Eco Survey is assuring; believes we have completely regained lost ground: Business Standard: 31 January 2023

 The Economic Survey is a review of everything that has happened so far, with a prognosis on what to expect in the coming year. In terms of numbers, most of the data presented for the running year is already known, which includes the NSO data on gross domestic product (GDP), index of industrial production (IIP), and trade and so on. The point of interest really is in the outlook, and here the Economic Survey is positive about the ‘India story’.

GDP growth for the year is projected at 6-6.8 per cent with a baseline of 6.5 per cent, which is in accordance with Bank of Baroda’s forecast of 6 – 6.5 per cent. This is good news, as a number of researchers have spoken of numbers as low as 5 – 5.5 per cent. The Survey points to the strong domestic economy, which will provide immunity to an extent from the global recession. This is sound reasoning and the number also tallies well with the International Monetary Fund (IMF), which has retained its forecast at 6.1 per cent for the year.

The other point of interest is the nominal GDP growth rate that has been placed at 11 per cent. This number may not necessarily be the starting point for the budget, which is to be announced on Wednesday, but gives a clue that the growth assumption will be close. It is important because the entire edifice of the budget is built on this number as it will determine the level of fiscal deficit that can be tolerated as we move along the path of fiscal prudence. In all likelihood, a double-digit number will allow room as the nominal number will be close to Rs 300 trillion, on which even a fiscal deficit ratio of 6 per cent will justify a deficit of Rs 18 trillion.

The Survey points out that a higher GDP growth number in an environment of shadows in the West will also mean that both consumption and investment will be up, thus increasing imports that will add to the current account deficit (CAD) and hence pressurise the currency.

The first part needs to play out, because in fiscal 2022-23 (FY23) we have seen consumption rising mainly due to the pent up demand phenomenon, which coupled with inflation helped to garner higher revenue. While investment had improved, it was sector specific with the infra based industries witnessing higher investment compared with the consumer based industries. This matrix does not look too strong and hence there can be some skepticism on whether it can be sustained.

Interestingly, the Survey does not believe that high inflation will come in the way of consumption, which has to be monitored because there are already signs of weakening demand. In FY23, people spent money at the cost of savings. But now with the pent up demand being exhausted, households are preferring to save than spend. Further, the Survey is also positive on corporate balance sheets, which in FY23, have tended to be skewed. Profits of companies have been under pressure due to elevated input costs that have tended to come in the way of profit growth.

On inflation the Survey is still cautious. This also means that it has signaled that elevated interest rates may be there for some more time. This rhymes with the Reserve Bank of India’s (RBI’s) view that even when inflation comes down, one has to be watchful on repo rate changes as the climate is uncertain. With China likely to recover, it means that there could be commodity price pressures once again.

On the whole, the Survey is assuring, and though it believes that we have regained lost ground completely, we may have to do some close monitoring for another six months before celebrating.

Treating the middle class fairly: Indian Express 31st January 2023

 

A crucial Budget for banks: Buisness Line 24th January 2023

 The banking sector will always be at the forefront once Budgets are announced. While the government has several means of raising resources, at the end of the day after setting expenditure commitments with the available revenue, the balance, which is the fiscal deficit, has to be sourced largely from the markets in the form of borrowings — where banks are the largest.

Therefore for banks, while issues like capitalisation would be seen as expectations from the Budget, the action starts with the borrowing programme. Typically around two-thirds of the fiscal deficit is financed through net market borrowings and as redemptions are going to be large at over ₹4.5-lakh crore, the gross number will be important. This time the number will be more closely watched as we are in a unique situation where the liquidity surplus in the system has dried up considerably.

Growth in deposits has lagged that in credit and hence a larger borrowing programme can put pressure on liquidity. Right now, some banks are holding excess SLR to the extent of 28 per cent of NDTL (against the requirement of 18 per cent) and some of this have been drawn down to fund credit demand. Therefore, this Budget will be quite important for banking in the coming year.

Banks would also be keen to hear what the Budget has to say when it comes to lending to agriculture and SMEs. These are a part of the priority sector lending sectors. Budgets in the past have set targets for agriculture lending, and given that this is the last year before general elections, emphasis on agriculture lending can be expected.

Support for small units

For SMEs, the Emergency Credit Line Guarantee Scheme has been supportive ever since the lockdown was imposed. Looking ahead, some questions crop up on this front. First, whether it will be extended further through the pre-general elections year. Second, whether the outlay will be increased. This becomes only a contingent liability for the government when it is invoked, and hence is not technically an outlay in the Budget.

Third, whether more sectors would be covered under its ambit. It may be recollected that the hospitality and health sectors were covered at some point of time, though through the monetary policy statements of the RBI. On the lending side, banks will be looking for signals on this score.

