway in the third quarter, largely because consumption and investment indicators have improved in the third quarter
  3. Rural consumption indicators such as tractor and two-wheeler sales picked up sharply ahead of the festive season, despite weak monsoon, likely reflecting improving cash levels with remonetization
  4. Urban consumption indicators such as passenger vehicle sales and consumer credit also improved in the September quarter, relative to June quarter

Annual growth figures

  1. For this financial year, Nomura expects a GVA growth of 6.4 percent, slightly lower than the RBI’s forecast of 6.7 percent
  2. This is  partly because it expects the government to cut spending due to fiscal constraints

Stance on Monetary policy

  1. It expects rates to stay unchanged in the base case
  2. This is due to incremental growth momentum headed higher, core inflation above 4 percent and fiscal risks on the horizon
Oct, 18, 2017

Outstanding credit grows 14.6% in 1 year; non-food loans fall to 13.6%

Note4students

Mains Paper 3: Indian Economy

The following things are important from UPSC perspective:

Prelims: Not much

Mains level: This news talks about the growth in the outstanding credit and the reasons for it.


News

Context

  • Outstanding credit loans, bonds and commercial papers (CPs) grew 14.6 per cent year-on-year (y-o-y) between September 30, 2016 and September 30, 2017.
  • But in the same period last year the growth had been lower at 13.8 per cent.

The growth in other areas-

  1. The growth in non-food credit in the fortnight to September 29, 2017, was slightly lower at 13.6 per cent y-o-y.
  2. The net corporate bonds outstanding as at the end of September, was also up by 18 per cent as per latest data released by the Securities and Exchange Board of India (Sebi).
  3. Data from RBI showed that the net outstanding on commercial papers stood has also increased from last year.

 

Why is there growth in outstanding credit ?

  1. With banks increasingly participating in the bond markets, the share of bonds in total credit is rising.
  2. Higher-rated corporates have in recent days chosen to borrow from the markets rather than from banks as the former route has turned out to be cheaper.
  3. Bankers and sector analysts have in recent days made a case for measuring credit growth in terms of outstandings on loans as well as bonds as better-rated corporates are borrowing increasingly from the money markets.
  4. Between June 2016 and June 2017, around Rs 40,000 crore had moved from the bank’s loan book to the markets.
  5. A large portion of it about 70 per cent of it is in the CPs, or commercial papers. These commercial papers swing between the loan book and the markets, depending on the price, availability, etc.
Oct, 12, 2017

Economic slowdown a concern, need to push growth, jobs: PM’s advisors

Note4students

Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.

 

From UPSC perspective, the following things are important:

Prelims level: Fiscal Deficit and Fiscal Consolidation

Mains level: Steps to revive economy

 


News

Context-

  1. The article talks about the newly constituted Economic Advisory Council to the Prime Minister. It also talks about the future roles of this council.

  

What is the PM-EAC?

  1. The Prime Minister’s Economic Advisory Council was first set up in the year 2004 by the then PM Dr. Manmohan Singh. However, in 2014 it was disbanded by the government.
  2. The re-constitution of the PM-EAC came in the backdrop of growing concerns over the pace of growth in the economy and the slow pace of job creation.
  3. This council consists of Bibek Debroy (Chairperson) and members as Surjit Bhalla, Rathin Roy, Ratan Watal and Ashima Goyal.

 

What are its tasks?

  1. The council recognised the need to accelerate economic growth and employment over the next six months.
  2. The Council recognised the need for instituting an Economy Track Monitor, using lead indicators and triggers for action, based on informed assessment and analysis.
  3. It will provide specific recommendations for tackling the economic slowdown.
  4. The EAC identified ten themes on which reports will be prepared:
  5. economic growth;
  6. employment and job creation;
  • informal sector and integration;
  1. fiscal framework; monetary policy;
  2. public expenditure;
  3. institutions of economic governance;
  • agriculture & animal husbandry; and
  • patterns of consumption & production and social sector.
  1. The Council will work in consultation with various stakeholders, including sectoral ministries, states, experts, institutions, regulators and the private sector.

 

The council has consensus on two things:

  1. There is economic slowdown in the country, we need to look into the causes.
  2. The government should not breach the targets of fiscal consolidation and fiscal deficit (3.2 per cent of GDP for current financial year).

 


Back2basics

  1. Fiscal Deficit: A Fiscal Deficit occurs when government’s total expenditures exceed its total revenues (excluding borrowings).
  2. Fiscal Consolidation: The steps taken by government to reduce its fiscal deficit and debt are known as Fiscal Consolidation. This includes raising taxes, dis-investment in PSUs, rationalisation of subsidies etc
Oct, 11, 2017

IMF lowers forecasts for India

Image Source

Note4students

Mains Paper 3: Economy | Growth

From the UPSC perspective following things are important:

Prelims Level: Not much

Mains Level: Many organisations forecasts growth rates of countries, around the world. Not all of them are important. As, this forecast came from the IMF, it should be noted.


News

Forecasts by the IMF

  1. Maurice Obstfeld, IMF Economic Counsellor and Director of Research, said the upward revisions in both cases “were 0.1 percentage point above our previous forecasts”
  2. The IMF has revised upwards, India’s growth performance for 2016 in its latest calculations, which is now 7.1% as opposed to 6.8% in April(owing to strong government spending and “data revisions in India)
  3. According to the IMF report, in India, growth momentum slowed, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the mid-year introduction of the country-wide GST
Sep, 30, 2017

Fiscal deficit hits 96.1% but Modi govt confident of meeting target

Image Source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Basics of Fiscal Deficit

Mains level: It is important to know the pattern of increase and decrease of Fiscal deficit throughout the year. The given article explains the pattern, properly.


