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Subject: Economics

  • An unrest, a slowdown and a health epidemic

    Context

    India faces imminent danger from the trinity of social disharmony, economic slowdown and a global health epidemic.

    Social disharmony

    • Violence in Capital: Delhi has been subjected to extreme violence over the past few weeks. We have lost nearly 50 of our fellow Indians for no reason. Several hundred people have suffered injuries.
      • Communal tensions have been stoked and flames of religious intolerance fanned by unruly sections of our society, including the political class.
    • University campuses, public places and private homes are bearing the brunt of communal outbursts of violence.
    • Institutions of law and order have abandoned their dharma to protect citizens. Institutions of justice and the fourth pillar of democracy, the media, have also failed us.

    Impact of social disharmony on the economy

    • Exacerbating the economy: At a time when our economy is floundering, the impact of such social unrest will only exacerbate the economic slowdown.
    • Lack of investment by the private sector: It is now well accepted that the scourge of India’s economy currently is the lack of new investment by the private sector.
      • Investors, industrialists and entrepreneurs are unwilling to undertake new projects and have lost their risk appetite.
      • Increase in fears and risk aversion: Social disruptions and communal tensions only compound investors’ fears and risk aversion.
      • Social harmony, the bedrock of economic development, is now under peril.
    • When policy tweaks stop to matter: No amount of tweaking of tax rates, showering of corporate incentives or goading will propel Indian or foreign businesses to invest, when the risk of eruption of sudden violence in one’s neighbourhood looms large.
    • How the vicious cycle works: Lack of investment means a lack of jobs and incomes, which, in turn, means a lack of consumption and demand in the economy.
      • A lack of demand will only further suppress private investments. This is the vicious cycle that our economy is stuck in.

    Impact of COVID-19 on the economy

    • Global reactions: Nations across the world have sprung into action to contain the impact of this epidemic. China is walling off major cities and public places. Italy is shutting down schools. America has embarked aggressively both to quarantine people as well as hasten research efforts to find a cure.
      • Many other nations have announced various measures to address this issue.
    • What India can learn? India too must act swiftly and announce a mission-critical team that will be tasked with addressing the issue. There could be some best practices we can adopt from other nations.

    Bringing in reforms to address the problems

    • The government must quickly embark on a three-point plan.
      • First, it should focus all energies and efforts on containing the COVID-19 threat and prepare adequately.
      • Two, it should withdraw or amend the Citizenship Act, end the toxic social climate and foster national unity.
      • Three, it should put together a detailed and meticulous fiscal stimulus plan to boost consumption demand and revive the economy.

    Turning a moment of deep crisis into a moment of great opportunity

    • The past instance of turning crisis into an opportunity: In 1991, India and the world faced a similar grave economic crisis, with a balance of payments crisis in India and a global recession caused by rising oil prices due to the Gulf War.
      • But India was able to successfully turn this into an opportunity to reinvigorate the economy through drastic reforms.
    • Turning the present crisis into an opportunity: Similarly, the virus contagion and the slowing down of China can potentially open up an opportunity for India to unleash second-generation reforms to become a larger player in the global economy and vastly improve prosperity levels for hundreds of millions of Indians.
      • To achieve that, we must first rise above divisive ideology, petty politics and respect institutional salience.

    Conclusion

    The India that we know and cherish is slipping away fast. Wilfully stoked communal tensions, gross economic mismanagement and an external health shock are threatening to derail India’s progress and standing. It is time to confront the harsh reality of the grave risks we face as a nation and address them squarely and sufficiently.

     

     

     

     

     

  • Online versus offline

    Context

    Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.

    Duopolies and scrutiny by the CCI

    • Duopolies in the most segment: The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments:
      • Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings.
      • Some niche players do exist in these segments, but by and large, the market has been carved up by large players.
    • Why CCI is scrutinising these companies? Several of these companies have come under the scrutiny of the Competition Commission of India (CCI).
      • What are the issues involved? The issues involved here have far-reaching ramifications for both online and offline market places. Some of the more contentious issues are:
      • Do such market structures restrict online competition?
      • Are the players engaging in predatory pricing?
      • If so, is it driving out both online and offline competition and does this adversely impact consumer welfare?
      • Is there a need for policy intervention, and, if so, what should be the underlying framework?

    Lower barrier to entry not translating into greater competition

    • Market not working as per theory: In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case.
      • Take-over: Most other firms in the segments mentioned above have either been taken over or have folded up.
    • What is the reason for the emergence of such marker structures
    • Positive feedback loop: One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop.
      • This leads to market concentration.
      • Difficulties for new players: Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.
    • Capital intensive market: Another possible explanation is that, contrary to perception, the online space is highly capital intensive.
      • Deep pockets are required to fund the discounts to get customers on board initially.
      • Such market structures are more likely in capital deficit countries like India.
    • Incumbents restricting new entrant: Incumbents, as in other sectors, may also engage in various strategies to restrict entry and thus competition.
      • Even small actions by these platforms coupled with the network effects can adversely impact competition.