Along with these two mandatory segments, banks would also be keen to see whether the government has any further plans on the Production Linked Incentive (PLI) scheme. The progress of this scheme would be highlighted for sure, and the banking sector will also use these cues when they seek to expand their corporate business in the coming year. Here, the outlay for the government will materialise only when the investment and sales targets are realised by the covered companies. But any extension in coverage would mean additional demand for credit from banks during the year.

On the deposits side, one of the repeated pleas to the Finance Minister has been the provision of a level-playing field for bank deposits and debt market instruments. Presently, interest on fixed deposits carry no benefits while the gains on bonds and debentures have an advantage in the capital gains sphere. This has led to some migration in savings from the banking system to mutual funds.

As banks are major investors in government securities as well as providers of finance to industry, a correction in these tax laws would help augment deposits that can be used for these purposes.

Presently, public sector banks (PSBs) do not look like they require capital support from the government. As most banks have turned profitable and the NPA (non-performing asset) levels have come down, this means that provisions for NPAs will come down while the higher profits will add to reserves and hence capital.

The government will, however, evaluate if there is a requirement for any specific bank, which, in turn, can lead to some provisions being made. The banking sector will also be closely tracking the approach taken to privatisation of a now private bank where stake is held by the government and LIC. The government has been examining all alternatives; this has also had SEBI making allowances on the public shareholding front for this bank. The Budget will probably throw more light on this process and quite clearly this is an experiment that will set a template for the future.

Fiscal consolidation

At a broader level, the Budget may be expected to move along the path of fiscal consolidation and the revised estimate of fiscal deficit ratio for FY23 will act as the anchor for that for FY24. We could expect 50-75 basis point improvement from the revised number. The challenges will be that tax revenue and buoyancy will be less encouraging compared with FY23 and the expenditures may have to be fine-tuned to ensure that all classes are placated, in the context of elections.

The fiscal deficit ratio budgeted will also set the tone for the financial markets; it would set the contours of the gross market borrowing programme of the government. While ₹16-17-lakh crore looks reasonable after accounting for switches as well as drawdowns from the NSSF (National Social Security Fund), the present state of liquidity poses a challenge. Banks are the major subscribers of government paper (which includes both Central and State), and are already under pressure on the liquidity front.

Excess liquidity in the system has dried up. The struggle is to raise resources to meet the growing demand for credit. Deposit rates have been increased, and while there has been some increase in the flow of savings, banks have sought recourse to other instruments like CDs (certificate of deposits) and bulk deposits to augment resources.

Banks will be on guard in FY24 to balance demand from the commercial sector with that of the government. Banks are at times liquidating SLRs to finance credit. They face uncertainties with respect to FY24.

india in the limelight: A cogent argument of how country’s time is now to lead on economic front: Book review in Financial Express 22 January 2023

 Saurav Jha’s book on negotiating the new normal is a combination of taking a call on how the global economy is placed as well as positioning India on the world stage. The financial crisis combined with Covid were turning points in the past two decades, which have sort of changed the way in which the global economy is placed.

Today, the economic equations have changed. From domination of the western world to the emergence of China as the main driver of the global economy post-Lehman, the future looks different, with India probably having a very good chance of providing direction. The author’s premise is that the developed world is in a state of flux, which has been the case for over a decade now. This segment is not in a position to drive the world economy. The power of central banks to drive their economies through quantitative easing has withered. USA got into the financial crisis and then was getting out of it with impetus coming from Fed when Covid acted as a barrier.

Eurozone, too, had its run-ins with a crisis, and Covid had a similar role to play here. Japan has been in a phase of low growth for long and China is now deeply enmeshed with a credibility issue where there is a major pushback from the West.

There was also the concept of BRIC nations which got extended to becoming BRICS. Today, the author believes the concept is less relevant with the decline in China, as well as Russia (the book is updated to cover the Ukraine crisis which virtually makes this country irrelevant in the global landscape where it has been cast as a pariah). In such a situation, India is definitely a frontrunner for growth, which has been seen in the past few years.

The author takes us through each of these experiences, country-wise, to explain the developments that have taken place with a semi-historical perspective so that the reader gets to know everything that matters about their stories. There are chapters dedicated to each country and region. Then there is a rather detailed study on the developments in India in the past few years where he tends to be critical of the establishment.

The book could have had titles for the chapters to make it easier to read. It is written more like a novel where chapters are numbered without titles, which would have worked if the narrative was continuous. However, the chapters are standalone descriptions and analyses.

There is quite a bit of detailing of the several reforms brought in by the Indian government and the focus is on demonetisation and GST, which the author thinks were not good for the people. Besides, he believes the economy was pushed back due to these reforms, with the SMEs bearing the brunt.