News

Fiscal Deficit Data

  1. India’s fiscal deficit touched 96.1% of the Budget estimate for FY18 at the end of August
  2. Possible reason behind this increase: The fiscal deficit has been higher than in the previous years because of the quick start to spending facilitated by the early presentation of Budget on February 1
  3. According the data released by the Controller General of Accounts (CGA) , April-August fiscal deficit is substantially higher than 76.4% for the year-earlier period

Government’s view on this

  1. According to government, it will meet the fiscal deficit target for the year
  2. The target is3.2% of GDP, or Rs 5.47 lakh crore
  3. In absolute terms, the fiscal deficit for April-August was Rs 5.25 lakh crore

Will government be able to achieve the targets?

  1. The government is considering ways of reviving growth, which slumped to its lowest in three years in the June quarter
  2. The government has already allocated large sums to a few of its key schemes to ensure there was no delay due to funds
  3. The revenue deficit was 133.9% of budget estimate against 91.7% last fiscal
  4. With this big spending(allocations) done, the fiscal situation should start to improve as revenues pick up pace in the second half of the financial year

Back2basics

Fiscal Deficit

  1. A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings
  2. It is an indication of the total borrowings needed by the government
  3. Deficit differs from debt, which is an accumulation of yearly deficits
  4. Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure
  5. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development
Sep, 26, 2017

[op- ed snap] Case for a fiscal push

Note4Students :

Mains Paper 3: Economy | Growth

Prelims: Pro Cyclical fiscal policy and Counter cyclical fiscal policy.

Mains level: The article could be linked to the Growth tag in GS paper 3. Growth process has slowed down in recent month.Government is weighing the pros and cons of using fiscal stimulus as a policy to counter the slowdown in growth process.This article is related to that.


News

Even as there is talk that the government is planning a fiscal push to support growth, strong dissenting voices are suggesting that all hell will break loose. Comparisons are being made with the 2008 stimulus and dire warnings are being issued

Why Counter Fiscal policy push to the economy cannot be misconstrued as similar to the fiscal policy of 2008?

  1. In 2008 India provided fiscal stimulus of 1.8% of GDP which was far less than provided by its Asian counterparts and several other countries — Korea, US, China, South Africa.
  2. The runaway inflation that followed was not entirely because of fiscal stimulus. Other factors to contributed like debt waiver, pay commissions recommendations, increase in MSP.
  3. There are common elements like Pay Commission recommendations and loan waivers in the current economic scenario and that of 2008.
  4. But, the Pay Commission’s recommendations as a percentage of the incremental PFCE (private final capital expenditure) are down to 9 per cent in FY17 from 22 per cent in FY09. Thus, a less boom in consumption.
  5. Unlike earlier years no arrears have to be paid.
  6. The loan waivers are unlikely to fuel inflation, as inflation has structurally corrected from double digits to low single digits in the last three years, and rural demand is now at multi-year lows.
  7. Procurement price increases in the last three years have been moderate and do not threaten inflation.
  8. Fiscal expansion got a bad name because in India it has been largely pro-cyclical. But, counter-cyclical policy is more effective. This means that deficits should decline when the economy is expanding and increase during economic downturns.

 

Way Forward

  1. Policy should now focus on structural bottlenecks and not on putting money in the hands of consumers.
  2. Recapitalise public sector banks through widely-discussed recapitalization bonds
  3. The government need not raise immediate tax revenues and the government should avoid crowding out private borrowings .
  4. The fiscal package could also include sector-specific measures, such as on sectors like exports, telecom, construction and power.
  5. Last years textile package of support for wage costs and interest subvention could be expanded. Some successful state-level initiatives, as in the garment sector in Odisha, can be expanded nationally.
  6. Affordable housingoffers multiplier effect. It helps the construction sector and has the maximum employment elasticity.
  7. Resolution of stressed assets must be focused, the National Company Law Tribunal infrastructure needs further ramping up.
  8. Structural and deep reforms like GST, RERA, monetary policy framework and move to less-cash and digital economy, will all pay back over the longer term.  But, create uncertainity in shorter term so it needs deft policy and perception management.
  9. India needs to correct imbalances in regional growth, and the urban-rural divide, and addressing the woes of the farm sector.

Conclusion:

There is much work to do, but for this year, we need a definite fiscal push.


Back2basics

Procyclical Fiscal Policy

  • This fiscal policy goes in line with the current mood of the business cycle; amplifying them.
  • Boom: total government spending as a percentage of GDP goes up and tax rates go down, increasing government deficit..
  • Recession: total government spending as a percentage of GDP goes down and tax rates go up, decreasing government deficit.
  • Such a policy is dangerous and undesirable as it brings instability in the economy.
  • The Economic Survey 2017 also acknowledge some procyclicality during boom periods in India.

Countercyclical Fiscal Policy

  • It refers to strategy by the government to counter boom or recession through fiscal measures.
  • It works against the ongoing boom or recession trend; thus, trying to stabilize the economy.
  • Boom– Increasing taxes and reducing public expenditure. This will help to slow down the demand and thus keeping inflation under control.
  • Recession- Reducing taxes and increasing expenditure will help to create demand and producing upswing in the economy.

 

I

 

 

 

Sep, 13, 2017

[op-ed snap] Time for course correction

Image Source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Particulars of the GVA, GDP and CSO.

Mains level: Declining growth rate is a hot topic these days. The Op-Ed presents a comprehensive view of the issue.