    Predatory pricing-issues involved in it

    • Allegations of predatory pricing driving out the competition: Many allege that these two-sided online platforms engage in predatory pricing or below-cost pricing either by funding it themselves (deep pockets) or by squeezing producers.
      • This drives out the competition — both online as well as offline.
      • Predatory pricing is anti-competition, to begin with.
      • How it is harmful to the customers? While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses.
      • But is it that straightforward?
    • What are the issues involved in predatory pricing?
    • First- Assessing whether a platform is engaged in predatory pricing.
      • In India, it is defined as price falling below average variable cost — may not be a straightforward exercise.
      • Why it is not a straight forward exercise? The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
      • Discount for clearing inventories: Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories.
      • As do both online and offline firms to acquire customers in the early stages of their business.
    • Second-The impact of such pricing strategies on competition and on consumer welfare must be carefully assessed.
      • Driving out competitors is not equal to driving out the competition: It is quite likely that once the competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices.
      • Driving out competitors may not be the same as driving out the competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist.
      • Concerns of recovering the losses: Platforms will be mindful that losses will be hard to recover, and may not engage in below-cost pricing to drive out competitors for extended periods.
      • Consumers are unlikely to lose out as prices are likely to remain low.
    • Third- Possibility of collusion
      • There is also an argument for closer examination of such market structures because of the possibility of collusion.
      • Customers moving towards cheaper options: In most such markets, as the consumer has little to differentiate between the two platforms, it is the price that sets them apart.
      • Consumers tend to gravitate towards the cheaper option. This ensures continuous competition between the major players to offer low prices.
      • Possibility of customer left with no option: It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.
    • Fourth- Linking predatory pricing with abuse of dominant market position must be reexamined.
      • The dominant position is not always linked with predatory pricing: As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing.
      • Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established.
      • Taking into account deep pockets: Alternatively, the definition of market dominance could be expanded to take into account deep pockets.

    Conclusion

    • Set of guidelines instead of the fixed framework: Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise. Having a fixed predetermined framework is unlikely to be helpful. Instead, it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.
    • Safeguarding competition not competitors: Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.

     

  • [pib] Mega Consolidation in Public Sector Banks 

    The Union Cabinet, chaired by the Prime Minister has approved the mega consolidation of ten PSBs into four which include the –

    • Amalgamation of Oriental Bank of Commerce and United Bank of India into Punjab National Bank
    • Amalgamation of Syndicate Bank into Canara Bank
    • Amalgamation of Andhra Bank and Corporation Bank into Union Bank of India
    • Amalgamation of Allahabad Bank into Indian Bank

    About the merger

    • The amalgamation would be effective from 1.4.2020 and would result in creation of seven large PSBs with scale and national reach with each amalgamated entity having a business of over Rupees Eight lakh crore.
    • The Mega consolidation would help create banks with scale comparable to global banks and capable of competing effectively in India and globally.
    • Greater scale and synergy through consolidation would lead to cost benefits which should enable the PSBs enhance their competitiveness and positively impact the Indian banking system.

    Must read

    Bank Mergers

    [Burning Issue] Merger of Public Sector Bank

  • Supreme Court ruling on Virtual Currency

    The Supreme Court in a significant move has set aside a ban by the Reserve Bank of India (RBI) on banks and financial institutions from dealing with virtual currency holders and exchanges.

    Why did the Supreme Court ban virtual currencies?

    • In a circular in 2018, the RBI had banned banks from dealing with virtual currency exchanges and individual holders on the grounds that these currencies had no underlying fiat.
    • RBI held that it was necessary for the larger public interest to stop banks from providing any services related to these.

    Why was the ban unjustified?

    • The court held that the ban did not pass the “proportionality” test.
    • The test of proportionality of any action by the government, the court held, must pass the test of Article 19(1) (g) which states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.

    What are virtual currencies?

    • There is no globally accepted definition of what exactly is virtual currency.
    • Some agencies have called it a method of exchange of value; others have labelled it a goods item, product or commodity.
    • In its judgment the apex Court observed- Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism, who attempt to describe an elephant but end up describing only one physical feature of the elephant.

    Similarities with Bitcoin

    • Satoshi Nakamoto widely regarded as the founder of the modern virtual currency bitcoin and the underlying technology called blockchain defined bitcoins as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”.
    • This essentially meant there would be no central regulator for virtual currencies as they would be placed in a globally visible ledger, accessible to all the users of the technology.
    • All users of such virtual currencies would be able to see and keep track of the transactions taking place.

    Are they different from cryptocurrencies?

    • Virtual currency is the larger umbrella term for all forms of non-fiat currency being traded online. Virtual currencies are mostly created, distributed and accepted in local virtual networks.
    • Cryptocurrencies, on the other hand, have an extra layer of security, in the form of encryption algorithms.
    • Cryptographic methods are used to make the currency as well as the network on which they are being traded, secure.
    • Most cryptocurrencies now operate on the blockchain or distributed ledger technology, which allows everyone on the network to keep track of the transactions occurring globally.

    Are cryptocurrencies dangerous?