The author talks of the Covid action of the government through the atmanirbhar schemes and compares them with approaches taken by other countries that were definitely direct in the form of cash transfers, which helped in uplift of the masses. This was not the case in India and hence, in his view, the approach was flawed.

There are some facts that could have been checked. For instance, he mentions that Nachiket Mor was removed by the government from the MPC (monetary policy committee) in context of the sharp altercations between the government and the RBI during the Rajan-Patel regimes. But Mor was never part of the MPC and was only a director on one of the regional boards of RBI. Similarly, the author talks of Raghuram Rajan, then governor of RBI, leaving the bank because he reportedly felt his political bosses were not behind him. This is not correct since Rajan had completed his full term. This is a misconception often expressed by those who are antagonistic to the current government’s form of governance where it is assumed that Rajan should have gotten an extension given his pedigree. Not being given an extension of tenure, which is the government’s prerogative, is quite different from one leaving the office. These facts could have been validated, because by stating them incorrectly the reader gets an impression that the author has a one-sided view.

The subtitle of the book makes the reader search for the author’s roadmap or game plan for the country to grow in the coming years. This is not clear as there has been considerable detailing on the policies of the government, both before and after Covid. There are several red flags raised on debt and deficits, both on external and internal accounts, that are relevant when we talk of the future.

The book overall is well-written and gives even the lay reader the state of the world economy with considerable detailing of what India has done in the past few years under the banner of reforms. It is refreshing as it also talks of geopolitical themes and how they fit into the economics of the world.

Negotiating the New Normal: How India Must Grow in a Pandemic-Ridden World

Saurav Jha

Hachette

Pp 424, Rs 699

Freebies a must in our society: Free Press Journal 21st January 2023

 Savour these facts. “Since 2020, the richest 1% have captured almost two-thirds of all new wealth – nearly twice as much money as the bottom 99% of the world’s population. Billionaire fortunes are increasing by $2.7bn a day, even as inflation outpaces the wages of at least 1.7 billion workers, more than the population of India. Food and energy companies more than doubled their profits in 2022, paying out $257bn to wealthy shareholders, while over 800 million people went to bed hungry. Only 4 cents in every dollar of tax revenue comes from wealth taxes, and half the world’s billionaires live in countries with no inheritance tax on money they give to their children. A tax of up to 5% on the world’s multi-millionaires and billionaires could raise $1.7 trillion a year, enough to lift 2 billion people out of poverty, and fund a global plan to end hunger.” This emerges from Oxfam’s latest assessment on inequality.

Let us turn to India. “Just 5% of Indians own more than 60% of the country’s wealth while the bottom 50% of India’s population possess only 3% of wealth. India’s richest man has seen his wealth soar by 46% in 2022. The report shows that a one-off 20% tax on this billionaire’s unrealised gains from 2017–2021 could potentially raise Rs 1.8 lakh crores. This is enough to employ more than five million primary school teachers in the country for a year.” In fact the report shows that the reduction in corporate tax rate from 30% to 20% involved a loss of over Rs 1 lakh crore which was higher than the outlay on NREGA! In FY22, bottom 50% contributed to 64% of GST while the top 10% contributed to 3%.

These facts at both the global and domestic levels are disturbing and can cause considerable umbrage. However, while these numbers do indicate that there is something amiss in the way in which the world operates, on deeper thought it does appear that this is inevitable in a capitalist world. And also considering that there is no alternative to capitalism to bring about growth, as socialism in any form has failed, inequality is inevitable and has to be accepted. The challenge for governments is to then balance out society requirements and hence fiscal policy plays a very important role in re-distribution through appropriate tax and expenditure policies.

In a utopian world, every individual should be having a proportionate share in the national wealth. But this does not happen and even if it were so, there would be limited progress. The issue with capitalism is the following. Policies (that are influenced by corporates largely) are geared to generating growth and the capitalists are the ones who take on this role. A large number of them fail (start ups for example) and invariably there is a step-down structure where the top 100 own the largest share of wealth. But they create the genesis of the high GDP growth which holds not just in India but everywhere else. Often when there is talk of unrealised wealth, it is very notional because of the valuation in the stock markets. This may again not be the best measure as such value can never be realised. This is borne out by the stories of failed billionaires whose capital market value has disappeared. The broader question is whether anything can be done?

