As we hear about the activities going on in South east china sea (chinese claim), Indian ocean (piracy), time has come to clear some terms about blue economy. It will be significant for India in strengthening prospects in indian waters. Let’s analyse this in detail.

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What is Blue economy?

• Gunter Pauli’s book, “The Blue Economy: 10 years, 100 innovations, 100 million jobs” (2010) brought the Blue Economy concept into prominence
• Blue Economy began as a project to find 100 of the best nature-inspired technologies that could affect the economies of the world
• While sustainably providing basic human needs – potable water, food, jobs, and habitable shelter
• This is envisaged as the integration of Ocean Economy development with the principles of social inclusion, environmental sustainability and innovative, dynamic business models
• It is creation of environment-friendly infrastructure in ocean, because larger cargo consignments can move directly from the mothership to the hinterland through inland waterways, obviating the need for trucks or railways

What makes Indian water attractive? How is it geographically different?

• Vast coastline of almost 7,500 kilometres, with no immediate coastal neighbours except for some stretches around the southern tip
• This is not possible, for instance, in the Persian Gulf region because of the proximity to trade routes and contiguous countries
• In some sense, India has the advantage of a latecomer, helped by natural geography
• For an offshore transloading zone, the availability of calm waters during the monsoons is a problem
• But this can be overcome by conducting such operations closer to the coast and seasonally, in calmer waters

What are some developments initiated by India?

• An offshore infrastructure project was successfully launched by the ministry of shipping, for transporting imported coal to the thermal power station at Farakka in West Bengal
• Such transshipment, out on the high seas yet within India’s economic zone at the Sandheads in the Bay of Bengal, worked out to be financially viable and environmentally friendlier, compared to traditional handling of cargo at ports
• As ship sizes become bigger, transshipment/ lighterage operations on the high seas are becoming more viable

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What are the potential efficiencies from blue economy infrastructure?

• Ports can multiply operations because each cargo shipment is of small parcel size, with no extra capital expenditure for dredging or for large berths and associated equipment
• As larger surpluses are generated, some parts can be utilised for better and more environment-friendly “smart ports” Less physical congestion unclogs bottlenecks at ports
• Faster clearances mean less waiting time and savings on demurrage, so a shorter waiting time for ships also helps the environment by reducing fuel burn
• As transloading takes place on the high seas, it creates an opportunity to spread the cargo across more ports
• It makes ample sense to create a well-distributed network for handling bulk cargo along the entire coastline
• If we introduce “smartness” to transloading zones, we can add value and reduce transaction costs

How does maritime diplomacy set rules in Indian ocean?

• Maritime diplomacy had its heyday back in the 1980s, with the sensational discovery of manganese nodules and cobalt crusts on the ocean floor
• The euphoria over marine mining led to the establishment of the International Seabed Authority <An intergovernmental body based in Kingston, Jamaica, was established to organize, regulate and control all mineral-related activities in the international seabed area>
• The UNCLOS, the “constitution of the seas”, which came into force in 1994, became the basis for the legal rights for mining in the open sea
• The interest in seabed mining flagged because of escalating costs, but it’s being revived on account of the demand for minerals and metals in industrial development, particularly in China, Japan and India

Why are regional organisations considered as most active players?

• The importance of regional organisations has increased in the context of the blue economy as PM Modi spoke to the SAARC leaders
• In September 2015, the Indian Ocean Rim Association (IORA) hosted the first Ministerial Blue Economy Conference and identified priorities
• Goal 14 of the UN’s Sustainable Development Goals (SDGs) — “Conserve and sustainably use the oceans, seas and marine resources for sustainable development”
• This makes detailed references to the reduction of marine pollution, conservation of coastal and marine areas and regulated fish harvest

Why is blue economy significant for India?

• The new focus on the Asia-Pacific highlights the security and economic dimensions
• The US rebalancing of forces and counter-measures by China have created a new cold war
• New partnerships are in the making in the Asia-Pacific, seeking Indian participation by competing powers
• The blue waters of the Indian Ocean have become a new theatre of tension

What does Delhi needs to do to transform its efforts into action?

• India can profitably integrate its ongoing programmes like Make in India, smart cities, skill development and self-reliance in defence
• Delhi’s forthcoming chairmanship of the BRICS will offer a splendid opportunity to highlight the cooperation needed for the blue economy
• The imperatives of cooperation and the need for adept diplomacy are evident
• Prime Minister endorsed the blue economy during his visit to Seychelles, Mauritius and Sri Lanka
• Diplomats aspiring to a “blue diplomacy” should begin to grasp the immense possibilities of the blue economy
• It will be diplomats in coastal and island countries and with the UN, IORA and Saarc, who will have to operationalise it

Published with inputs from Arun | Image source - cri.org

An Indian express report suggest that Public Sector Banks have written off huge sums of money from their balance sheet. It paints alarming picture of banking sector in India. Governor Rajan has suggested that mere band aid won’t do, deep surgery is required to nurse banking system to health.