    • The jury is out on that. Organisations across the globe have called for caution while dealing with virtual currencies.
    • A blanket ban of any sort could push the entire system underground, which in turn would mean no regulation.
    • In June 2013, the RBI had for the first time warned users, holders and traders of virtual currencies about the potential financial, operational, legal and customer protection and security-related risks that they were exposing themselves to.
    • The following year, the FATF came out with a report that highlighted both legitimate uses and potential risks associated with virtual currencies.
    • In a different report, it again said the use of such virtual currencies was growing among terror financing groups.

    Why did the RBI ban virtual currencies?

    • Owing to the lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules, the RBI initially flagged its concerns on trade and use of the currency.
    • Risks and concerns about data security and consumer protection on the one hand, and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand, also had the RBI worried about virtual currencies.
    • In its arguments, RBI said it did not want these virtual currencies spreading like a contagion, and had, therefore, in the larger public interest, asked banks not to deal with people or exchanges dealing in these non-fiat currencies.
    • The RBI perceived significant spurt in the valuation of many virtual currencies and rapid growth in initial coin offerings as a risk.

    Proponent’s stance

    • They said the RBI action was outside its purview as the non-fiat currency was not a currency as such.
    • They also argued that the action was too harsh and there had been no studies conducted either by the RBI or by the central government.
    • Arguing that the ban was solely on “moral grounds”, the petitioners said the RBI should have adopted a wait-and-watch approach, as taken by other regulators such as SEBI.

    Faring the Proportionality test

    • In its judgment, the Supreme Court held that the RBI directive came up short on the five-prong test to check proportionality.

    It includes:

    • the direct and immediate impact upon fundamental rights
    • the larger public interest sought to be ensured; a necessity to restrict citizens’ freedom
    • inherent pernicious nature of the act prohibited or its capacity or tendency to be harmful to the general public
    • the possibility of achieving the same object by imposing a less drastic restraint

    Way Forward

    • The Supreme Court’s judgment could lead to the RBI rethinking its policies surrounding virtual currencies.
    • It is expected that the RBI will reconsider its approach to cryptocurrency and come up with a new, calibrated framework or regulation that deals with the reality of these technological advancements.
    • The decision will help those investors who had used legitimate money through banking channels.

  • Way out lies within

    Context

    Domestic demand must play a greater role in India’s growth story.

    Recovery in the Indian economy

    • Sub-5 per cent growth rate: India’s fourth-quarter GDP growth (the calendar year 2019) printed another sub-5 per cent growth rate.
    • Favourable base effect: It would have been lower had it not been for the large downward revisions to previous years’ GDP that statistically boosted the last quarter’s growth rate because of favourable base effects.
    • The decline in GDP stabilised: Policymakers and the market heaved a sigh of relief that the relentless decline over the last three years at least seems to have stabilised around 4-5 per cent.
    • Why some countries prefer sequential growth rate: Because year-over growth rates are so strongly affected by what happened a year ago, most economies (including China) instead publish and conduct policy discussions based on sequential quarterly growth.
      • Better sense of momentum: Sequential growth rates provide a much better sense of the momentum and turning points in activity, which are critical to deciding whether, how much, and when the economy needs policy support.
    • The magnitude of recovery: The growth momentum rose, albeit modestly, from 3.8 per cent in the third quarter of 2019 to 4.1 per cent.
      • Non-farm and non-governmental GDP recovery: More importantly, non-farm and non-government GDP (the closest approximation to non-farm private-sector GDP) bounced much more sharply from 1.6 per cent (and no this is not a misprint) to 4.4 per cent in the fourth quarter.

    What is the dominant narrative of the slide in growth?

    • The deceleration in sequential terms: With the revised data, we now know that annual growth over the last four years has slowed from 8.3 per cent to 7 per cent to 6.1 per cent to 4-5 per cent.
      • The decline in non-farm private GDP: In sequential terms, the deceleration was far more dramatic, especially in non-farm private GDP, which after hitting a run rate of 13 per cent in the first quarter of 2016 fell to 1.6 per cent by the third quarter of 2019.
      • The dominant narrative of the cause of slide: The dominant narrative is that India’s woes are just an unfortunate and unintended consequence of demonetisation, the shift to a national GST, and the credit squeeze caused by the bad debt in banks and non-banks.
      • The dominant narrative on recovery: With a bit more fiscal support, some monetary easing, and extended regulatory forbearance to help banks work out their bad debts, these headwinds will fade and India will likely be back to its winning ways.

    Why real cause of the slowdown lays somewhere else?

    Following factors suggest that answer lies somewhere else.

    • Disruptive but not the drivers of the slowdown: While it is undeniable that facts stated in the dominant narrative had been disruptive, they couldn’t be the drivers of the decline.
      • Slide in growth started even before demonetisation: India’s growth had been sliding since the second quarter of 2016; nearly 6 months before demonetisation and a year before the GST was introduced.
      • By the third quarter of 2016, non-farm private sector growth had already slid to 3.5 per cent.
      • Bad debt problem predates slowdown: Although bad debt hit the headlines in 2016, the overleverage had already begun to tighten bank lending since 2014.
    • Fall in corporate investment- inexplicable cause: More inexplicable is the argument that falling corporate investment is the main culprit for the slowdown.
      • It is true that corporate investment is no longer running at the heady 17 per cent of GDP of the pre-global financial crisis (GFC) days but at a much more sombre 11-12 per cent.
      • However, this outsized adjustment had already taken place by 2010 and since then, corporate investment has flatlined at current levels.