If the capitalist was not on the scene there would have been limited growth and employment opportunities. The state can provide limited employment and it is the private sector that drives the economy as the former cannot look at profit all the time. In this situation the only way out is redistribution. The model followed in India has been pro-industry where the tax rate has been kept low (the effective tax rate at 22% is much lower than the nominal 30% rate once companies take advantage of the exemptions and deductions). The focus on infrastructure and the PLI scheme by the government is supposed to lead to higher growth in turnover of companies and bring in more jobs and hence income leading to a virtuous chain of higher consumption, investment and further production. Practically speaking taxing the rich because they are rich can become a disincentive as was the case when the marginal tax rate was close to 100% around five decades ago.

The job of budgets both at the centre and state levels is to do the maximum possible to balance this inequality. This is in the concept of a welfare state. All the debates on freebies are centred on this concept. In a society like ours’ such measures are required. The MGNREGA scheme for example is an example of one which adds no value but provides paltry income to the poorest sections. The same holds for the PM-Kisan scheme where money is given to farmers. Food subsidy from now on will be a free PDS scheme again targeting the poor. The states have their schemes like free cycles, free water to farmers, sewing machines, computers etc. which are targeted at the lower income groups. While critics call them populist which ruin fiscal accounts, the fact remains that if not done, the poor would be in a worse state. Similarly the interest subsidy given to the lower income groups under affordable housing should be welcomes as it does help in wealth generation at the lower levels. Therefore in an unequal world, there is a strong case for persevering with such schemes.

The dexterity to be shown in budgets is as to how a balance is drawn between the two – providing for the poor and giving incentives to the capitalist as both are required to maintain equilibrium in society. And hence irrespective of what economists and critics say, all governments tend to find a delicate balance between the two. But as critics, we need to look at freebies with an open mind just as we do for the wealth creators.

Don't look for any big surprise in the budget: MInt 17th January 2023

Programme names can be changed or combined, or new schemes with low outlays announced, to create the necessary optics.

Elections and budgets elicit the same amount of media attention, often even public interest. The difference, however, is that while the former take place every five years, the budget is an annual affair and sees repeated debates. Now that the Union budget of 1 February will be the last one before general elections in 2024, discussions are around whether populism will dominate its proceedings.

What should be remembered is that the government is responsible for and has committed itself to a path of fiscal prudence by which its budget deficit will reduce to reach 4.5% of gross domestic product (GDP) by 2025-26. Considering that the deficit was budgeted at 6.4% for 2022-23, it stands to reason that there will be a staggered reduction of around 0.5-0.75% of GDP in the next three years. Therefore, any conjecture on what the government will announce would be within this perimeter.

It must be reiterated that budgets can never be precise because they are based on assumptions of growth which can never be gauged with full accuracy before the year begins. Hence invariably, fine-tuning of expenditures is required, which then becomes the fulcrum.

That said, expenditure outlays always generate primary interest. Here, interestingly, a large part is what can be called committed expenditure, or expenses that have to be incurred whether or not one likes it. Interest payments and pensions are items which cannot be cut and only tend to increase. Our defence outlay will probably increase in line with India’s ongoing border issues. Subsidies are necessary and the challenge is to roll-back what was provided as contingency in the last few years. Covid and the war in Ukraine had necessitated higher outlays that are not required now. This would be one of the challenges this time round. The budget for 2022-23 had allocated almost half its total outlay of ₹39.44 trillion for these purposes.

After meeting these fixed commitments, there are allocations to be made for other essentials like health, education and administration. Add to this transfers to states as grants for implementing centrally-sponsored schemes, and there is not much flexibility left. There are overhangs in the form of the PM-Kisan scheme, under which cash transfers were given to farmers, as well as the NREGA programme, whose outlay had to be upped from the ₹73,000 crore initially budgeted. Therefore, once the fiscal deficit level has been fixed, there is little room for bringing in any big-bang programme that involves a significant outlay. The production linked incentive scheme’s outlay can be increased, and will probably be done, but will turn into a big expense only when industry meets large targets. There can, hence, be some tweaking of numbers, and the priority will be on increasing capital expenditure to the extent feasible. The 2022-23 outlay was ₹6.5 trillion (excluding a ₹1 trillion transfer to states), which can be increased by not more than 10-15%.

The secondary part of the story is revenue. The fiscal deficit ratio will be defined by the GDP growth assumed, and it looks like 11-12% would be it. This will shape other assumptions made on line items, which get linked to the absolute nominal GDP figure of ₹305 trillion. Next year, two handicaps will be a lower real GDP growth number of 6-6.5% and lower inflation of 5.5%. The bounty of 2022-23 in India’s GST mop-up as well as corporate tax will not be replicated in 2023-24. Lower global commodity prices will also come in the way of customs collections. Hence, there is little space on the revenue front. If at all some populism has to be brought in, the government could consider lowering excise on fuels, probably in the beginning of 2024, to placate the electorate. Or oil marketing companies may be asked to trim their profits with crude remaining stable in global markets.

