ECONOMIC ACTIVITY - A REALITY CHECK
On the 8th of November 2016, the Prime Minister came on National TV and announced that from the midnight of that day all the high value notes of 500 and 1000 stand withdrawn as they cease to be legal tender any more. This created a panic of sorts of across the country and there were last minute purchases of gold ornaments, stocks of goods, transport vehicles, real estate etc The demonetization of the high value notes sent shivers down the spine of many and there were frantic attempts to convert the demonetized notes to lower denomination legal tender. The daily changing rules as the government and the special team of officers who were directly monitoring the note ban effect changed the rules almost on an hourly basis, spelt lots of difficulties. The government tightened the screws in exchanging the notes and limited the number of notes per day and restricted the withdrawal of the notes from the bank branches or ATMs. However, there was no restrictions in the money that was being credited into the accounts. Here is where the government think tank was working overtime and made a huge killing. They allowed the money on hand to be credited into the accounts with the bank branches.
This made the banks flush with funds which forced the banks to reduce the rates drastically both on deposits and lending. Once the deadline was over, the government machinery acted with alacrity to find out the abnormal deposits into the accounts of many bank branches. This was possible with the software that was being put to best use by the FIU (Financial Intelligence Unit). The banks were reporting the daily credits into the accounts collected from their CBS platform and reporting it to the FIU for analysis by the software. This helped the government to narrow down the action to be taken and the number of entities and individuals to follow up. The ITD and ED started acting by sending innocuous letters of inquiry to many such individuals seeking their replies to the questions on the abnormal amounts deposited into their bank accounts.
The follow up action is being done quietly without attracting any attention and the government agencies are evaluating the replies and with the help of the software and professionals taking the action to logical conclusion. The RBI on its part got all the tendered old high value notes into various bank branches to its own offices and put the men on the job of counting and verifying. In the initial days of the note ban, there were reports that in a few states huge cache of Forged Indian Currency Notes (FICN) were tendered at the bank branches. To assess the quantum of FICN the RBI had taken the manual route to verify and check the notes individually. As it is a matter of national security, both the RBI and government had not come out with the exact number of FICN that were tendered and returned to RBI. This has given a whip to the naysayers to beat the government with. They were claiming that the note ban exercise was a failure and disrupted the entire economy. Even former finance ministers who were acclaimed economists claimed that the claims of the government as the reasons for the note ban were not substantiated and it has wreaked havoc on the economy.
Within a period of next six to eight months the government followed with the introduction of the Goods and Services Tax replacing many other taxes levied by the central and state governments until then. There was all-round criticism of this move from all and sundry. The GST council comprising of finance ministers of almost all the states and UTs had decided to keep the slabs of the GST to five including the zero tax rate and the maximum of 28%. The GST council also decided that the rates will be split equally between the state and central governments. Any major change in the way in which we are comfortable with will definitely be disastrous in the immediate aftermath of such changes being introduced. A comparison to this can be drawn to the massive disruption in the way in which the banks were working when the Core Banking Solution was being implemented across the banks. Many operating staff were not aware of many of the features of the software and the time available to train the entire workforce was very limited which left many untrained to gain knowledge on the job. Similar was the case when the GST was rolled out as many did not know the positive features. The criticisms were flying thick and fast and still continuing. The non invoice sale has been reduced to a large extent with the introduction of the GST and this has paved the way for the reduction of cash economy.
The note ban exercise and the introduction of GST had made the cash economy look at the scenario with dismay. The businesses who were comfortable dealing in cash suddenly found that they are now forced to work without cash and account for all the transactions. The input tax credit and the net tax outflow provisions resulted in the businesses switching over to invoicing all their sales be it to the ultimate buyer or an intermediary. This has thrown up an indirect increase in many of the food items in restaurants. If a plate of meal was charged Rs. 80/- including the VAT at 14.5% earlier, now with the introduction of GST, the restaurants started charging a plate of meal at Rs. 80/- plus applicable GST rate thereby inflating the bill to be paid by the customer. Some confusion that.