    The answer lies in globalisation

    It is obvious once one eschews India’s exceptionalism and accepts that it is just another emerging market economy that grew on the coattails of globalisation with the minimal reforms. Globalisation has largely determined India’s fate.

    • Growth in corporate investment and exports: Contrary to a widely held misperception, India is and has been for a long time far more open to the global economy than believed.
      • Rise in corporate investment from 5 to 17%: The limited liberalisation of 1991-92, coupled with the corporate restructuring in the late 1990s, spurred corporate investment to rise from 5-6 per cent of GDP in the early 2000s to 17 per cent of GDP by 2008.
      • Increase in exports: Almost all of this expansion in investment was geared to produce for exports, which grew at an astonishing pace of 18 per cent per year-over-year in this period as global trade expanded at breakneck speed with the entry of China into the WTO in 2001.
      • 12% of GDP to 26% of GDP: Exports as a share of GDP more than doubled from 12 per cent in the early 2000s to over 26 per cent by 2008.
      • Slow growth in private consumption: In contrast, private domestic consumption, which is considered to be India’s great strength, grew only at 6 per cent annually, less than the growth rate of the economy, such that its share in GDP fell from 63 per cent to 56 per cent.
      • The engine of the Indian economy- Export: Since 2012, global trade has floundered and with that so has India’s economy.
      • Indeed, the entire rise and fall of investment, including the quarter-to-quarter twists and turns in it, can be almost fully explained by changes in exports.
      • The Indian economy has long been flying on one engine – exports — and that is now spluttering.

    What are the prospects of taking the economy back to its high growth path

    • Unlikely: So will the nascent recovery strengthen and take the economy back to its high growth path? Unlikely on current policies.
    • COVID-19 factor: In the near term, as in now widely feared, the COVID-19 outbreak could turn into a pandemic, sharply reducing global demand and trade.
      • With that, even expectations of a modest 2019-20 recovery to 5.25 per cent growth are under threat.
    • Backlash against globalisation: Over the longer term, it is unlikely that global trade will return to its pre-Global financial crisis growth rates not only because supply chains have stopped expanding in the absence of any material technology breakthrough, but there is also a growing political backlash against globalisation in the developed market that has led to increased trade barriers.

    Way forward

    • Search for new sources of growth: India too, like other emerging market economies, needs to face up to the reality that it can no longer depend on global trade to be the only growth driver. Instead, it needs to search and find new sources of growth and that starts with recognising and accepting reality.
    • Let domestic demand play a greater role in the economy: Policymakers need to stop thinking about India as a perennially supply-constrained economy focusing almost all policies and reforms to easing these constraints. Instead, it is time to let domestic demand play a greater role in India’s growth story.
    • Policy changes: The above factors mean that India Inc. needs to shift from producing what foreigners want to produce what residents can afford, it also means that policymakers have to reverse policies that have so far forced households to keep increasing savings (for retirement income, children’s education, healthcare, and housing) through a web of financial repression, regulatory distortions, and public spending choices.
      • It means redesigning India’s infrastructure to look more inward and less outward.
      • Reduce out of pocket expenses: Increasing public provisioning of healthcare and education, reforming insurance regulations to reduce out-of-pocket expenses and eliminating financial repression to raise returns on retirement savings.
      • Merely tinkering with macroeconomic policies will not be enough.

     

     

  • The growth challenge

    Context

    The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

    Growth prospects of India

    • The NSO forecast at 5%: The latest data from the National Statistical Office (NSO) retained India’s economic growth forecast at 5 per cent for the current financial year.
      • Growth has dropped from 6.1 per cent in the previous year.
    • Fall in nominal GDP: More strikingly, nominal GDP growth has decelerated from an average of 11 per cent during 2016-17 to 2018-19 to 7.5 per cent this year.
      • Lower inflation added to the volume slowdown.
      • The value of India’s GDP for FY20 is estimated at around $2.9 trillion.

    Input and output side growth prospects

    • GDP is estimated from both output and demand lenses, using specific economic indicators as proxies for activity in specific sectors.
    • Output side: From the output side, sector-wise estimates were as following-
      • Agriculture sector growth was revised up to 3.7 per cent (up from the 2.8 per cent previously).
      • Agricultural production is expected to improve based on the third advance estimates of the rabi season crops, as well as higher horticulture and allied sector output (livestock, forestry and fishing), which now is significantly larger than conventional food crops.
      • Industrial activity was lowered to 1.5 per cent (from 2.3 per cent earlier).
      • The key concern regarding the continuing slowdown is the increasing weakness in the industrial sector (particularly of manufacturing, whose growth has progressively fallen from 13.1 per cent in FY16 to 5.7 per cent in FY19, and plummeting to 0.9 per cent in FY20).
      • Services output remained largely unchanged at 6.5 per cent.
    • Demand-side: From a demand perspective, the obverse side to the manufacturing slowdown is the even sharper drop in fixed asset investment growth — down sharply from an average 8.5 per cent during FY17 and FY19 to -0.6 per cent in FY20.
      • The causes for this contraction needs to be understood in detail, and we will return to this.