What’s the problem with the banking sector in India? Why are banks writing off such huge sums and what kind of surgery is governor Rajan prescribing? In this write up, we shall try to answer all these queries but first some basics of banking.

https://youtu.be/wjOt13aPvJw

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A bank is a financial intermediary that connects savers (depositors, creditors) with borrowers. People deposit their money in the bank for which they get paid some interest rate. Deposit amount on bank balance sheet (account book) is put under liability category for banks have to pay that amount back with interest.

Banks in turn lend that money to businesses and earn interest on it. Lent money is put under asset category as it generate income for the bank in the form of interest.

Banks also have something called capital or equity which is brought in by promoters/ investors. The capital is to absorb losses if borrowers default on their commitment and do not pay back their loans.

In summary, every banks has on its books, capital to absorb losses, assets which generate income and liabilities i.e. deposit amounts which have to be returned back with interest.

What’s Provisioning?

Whenever banks lend to any business, it carries with it some risk that money wouldn’t be paid back, borrower would dimply default. This risk is accounted for at the time of disbursal of loan itself in the form of keeping aside some capital in anticipation of future losses. This is called provisioning.

For instance, if banks feel 1% of loans are likely to default, they will provision 1% against any loans they make, When a loan actually defaults, they don’t have to book huge loss for they have it already covered. Note that higher the likelihood of default, higher the amount of provisioning. Guidelines in this regard are prescribed by RBI.

What is a non performing asset (NPA)?

Asset is one which generates income for the bank in the form of interest. Assets are meant to perform function of generating cash flows for banks. When assets cease to perform that function i.e. do not pay back interest and installments, they become non performing and are known as non performing assets.

Technical definition:  A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.

2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

Let’s understand all this with an example: 

Suppose, SBI lent 100 rs to Mallya on 1st Jan 2015 which he has to return in 10 monthly installments of 12 rs each beginning 1st jan 2016.

Mallya returns 1st and 2nd installments on 1st jan and 1st feb 2016 but does not return 3rd installment on 1st march. He simply refuses to pay back.

Till 1st march 2016, this asst would be considered a standard asset as it was generating regular cash flows.

• After 90 days from due date i.e. 1st june (1st March due date), it becomes an NPA.
• From 1st june 2016 to 1st June 2017, it remains a substandard asset.
• After 1st june 2017 it becomes a doubtful asset.

When bank or auditors feel it’s virtually unrecoverable, it is termed as loss asset and after that it is taken off balance sheet in what is termed as writing off.

Why wouldn’t banks want to declare bad loans as NPA?

As NPAs carry higher risk of eventual default, provisioning for NPAs is higher than standard assets. They carry 15% provisioning. What this means is that banks have to set aside 15 rs to cover future losses, the same money they could have lent to someone else and earn interest on it. It basically brings down profitability of banks and erode their capital base.

But isn’t it like extending problem to the future?

Well, banks feel if they can continue lending to these assets so that they could repay interest (refinancing), some day economy will return and they will be able to repay all the debt. so they simply restructure the loan and keep these assets as standard assets. Rajan calls it policy of extending and pretending i.e. extending the loan and pretending as if everything’s alright even though there are serious underlying problems. This is what Rajan calls applying band aid.

Total stressed assets = Gross NPAs + Restructured assets

It’s true that some sectors are affected by economic downturn and would revive once economic cycle picks up speed but extending every loan for a long time creates problem of moral hazard and promoters simply lose interest in reviving the project for interest cost becomes too high with the rising debt. Banks keep on throwing good money after bad, day of reckoning eventually arrives when banks are forced to book huge losses and tax payers suffer.

In PSBs, restructured assets are more than double of NPAs and analysts feel restructured assets to be as bad as NPAs.

The other thing banks can do is recognize NPA as NPA and try to put project back on track. This would then lead to active intervention on the part of all parties concerned. Banks would take some hit on their balance sheet, write off some part, promoters will bring more equity, govt will provide clearances, tarriff authority can increase the tariff etc.

What are all the things that banks can do?

1. If management is inefficient, banks can change the management.
2. Acquire majority stakes under strategic debt restructuring (SDR) and sell the asset to new promoters.
3. Start liquidation proceedings if turnaround seems unlikely under SARFAESI act.
4. Sell asset to Asset Reconstruction Companies (ARCs).

This is what Rajan calls deep surgery but it would require recognizing the problem as NPA first. It would put strain on the profitability in the short run but cleaned up balance sheets would reflect true picture of the state of banks. Government will infuse capital in the banks so that banks are ready to lend money to deserving businesses which will lead to economic recovery as well as expand asset base.

Economic recovery will help stressed assets to pay back their loans while expanded asset base will increase denominator bringing NPA ratio down thus starting a virtuous cycle.

Gross NPA ratio = Total NPA/ Total asset base

We can decrease NPA ratio by increasing the denominator i.e. lending more.