On the non-tax front, there would be some conundrums. The disinvestment target has not been met for several years and a more realistic number could be around ₹40,000 crore. Further, a surplus from the banking system will be hard to count on this time. The Reserve Bank of India (RBI) may not be able to transfer a larger amount, given that systemic liquidity was in surplus this year and RBI made higher interest payments to banks. Unless adjustments are made in the reserves to transfer funds, this part would require some working.

Markets would be interested in government borrowings, which New Delhi may keep within range so as to not spook rates as liquidity is already tight. Greater recourse to the National Social Security fund looks likely, to ensure that net market borrowings as a proportion of the fiscal deficit stays at around 67-70%.

All this means that while there will be several discussions on trade-offs and populist measures that will form the core of the budget, practically speaking, nothing significantly different is likely to materialize. Programme names can be changed or combined, or new schemes with low outlays announced, to create the necessary optics. There will be the standard achievements of the year laid out with some innovative acronyms for thrust areas in 2023-24. A target for farm credit is a necessity, while there could be a new theme taken up, like logistics was last year. It will be a prudent statement, with public money well spent. This we can reasonably expect and that is what matters at the end of the day.

Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Lockdown or Economic Destruction?’ 

Privatisation and debt are on the radar of bankers: Business Standard 16th January 2023

 https://www.business-standard.com/article/opinion/privatisation-and-debt-are-on-the-radar-of-bankers-123011500527_1.html

Simple yet important: Financial Express 14th January 2023

 https://epaper.financialexpress.com/3646427/Pune/January-14-2023#page/6/1

Talking Budget, sense deja vu? Economic Times January 9, 2023

 

What can we expect in 2023? Free press Journal 7th January 2023

 

The implications of a recession would be positive on inflation as prices of commodities should ideally come down, barring energy which will be driven by geo-political factors. Lower growth would also mean a decline in trade which will have repercussions on other developing countries — especially those dependent on exports

The year 2023 does not seem to start on a cheerful note as there is a shadow of gloomy uncertainty. This holds for the global economy for sure, and can percolate to the domestic shores.

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The three areas of concern for the global economy are Covid, recession and war. While there is no reason to believe that Covid will come back in a big way across the globe, the Chinese situation is alarming and does raise a lot of déjà vu as this is how it began in 2020. The reaction so far does not seem to be very different from what happened in 2020, where to begin with restrictions on human movement have been placed for anyone from China. Hence, if it were to spread, the possibility of different kinds of lockdown cannot be ruled out.

The war too shows no signs of ebbing and while it has become mainly a Ukrainian problem, the effects on the energy sector will be known in the coming months. Russia will most probably cut off supply of oil and gas to Europe, which can create turbulence in the energy markets. This may not be a problem for India where we have established different relations with Russia for purchase of cheaper oil.

Third, the recession in the West will be a reality as central banks continue to increase rates, though less aggressively. The main purpose of raising rates is to slow down growth which will be achieved in course of time. This is why all predictions of growth for 2023 point to lower numbers which at times can turn negative. The implications of a recession would be positive on inflation as prices of commodities should ideally come down, barring energy which will be driven by geo-political factors. Lower growth would also mean a decline in trade which will have repercussions on other developing countries — especially those dependent on exports.

Closer to home, the Indian economy is also projected to grow at a slower rate — which can be in the region of 6-6.5% — in 2023-24. Here too the RBI has been increasing the repo rate to slow down the growth in credit by raising borrowing costs and cutting back on unnecessary credit. This would mean three things. First, the pace of job creation will slow down considerably as companies become more discerning on employment. Second, consumption will be disadvantaged as the pent-up story has now ebbed and households will realise that cumulative inflation of 20% in the last three years has come in the way of demand. Third, following the plateauing of consumption in 2023, there will also be less incentive to invest and the present trend of investment taking place mainly in the infra-related sectors will continue.

The positive aspect of the global scenario and domestic economy is that inflation will be more under control and to this extent it may be expected that RBI will pause with repo rate hikes which will peak at 6.5% in February before levelling off. Depending on the exact trajectory of inflation we may also expect the RBI to consider lowering rates towards the end of the year, though it will be largely data-driven. In a way one can say with some level of confidence that the worst of inflation is behind us.

Also connected with the global recession is the fact that the dollar will no longer be as strong as it was in 2022 when it passed the parity level with the euro. This will be good news for other currencies, as most of them depreciated in 2022 more due to the dollar strengthening than weaker fundamentals. The rupee also bore the brunt of this phenomenon with deprecation of almost 10% during the year. This will be obviated, though the weakening fundamentals will continue to pressurise the currency with exports in particular slowing down further.

