War against black money is not yet over: Free Press Journal 27th May 2023

 Two important announcements last week, which were almost back-to-back, indicate that the war against black money is not yet over. Efforts are still on to bring it out. However, there have been some ambiguities that have caused modification in one of the notifications and continued conjecture about the second. These refer to the forex remittance scheme for individuals and the supposed demonetization of the Rs2,000 note.

heme, one can take out $250,000 per annum without any permission. These amounts are normally for travel (50% in FY23), 15% for relatives maintenance, 13% studies and 11% gifts. In FY23, around $27 billion was claimed under this scheme. The official announcement was that expenditures through credit cards will warrant a 20 per cent tax collection at source as would be the case with all other payments except education and health. The lacuna in the announcement was that it was not clarified as to how banks would identify payments made for studies or stay, which had differential status.

There are two issues here. The first is that keeping credit cards out of the ambit of the $250,000 was a major anomaly as there was no justification for it. Any forex expenditure on a card has to be accounted for under the limit. There is an argument that often one spends money for the company when they travel out. Regulation could have always specified that companies can have corporate credit cards issued, which would be identified with the company rather than the individual. This is how the billing is done anyway as these cards are linked to the company though the individual’s name is mentioned.

The second is a broader issue of tax collection at source. It was hard to argue such a levy even earlier when a TCS of 5 per cent for expenses beyond Rs7 lakh in forex was introduced. The reason is simple. A tax collected at source can be claimed when filing returns and hence is not an income for the government. As there are time lags involved in the deduction and claim, there would be a loss of interest for the customer, which makes living difficult. However, the logic given here is that there is a trail of such expenses and the income tax department can pick up heavy spending. The logic is, however, questionable. As all payments are made through the banking channels anyway either as a transfer or card payment, knowledge of large payments is identifiable and can always be reported in form 26AS just as it is done for purchases of mutual funds. TCS is a very convoluted attempt to discover something that can automatically be discerned through the digitization process in place.

The revised notification says that credit card payments beyond Rs7 lakh will be charged the TCS. Can this really be tracked by the system if one uses multiple cards? Asking banks to report large payments is much simpler and can be found by a simple algorithm rather than going through the process of TCS. Tour packages are still subject to 20 per cent TCS, which is out of place as there is anyway an audit trail as PAN cards are a necessary proof to be provided. However, it seems that this inconvenience has to be lived with.

The withdrawal of the Rs2,000 note has created confusion because of the ambivalence exuded by putting a date of September 30 as the cut-off for exchanging or depositing the notes while also saying that it continues to be legal tender. The rather contradictory nature of these statements has created uncertainty in the minds of citizens. Besides, banks are not on the same page when it comes to acceptance of notes for exchange with some insisting on identity papers and others not doing the same. As the official stance is that it is part of the clean notes policy and not demonetization, there is no reason to ask for identity papers. However, after the demonetization episode of 2016-17 no one wants to take a chance and hence this has led to considerable apprehension.

The basic issue is that despite all the efforts made to migrate people to the digital mode, there is demand for currency. Total currency in the system is around Rs34.5 lakh crore and increases by Rs2.5-3 lakh crore every year. High denomination notes are held for several reasons. Individuals hold it for precautionary purposes such as health emergencies. Land and jewellery are still traded in currency as is the case with the grey currency market. Elections involve a lot of currency transactions both in terms of wooing voters and escaping the attention of the Election Commission. This being the case, the quest to hold on to currency will remain and with the Rs2,000 note being banished, there will be a tendency to switch to Rs500 notes as the purpose for holding will never change.

While it has not been overtly stated that the removal of the Rs2,000 note is linked with black money tracking, the fact that there is an end point for exchanging the same indicates the intent. Interestingly, it has been stated that the Reserve Bank of India had stopped printing such notes in 2018-19 and that the volume of such currency has come down to Rs3.6 lakh crore this year. If they were being withdrawn in the normal course, having such an announcement does lead to formation of conjectures.

Quite clearly, the establishment is still convinced that there is a lot of black money that needs to be weeded out. However, this also means that we need to harness technology in a more effective way to track the same, which will be less intrusive than increasing the living costs of citizens.