News

Context

  1. The article talks about the recently published Growth Data and Estimates, and the possible reasons behind it

Low Growth rate data released by the Central Statistics Office (CSO)

  1. The CSO has released the estimates of the GDP for the first quarter (April-June) of 2017-18
  2. The numbers showed that in Q1 of 2017-18, GDP grew by 5.7%
  3. Gross value added (GVA) at basic prices grew by 5.6%
  4. Whichever measure one take, the growth rate has fallen below 6%
  5. In the corresponding quarter of the previous year, GDP grew at 7.9% and GVA at 7.6%
  6. The most disappointing aspect of the first quarter numbers is the steep fall in the growth rate of manufacturing to 1.2%

Possible reasons behind this low growth

  1. Certainly, demonetisation must have had a negative impact
  2. Also, the destocking of goods which might have happened prior to the introduction of the GST must have also had a negative impact
  3. But, it might be inappropriate to attribute the entire decline of 2 % points to the two factors

Is low Growth rate reason behind this low growth?

  1. One of the arguments attributed to the low growth rate is the poor performance of the external sector
  2. The high growth phase between 2005-06 and 2007-08 saw exports growing at an average annual rate exceeding 20%
  3. Both in 2014-15 and 2015-16, the export growth rate was negative
  4. India’s declining growth rate has also coincided with poor export performance
  5. However, the export growth rate has become positive since the second half of 2016-17
  6. Due to this reason, the sharp decline in growth rate noted in the last few quarters cannot be attributed to poor export performance

Fundamental Problem behind the Low Growth rate

  1. The fundamental problem has been the sharp fall in the investment rate
  2. Gross fixed capital formation rate stood at 34.3% in 2011-12
  3. This started falling steadily and touched 29.3% in 2015-16
  4. It fell further to 27.1% in 2016-17
  5. According to the latest numbers, in the first quarter of 2017-18, it stood at 27.5%
  6. It is the decline in private investment, both corporate and households, that has been responsible for the steady fall
  7. The fall in corporate investment is steep compared to what was achieved in 2007-08
  8. And Household investment has continued to decline even in recent years
  9. Household here includes not only pure households but also unincorporated enterprises

One important actor behind the Low Investment Rate

  1. One reason is the falling investment rate is that the last few years have shown a steady and substantial increase in FDI
  2. FDI inflows in 2016-17 were at an all-time peak of $60 billion

What can be done to stimulate private investment?

  1. Most important thing is to create an appropriate investment climate
  2. Some of the noteworthy changes that have happened in the last few years are the passing of the bankruptcy code and GST legislation, and modifications in FDI rules
  3. We must continue with the reform agenda and there is still a lot to be done in the area of governance

NPA issue behind low investment

  1. Financing investment has taken a wrong turn because of the poor health of banks
  2.  The sharp reduction in the flow of new credit has also put prospective investors in a difficult situation
  3. To bring banks back to good health, recapitalisation has become urgent

The way forward

  1. To sum up, the growth rate in 2017-18 is unlikely to exceed 6.5%
  2. Once the glitches and fears of the GST are over, the growth rate may pick up
  3. Our goal must be to achieve and sustain a growth rate of 8% and above over an extended period
Sep, 11, 2017

[op-ed snap] Narendra Modi govt’s growth challenge

Image Source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Particulars of the GDP and GVA

Mains level: It is important know the reason behind the current slowdown in the Economy.


News

Context

  1. The article talks about the reasons behind the slowing down of the Indian Economy

Slow Pace of Economic Health Indicators

  1. The pace of economic growth has slowed considerably, with no clear sign of a sharp pullback in the near term
  2. GDP increased at a modest pace of 5.7% in the first quarter of the current fiscal
  3. GVA growth, the preferred indicator of economic activity, came in at 5.6%, compared with 7.6% in the same quarter last year
  4. It now seems difficult for the economy to get close to the RBI’s GVA growth forecast of 7.3% for the current year

Reason behind this Slowdown

  1. Impact of demonetisation
  2. And destocking of inventory before the implementation of the goods and services tax (GST)
  3. However, it is also likely that the softening of economic activity, which started before demonetisation, is still continuing
  4. Therefore, it will not be possible, to gauge precisely which factor is affecting growth to what extent

The Main reason of worry

  1. The main worry for policymakers is that the economy is slowing at a time when global markets are reasonably stable
  2. And commodity prices are within India’s comfort zone

Is it right to give a fiscal stimulus to revive growth?

  1. It is likely that a sufficiently large fiscal push will help growth in the short run, but there are at least three big problems with this idea
    (1) There is no guarantee that it will take the economy to a higher growth trajectory in a sustainable manner
    (2) The government doesn’t have the fiscal space(means resources) to give a meaningful stimulus at this stage
    (3) Breaching the fiscal deficit target(by giving fiscal help to economy) yet another time will affect policy credibility and could pose a threat to hard-won macroeconomic stability
  2. Therefore, Fiscal stimulus is best avoided

The need for recapitalization of public sector banks

  1. It is highly unlikely that a predominantly bank-financed economy will grow as desired when about three-quarters of the banking system is in deep stress
  2. While the bankruptcy process will help deal with non-performing assets, the government needs to move fast on bank recapitalization

The Way Forward

  1. The government has taken several steps in the right direction, such as the implementation of GST, which will help the economy in the medium to long run
  2. But there has been virtually no movement on reforms in areas like land and the labour market
  3. The government should go all out and use its political capital to push reforms in these sectors, which will improve the ease of doing business
  4. All this may not lift growth in the next quarter, but will help strengthen the foundation for a sustainable economic recovery

 

May, 16, 2017

April trade deficit widens to $13.2 bn, highest since Nov. ’14

Note4Students

Important:

The changing trends in India’s import and export sector need to be analysed. From UPSC’s perspective, the following things are important:

Prelims Level: What is trade deficit, BoP and other related terms.