Against this background, how would one evaluate the overall state of the economy? Agriculture will play a critical role in supporting the growth process as this would proceed independent of what happens across the world. Also, as India is largely a domestic economy where demand emanates from within, the recession will not hit that hard. This is one reason why India will still continue to grow by a rate of above 6% which will be impressive. But this also means that as long as growth remains less than 7-8% it would take that much more time to attain the target of $ 5 trillion which has been spoken of. This will hence be the second successive year of consolidation for the economy.

Corporates will have to be more watchful once again. In 2022 topline growth was swift while profits lagged mainly due to high input costs. The tables will turn and input costs will be under control with benign commodity prices. However, scoring a good run rate in turnover growth will be a challenge given virtually stable consumption and investment in the economy. Against this background, it would be interesting to see how the stock market performs. A level of 60,000 for the Sensex, which has been taken for granted, will form the base for future growth. In 2022 the Indian market was a better performing one. Under the conditions outlined, scaling up to 65,000 would be commendable. Anything higher would be a bonus.

GDP forecast is comforting, propped up by construction, trade and transport: Indian Express 7th January 2023

 The first advance estimate of GDP growth for FY23 is somewhat comforting because it is in line with what the RBI had forecasted. In fact, it is slightly better at 7 per cent. But these numbers need to be read with a bit of caution because they are based on extrapolations of numbers for various sectors, based on the latest available information, which could be up to November for some variables. As value added is proxied by corporate results, which are available for the period from April to September, the extrapolation will stretch for six months. Normally, the final numbers are within this range and so we could expect them anywhere between 6.6-7.2 per cent, although they normally tend to be lower.

How is one to read these numbers? The growth rate of 7 per cent is based on growth of 6.7 per cent in value addition across eight sectors and 0.3 per cent in net taxes. The net taxes growth is only 0.3 per cent because while indirect tax collections have been robust, the subsidy bill has overshot for both food and fertilisers and slightly for fuel. The growth rate is satisfactory nonetheless, as this will still make India the fastest-growing large economy. The growth rate is also similar to what the World Bank had stated in its update and so it puts to rest the class of critics that had doubted the growth story.

Of the eight sectors that contributed to this growth, most showed expected trends. The manufacturing sector is disappointing — it is expected to grow by only 1.6 per cent. The proxies used here are the profit numbers of corporates in this sector to represent the organised sector and the IIP growth to capture the SME sector. It is known that corporates were hit hard by rising input costs and while they have started passing them on to the consumer in the interim period, their profit lines have been affected. This has been a challenge for India where growth was not coming from manufacturing even before the pandemic hit. The SMEs are still struggling to stay afloat and with a recession in the West, they have been affected as they have a significant share in exports (about 35-40 per cent). Clearly we need to review the manufacturing sector and its potential because it is accepted that most jobs are created in this sector, and so it has to be the engine and not carriage of the growth train.

The trade, transport etc. segment was very impressive with a growth of 13.7 per cent. This comes on top of a double-digit growth number in FY22. While this bump up has been supported by a sharp fall in FY21 (the base effect), the sector received a boost due to the opening up of Covid restrictions after April 2022. Thus the pent-up demand can be seen in travel, tourism, dining, logistics (for online delivery) etc. Hence, it has been a strong part of the story so far. This is notwithstanding the sharp increase in prices for all these services due to rising input costs, which does raise the question of whether it would be possible to maintain the tempo of growth in FY24.

The other sector which has done well is construction with 9.5 per cent growth over 11.1 per cent last year. Here two factors have worked. The first is the government push on infrastructure, especially roads. The other is again pent-up demand for residential property which is also supported by the sharp rise in bank credit to this segment. In fact, banks have been aggressive here as retail lending is considered to be less risky than corporate credit. Both these factors have provided an impetus and presently there is no reason to expect a slowdown provided the government perseveres with its effort to push capex.

Agriculture shows a reasonable growth of 3.5 per cent which is good, because there has been some skepticism on whether the rabi crop would be affected by the late departure of the rains. As this is not expected, growth of 3.5 per cent is comforting even though we have not seen any sharp uptick in rural demand so far for the consumer goods industry.

The positive surprise factor here has been an increase in expected gross fixed capital formation rate — from 28.6 per cent to 29.2 per cent. This could be an overstatement because the funding counterpart, that is bank credit, does not support this phenomenon. Therefore, it needs to be seen if this finally materialises.

The NSO also presents the nominal GDP numbers where growth is to be 15.4 per cent, which means that the inflation deflator would be closer to 7.4 per cent. Higher growth this year brings the GDP to Rs 273 lakh crore. Under normal conditions this would not have been important. But, the budget for FY22-23 was drawn on a GDP number which was lower. This means that with a higher denominator, if the government maintains its fiscal deficit at the targeted level, then the fiscal deficit ratio can actually come down. This will be a boost for the budget for sure. Hence a deficit of Rs 16.61 lakh crore will translate to a fiscal deficit ratio of 6.1 per cent as against a targeted 6.4 per cent.