Remember Robert Lucas everytime expectations confound us: Mint 25th May 2023

 

Remember Robert Lucas everytime expectations confound us

 

His was an extreme theory but what people rationally expect is often seen to impair policy efficacy

Economic doctrines pursued today are dominated by two theories: Monetarism and Keynesian. The former is used to justify monetary policy action that according to Milton Friedman is effective in inflation contol. The fiscal aspect of growth is explained well by the theory of Keynes. But both these theories could be exceptions that work at times and not always be effective. This may sound odd, given that most countries espouse these tenets for policy. But the factual at times does prove this supposition because regardless of what authorities do, the desired results aren’t always attained.

The clue to this conclusion lies in the realm of the theory of Rational Expectations, which gained fame in the 1970s. Robert Lucas, who won the Nobel Prize in Economics in 1995 for his role in this school, had a different take that remains relevant. Today, we often say that even though interest rates were kept low post the financial crisis or as covid relief to secure growth, there was no discernible impact on it. A Keynesian would argue that growth is better engineered by an expansionary fiscal policy. But even uncontrolled expansion of the deficit by giving cash handouts did not restore growth, though it made living easier. In fact, both central bank and government actions contributed to inflation rather than growth. Clearly, neither theory helped much.

Robert Lucas worked with Thomas Sargent on a theory based on the principle of ‘rationality’. Micro-economics assumes that all economic agents are rational and take decisions based on available information and expectations. Therefore, the same assumption must feed macroeconomic analysis. To take decisions, for example, people need to know the policy environment and other conditions as revealed by data, so that they can formulate expectations that guide actions. When expectations were negative during covid, investment did not take place even though authorities did everything possible.

If interest rates are kept stable and the government spends prudently, all affected sectors will take decisions on investment and employment based on this information. This will lead to an optimal growth rate. People do not borrow money only because it’s cheap. This is why lower rates rarely promote growth. Note that India experienced higher growth in the earlier part of the last decade, when interest rates were high. This is where demand comes into the frame. If the Centre is conservative and the private sector hesitant to invest, then monetary action achieves little.

Similarly, as visible today, it is not possible to control inflation by letting unemployment rise, which is what the conventional Phillips Curve spoke of. Theory said that as joblessness rises, it can bring down prices as demand drops. But this is not happening. Unemployment has gone up in India and inflation remains high. Cheaper loans did little to create jobs as the future expectations of enterprises did not lead them to do so.

In short, the theory says that all monetary and fiscal policy announcements will get discounted by the market. If the Centre is expected to enhance capex or RBI to slash rates, business decisions will been made assuming this. Therefore, expected measures have only a muted effect on macro parameters such as investment or employment rates. One often hears after a credit policy that the action had already been buffered in by the bond market, say, and so yields did not move. Ideally, our policymakers should state their stance at the beginning of a year and let things be.

Rational Expectations further argues that beyond a point, the only way a government make policy work is by ‘fooling the public’. This means that a stance is taken and then changed through shocks which in turn can create an impact. But here too, it is argued that the effect is temporary, as once people get to know of the temporary nature of a shock or policy, they would re-adapt to this new environment. If the market expects a 25 basis points repo-rate hike but RBI goes in for 40-50 basis points, it works. But this is only for few days. Things revert to normal and growth remains unaffected.

Embarking on reforms sends a strong set of messages to investors, which then forms expectations and brings about investment, employment and growth. However, sudden shifts in stance and policy changes in the form of, say, additional customs duties on steel, can disrupt expectations. But again, this will be only for a short duration, after which the news gets absorbed. The imposition of such duties by earlier Indian budgets did not really have a significant impact on the steel industry.

Rational expectations is surely an extreme view. It urges policymakers to be transparent with their stance and let market forces play out. The assumption here resembles one made by classical economists that all economies would reach an equilibrium which may not always go with full employment. There would be a ‘natural rate of unemployment’ that cannot be eschewed. Growth, employment and investment would all be guided by rational decisions taken by economic agents and hence the government should provide a medium-term perspective with few deviations to maximize certainty. That, in essence, would be what Lucas would have reiterated.

Are we getting the best from digitisation? May 24th 2023 Financial Express

 The idea of having tax collection at source (TCS) on credit-card payments raises some finer points on the remittance policy of the country as well as the effective use of technology. To begin with, having credit-card payments for foreign use should have always been under the Liberalised Remittance Scheme as there was no justification for keeping them out of the ambit. But the concept of tax collection at source (which started for expenses over `7 lakh per annum) raises some questions on the robustness of our systems.  Does this mean that, somewhere, the digitisation effort has not quite helped the cause?