The RERA and the benami property acts have made the real estate sector sit up and take note. These two acts have made the sector to spruce up its act. The huge inventory that was reported in the last quarter of the last fiscal is slowly coming down and new projects are getting cleared especially in the FDI areas. There are some upmarket upscale projects under the FDI route in this sector in some of the cities which are being lapped up eagerly. Given the present scenario there is likely to be a cleaning up of this sector from being a generator of black money and a great contributor to the parallel economy.
The collection of the revenue from GST for the months of July and August portends for a healthy economic activity. The automobile manufacturers had been claiming an increase in the sales of passenger vehicles both cars and SUVs on a month to month basis since April this year. The first half sale of automobiles is likely to be better than what it was for the last year. With the festival season in the offing in the third quarter, the output and sales of automobiles are expected to be better than in the first two quarters of the current fiscal. Sale of automobiles is an indication of the economic welfare of the society. The public at large have disposable income who are investing in automobiles and other assets. The prize of bullion has been on the increase ever since and it is expected to touch all time high soon. One of the economic indicators of the disposable income with the public is the indicator of the stock market which had been doing very well since the last six quarters and the underlying financials of the most of the major stocks had been good to support the price they are commanding in the market, though it cannot be said of stocks of most of the mid level companies.
However, the credit off-take from the banks had been sluggish from quarter to quarter. The non food credit increase was in the range of 14% at the end of March 2014, and this can be attributed to the huge exposure to the coal, power, infrastructure and telecom sectors by the banks. The later day development of cancellation of the allotment of spectrum to many companies and the allocation of coal blocks resulted in many of these exposures became questionable ones with a good number slipping as NPA in the subsequent quarters. Such a huge downtrend in the credit off-take is seen mainly in Non food credit Being a monsoon dependent country for its agriculture activity with the last two monsoons failing, the incremental agriculture credit took a beating from around 13% as of March 2014 to 6.5% as of August 2017. with a bountiful monsoon this year, the incremental agri credit is expected to grow better in the remaining quarters of the current fiscal. The incremental exposure to personal sector had remained almost same clocking about 15.5% as of March 2014 and 15.70% as of August 2017. The incremental credit exposure to service sector had declined from around 16% as of March 2014 to 6% as of August 2017. The exposure to various sub segments within non food credit and service sector display a characteristic downward trend in many areas which had been hit by the actions of the Supreme Court of India and some of the actions of the present administration against the black money and hoarding. Moreover, there is a reluctance on the part of the banks for credit growth as they are already battling a huge pile of NPA which is increasing quarter to quarter. The NPA had been growing from 3.4% as of March 2013 to 4.1% as on March 2014 to 4.60% as of March 2015. The NPA ratio at 7.69% as of March 2016 increased to 9.06% a year later and to 10.21% as of June 2017. The Net NPA also had been growing in the same period indicating that the profitability of the banks had been reducing leading to increase in Net NPA in the same period. The quantum of gross stressed assets during the period 2013 to 2015 had seen an alarming increase from 9.20% as of March 2013 to 11.10% as of March 2015.
The foreign exchange reserve with the government estimated in USD terms is on the increase and hovering around USD 400 billion as of Sep 29, 2017 as against USD 303 billion as of April 4, 2014. There is a healthy inflow of FDI and some of the actions taken by the present administration have started yielding the desired effects in terms of increased productivity. The job creation will be a long term benefit and this may take a few more years before there is a perceptible increase in job creation.
Given all these parameters of the economic activity, it is surprising that the once famed and celebrated former finance ministers find that the economy is on a downward spiral and the government has not been doing enough to arrest this trend. The present finance minister's rejoinder on the issue was more political than economical. It would have been ideal if the present finance minister made some bullet point presentation of the economic indicators and a comparative chart with what was in April 2014 to buttress his points instead of harping back to pre 1991 position of the foreign exchange reserve and the personal snide remarks of jobapplication@80 which lowered the prestige of the finance minister as an astute person.