Also, with a higher GDP base, the budget for FY24 can target a growth rate of 11-12 per cent, which will in turn afford more space for a fiscal deficit in absolute terms. Therefore, the same level of fiscal deficit, if retained, can bring the ratio down to 5.5 per cent. If the government targets a ratio of 6 per cent then it can run a higher deficit of Rs 18-18.5 lakh crore.

Therefore, these numbers on growth forecasts for FY23 should be satisfying for the finance ministry when the budget is drawn up. It must be remembered that next year it is widely expected that real GDP growth rate will probably slow down to 6-6.5 per cent as the impact of world recession sets in. Concomitantly, the inflation rate will also come down to a more bearable 5-5.5 per cent. By taking a fiscal deficit ratio of, say, 6 per cent, the government could get more room for capex which is what industry is asking for. The government would also probably have some space in terms of not spending much on health this year now that the vaccination programme has virtually ended.

February will be an important month, as the two big policies — the Union budget and the monetary policy — will be announced in the first week, and will set the tone for the rest of the year.

The middle path: Story of India’s New-age Entrepreneurs: Book Review in Financial Express 8th January 2023

 Winning Middle India: The Story of India’s New-age Entrepreneurs

Bala Srinivasa & TN Hari

For those who are familiar with the concept of fortune at the bottom of the pyramid made famous by CK Prahalad, Winning Middle India will bring a sense of déjà vu. In fact, the ideas are the same, but the context is more contemporary, which makes the said book quite relevant. We are not talking now of those at the bottom of the pyramid, but somewhere in between. This segment would typically have an income between Rs 3 lakh and Rs 20 lakh and fits the bill of middle India. The authors, Srinivasa and Hari, focus on this class, suggesting routes to be taken to bring about prosperity for these people. It is not a case of giving any largesse but establishing commercial business models that work for the enterprise as well as the targeted people. It would mean changing the approach to doing business by looking at a larger mass of the market who may individually have a small wallet but big dreams.

The Indian middle class has been written about very often, and it has been the main attraction for foreign investors in particular. It is probably fair to say that focusing on the middle class is the right way as there is increasing spending power too in this class, with the size of the cake becoming progressively bigger with increasing prosperity. Therefore, while the concept of small sachets was quite innovative to reach the base of the pyramid, technology will guide the way when you look at the middle where value-added products are delivered. The focus is clearly on how technology can be harnessed by businesses to obtain solutions while reaching out to a wide canvas.

The models of Amazon and Flipkart are legendary, but there are several startups in India that have effectively leveraged technology platforms delivering services that are close to the hinterland. This can be in the form of pure information on movement of trains or goods or prices of goods. These products touch the people more and are tailormade to ensure that value is derived from them. The new wave of entrepreneurs are qualified management and engineering graduates who are out to do something different from the conventional jobs. This has fostered high paced innovation which integrates with the aspirations of the people.

The book is also a kind of tribute to the new breed of entrepreneurs who have taken the effort and risk to try out something new. The underlying assumption is that for the country to grow in future, we need to take the 500 million people or so together through innovative routes. The focus is not just on creating new products, but providing technology-driven marketplaces for existing goods and services. Urban Company, for example, brings households in touch with plumbers, carpenters, electricians, etc, who necessarily go in for upskilling to provide higher value-add services and increase their incomes.

The authors have given a playbook that can be followed for best results. These are interesting. They argue for customer segmentation not in the traditional mode of rural or urban markets, but across age groups, which makes sense. Products have to be designed keeping in mind which segment one is looking at, as the responses tend to be different. Then they talk of customer trust, which is more from the point of view of being able to use technology. Doing things online is common but when targeting customers, it should be ensured that things should not go wrong. Further, the authors rightly point out that people in the middle are still risk-averse and will not trade loss for higher gains. Farmers don’t migrate to different crops merely because they can earn better returns. This cannot be contested and has to be kept in mind.

We all know that most startups end up shutting down in a period of four-five years. This has not been flagged by the authors, but invariably one realises that such failures can be linked to these seven principles being violated. The other points made relate to cost of acquisition, which has to be kept low, especially for new products being offered.

Blank vertical book template.

Also, no one can start from a single product and the strategy has to cover multiple products for success. Giving plain student loans on an app will not be adequate and other products like investment, or insurance should be part of the bouquet. And, of course, there has to be ease in operations or what they call low friction for on-boarding. Or else they can become deterrents.