Mains level: Well Even though 1 month data is not much relevant for mains but you need to track this news as if this trend continuous in long run this could effect India’s external sector stability which then becomes an important topic for mains.


News

  • The country’s goods trade deficit in April, the first month of FY’18, widened to $13.2 billion — the highest since the $16.2 billion clocked in November 2014, data released on Monday by the Commerce Ministry showed

Why this happened?

  • This was due to goods imports in April recording a historic 49.07% year-on-year growth to $37.9 billion — following a surge in gold, oil, coal, chemicals, pearls and precious stones, machinery, transport equipment and electronics imports
  • and outpacing exports despite shipments rising for the eighth consecutive month

Stats: (The figures need not be remembered, but note the share of various commodities in import and exports)

  •  In India, gold imports continued to surge when it jumped 211.35% in April to $3.8 billion Oil imports in April rose 30.12% to $7.3 billionIn this connection, it is mentioned that the global Brent prices ($/ bbl) have increased by 25.4% in April 2017 vis-à-vis April 2016 as per World Bank commodity price data(The pink sheet)
  • On the exports side, petroleum products shipments rose 49% to $2.94 billion while readymade garments exports increased 31.7% to $1.7 billion
  • Exports of engineering goods went up 28.2% to $6.1 billion, while chemicals increased 24% to $1.29 billion and gems and jewellery exports rose 15% to $3.97 billion

Positives:

  • Increase in imports of oil and pearls and precious/semiprecious stones augur well for exports of petroleum products and gems and jewellery respectively as such imports are inputs for the exports.

Back2basics

Trade deficit(Explained)

  • A trade deficit is when a country imports more than it exports.
  • It is also called a negative balance of trade. It is one way of measuring international trade.
  • To calculate the trade deficit, subtract the total value of exports from the total value of imports. What Causes a Trade Deficit? A trade deficit occurs when a country does not produce all it needs. Most nations must borrow from foreign states to pay for the imports. Therefore, a country with a trade deficit will also have a current account deficit.
  • A trade deficit also results when domestic companies manufacture in foreign countries. When raw materials are shipped overseas to factories, they count as exports. When the finished goods are shipped back home, they count as imports. That’s true even though they’re made by domestic companies.
  • The imports are subtracted from the country’s gross domestic product. That’s despite the fact the earnings benefit the company’s stock price and the taxes increase the country’s revenue stream. Effects of a Trade Deficit (Hint: It’s not always bad) Initially, a trade deficit is not a bad thing. It raises a country’s standard of living. Its residents have access to a wider variety of goods and services for a more competitive price.
  • It reduces the threat of inflation, since it creates lower prices. A trade deficit indicates that the country’s residents are feeling confident and wealthy enough to buy more than the country produces.
  • Over time, a trade deficit creates jobs outsourcing. As a country imports certain goods rather than buying domestically, the local companies start to go out of business.
  • The domestic industry will lose the expertise needed to remain competitive. As a result, the home country creates fewer jobs in that industry. Instead, the foreign companies hire new workers to keep up with the demand for their exports.

 

May, 03, 2017

India to launch new IIP series with 2011-12 base year on May 9

  • India will unveil a new series of Index of Industrial Production with a base year 2011—12 on May 9 with an aim to map economic activities more accurately.
  • A high-level panel had firmed up the methodology for the IIP with new base year of 2011—12. Currently, the IIP is calculated on base year of 2004—05.
  • The change in baseline for the IIP is expected to bring in more accuracy in mapping the level of economic activity and calculating other numbers like national accounts.3
  • Work is also in progress to change the base year for the wholesale price index (WPI) to 2011—12 year.
  • The Central Statistics Office (CSO) has already changed the base year for the country’s national accounts,
    including the gross domestic product (GDP) and the gross value addition (GVA).
  • The retail inflation based on the consumer price index (CPI) is also calculated on the base year of 2011—12.
  • For long, economists and think tanks have been pitching for release of new time series of the IIP and the WPI so that GDP numbers can be based on more accurate and realistic data.
  • The base year is revised periodically to capture the changes in the structure and composition of the industry
    over time due to technological changes, economic reforms and consumption pattern of the people.
Sep, 20, 2016

India’s external debt rises to $486 billion

  1. India’s external debt at the end of March 2016 stood at $485.6 billion
  2. It is an increase of 2.2% from over its level at end-March 2015
  3. Factors: It is largely driven by the increase in long-term external debt, particularly NRI deposits
  4. Of total external debt, the Govt’s share stood at 18.9% or $93.4 billion at end-March 2016 compared to 18.8% ($89.7 billion) at March 2015
  5. Manageable: India’s external debt has remained within manageable limits in 2015-16
  6. Indicators: Increase in foreign exchange reserves to debt ratio to 74.2%, the external debt-GDP ratio of 23.7% and fall in short term debt to 17.2%
Jul, 15, 2016

WPI rises to 20-month high

  1. News: Wholesale Price Index (WPI) inflation accelerated in June from the previous month, touching a 20-month high as prices of fruits, vegetables and cereals continued to rise
  2. WPI inflation for June accelerated to 1.6% from 0.8% in May
  3. The rise in the WPI was driven largely by inflation in the food articles segment
  4. Office of the Economic Adviser, Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce, calculates the WPI index
  5. Base year: 2004-05
Jul, 13, 2016

Retail inflation quickens; IIP up

  1. News: A sharp jump in the prices of vegetables drove up food costs and fanned consumer price inflation to its fastest pace in 22 month
  2. Consumer Price Inflation (CPI) was 5.77% year-on-year in June 2016
  3. The Index of Industrial Production (IIP) recorded a 1.2% year-on-year growth in May 2016, due to high growth in consumer durables (washing machines, televisions, refrigerators) output
  4. The Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation (MOSPI) releases both CPI and IIP data
  5. CPI: Base year – 2012; Released on a monthly basis for urban, rural, and combined
  6. IIP: Base year – 2004-05; Released on a monthly basis with a time lag of 6 weeks
Jul, 02, 2016