This made the banks flush with funds which forced the banks to reduce the rates drastically both on deposits and lending. Once the deadline was over, the government machinery acted with alacrity to find out the abnormal deposits into the accounts of many bank branches. This was possible with the software that was being put to best use by the FIU (Financial Intelligence Unit). The banks were reporting the daily credits into the accounts collected from their CBS platform and reporting it to the FIU for analysis by the software. This helped the government to narrow down the action to be taken and the number of entities and individuals to follow up. The ITD and ED started acting by sending innocuous letters of inquiry to many such individuals seeking their replies to the questions on the abnormal amounts deposited into their bank accounts.
The follow up action is being done quietly without attracting any attention and the government agencies are evaluating the replies and with the help of the software and professionals taking the action to logical conclusion. The RBI on its part got all the tendered old high value notes into various bank branches to its own offices and put the men on the job of counting and verifying. In the initial days of the note ban, there were reports that in a few states huge cache of Forged Indian Currency Notes (FICN) were tendered at the bank branches. To assess the quantum of FICN the RBI had taken the manual route to verify and check the notes individually. As it is a matter of national security, both the RBI and government had not come out with the exact number of FICN that were tendered and returned to RBI. This has given a whip to the naysayers to beat the government with. They were claiming that the note ban exercise was a failure and disrupted the entire economy. Even former finance ministers who were acclaimed economists claimed that the claims of the government as the reasons for the note ban were not substantiated and it has wreaked havoc on the economy.
Within a period of next six to eight months the government followed with the introduction of the Goods and Services Tax replacing many other taxes levied by the central and state governments until then. There was all-round criticism of this move from all and sundry. The GST council comprising of finance ministers of almost all the states and UTs had decided to keep the slabs of the GST to five including the zero tax rate and the maximum of 28%. The GST council also decided that the rates will be split equally between the state and central governments. Any major change in the way in which we are comfortable with will definitely be disastrous in the immediate aftermath of such changes being introduced. A comparison to this can be drawn to the massive disruption in the way in which the banks were working when the Core Banking Solution was being implemented across the banks. Many operating staff were not aware of many of the features of the software and the time available to train the entire workforce was very limited which left many untrained to gain knowledge on the job. Similar was the case when the GST was rolled out as many did not know the positive features. The criticisms were flying thick and fast and still continuing. The non invoice sale has been reduced to a large extent with the introduction of the GST and this has paved the way for the reduction of cash economy.
The note ban exercise and the introduction of GST had made the cash economy look at the scenario with dismay. The businesses who were comfortable dealing in cash suddenly found that they are now forced to work without cash and account for all the transactions. The input tax credit and the net tax outflow provisions resulted in the businesses switching over to invoicing all their sales be it to the ultimate buyer or an intermediary. This has thrown up an indirect increase in many of the food items in restaurants. If a plate of meal was charged Rs. 80/- including the VAT at 14.5% earlier, now with the introduction of GST, the restaurants started charging a plate of meal at Rs. 80/- plus applicable GST rate thereby inflating the bill to be paid by the customer. Some confusion that.
The RERA and the benami property acts have made the real estate sector sit up and take note. These two acts have made the sector to spruce up its act. The huge inventory that was reported in the last quarter of the last fiscal is slowly coming down and new projects are getting cleared especially in the FDI areas. There are some upmarket upscale projects under the FDI route in this sector in some of the cities which are being lapped up eagerly. Given the present scenario there is likely to be a cleaning up of this sector from being a generator of black money and a great contributor to the parallel economy.
The collection of the revenue from GST for the months of July and August portends for a healthy economic activity. The automobile manufacturers had been claiming an increase in the sales of passenger vehicles both cars and SUVs on a month to month basis since April this year. The first half sale of automobiles is likely to be better than what it was for the last year. With the festival season in the offing in the third quarter, the output and sales of automobiles are expected to be better than in the first two quarters of the current fiscal. Sale of automobiles is an indication of the economic welfare of the society. The public at large have disposable income who are investing in automobiles and other assets. The prize of bullion has been on the increase ever since and it is expected to touch all time high soon. One of the economic indicators of the disposable income with the public is the indicator of the stock market which had been doing very well since the last six quarters and the underlying financials of the most of the major stocks had been good to support the price they are commanding in the market, though it cannot be said of stocks of most of the mid level companies.