It is worth remembering  that the nation went through the agony of a not- too-successful demonetisation—one that didn’t reveal the existence of significant black money or counterfeit currency. The justification provided was the move promoted digitisation, creating an audit trail. If the effort to migrate payments to cards, bank transfers, e-wallets, etc, was part of the strategy, then it questions the need for TCS.

The rationale given is that there have been instances of people making use of the LRS to spend probably more than the $250,000 permitted without having adequate earnings. The issue of money laundering has come up as it is believed that some people may be using such funds for unauthorised purposes. But since all payments made in dollars through any route starting from bank transfers to cards are through the banking system, there is knowledge of the big spenders of forex. Spends of more than `10 lakh per annum on even domestic purchases using credit cards are already being reported to the tax authority. Hence, a similar reporting could have been done for forex spending.

In fact, one pays tax on the service component when forex is purchased in any form. TCS is not really a cost for the user as it can be claimed as a refund when filing returns. Hence, it is not a source of revenue for the government, as all the taxes collected would be given back. This new rule creates a major operational issue for banks handling the customer accounts. For instance, if payments are made for education, they would have to figure out whether the expense is for fees or boarding. When bank transfers are made, the customer has to mention the purpose. But this does not happen in case of card payment when the vendor swipes the card. Often, the vendor’s machine will show a different name from the purpose. Similarly, tax payers will have to ensure that that the bank does not slip up, or else they may be held liable for avoiding this tax.

There is little rationale for having TCS for forex as every transaction is going through the audit trail. Simple algorithms can enable banks to let the tax authority know who the big spenders are. Total remittance under LRS on an annual basis is around $20-25 billion, of which 15% is for looking after relatives, 25% for studies, and 35% for travel. The amount involved can be considerable, besides the inconvenience of paying the tax and claiming refunds. Assuming around 60% of the $25 billion qualifies for a 20% TCS, it would mean that around `1.2 trillion would be the amount involved, on which 20% would be collected as tax at source. The `24,000 crore of tax will mean foregone interest of around `1500 crore for the tax payers. Further, the wait for refunds would cause considerable discomfort for tax payers.

The problem with going full steam on digitisation is that loose ends have not been tied up. Aadhaar, for example, helps target beneficiaries better. But the link ends there. One uses the passport to get Aadhasr card, and when the passport has to be renewed, one needs to show the Aadhaar, implying circularity. The process should ideally be seamless and automatic for issuing passports when all information already exists with the government.

As the country works towards ‘easing doing business’, such laws do make things tough for players. In fact, it is also time that we move away from the statutory TDS concept, which today is at 10%. With technology being widespread in the financial sector, customers should be asked upfront to specify the tax bracket they are in so that appropriate deductions are made. 

Today there is a form 15H that has to be filled if not liable for paying tax, which can get messy as different banks have their dates for accepting such declarations. Presently, it is onerous for individuals to keep track of all interest and dividend payments received throughout the year to be in a position to pay the requisite advance tax. Shortfalls attract a penal interest rate. By stating upfront the tax bracket and having the company/bank deducting the full tax, there would be greater ease in managing finances.

There is need for the country to make better use of technology to improve ‘ease of living’. There is a tendency to create systems with alacrity. However, completing the loop has always been a challenge leading to duplication and unnecessary interventions. There can be a case to withdraw the TCS concept in this regard.

USA, Do it our way: Economic Times 23rd May 2023

 

Shadow of demonetisation as RBI withdraws Rs 2,000 note: Has the clock struck 8 again? May 21 2023 Indian Express

 With the RBI announcing a virtual demonetisation of the Rs 2,000 note, the 8’o clock syndrome was repeated once again, or almost. There were signs in the last six months that something like this was on the anvil, but it was never clarified by the central bank. Coming just hours after the government clarified on the issue of tax collected at source on international credit card spends, introduced on grounds of tracking suspicious transactions, this measure does fall in place with the current thinking on black money. So, how will it play out?