Manufacturing activity picks up in June

  1. Manufacturing activity saw a pick up in June after two months of sluggish growth, according to a private survey
  2. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose to 51.7 in June from 50.7 in May
  3. Indian manufacturers raised production at a faster rate during June, supported by a stronger increase in new business inflows
  4. The PMI data suggest that external demand remains lacklustre even as domestic demand continues to support growth, led by consumption
Jul, 01, 2016

Core sector growth at 2.8%

  1. News: 8 core sectors of the economy posted a 2.8% growth in May, due to a decline in output of refinery and steel products
  2. Core sectors: Crude oil, natural gas, refinery products, electricity, coal, cement, fertiliser, steel
  3. These 8 sectors, comprise almost 38% of the weight of items included in the Index of Industrial Production (IIP)
May, 14, 2016

Core inflation higher than desired: Rajan

  1. Context: RBI Governor Raghuram Rajan on inflation condition in India
  2. Inflation: India’s core inflation remains a bit higher than policymakers would like
  3. Consumer prices rose last month at a more-than-expected 5.39% annual rate, up from 4.83% in March
  4. It was the first increase in the retail inflation rate since January
  5. Economic growth: However, the economy’s recovery should accelerate with a good monsoon
  6. Growth also seems to be ticking higher & India’s economy is among the world’s fastest growing, at 7 percent-plus
  7. However, the 8 percent level needed to alleviate poverty remains elusive
Apr, 15, 2016

Resistance to reforms vanishing: Jaitley

  1. Context: Jaitley was speaking at US think tank on India’s growth prospects
  2. Opinion: India is undergoing the most critical and significant reforms after 1991, in terms of unleashing its productive forces
  3. The 7.5% growth looks impressive but considering India’s requirements it is “not good” enough
  4. Approach: The govt had adopted 3-pronged approach – being decisive, consistent and transparent
  5. Measures: Tackled corruption, eased procedures and empowered the states to take decisions
  6. The govt kept significant part of the revenue gained and diverted it to social sector and infrastructure
Mar, 31, 2016

ADB lowers India’s growth forecast to 7.4 % for 2016-17

  1. News: Asian Development Bank has lowered India’s growth forecast to 7.4 per cent from an earlier estimate of 7.6 per cent for the financial year
    ending March 31, 2017
  2. Context: Because failure of the govt to push through the GST reform bill and the Land and Labour Reforms
  3. Relevance: Potential growth can be raised if it can successfully implement reforms including unifying tax regime, improving labour market regulations, and opening further to FDI and trade
  4. Report: Asian Development Outlook 2016
  5. Challenges ahead: India’s Challenges to finance the infrastructure, needs delivery of sustainable growth, with funding requirements estimated at around $200 billion a yr through 2017-18
Feb, 29, 2016

Rising working population favours growth

  1. Context: DBS Group Research report ‘Global growth: what is potential and where is it going?’
  2. Global growth: Today, it is running at or a little above potential, & potential is headed down thus growth will be slower
  3. Why? Productivity and population growth have slowed a lot & will continue to fall rapidly in the years ahead
  4. India: Productivity and population growth in working age group puts India in a better place than Asian
Feb, 26, 2016

Competitive federalism in the state bond market

  1. Context: Data from this week’s auction of state government bonds (a.k.a. state development loans)
  2. Finding: Markets are starting to differentiate between states based on their individual credit quality
  3. Usually: It is a routine affair which gets far less attention than central government bond auctions
  4. Change: but this time it caught the eye of market watchers
  5. Why? The yields being demanded by the markets for state bonds jumped considerably
  6. There was a wide difference between the yields demanded on bonds of different states
Feb, 23, 2016

Consensus in pre-budget all party meet

  1. Context: An all party meet was held to discuss issues for Budget session so that the session goes productive
  2. The consensus: on the need to allow Parliament to function smoothly
  3. The change: It signals a rethink by political parties, who let their differences and the resulting disruptions to cause a washout of the previous 2 sessions
  4. Opposition stand: will not allow the passage of any contentious bills in the first half of the session, except those on which there is a consensus
Feb, 23, 2016

Budget to bet on spurring growth

  1. Context: Union Budget for 2016-17 will primarily focus on stimulating growth without deviating too much from the fiscal deficit target set by Finance Minister in previous Budget
  2. Fiscal deficit target: 3.9 per cent of GDP for 2015-16, paring it further to 3.5 per cent for 2016-17 and 3 per cent for 2017-18
  3. Economic scene: Economic recovery is tentative and private sector investments remain elusive
  4. What’s clamour? Government to relax its deficit targets, to pump prime the economy via enhanced public investments
  5. Use of Twitter: For budget, the govt. invited suggestions from citizens through Twitter for the first time
  6. Some of the new suggestions are administrative in nature and can be examined at any point in the year
Feb, 11, 2016

Industrial growth in FY14 was higher in poorer states

  1. Industrial growth in the traditionally weaker states of Bihar, Odisha and Chhattisgarh in 2013-14 dwarfed that of their more developed counterparts
  2. Data released as part of the Annual Survey of Industries showed Bihar, Odisha and Chattisgarh had grown the most industrially in FY14
  3. This is in a year when the economy had to cope with the euro crisis and its effects on Indian industry
  4. Bihar at 97.5 per cent had the highest growth but measured from the country’s steepest decline the previous year
Feb, 02, 2016

Core sector output recovers, grows 0.9 per cent in Dec.