    Private consumption- a significant driver of growth

    • Private consumption at 60% of GDP: The other significant driver of growth in India has been private consumption. For perspective, the share of private consumption had averaged 59-60 per cent during FY16-FY20.
    • Government consumption 10% of GDP: Reflecting the higher spending over the last couple of years, the share of government consumption in GDP has risen from an average of 10.5 per cent of GDP over FY12-17 to almost 12 per cent in FY20, resulting in the share of total consumption above 70 per cent.

    Drop in the share of nominal investment

    • Drop from 39 % to 30 % of GDP: The really remarkable trend, though, as noted above, is the share of nominal investment in GDP progressively dropping from 39 per cent in FY12 to 30 per cent in FY20.
    • Is it a good sign? Part of this is actually good, reflecting higher Capex efficiency.
      • Slowing household consumption: One narrative underlying the contraction in fresh Capex in FY20 was slowing household consumption growth, which, in nominal terms, fell from an average 11.6 per cent during FY16-19 to an estimated 9.1 per cent in FY20.
      • Disproportionate contribution to lower growth: Though the deceleration prima facie does not seem significant enough to result in a broader economic slowdown of the current magnitude, the high share of household consumption has contributed disproportionately to lower growth.
      • Fall in capacity utilisation: A direct fallout of this is that seasonally adjusted capacity utilisation (based on RBI surveys) had shrunk from 73.4 per cent in the first quarter of FY20 to 70.3 per cent in the second quarter, and this is unlikely to have improved materially in the second half of the year.
      • This is one of the reasons for the low levels of fresh investment.

    Reduced flow of credit to the commercial sector

    • Impediment to growth revival: The other cause of the low Capex, more from the supply side, is a much-reduced flow of credit to the commercial sector, and this remains the proximate impediment for growth revival, with signs of risk aversion in lending still strong despite the recent measures by RBI to incentivise credit to productive sectors.
      • Funds from selected sources, over April-January FY20, was only about Rs 9 lakh crore as against Rs 15 lakh crore in the corresponding 10 months of FY19.
    • Bank credit lowest in three months: Growth in bank credit (which is still the largest source of financing) till mid-February 2020 was down to 6.3 per cent — the lowest in three years.
      • Even this is almost wholly driven by retail credit; incremental credit to industry and services over this period was negative.

    Investor confidence and coronavirus factor

    • A bright feature of the economic environment: One bright feature in this economic environment is strong foreign investor confidence in India, reflected in both FPI equity and FDI flows.
      • Many borrowers have used offshore sources to refinance or pay down domestic bank loans and debt.
      • A global risk-off environment might restrict even this channel in the near future.
    • Robust corporate bond issuances: Domestic corporate bond issuances have also remained robust, although the dominant set of borrowers still remain public sector agencies and financial institutions.
    • Coronavirus factor likely to moderate the gains: Monthly economic indicators suggest that the growth deceleration has likely bottomed out in the third quarter.
      • The bet has been on reducing inventories and the consequent production ramp-up to replenish stocks. However, the evidence on this is mixed.
      • The coronavirus effects, both concurrent and lagged, will also moderate some of the emerging positive effects of counter-cyclical policy measures of the past six months.
      • If the outbreak does not abate over the next month or so, the complex supply chains of intermediates sourced from China will run dry and add to the already weak system demand.
    • Growth prospects in the next few weeks: Surveys indicate that both business and consumer confidence, which while improving, remain muted. A growth revival, hence, is likely to be only very modest over the next few quarters.

    Conclusion

    A $5 trillion economy by 2025 is still a worthwhile target and aspirational; coordinated strategies, policies, execution and institutional mechanisms will be needed to move up to a sustained 8 per cent plus growth consistent with achieving the target. The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

     

  • Pushing the wrong energy buttons

    Context

    For more than a decade, no major meeting between an Indian Prime Minister and a U.S. President has passed without a ritual reference to India’s promise made in 2008 to purchase American nuclear reactors.

    Issues in the nuclear deal

    • Construction of reactors: During president Trumps visit techno-commercial offer for the construction of six nuclear reactors in India at the earliest date was considered.
    • More expensive: Indeed, it has been clear for years that electricity from American reactors would be more expensive than competing sources of energy.
    • Prone to disasters: Moreover, nuclear reactors can undergo serious accidents, as shown by the 2011 Fukushima disaster.
    • No liability for accidents: Westinghouse has insisted on a prior assurance that India would not hold it responsible for the consequences of a nuclear disaster.
      • Which is effectively an admission that it is unable to guarantee the safety of its reactors.

    Who will be benefited from the deal?

    • The two beneficiaries: The main beneficiaries from India’s import of reactors would be Westinghouse and India’s atomic energy establishment that is struggling to retain its relevance given the rapid growth of renewables.
    • Political implications: Mr Trump has reasons to press for the sale too. His re-election campaign for the U.S. presidential election in November.
      • The election centrally involves the revival of U.S. manufacturing and he has been lobbied by several nuclear reactor vendors, including Westinghouse.
      • Finally, he also has a conflict-of-interest.