To begin with, it must be mentioned that when the Rs 2,000 note was introduced post demonetisation, it was a perplexing decision. If it was believed that Rs 500 and Rs 1,000 notes were a means to store black money, replacing them with Rs 2,000 notes did not help to attain the goal of curbing black money. Quite clearly there is a feeling today that these notes could be used for storing black money.

There were around Rs 4.28 lakh crore worth of Rs 2,000 notes in circulation as of March 2022. This involves around 214 crore physical notes. The RBI stopped printing these notes in 2018-19. Therefore, it was being subtly conveyed that in course of time these notes would not be preferred by the central bank. There are seven possible areas where the use of Rs 2,000 notes would have found favour.

First, households tend to keep a certain amount of currency at home for precautionary purposes. This was heightened during the Covid-19 pandemic as almost every household had to be prepared for the worst. The Rs 2,000 note would have found favour here as it is easier to handle.

Second is the real estate market. Today, it is axiomatic that almost all land deals involve payment of cash. The reason is clear. The developer would have paid cash to buy land, to get the permissions and pay the requisite bribes to various authorities. This is recovered through cash payments from customers. Therefore, it may not be right to blame the developers as the system has not changed much especially for the non-listed companies. This is prevalent even more in the semi urban and rural areas.

Third, there is a large informal market for gold and jewellery which could be bigger than the organised branded stores. Here, payments through cash are common as it works for both parties. One can escape paying tax and more importantly not be tracked. This is an old business, and while GST has corrected this to a certain extent, this model is pervasive in the hinterlands.

Fourth, there is also a big informal forex market where foreign currency can be bought quite easily in cash. Here, too, one can escape identification as well as pay a lower cost. This is rampant in almost all cities which have international airports.

Fifth is in the political domain. During elections, we do get to hear of stories where people are paid cash by various political parties to vote for their candidates. The denominations vary, but Rs 500 and Rs 2,000 are standard. Also, the Rs 2,000 note is useful for storage and can be used for other payments when campaigning is on. This segment will be hit hard as it is likely that large amounts have been stacked given that there are several upcoming state elections.

Sixth, weddings are another occasion where Rs 2,000 notes are used both in terms of paying for arrangements as well as in gifting. There will be disruption here as well. And seventh, donations to various religious institutions are also made in high value currency denominations and these institutions will have to opt for exchanging/depositing them. This was observed even in 2016 when notes were put into the donation boxes.

The interesting part here is that the rules for exchanging or depositing the notes are not very different from what happened during demonetisation. Banks have been told that there will be a limit of Rs 20,000 that can be exchanged at a time. This is bound to create panic and lead to long queues. While time has been given till the end of September, herd mentality will come into play. This will be challenging for banks. Going by the quantum of notes that will be exchanged, hopefully other denominations should be available. These provisions should have been made.

From the banking system’s perspective, there are two issues. The shadow of demonetisation will linger as individuals come to exchange notes. As a limit of Rs 20,000 has been placed, the use of agents cannot be ruled out. The first few days will be stressful for branch officials. Such a large exchange of notes runs the risk of fake notes also being pushed through.

At the system level, typically overall liquidity should increase as people deposit their notes and do not opt for withdrawals. The next three months will be critical to determine whether deposits are going to increase sharply or will currency be merely exchanged. While the latter will be liquidity neutral, the former will enhance it. This will lead to higher costs for banks in terms of interest paid on deposits.

It will be interesting to see if the RBI will consider bringing out a Rs 1,000 note in case the public requires something higher than the Rs 500 denomination note. The RBI will also be keenly following the identities of those depositing the money, and this could give some leads to the government. From here on, banks will be the main protagonists.

Mumbai Metro: Have we added the inconvenience cost? Free Press Journal 13th May 2023

 

What is evident to the common citizen is that ever since the construction work started, roads have been dug up which means that they have been almost permanently narrowed down. The existing side roads have been maintained in a shoddy manner which means that traffic crawls along.

The construction of the Mumbai metro system for all practical purposes commenced in 2016 after the first line between Andheri and Versova was launched in 2014. There has been a promise of a new Mumbai which now stretches across all the three cities: Greater Mumbai, Thane and Navi Mumbai. As of now there are two other lines which started in 2022 but the bulk of the transport system is still under construction. One is not sure when the comprehensive system would be operational and a best guess is that it could be 2030.