Fertiliser, coal, cement output and electricity production contribute.

  1. The output of 8 core industries — that comprise almost 38 per cent of the weight of items included in the Index of Industrial Production (IIP) — could record only a 0.9 per cent growth in Dec.
  2. Due to 4.1 per cent contraction in output of crude oil, 6.1 per cent contraction in natural gas and 4.4 per cent shrinkage in steel.
  3. Data on the core infrastructure industries has clearly been disappointing as growth remained sub one per cent in December after a negative blip in November.
  4. During April-December 2015 period this fiscal, the output of these eight sectors slowed to a 1.9 per cent growth from 5.7 per cent growth in the same period last fiscal.
Jan, 30, 2016

Govt lowers GDP growth rate to 7.2%

  1. Govt has marginally revised the economic growth for 2014-15 to 7.2% from earlier estimate of 7.3%.
  2. It has taken into account the latest data on agriculture and industrial production.
  3. GDP growth rate for 2013-14 has also revised downwards to 6.6% from earlier estimate of 6.9%.
  4. There is a downward revision in terms of Gross Value Added for 2014-15 on account of subdued performance of secondary sector.
  5. GVA as a concept was introduced by the CSO last year to measure value addition in the economy.
Jan, 30, 2016

Govt. to back state-run banks’ capital needs: Sinha

The government reiterated its commitment to support public sector banks’ capital needs at a time when bad loans are eroding their capital and putting pressure on profits.

  1. Government is going to support public sector banks and fully support all the Basel-III requirements.
  2. The banks are going to be fully supported as far as their capital adequacy in concerned.
  3. The RBI is forcing banks to clean up their balance sheet by asking the lenders to make adequate provisions for bad loans, which were unidentified hitherto.
  4. The banking regulator has prepared a list of borrower accounts, which has to be classified as non-performing.
  5. The government said it would provide Rs.25,000 crore in this fiscal year and an additional Rs.25,000 crore next fiscal year.
Jan, 23, 2016

PMO seeks industry inputs to spur growth

The performance of 8 core sectors in November is worrying, with their output shrinking.

  1. The PMO has sought industry recommendations on reviving and sustaining the growth momentum in the core sectors of manufacturing and infrastructure.
  2. Industry had urged finance minister Jaitley to spur domestic demand in the Budget in order to revive private sector investments.
  3. To sustain the reforms process in specific sectors and assess policy issues beyond the short-term imperatives which can be addressed in the Budget.
  4. Though industrial output has grown at 3.9 per cent from April to November 2015, it remains volatile.
  5. After surging 9.8 per cent in October last year, the index of industrial production fell by 3.2 per cent in November — its worst performance since October 2011.
Jan, 22, 2016

Act local

The best way to deal with global market panic is to get domestic policies right.

  1. The BSE Sensex has plunged below the level when Modi secured a stunning victory in elections .
  2. Rupee has fallen below Rs 68 to the dollar for the first time since August 2013 (time of taper tantrum)
  3. This volatility owes more to global factors, especially a deepening Chinese slowdown, collapse in commodity prices and US Fed normalisation of its monetary policy.
  4. US Federal Reserve embarking on a “normalisation” of its monetary policy.
  5. In real effective term, rupee has actually strengthens against a basket of 6 currencies after adjusting for inflation differential.
  6. Weakening against the dollar is, thus, a sign of the latter’s strengthening in an uncertain global environment where the greenback has become every investor’s safe-haven asset.
  7. Our focus should be on improving the domestic investment environment and preserving macroeconomic stability.
Jan, 21, 2016

Dealing with the slowdown

IMF forecast provides India a comparative edge in wooing the global investor community.

  1. IMF has cut the global growth forecast to 3.4 % In 2016, 0.2 % below its forecast of October.
  2. Growth forecast for China unchanged at 6.3 per cent and for India at 7.5 per cent.
  3. Slowdown in China with it posting the slowest growth yet in 25 years and weak commodity prices are indicative of pronounced global weakness.
  4. The year saw turbulence in the Chinese economy, with heavy capital outflows and stock market volatility which might exacerbate in the coming year.
  5. Containing the spillover effects of volatility (exchange rate plus point no. 4) in Beijing would be a big challenge for planners in India.
  6. But it is essential for the government to coherently address the growing anxiety among domestic consumers and stem, if not fully reverse, the demand slump.
Jan, 14, 2016

Rise and fall

2 data sets point to tenuous nature of India’s economic recovery.

  1. First, industrial production(IIP) contracted in November to the lowest level in over 4 years with manufacturing sector esp capital goods output — a barometer of investment — to share much of the blame .
  2. CPI rose to 5.6 per cent for December, though it remains within the RBI’s January target level of 6 per cent. The main reason here was the higher food price inflation.
  3. Data paints a contradictory picture. Anaemic industrial performance with rising inflation rather than falling inflation, which is not the case.
  4. CPI continues to be relatively high and “sticky”, despite the sharp fall in commodity prices globally, especially crude.
  5. Challenges – if the government tries to jump-start the economy through higher expenditure, it will worsen its fiscal deficit, resulting in increased inflation and put pressure on the RBI to raise interest rates.
  6. If the RBI, on the other hand, tries to reduce interest rates in order to incentivise economic activity, it may further weaken its grip over the CPI inflation targets it has set itself.
  7. Quality of its expenditure is key.
  8. Government must ring-fence capital expenditure and restart private capex cycle .
  9. Reaching out to rural India, where demand has collapsed.
Jan, 11, 2016

Tax on seed funding to be scrapped

According to estimates by the team of officials working on the Start Up India programme, start-ups in the country received around 9 billion dollars of funding in 2015.