The future surely will be exciting for entrepreneurs venturing into business, and technology will be the vehicle. And, these enterprises would be looking at this growing segment of population to target their business. With several platforms or marketplaces being created for reaching out to the middle class, we can see competition increase. People will need to think differently and be willing to think big and use innovative routes to provide solutions for complex problems. This is the way to go for startups, which the authors believe will be fulfilling their dreams. We have seen digital solutions reshaping industries like finance and agriculture, besides healthcare, logistics, etc. Quite clearly, the canvas is expansive.

Can rupee trade take off in 2023? Businessline 3rd January 2023

 The Ukraine-Russia war followed by sanctions has had an interesting fallout — the opening of doors for foreign trade in local currency. Today, most foreign trade is in internationally accepted currencies like the dollar, euro and pound followed by yen and probably a bit of yuan and Swiss franc.

Recent IMF data on global holdings of forex reserves suggest that 60 per cent is held in dollars, followed by 18-20 per cent in euro, about 5 per cent each in yen and pound, and 3 per cent in yuan among others. Trade would broadly follow this pattern.

The idea of trading in domestic currency germinated against the backdrop of sanctions imposed on Russia. This was accompanied by impounding of its forex reserves held in dollar assets. As a further top-up, payments to Russia was banned from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system. As most payments go through SWIFT, dealing with Russia became tough. Sanctions have, however, been different this time with energy being virtually excluded — unlike in the case of Iran where the US had retribution clauses, the present situation does not carry such a threat.

Trade still carries on with Russia with payments being made through third parties, which is also common when commodities are dealt with globally; trading houses specialise in channelling payments and settling trades across countries. In this situation it makes sense for India to look to have rupee trade agreements with its partners.

The idea is not new but has been resurrected in the present situation. Essentially, this means that if we have a rupee rouble trade agreement, we would pay for imports in rupees converted to roubles and Russia would do so for their imports in rupees with the exchange rate being determined by a market factor. Sounds straightforward, but there are questions to be answered.

Rupee-rouble pact

Typically, two countries run either a deficit or surplus with the other. Therefore, one country will end up getting more of the other currency. The issue is whether it can be used elsewhere. While India imports more from Russia and will be paying rupees, the same cannot be used by Russia to buy goods from other countries. This is why we need hard currencies for foreign trade.

Any possibility of such trade must necessarily address this issue where domestic currency is used by the counterparty to settle transactions with a third party. This was also the context when experts have spoken on internationalisation of the rupee.

India is exploring having such agreements with various countries. Intuitively, it would work with countries where we run deficits, because if we are importing more than we export and pay in rupees, then that would be to our advantage. The table below gives the top countries with whom we run a trade deficit. As can be seen, in FY22 the cumulative deficit was around $230 billion for these 10 countries. If India is able to breakthrough with rupee trade with some of them, it would help in conserving forex. Five of these are oil supplying nations with around $90-95 billion of deficit.

The question is whether or not a rupee arrangement will work with any of them. Hypothetically, if Australia were to agree to rupee-Australian-dollar trade, they would end up with surplus rupees that cannot be used for trade with other countries. Therefore, a group of countries is needed where members are willing to accept each other’s currencies.

The table below gives the list of the top countries with whom we had a trade surplus. Interestingly we have the biggest surplus with US which helps in bringing in dollars in net terms for us.

The other countries with which we have considerable surplus are Bangladesh ($14 billion), Nepal and Sri Lanka (cumulative $13 billion). Here, while rupee trade would be acceptable, the question is whether we would be willing to accept takas.

A broader issue one needs to look at when considering rupee trade is — while it would be possible to group countries with similar mindsets and have Indian rupees being used within the closed user group, this would also mean that there would be less flow of dollars and other hard currencies.

Currency bloc

Are we prepared for this? Therefore matching of countries is important, involving a mix of both the countries with whom we have surplus and deficit. Bangladesh may find it well to deal in domestic currencies but we will be losing out on the dollar surplus of say $14 billion as per the table which would go into the pool of dollars that finance imports from other countries.

Ideally, having rupee agreements with oil exporting countries will help to ease pressure on foreign exchange and hence India can work towards forming a currency bloc with the Gulf countries where the surplus rupees received by them will be used for trade within the group.

The need to have trade in domestic currencies is compelling because US will be using the tool of sanctions against countries that it believes are going wrong on the political side. This can lead to also putting an embargo on dealing through SWIFT, the international clearance system for currencies. The Russia-Ukraine conflict exposes these vulnerabilities for the rest of the world. There is also the fear of dollar assets kept in US being frozen. Hence the Russia episode causes nations to think harder. This will be high on the agenda for 2023.