However, the credit off-take from the banks had been sluggish from quarter to quarter. The non food credit increase was in the range of 14% at the end of March 2014, and this can be attributed to the huge exposure to the coal, power, infrastructure and telecom sectors by the banks. The later day development of cancellation of the allotment of spectrum to many companies and the allocation of coal blocks resulted in many of these exposures became questionable ones with a good number slipping as NPA in the subsequent quarters. Such a huge downtrend in the credit off-take is seen mainly in Non food credit Being a monsoon dependent country for its agriculture activity with the last two monsoons failing, the incremental agriculture credit took a beating from around 13% as of March 2014 to 6.5% as of August 2017. with a bountiful monsoon this year, the incremental agri credit is expected to grow better in the remaining quarters of the current fiscal. The incremental exposure to personal sector had remained almost same clocking about 15.5% as of March 2014 and 15.70% as of August 2017. The incremental credit exposure to service sector had declined from around 16% as of March 2014 to 6% as of August 2017. The exposure to various sub segments within non food credit and service sector display a characteristic downward trend in many areas which had been hit by the actions of the Supreme Court of India and some of the actions of the present administration against the black money and hoarding. Moreover, there is a reluctance on the part of the banks for credit growth as they are already battling a huge pile of NPA which is increasing quarter to quarter. The NPA had been growing from 3.4% as of March 2013 to 4.1% as on March 2014 to 4.60% as of March 2015. The NPA ratio at 7.69% as of March 2016 increased to 9.06% a year later and to 10.21% as of June 2017. The Net NPA also had been growing in the same period indicating that the profitability of the banks had been reducing leading to increase in Net NPA in the same period. The quantum of gross stressed assets during the period 2013 to 2015 had seen an alarming increase from 9.20% as of March 2013 to 11.10% as of March 2015.
The foreign exchange reserve with the government estimated in USD terms is on the increase and hovering around USD 400 billion as of Sep 29, 2017 as against USD 303 billion as of April 4, 2014. There is a healthy inflow of FDI and some of the actions taken by the present administration have started yielding the desired effects in terms of increased productivity. The job creation will be a long term benefit and this may take a few more years before there is a perceptible increase in job creation.
Given all these parameters of the economic activity, it is surprising that the once famed and celebrated former finance ministers find that the economy is on a downward spiral and the government has not been doing enough to arrest this trend. The present finance minister's rejoinder on the issue was more political than economical. It would have been ideal if the present finance minister made some bullet point presentation of the economic indicators and a comparative chart with what was in April 2014 to buttress his points instead of harping back to pre 1991 position of the foreign exchange reserve and the personal snide remarks of jobapplication@80 which lowered the prestige of the finance minister as an astute person.
Yashwant Sinha has said many things. Some of these are true while some are twisted/partially true.
ReplyDeleteYashwant sinha has been a good reformer of Indian economic policies during his tenure as FM. In fact his policies of freeing of telecommunications sector, deregulating the petroleum industry, tax reforms, privatisation, encouragement of FDI, etc. have had a major impact on economic development of India.
It is his economic reforms that put India on the train of rapid growth. In fact, he is the second best FM we have had, topmost being Dr. Manmohan Singh.
But his economic reforms, too, were criticized heavily as these reforms had brought the GDP growth rate from 8.8% down to 3.8%.
Although he did a very good job, he had to swap his position with Jaswant Singh.
It was his reforms and progressive thinking that later put India to good and steady figures of GDP growth rate.
Same is happening now. Economic policies aimed at improving the economy in long run are being criticized for causing glitches. Reforms are imperative for proper functioning of any economy or society.