What is evident to the common citizen is that ever since the construction work started, roads have been dug up which means that they have been almost permanently narrowed down. The existing side roads have been maintained in a shoddy manner which means that traffic crawls along. Given that the BMC’s reaction during the monsoon is one of indifference, the potholes multiply and slow down traffic further. Highways are occasionally attended to especially if dignitaries are to enter the city from the airport. There is hence a difference in the speed of repair for roads to the airport and beyond this landmark.

What does this mean in terms of pure economics? Line 3 which is funded also by Japan International Cooperative Agency (JICA) has officially overshot the budget by Rs 10,000 crore with at least a 2 year delay. The other lines would be having their share of time and cost overruns which an audit would reveal. All of them were launched at different points of time and hence indicates absence of perspective planning. This all means that until the final line is launched, the citizens would have to live with broken narrow roads across the city. Add to this the myriad work undertaken by the BMC for storm water drainage work, water supply, electrical wiring, piped gas and so on, it is rare to come across any road without some work in progress. An accompanying habit is that once the work is done, the holes are filled with the existing stones and mud, with the levelling coming much later when the concerned contractor gets to work.

The cost for citizens as well as the nation can be mindboggling. All vehicles which are sold in the market offer a mileage of 15-20 kms a litre which is admittedly in ideal conditions which can be achieved once out of the city. In the city the mileage comes down to something closer to 8-10 kms/litre depending on the time one drives. With the present set of construction work in progress one tends to lose at least 3-4 kms/litre in mileage quite unwittingly. It would be higher for larger vehicles and lower for two wheelers. During peak hours an 8 km stretch on the two highways can take up to an hour both in the evening and morning. Hence the loss of 3 kms per litre is quite conservative and could be more.

There are no firm recent figures on the number of vehicles registered in Mumbai and Thane but a ballpark would be 40 lakhs in the former and 2/3 of the same in the latter. Out of the 65 odd vehicles let us assume that 50 lakhs ply on a daily basis. Ideally all rides would be losing 3 kms each way. Being conservative given the distances travelled by individuals would vary (buses and cabs run the whole day while private vehicles for 1-3 hours depending on the distance), one can assume that everyone loses 3 kms in mileage every day. This works out to 150 lkh kms a day.

Assuming again at an optimistic level, an average vehicle gives around 10 kms a litre, which can easily be contested, it would mean 15 lkh litres of fuel being wasted. At Rs 100 a litre on an average, this works out to Rs 15 crore a day, which multiplies to at least Rs 400 cr a month assuming there is less running of vehicles on Sundays. On an annual basis this cost would be around Rs 4800-5000 crore. As the metro project has been running now from 2017 onwards, for the five years that work is in progress (excluding the pandemic year), the citizens, city and nation have lost around Rs 25,000 crore of income as fuel expenses. This is large.

The reader can make her assumptions on the mileage front and arrive at different numbers. But the sum and substance of this calculation is that the nation loses a lot of money in the form of lower mileage due to poor planning and implementation of road projects.

Similar stories are narrated in other cities too like NCR, Bengaluru, Chennai and Hyderabad. All progress through such works invariably cause a lot of damage to the ecology as several homes, shops are dismantled to widen roads. Trees are uprooted to make way for progress. The citizens choke on roads while walking or get tense while travelling with the waste of fuel being enormous. Cumulatively the nation is wasting a lot of fuel even as our imports increase. The cost is not just citizens paying more for fuel but also the government which has to cut taxes at times to control inflation.

A more responsible approach to such constructions is the clue. The problem in India is that we all love to make announcements. But the follow up activity is sub-standard with the blame game justifying tardiness. The centre talks of highways, the state of state connections, municipals of inner roads. The blame passes from one to another with no visible action on contractors for bad work. There should be concerted action to change this matrix.

Rating agencies are unfair to India: Business Line 12th May 2023

 

Ratings wrangle. India’s growth rate, and macroeconomic and financial stability are reasons enough for an upgrade

There is an unmistakable rigidity about global credit rating agencies when it comes to their take on India. The sovereign rating of Fitch has been retained at BBB-, just about investment grade.The concept of credit rating is quite different when it comes to sovereigns. For companies it is straight forward as the agency evaluates the probability of default based on performance parameters.