A few more points:

Banks lend against capital and Basal committee on banking supervision prescribes norms for capital adequacy.

Capital Adequacy Ratio (CAR) = Total Capital/ Total risk weighted assets

This ratio has to be maintained for soundness of banking system. It’s clear from the above that to expand asset base, banks need more capital and for PSBs government has to infuse more capital.

PS– This article is to be read alongside this discussion to know the causes and ways of resolution of this mess.

Read this analysis of RSTV

Last year methodology of calculating India’s GDP was revised along with base year revision. It produced surprising results revising growth rate for 2013-14 to 6.9% from 5% (38% jump) as per old methodology. Not many were convinced then and most are still unconvinced.

In this article, we discuss various changes brought about by the recent revision but before we go there, let’s have a look at basics of GDP.

https://www.youtube.com/watch?v=FRb0zIo0Y5g&feature=youtu.be

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What is GDP and how is it calculated?

GDP or gross domestic product is nothing but money value of all the final goods and services produced in the domestic economy in a given time period.

Let’s break GDP down-

It’s gross because it does not account for depreciation.

What is depreciation-

A part of capital is lost every year due to wear and tear. Suppose life cycle of a machine which makes toys is 20 years, after 20 years we will have to replace it or we can say that every year 1/20th portion has to be replaced. This replacement cost is called depreciation.

When we subtract depreciation, we get net product.

Net Domestic Product = GDP – Depreciation

It’s domestic because production happening in domestic economy is considered. It does not matter if it’s produced in India by Indians or Americans.

On the other hand national product takes into account production by nationals. It does not matter whether they produce in India or US.

Let’s understand this with an example –

Priyanka Chopra charges some (hefty) fee for acting in Quantico in US. Her fee will be counted in domestic product of USA and national product of India.

By this very same token, McDonald american manager’s salary who is working in India will be counted in US National product and Indian Domestic product .You get the point, right ?

National product = domestic product +income of nationals in abroad – income of foreigners in the country

Or

Domestic product – net factor income from abroad.

Okay so now that we understand the basic definitions, let’s understand how GDP is calculated.

There are only 3 methods of GDP calculation

1. Income method i.e. add income of all the individuals of the economy
2. Expenditure (consumption) method i.e. add all the expenditure incurred by all the individuals
3. Production or value added method i.e. add value addition at each stage of production or as we say in definition Final value of all goods and services produced.

Note here that I mention final value which implies if we count value of a Maruti, we shall ignore value of component parts of Maruti such as steel used or rubber etc. Or we can ignore the final value of Maruti but add value addition at every stage. Point here is to avoid double counting.

All 3 methods shall give the same result due to circular flow of money.

What is this circular flow of income?

A theory that states that money flows to workers in the form of wages, they buy goods and services from it ( expenditure) and money flows back to firms in exchange for products.

What’s the concept of GDP at Factor cost and GDP at market price?

Factor cost is cost incurred in paying factors of production i.e. land (rent), labour (wages), Capital (interest,dividend), entrepreneur (profits). Essentially cost of production.

Market price of a good = Factor cost + Indirect taxes – subsidies

GDP at market price = GDP at factor cost + Indirect Taxes – Subsidies

What’s this GDP at current market price and GDP at fixed price?

Because of inflation, money value of output may increase without any commensurate increase in actual real production.

For instance, if last year we produced 100 kg of pulses whose cost was 100 rs per kg, our GDP would be 100*100.

This year due to some reason price has risen to 200 per kg. We produce only 100 kg this year but GDP at current market price would be 100*200 i.e. double of last year even though there’s no real increase in output. 

Hence, when we calculate real GDP growth, we compare the real GDP i.e. inflation adjusted GDP with some base year. That inflation adjuster is known as GDP deflator.

Real GDP = Nominal GDP at current market prices/ GDP deflator.

The base year has to be revised periodically as structure of economy changes. Some goods become obsolete with time (audio cassettes) while new goods come into the market and base year has to reflect those changes.

It was to reflect these changes that the base year was revised but other changes were also incorporated in the methodology of GDP calculation.

Let’s analyse these change in brief –

1. Base Year was revised from 2004-05 to 2011-12
2. GDP calculation at constant market prices instead of at factor cost.
3. Sector wise estimation of gross value added (GVA) at basic prices instead of factor cost.
4. Comprehensive coverage of corporate sector using MCA21 software.
5. Comprehensive coverage of financial sector
6. Improved coverage of activities of local bodies and autonomous institutions.

All these changes were made to align Indian accounts as per IMF approved methodology.

But as mentioned earlier, revision dramatically increased our growth rate but high growth rate numbers don’t correspond with the high frequency macro-economic indicators in the economy, such as bank credit growth, corporate performance, auto sales, factory output etc.

What needs to be done?

Central Statistical Organization (CSO) will have to create a back series so that analysts are able to make sense of the GDP data. Otherwise credibility of our numbers will be questioned which would be a very bad news for investor confidence.