But this time it is Yashwant Sinha himself who is disparaging these vital reforms.
Yashwant Sinha says that being a FM is a full time job and handling other ministry along with that is very difficult. Well, I agree. I don't think that someone should be given any ministry if he/she is handling a big and important ministry.
ReplyDeleteHe says that GST should have come later. I disagree.
I am no economic expert and I would like to rely on predictions of neutral experts—
Morgan Stanley— implementation of GST is unlikely to create a meaningful roadblock in the growth trajectory. "Indeed, from a medium term perspective, the implementation of GST should lead to efficiency gains through better allocation of factors of production.
Hugo Erken, the economist who correctly predicted GDP growth rate of 5.7% (April-June) — while the rollout of the goods and services tax (GST) is expected to weigh on second quarter GDP growth, on a medium- to long-term basis, the Indian economy has the potential to reach a higher growth rate. Various reforms undertaken by Prime Minister Narendra Modi are the main reason for his optimism.
This is politics. Yashwant Sinha wants importance in BJP but he is not getting it. So he is harshly criticizing the policies undertaken. His son is a minister and he has to defend the government even at the cost of twisting facts. That's it.
Economic slowdown is real and hopefully due to transitions. This is true. Yashwant Sinha’s allegations are not very honest yet partially true.
I am sure that even Mr Yashwant Sinha would have defended all the decisions of the ‘Modi Sarkar’, if he would have been in Government.
ReplyDeleteHe is voicing his concern in public because he has nothing to lose.
He is, however, risking the career prospect of his son, who is still a minister in the Modi Government.
He is also disappointed because the PM is not giving him time to meet even after one year
Mr. Yashwanth Sinha has joined the Short term result seekers club together with Mr. P. Chidambram and other congress leaders. Many in BJP hate Mr. Jaitley, and in the process to express their obsession they join this Short term result seekers club. So what is the behaviour pattern of this Short term result seekers? Let us see some few examples.
ReplyDeleteWhen Mr. Vajpayee inititated Golden quadilateral higways plan connecting the corners of India, the Short term result seekers in India were highly critical about him. But after a decade they are the people who are cherishing the benefit of his initiation.
When Mr. Vajpayee detonated an hydrogen bomb which resulted in economic sanctions, the Short term result seekers in India were highly critical about him. But after a decade they are the people who are cherishing the benefit of his initiation.
When Mr Vajpayee, initiated the strengthining of India’s relation with US, in 2000 Bill Clinton became the first American President to visit India since Jimmy Carter’s visit in 1978, the Short term result seekers in India were highly critical about him. But after a decade they are the people who are cherishing the benefit of his initiation.
When Mr.Vajpayee initiated the encouragement of foreign investment and approved the Delhi Metro Project, the Short term result seekers in India were highly critical about him. But after a decade they are the people who are cherishing the benefit of his initiation.
When Mr. Vajpayee initiated the endorsement of India’s policy of “No first use of Atom Bomb by India”, the Short term result seekers in India were highly critical about him. But after a decade they are the people who are cherishing the benefit of his initiation.
When Mr. Manmohan initiated Nuclear treaty with US, the Short term result seekers in India were highly critical about him. But after 5 years, they are the people who are cherishing the benefit of his initiation.
When Mr. Manmohan initiated Aadhar project, the Short term result seekers in India were highly critical about him. But after 5 years, they are the people who are cherishing the benefit of his initiation.
When Mr. Manmohan initiated Right to information act, the Short term result seekers in India were highly critical about him. But after 5 years, they are the people who are cherishing the benefit of his initiation.
Today’s initiation of demonitization, GST, Swacha bharat, budgetry reforms, smart city initiatves, Surgical strike policies etc., are also critically criticized by the Short term result seekers in India, but for sure all these projects of Modi will add into the above list and the benefit would be cherished by these criticizers.
One thing what we cannot change is the hyper activeness of this Short term result seekers and a Good leader should ignore them. Thats why BJP dismissed the case of Yashwant Sinha by simply ignoring him.