However, when it comes to a sovereign rating, the overall economic structure is evaluated to gauge whether a country can default. The judgment is hence subjective, as country can always print currency to repay debt even at the risk of running high inflation.

Such an evaluation can be justified if countries have external exposure. However, for India,almost all debt is exclusively in rupees and even participation of FPIs is in rupee bonds. Therefore, there is never a case of forex risk for India. And the ultimate vindication of any country’s credibility is how investors perceive the economy. India is one of the largest recipients of FDI and is also high up on the scale of foreign portfolio investment.

Therefore, if foreign investors are bullish on India, a rating of just investment grade seems an anomaly. These are investors who are actually putting their money on the table and have never had any issue in taking it out, as there is full capital account convertibility there.

The reasons for a rating upgrade are quite compelling. Without making comparisons with other nations, growth of 7 per cent in FY23 and 6-6.5 per cent projected for FY24 is quite impressive. While it is lower than the potential of 8-8.5 per cent, coming out of the Covid blow, the performance is more than commendable.

Second, during the lockdown all nations upped their fiscal deficits in the form of payouts to ensure that people had money to spend. The Indian response was unique in so far as that while revenue was pushed back, expenditure was nuanced. The approach was more through the reform and policy route. As a result India has found it easier to unwind compared with the West.

Using banking channels to provide support helped industry while the guarantee schemes provided assurance to the financial system. Even today, there is determination to revert to the path of fiscal prudence in a minimal time period. In fact, expenditure is being rolled back, like the free food scheme being amalgamated with the food subsidy.

Third, the banking system has rebounded well, using the pandemic period to clean up the books. This means that it is better placed to provide funding to enable the economy to move on to a higher growth path.

RBI’s role

Fourth, the RBI has ensured a smoother path to normalcy compared with central banks of other nations. Here the withdrawal of accommodation has worked well and has been done in a non-obtrusive manner.

Also here interest rates have moved without any significant impact on growth. This is important because the kind of volatility that has been witnessed in the US on account of the Fed raising interest rates, has not been seen in India as bond yields have moved in a narrower band. The RBI template can be followed by other central banks. Fifth, the forex situation in India remains strong. Here again the RBI has ensured a couple of things.

First, as the dollar appreciated, the rupee always remained at the median level of depreciation compared with other currencies, which ensured there was no market panic while retaining the competitive edge for exporters. Second, forex reserves, which declined mainly due to valuation issues, has regained its level subsequently with a comfortable import cover ratio of just above nine months. This provides a lot of support to the balance of payments.

Sixth, the quality of government spending is again significant. The Budget has increased the share of capex from around 12-13 per cent pre-pandemic to 22 per cent for FY24. Despite the number of upcoming Assembly elections this year, the Budget has plumped for fiscal prudence.

Seventh, an important development during the year was the way in which India was able to initiate new thinking on the trade front, as seen in the rupee trade agreement with Russia which has now found favour with several countries. This is a major step as these arrangements can help countries move away from the dollar-euro dependence which will add to their economic strength.

While admittedly this is a slow process and will take time to work out, the strategy to go-domestic is a unique model. This needs to be appreciated by the rating agencies as it is a model that several emerging countries will find worth pursuing.

Lastly, India’s strides in digitisation have been remarkable, spanning from banking transactions to the Covid vaccination drive. The digitisation drive has brought about structural changes in the economy making systems more efficient.

In fact, India has carved a unique niche on this front.

Quite clearly the global credit rating agencies seem to be operating with a fixed mindset where it is believed that emerging markets can never really move up the scale. The highest rating that India has achieved is BBB. The CRAs need to reinvent themselves to retain their credibility.

The rating methodologies need to adapt with the times and old shibboleths need to be revisited and changed. Quite ironically the commentary given normally always seems positive and never justifies the low rating awarded.

On the other hand western countries with negative growth rates and higher inflation along with elevated unemployment levels never get downgraded by even a notch. Similarly serious bank failures don’t seem to raise the red flag in these nations. India certainly deserves a fair and unbiased evaluation.

Economics Weather Warning: Indian Express 11th May 2023

 

Let’s not be misguided that the dollar will be displaced: Mint 4th May 2023

 

Beyond the ‘fastest-growing economy’ tag: Financial Express 1st May 2023

 

While the economic growth CAGR of 3.1% over the 2019 level is impressive for India, the fact is that the growth rate needs to be a lot higher to generate the jobs needed.