  1. The government has decided to scrap a tax on seed funding provided to start-ups by Indian angel investors in the upcoming Union Budget.
  2. To help domestic financiers bankroll new entrepreneurial ventures under its Start Up India campaign.
  3. The tax provision in question treats infusion of funds by domestic angel investors as income in the hands of the start-up, making India.
  4. The only country in the world to penalise local angel investors in such a manner.
  5. This tax applies only to domestic investors and thus acts as a disincentive to local funding for start-ups that the government wants to incentivise instead.
Jan, 11, 2016

Indian companies plan record overseas fund-raising drive

  1. Indian companies plan to raise close to $12.33 billion in the next 3 months.
  2. This is mainly to refinance their old loans and fund expansion.
  3. It is happening at a time when very few companies are planning large capacity expansion because of stalled infrastructure projects and low capacity utilisation.
  4. Though the government has stepped up public spending, private investment is essential to a robust investment recovery.
  5. The union budget in February, the GST, and the awaited repeal of retrospective taxation could stimulate private investment.
Jan, 11, 2016

Corporate optimism on the wane as new investments decline sharply

Industry’s optimism about the investment climate has waned due to a sharp recent decline in the value of new project announcements, data from the Centre for Monitoring Indian Economy (CMIE) shows.

  1. New projects worth Rs. 1 lakh crore were announced in the December 2015 quarter, down from Rs. 4 lakh crore in December 2014.
  2. New project announcements were at Rs.8.2 lakh crore in calendar year 2015 as compared to Rs.9.4 lakh crore in 2014.
  3. At the same time, the data shows that the value of stalled projects fell to Rs.1,723.2 crore in the December 2015 quarter, down from Rs.86,177.3 crore in 2014.
  4. The stock of stressed assets come in 5 different buckets — specific permissions, sectoral issues, market-related postponements, promoter funding issues.
Jan, 09, 2016

Dragon’s fire may singe Indian industry

Commerce Ministry, Chief Economic Advisor, NITI Aayog Vice-Chairman to meet soon to assess impact.

  1. The decline in the value of China’s currency against the dollar is a worrying development as it may lead to a sharp increase in cheap imports hurting several Indian industries.
  2. The depreciation of the yuan may expand the country’s trade deficit.
  3. India’s trade deficit with China had ballooned from $1.1 billion in 2003-04 to $48.5 billion in 2014-15 or over 4 times India’s exports to China ($11.9 billion) in FY’15.
  4. The government is considering proposals to protect domestic steel manufacturers from cheap steel imports mainly from China.
  5. To offset the impact of trade deficit, India had sought more investments from China especially in mega industrial parks (in States such as Gujarat and Maharashtra).
Dec, 19, 2015

Govt. lowers growth outlook, stresses supply-side reforms

Without reforms, GDP growth next year is unlikely to be significantly greater

  1. India lowered its GDP growth projection for the current year to between 7-7.5 per cent against the earlier forecast of 8.1-8.5 per cent.
  2. The cut in forecast follows GDP growth in the first half of the year slowing to 7.2 per cent from 7.5 per cent in the last year.
  3. Economic growth was dragged down by the 17.4 per cent decline in exports and adverse impact of deficient monsoons on farm sector output.
  4. The slowdown will pose a challenge to meeting the fiscal deficit target of 3.9 per cent of GDP and will also place a stress on tax revenue collections.
Dec, 03, 2015

Maharashtra is biggest state economy, says Brickwork Ratings

Nationwide analysis finds state accounts for over 27 per cent of gross state domestic product and registered 11.69 per cent growth.

  1. Maharashtra is the biggest economy at Rs 16.87 lakh crore in terms of gross state domestic product (GSDP), followed by Tamil Nadu and Uttar Pradesh.
  2. Maharashtra earns approximately 70 per cent of its total receipts through tax revenues, the highest among the bigger states, followed by Gujarat and Tamil Nadu.
  3. Maharashtra’s infant mortality rate (IMR) of 25 is below the national average for all states, which stands at 50.
  4. The three fastest-growing states were Bihar at 17.06 per cent, MP (16.86 per cent) and Goa (16.43 per cent).
Dec, 02, 2015

India showing early signs of recovery: Moody’s

Some of the basic parameters of recovery were looking better, as growth in the production of capital goods has picked up, according to data.

  1. An increase in public sector expenditure and an upturn in capital replacement cycle are driving investment in India.
  2. It will take a while for private investment to show a sustainable revival.
  3. India’s economy was forecast to grow forecast at 7 per cent for 2015 and 7.5 per cent for 2016, which take into account a slower investment recovery.
  4. Report forecasting the GDP growth of 2.8 per cent in the G20 economies in 2016, with recovery expectations in U.S. offset by slower growth in China and emerging markets.
Dec, 02, 2015

Manufacturing sector growth drops to 25-month low

  1. India’s manufacturing sector grew at its slowest pace in 25 months in November on sluggish pace of new business orders.
  2. This also marks the 4th consecutive month of decline in the rate of Indian manufacturing output growth.
  3. Among sub-sectors, consumer goods was the best performing category.
  4. The slowdown in growth combined with weak inflationary pressures support further repo rate cuts.
Oct, 26, 2015

The problem of debt concentration

India is now coming to terms with the costs of crony capitalism

Let’s find some roots in the past, for dangerous growth in corporate debt ?