    Comparisons with the renewables

    • The total cost of the reactors: The six reactors being offered to India by Westinghouse would cost almost ₹6 lakh crore.
      • If India purchases these reactors, the economic burden will fall upon consumers and taxpayers.
    • Per unit price: In 2013, it was estimated that even after reducing these prices by 30%, to account for lower construction costs in India, the first year tariff for electricity would be about ₹25 per unit.
    • Comparison with solar energy: Recent solar energy bids in India are around ₹3 per unit.
      • Lazard, the Wall Street firm, estimates that wind and solar energy costs have declined by around 70% to 90% in just the last 10 years and may decline further in the future.

    Safety concern with nuclear energy

    • Long term cost in case of disasters: Nuclear power can also impose long-term costs.
      • Chernobyl accident: Large areas continue to be contaminated with radioactive materials from the 1986 Chernobyl accident and thousands of square kilometres remain closed off for human inhabitation.
      • Fukushima accident: Nearly a decade after the 2011 disaster, the Fukushima prefecture retains radioactive hotspots.
      • The cost of clean-up: the cost of clean-up has been variously estimated to range from $200-billion to over $600-billion.
    • No liability towards company: The Fukushima accident was partly caused by weaknesses in the General Electric company’s Mark I nuclear reactor design.
    • But that company paid nothing towards clean-up costs, or as compensation to the victims, due to an indemnity clause in Japanese law.
    • What are the provisions in Indian laws: Westinghouse wants a similar arrangement with India. Although the Indian liability law is heavily skewed towards manufacturers, it still does not completely indemnify them.
      • So nuclear vendors have tried to chip away at the law. Instead of resisting foreign suppliers, the Indian government has tacitly supported this process.

    India’s experience with nuclear energy

    • Starting with the Tarapur 1 and 2 reactors, in Maharashtra, India’s experiences with imported reactors have been poor.
    • The Kudankulam 1 and 2 reactors, in Tamil Nadu, the only ones to have been imported and commissioned in the last decade, have been repeatedly shut down.
    • Producing less than capacity: In 2018-19, these reactors produced just 32% and 38%, respectively, of the electricity they were designed to produce.
    • These difficulties are illustrative of the dismal history of India’s nuclear establishment.
    • Electricity generation stagnant at 3%: In spite of its tall claims, the fraction of electricity generated by nuclear power in India has remained stagnant at about 3% for decades.

    Conclusion

    The above factors indicate that the government should take the rational decision on the adoption of nuclear energy given its cost and the risk involved and the better alternative available in the form of solar and other renewable energies.

     

  • [pib] Star Labelling Programme

     

    The Bureau of Energy Efficiency (BEE) has included Deep Freezer and Light Commercial Air Conditioners (LCAC) under its Star Rating Programme on a voluntary basis.

    What is the news?

    • The program will be initially launched in voluntary mode from 2ndMarch, 2020 to 31st December, 2021.
    • Thereafter, it will be made mandatory after reviewing the degree of market transformation in this particular segment of appliances.
    • In order to cover split ACs beyond the scope of existing BEE star labeling program upto a cooling capacity of 18kW, BEE has prepared a star labeling program for split ACs having cooling capacities in excess of 10.5kW and upto 18.0 kW.
    • This category of Air conditioners is termed as LCAC primarily due to their application in commercial air conditioning.
    • Through this initiative, it is expected to save around 2.8 Billion Units by FY2030, which is equivalent to GHG reduction of 2.4-million-ton Carbon Dioxide.

    Why such move?

    • Energy Efficiency has the maximum GHG abatement potential of around 51% followed by renewables (32%), biofuels (1%), nuclear (8%), carbon capture and storage (8%) as per the World Energy Outlook (WEO 2010).
    • India can avoid building 300 GW of new power generation up to 2040 with the implementation of ambitious energy efficiency policies (IEA – India 2020).
    • Successful implementation of Energy Efficiency Measures contributed to electricity savings of 86.60 BUs i.e. 7.14% of total electricity consumption of the country and emission reduction of 108.28 million tonnes of CO2 during 2017-18.

    About Star Labeling Programme

    • The programme has been formulated by Bureau of Energy Efficiency, as part of its mandate, under the Energy Conservation Act, 2001.
    • Under this Programme, BEE has covered 24 appliances till date wherein 10 appliances are under the mandatory regime.
    • The existing BEE star labelling program for Air Conditioners is based on Indian Standard IS 1391 part 1, part 2 and covers AC with cooling capacities up to 10.5kW.

    Other facts: UDIT

    • Urja Dakshata Information Tool (UDIT) (udit.beeindia.gov.in), a first-ever initiative taken by BEE with the World Resources Institute (WRI), to facilitate a database on energy e­fficiency was also launched.
    • UDIT is a user-friendly platform that explains the energy efficiency landscape of India across industry, appliances, building, transport, municipal and agriculture sectors.
    • UDIT will also showcase the capacity building and new initiatives taken up by the Government across the sectors in the increasing energy efficiency domain.