The epithet of ‘fastest-growing economy’ for India has been a confidence-booster, especially since the world economy is poised for a major slowdown in 2023, according to the International Monetary Fund (IMF). While the IMF forecasts 5.9% growth for India in FY2023 against RBI’s 6.5%, the number is still very impressive. Without going into the intrinsic quality of the growth rate of 7% or it’s thereabouts for 2022, it would be interesting to compare growth rates with other countries.

Based on IMF data, what strikes us is that there are some smaller economies that are part of the group of emerging economies which also registered fairly impressive growth rates in 2022. Ireland, for example, is the fastest-growing country with 12% recorded for the year. It would not have been significant but for the fact that it was part of the infamous PIGS group which was responsible for the euro crisis in the early part of last decade. In fact, growth was very impressive even during 2020, the Covid year, at 6.2%. Quite clearly, being small has its advantages.

The other three countries that are much smaller in size than India and had impressive growth rates in 2022 were Philippines (7.6%), Malaysia (8.7%) and Bangladesh (7.1%). A comparison with these nations may not be proper but should be recognised.

Single-year comparisons can always be misleading as base effects play a major role. Such distortions began in 2020, when Covid ensured lockdowns of various magnitudes across several nations. This was the time when negative growth was the norm is most economies as economic activity had halted for a period of 2-4 months depending on the intensity of the disease there. It was coincidental that no country had an alternative solution to a lockdown, and this caused GDP to fall.

Not surprisingly, as countries started to come out from the lockdowns, there was a tendency for the growth rates to get pushed up due to the negative base effect. Therefore, positive effects were felt across the board in 2021 and, further, in 2022. This added impetus to these smaller nations in 2022.

In 2020, negative growth was the norm. Turkey, Taiwan, Bangladesh, China and Ireland were the only nations not to witness a fall in GDP as growth rates were positive. The UK witnessed a 11% de-growth as did Spain (11.3%). This helped bring about buoyant growth in 2021 (7.6% and 5.5%, respectively) as well as 2022. Growth in the UK was 4% and 5.5% in Spain in 2022. But the UK will draw little comfort from the same as it is expected to register negative growth in 2023 once again.

Argentina witnessed 9.9% de-growth in 2020 and 10.4% and 5.2% in 2021 and 2022, respectively. Even in the case of US, growth fell by 2.8% in 2020 but recovered to 5.9% in 2021 before moderating to 2.1% in 2022. Therefore, the important conclusion is that growth rates over 2021 have a base effect—this has propped up growth numbers across countries.

How does then one look at growth rates, given that base effects distort numbers in both directions? One way is to look at growth over a neutral year, say 2019. By calculating a compound growth rate for these nations a better picture emerges on the recovery process. Here the results are interesting as the growth now pertains to average annual for a period of three years.

Also read: A saga of pending reforms

Ireland continues to be the best performer with 10.5% CAGR growth. This is followed by Turkey with 6.2%, Bangladesh 5.8%, Taiwan 4.1%, China 4.5% and India 3.1% (this will be slightly higher if 2022 is taken at 7% instead of 6.8% as per IMF). The Indian performance is still very impressive, given, other than China, the countries in the pool are much smaller to warrant comparison.

India would rank third in terms of size going by PPP, with China being the largest. Turkey would be around 29% of India’s GDP and is the largest among the other nations which have witnessed higher growth rates. Taiwan is around 12% the size of India, Bangladesh 10% and Philippines 6%. Intuitively, it may be seen that with a smaller size of GDP it is easier to post higher growth rates, which is what has happened for the smaller nations.

While a 3.1% CAGR for economic growth for three years is creditable, it will still take some time for India to clock the 8% growth rate that it requires on a sustained basis to create more jobs and ensure that poverty is under check. Job creation is important, given, the debated on whether poverty has come down or not notwithstanding, the fact that the government gave ‘free food’ under the Pradhan Mantri Garib Kalyan Yojana till March 2023 to over 800 million indicates that the number of needy requiring support from the government is high. This can only be addressed by creating more jobs.

Hence, while the epithet of fastest-growing economy should be inspirational, there is still a lot of work to be done and should not lead to complacency. Growth of 6-6.5% in FY24 is achievable but will only be improving, albeit marginally, the status quo.