  • First, the bursting of the Indian credit bubble, when bank loans grew around 10 percentage points faster than nominal GDP, has left behind inevitable cracks in the financial system.
  • Second, the concerted push for higher private investment in infrastructure encouraged companies to take on excess debt.
  • While, inexplicable policy of allowing companies in the non-tradable sector to take on foreign debt is beyond rational economic explanation.
  • Third, the regulatory mess during last few years, projects got stalled after money was put on the ground and projects got into trouble because of policy confusions that were beyond control.
  • Fourth, most heavily indebted companies shows that there is a strong link between the current financial fragility and crony capitalism excesses of the past decade.

What now, Is their any way to move out? Two reasons, why more urgent action is needed.

  • First, financial fragility in the Indian private sector is one clear worry among global investors.
  • Second, the Indian economic recovery cannot be sustained unless private-sector investment picks up, and that is difficult unless corporate financials improve.
  • India is now coming to terms with the costs of crony capitalism. The bill should not be presented to taxpayers.

What is the way out for leveraged companies in India, Can you find some solutions?

Oct, 21, 2015

Gap widening between rural and urban India

Despite two successive years of drought, overall food inflation in India has remained tepid.

  1. Inflation has been slowing both in rural and urban areas, a widening difference between the two as rural inflation is decelerating at a much slower pace.
  2. The resultant gap between rural and urban inflation has more than doubled over the last one year, by HSBC Global Research show.
  3. The ‘excess inflation’ in rural India, is arising from food, fuel, transportation as well as from core inflation.
  4. The difference between rural and urban inflation is most stark for fuel and transportation, followed by core and to a lesser extent food.
  5. Rural India’s fuel mix is more geared toward domestically produced firewood, chips and biogas inputs, which are not a part of the global deflation cycle.

Higher investment in rural infrastructure and meaningful agricultural reforms are needed to make growth weather proof and put it on a higher, more sustainable path.

Sep, 26, 2015

Signals point to better economic activity: CEA

The signals are pointing to an improvement in economic activity. But on the pace, we do get mixed signals,Chief Economic Adviser Arvind Subramanian said.

  1. Indirect tax revenue numbers are doing very well, direct tax revenue numbers are not doing so well.
  2. Stalled projects have also come down, but at the same time exports are in negative territory.
  3. The economy is still well below potential and that’s the sense, even though it’s recovering and full of potential, therefore it needs monetary policy support.
  4. China was experiencing a temporary wobble and it would regain its footing, but at 5-7 per cent growth levels.
  5. If China grows rapidly, it is good for the world and for India. If China slows down, it will throw up challenges.
Sep, 22, 2015

ADB sees slower growth for Asia

Growth in developing Asia will likely be slower than previously thought as a slowdown in China’s economy hurts demand.

  1. Developing Asia is now expected to grow 5.8 percent and 6.0 percent this year and in 2016, down from the ADB’s July forecast of 6.1 percent and 6.2 percent.
  2. The region, which groups 45 countries in Asia-Pacific, grew 6.2 percent in 2014.
  3. Fears of a China-led global slowdown, which had sent global stock markets tumbling, prompted the U.S. Federal Reserve last week to hold off on raising interest rates for the first time in almost a decade.
  4. Capital outflows could accelerate ahead of the Fed rate hike and urged policymakers to strengthen financial systems in the region to mitigate shocks.
  5. India’s growth is seen weaker at 7.4 percent and 7.8 percent for this year.
Sep, 04, 2015

India relatively insulated against deflation. Why?

“India remains a very bright spot in the global economy because we have growth and we have robust underlying demand trends.”

  1. India is relatively insulated from deflationary tendencies due to strong demand trends, but there is still a need to be watchful.Powerful deflationary forces that are at work in the global economy.
  2. “The one real challenge that looms ahead for India’s economy appears not to be price inflation but possibly price deflation,” Dr. Subramanian said.
  3. “Some of the public investment that we are ramping up now, strong demand trends and hopefully a reasonable monsoon will enable us to achieve the 8 per cent GDP growth,”.
  4. With the government working hard to increase the ease of doing business, and the strong demand in the economy, Foreign Institutional Investors are likely to start returning to the country.
  5. Skills India is one programme where hands-on skills to workers will be provided so they can join industry, including the auto components industry.
  6. In addition, the government is planning an investment of Rs 8.5 lakh crore in the Indian Railways, investments in roads have doubled and the National Infrastructure Investment Fund will further help in providing investment in the infrastructure sector.

What else do you think works for our economy?

Sep, 04, 2015

Global growth likely to be weaker than expected: IMF chief

Ms. Lagarde said Asia is still expected to lead global growth, but the pace is slowing with a risk of possibly sagging further due to recent financial market volatility.

  • The head of the International Monetary Fund says global economic growth is likely to be weaker than earlier expected and will remain at moderate levels.
  • Asia is still expected to lead global growth, but the pace is slowing with a risk of possibly sagging further because of recent financial market volatility.

Global economic situation will have a significant impact on developing countries, including Indonesia.

Sep, 01, 2015

[Discuss] GDP growth estimates: Grappling with new complexities

Let us first understand the new methodology on GDP numbers, changed to reflect the new base year of 2011-12 against the earlier one of 2004-05.

  1. The revised methodology, changed the way GDP numbers have been calculated. The new method was used to calculate the figures for 2014-15.
  2. The new numbers changed GDP growth to 5.1 per cent from the earlier 4.5 per cent for 2012-13 and For 2014-15, the growth came at 7.3 per cent.
  3. Now, GDP is taken at market prices. This includes indirect taxes and excludes subsidies, quite different from what had been calculated so far. Which was GDP at factor cost, which included subsidies and excluded indirect taxes.
  4. The Central Statistics Office uses price deflators to convert nominal GDP into real GDP, which is a mix of WPI, CPI and other price indices.

 

Let’s dig out more on –

  1. Why this new methodology comes into picture this year?
  2. What is difference between Nominal GDP and Real GDP?
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