  • Is RBI raising systemic risks by pushing retail credit?

    Context

    Credit driven growth may not lead to sustainable growth.

    Credit driven economic boom

    • RBI and govt. acting in line: Both the government and Reserve Bank of India (RBI) have acted in line with their stated commitment towards the defined fiscal and monetary stability framework.
      • Given the pressures of a dwindling growth rate and limited fiscal and monetary elbow room, this is commendable.
    • Growth without increasing systemic risk: It is critical that the decisions taken to revive growth have a high likelihood of success without increasing systemic risk in the medium to long run.
      • Recent push may add to systemic risk: In this context, it may be argued that RBI’s recent push for retail credit growth would add to systemic risk, while the benefits for India’s gross domestic product growth (GDP) may be limited.
      • Credit-driven economic booms always end in economic misery.
    • Credit is a necessary evil: To pump-prime an economy, very few tools exist other than credit.
      • Thus there is all the more reason to handle it with care. In current economic growth frameworks, economic growth requires
      • Quite often, credit creation is the ultimate source of capital.
      • If the government spends by increasing its fiscal deficit, government debt increases. If the private sector borrows to invest and kick-start growth, its leverage increases.
      • What could be the best source of credit? The best use of credit is when it is used to finance real assets in the economy.
      • Creation of financial asset: When credit does not create real assets, it inevitably creates financial assets such as bonds held by investors, loans held by banks, or accounts receivables held by firms.
      • The precursor to a crisis: An overabundance of financial assets created by credit is a precursor to a crisis.

    How types of loans matters for growth and risk of the system

    • How money is used matters for reviving sustainable growth: Taking a consumer loan to splurge on a vacation or celebratory dinner does very little to support long-term growth. It creates economic activity only in the immediate period.
      • Which sector should be pushed to ramp up credit and how that money is used become important if reviving sustainable growth is the objective.
    • In a paper titled Who Gets The Credit And Does It Matter, Thorsten Beck et al studied the growth dynamics of 45 countries for the period from 1994 to 2005.
      • Only loans to firms contribute to growth: The paper concluded that only loans to firms are linked to GDP growth, the argument being that firms use credit to increase their capital stock, and thus, real assets.
      • Loans to households do not add substantially to growth: Loans to households, while having desirable social outcomes in terms of boosting consumption and allowing households to tide over short-term cash flow mismatches, do not add to sustainable GDP growth.
      • It is debatable whether consumer loans need a push at all.
    • Retail and household debt growth
      • Retail loan growth, while currently below its 2016 peak of 20%, has been managing to grow at around 15%.
      • Household debt: In December 2019, RBI cautioned lenders on household debt levels and the associated risk on retail loans.
      • Relation with banking crisis: Higher growth in household debt is associated with higher chances of a banking crisis (Household Debt And Monetary Stability, IMF, 2017).
    • Consumer loans not always add to capital stocks: Another kind of consumer loan, the home loan, need not always add to incremental capital stock. Given how slowly the supply of homes responds to demand in the short term, excess credit supply is known to add to the risk.
      • Of course, consumer loans such as education loans, which upgrade human resources, are a notable exception.
      • In fact, mortgage booms have played key roles in most credit blow-ups.
    • Surprising steps by the RBI
      • Risk weight of consumer loans lowered: Surprisingly, RBI reduced the risk weight for consumer loans other than credit card debt from 125% to 100% in September 2019.
      • Waiver to CRR requirement: Recently, RBI decided to waive lenders’ cash reserve requirement against new exposure to home, auto and Micro, Small and Medium Enterprises (MSME) loans.
    • Futile attempts to revive commercial lending:
      • Home loan growth was hovering around 15% for the last two years.
      • Commercial credit growth falling: Growth of commercial credit (loans to industry and services as per RBI), which last exhibited 20%-plus growth in June 2012, has been falling.
      • Since 2016, its annual growth averaged around 6%, with a strong downward trend observed since March 2019.
      • Efforts to revive commercial lending have not borne fruit.
      • Misplaced belief needs to be relooked: This misplaced belief—“if not commercial, let retail loans revive the economy”—needs to be re-looked.
      • The simplistic understanding that any credit uptick can revive the economy needs to change.
    • What retails at best can achieve? India’s retail credit push, if successful, may at best check the downward trend in GDP growth.
      • The argument that it will revive growth is based on optimism.
      • The assumption here being that consumption will drive the current capacity utilization of 69% to somewhere above 85%, which will trigger capital expenditure.
      • This assumes that the consumer loan boom, already a decade old, will continue for another 3-4 years.
    • Chances of household balance sheet weakening: In an environment of low job growth, it is difficult to see how household leverage will not increase.
      • If capacity utilization does not pick up sufficiently to revive growth, then along with banking and corporate balance sheets, household balance sheets will also be weakened.
      • Over the next 3-5 years, the downside of RBI’s retail push appears at least as significant as the upside.