Bullish on India: An optimistic progress report on economy and achievements of the government: Financial Express 30th April 2023

 

Amitabh Kant’s Made in India comes close on the publication of Ashok Lahiri’s book India in Search of Glory.

As the book is about 75 years of business and enterprise, Kant starts off with the pre-colonial era and takes us through the different phases the country has gone through.. (Express photo by Prashant Nadkar,)

Amitabh Kant’s Made in India comes close on the publication of Ashok Lahiri’s book India in Search of Glory. Both have a bio-data linked to the government, with Kant working for the establishment, while Lahiri is part of the government. Both the books start with a historical context and bring us up to date with the situation in the economy. Kant’s book is more focused on how business has excelled since 2014 due to the proactive policies of the government. This was also the time when the author, who is presently sherpa for the G-20 summit, had headed NITI Aayog. Lahiri’s exposition was more of a deep dive academic and unbiased analysis of all economic policies to date.

Formulating and driving the agenda of the government over the past decade or so, Kant is very optimistic that India is not just a major economic power, but has the potential to become a superpower where all global supply chains get linked with our potential. This rhymes with the title of the book, Made in India. It is a takeoff from the ‘Make in India’ campaign, which he was instrumental in formulating, right from the content to the design. Working closely with the government gives him not just direct access to the persons who take decisions but also allows him to see the bigger picture.

Two areas where he sees a lot of potential in driving future growth paradigms in the country are technology led by artificial intelligence and machine learning. Interestingly, he points to how we can leapfrog in case we are able to not just generate a lot of data, but also put it to use. This can transcend the traditional frontiers of banking where loans are given based on all data that is available on the entity/person to also building health records and soil information that will cut down on information asymmetry and lower costs while increasing efficiency. And given our skillsets in technology, this can be expanded as service exports to other countries too. This will carry this paradigm of Make in India to other countries too.

Reforms that were implemented in the 1990s were a good break, though not adequate; and as is usually the case, got diluted along the way. This led to stagnation that was amplified post the financial crisis. There was definitely need for a big push where a second series of reforms had to be undertaken. But this was not possible because of the policy paralysis, which ensued due to various controversies that best the sale of natural resources.

Blank vertical book template.

Here, the author is quite critical of the entire NPA issue which surfaced in the decade that had sort of brought the economy to a halt. A big push with new vigour and vision was required that was provided by the incumbent government. In particular, the author is all praise for the Prime Minister, who is responsible for this transformation. This, according to him, was the turning point. He touches on various schemes that have been effected on both the economic and social fronts. But his vote goes for the technology-led schemes, like say the JAM trinity which could reach the grassroots.

This book is a good quick summary of everything that has happened post 2014. He also gives some of his personal experiences while working in the government and takes quite a lot of pride in his effort to further tourism in Kerala and the term of ‘God’s own country’ emanated at this time. His initial skepticism on joining NITI Aayog was turned around as he does find this a very fulfilling stint where he feels he made a difference.

Kant looks at two areas in some detail where one could have a different view. He does believe that the potential we have shown in the area of creating startups is immense and this would be the way forward. Readers may have a different view given that the final performance has not always been positive for most of them. The second is on the issue of gig workers. He believes that this will be the way forward in the future, where there may be no firm employment like fixed jobs as people work when they want to and for who they want to. He pitches for gig workers not just in the blue collared (plumbers, carpenters, parlour services, etc) space, but also for white collared jobs as in programming or data analyses where one can work for several clients.

Also read: Meet Yashovardhan Birla, a scion of the Birla family, a 51-year-old fitness icon and entrepreneur: Know about his tragic past, education, net worth and more

Now that India is on the global stage with the G-20 presidency being the latest, where we have the power to influence other nations, the author bats a lot for furthering talks and actions on climate change. This, of course, is a burning topic today and his views are quite insightful.

Made in India is definitely a book that spews optimism and is something which will appeal to the reader. It does enumerate the several achievements as well as work in progress of the government and hence is a one-stop shop for all such knowledge. The author could have highlighted the dark spots in this story, though one could say the narrative is more about business than social issues.

Made in India: 75 Years of Business and Enterprise

Amitabh Kant

Rupa Publications

Pp 240, Rs 595