    Conclusion

    • Polity stability needed: The government and RBI must make more determined efforts to revive corporate activity. Policy stability and confidence in the business environment may push commercial credit better than mere interest rate cuts.
    • Need to increase government spending: Among the options available, using good old government spending to stimulate infrastructure spending, and eventually, the economy, appears to be a wiser option.

     

  • No gains for taxpayers

    Context

    Loss expected from lower tax rates may be countered by gains from the settlement of cases, higher dividend taxes on top incomes, and the wider scope for taxing international incomes.

    Simplification and providing ease to the taxpayers

    • Fiscal constraints leaving no room for a lower rate: Ahead of The Union budget, taxpayers had anticipated a wide range of measures that they hoped would stoke demand.
      • These ranged from lower tax rates to a more even tax structure on income from various sources.
      • As the former was less feasible given the fiscal constraints, the budget proposals focused on simplification and providing ease to the taxpayer.
    • Simplification in personal tax: The recalibration of personal income tax slabs was suggested as a step towards simplification.
      • However, its uptake is contingent on the preference for new slabs.
      • Who will not opt for a new slab? Switching over to the new slab rates is not beneficial to-
      • An individual currently claiming full exemptions.
      • An individual with incomes comprising largely of capital gains.
      • It is possible, however, that individuals do not claim such exemptions or deductions.
    • How switching to new slab impact revenue? An analysis of data published by the Central Board of Direct Taxes suggests that for the assessment year 2018-19, it suggest improvement in the collection.
      • 1% improvement: If individuals do switch over to the new regime, it may translate to a 1 per cent improvement in tax collections, rather than a loss.
    • Limited takers of the new slab: It can be inferred that this option may be exercised by few individuals, if at all, since the potential gains from foregoing exemptions and the intended simplification is expected to be limited.

    Tax disputes

    • The new scheme proposed: A common concern among taxpayers is protracted disputes. To reduce litigation, a new scheme has been proposed.
    • Importance of precedence in disputes: 39 per cent of the cases made a reference to a similar case in the previous year. This underscores the importance of precedence.
    • In such cases, the settlement is not a superior option as the waiver of the penalty and interest does not offer any advantage against a decision that would impact future assessment.
    • Success rates of disputes: The success rate of the tax department is 27 per cent at the Income Tax Appellate Tribunal (ITAT) and the Supreme Court and 12 per cent in appeals filed in high courts.
      • Given the odds of success, an assessee may thus be tempted to pursue litigation.
    • Incentivising the settlement: Taxpayers may choose to settle for the waiver of interest and penalty in cases where it is one time and does not set a precedent for future transactions.

    Dividend Distribution Tax (DDT)

    • What is DDT?  It is one of the significant change is in the taxation of dividends.
      • The dividend distribution tax is a unique levy on distributed profits and is payable by the distributing company.
      • What is the shortcoming in DDT? The shortcoming of such tax is that foreign investors can’t claim the credit.
      • Additional 10 % of DDT: In an effort to make the tax progressive, an additional dividend tax of 10 per cent was introduced for domestic investors receiving dividend in excess of Rs 10 lakh.
    • Dividend pay-out decreased after DDT: Changes in DDT were accompanied by a decline in dividend pay-out – the proportion of profits paid as dividends declined from 30 per cent in early 2000s to 22 per cent in 2019 (BSE 500 companies).
      • Chance of improvement in pay-outs: It is expected that the reversion to the classical system may improve dividends pay-outs.
      • However, this will benefit individual taxpayers with incomes below Rs 5 lakh as the slab rate applicable is less than the existing rate.

    Taxing cross-border income

    • In the international arena, India is determined to tax cross-border incomes.
    • Taxing digital companies: The addition of explanation 3A to the Income Tax Act reinforces India’s commitment to taxing digital companies.
    • What comprises the business with nexus to India: The proposed amendment clarifies that incomes related to the advertisement, sale of data of a person residing in India and sale of goods and services based on the data of a person residing in India, may be attributed to a business with nexus in India.
    • Taxing citizen not taxable anywhere: To tax Indian citizens that are not taxable in any other jurisdiction, the Act will now deem such individuals as resident taxable in India.
      • While the application of the law may be challenged giving rise to disputes, it is a step forward.

    The proposal of Citizen’s charter

    • Charter on rights and obligations: The finance minister also referred to introducing a citizen’s charter that incorporates taxpayer’s rights and obligations.
      • Limits of charters: International experience shows that charters have limited enforceability unless adopted in primary legislation.
    • Supporting charters with legislation: Introducing charter to the statutes may, therefore, prove to be a positive initiative.
      • Faith can be built through enforcement of the charter.
      • However, the penal provisions must be well-thought-out so as to avoid adding another contentious element.

    Conclusion

    • Lack of uniformity: The budget proposals aimed to provide simplicity, yet much remains to be done, given the lack of uniformity in the taxation of incomes such as capital gains.
    • Limited revenue implications: The success of schemes proposed is contingent on the traction they gain. As for the revenue implications, the impact of these measures may, in fact, be limited.
    • Countering loss through gains from settlements: Loss expected from lower tax rates may be countered by gains from the settlement of cases, higher dividend taxes on top incomes, and the wider scope for taxing international incomes.