Has Trump done what WTO couldn’t? Financial Express 7th March 2025

 Idiosyncrasy and vicissitude stamp Donald Trump as exceptional. He has been erratic in articulation but consistent in his stance on economic policy, whether the world likes it or not. His recent tirade on customs tariffs is something that has got all nations back to the negotiation table. But, if one reflects, it will appear that his proposed actions would do something that the World Trade Organization (WTO) was unable to accomplish. Will this be a turning point in foreign trade?

The US is the largest importer of goods at around $3.3 trillion, followed by China ($2.6 trillion) and Germany ($1.5 trillion). The next in the top 10 are the Netherlands, UK, France, Japan, India, Hong Kong, and South Korea. These nations have considerable power over imposing tariffs, given the quantum of imports. The US threat to impose reciprocal tariffs on all trading partners may not be feasible, as it imports from almost 180 countries. Besides, the number of products is large, and it would be hard to map commodity- and country-wise tariffs for comparison. While the threat has been on matching tariffs based on commodities, it could practically be applied in generalised terms only. In this context, the average customs tariffs imposed by countries could be looked at, though this may not necessarily match the average that the US faces due to several free trade agreements between countries, including the most favoured nation (MFN) status.

The weighted mean average tariff on commodities imported is relevant here. World Bank data for 2022 throws some light on these rates, which vary from almost nil in Singapore to 29.5% in Bermuda. For India, it was 11.5%, while it was 8.6% in Korea, 7.4% in Brazil, 4.7% in South Africa, 3.1% in China, 3.1% in UK, 1.3% in France and Germany, and 1.5% in the US. These are averages and would have a varied set, depending on the commodities that are imported.

The outcome of the reciprocal tariff policy approach of the US has led to two things. The first is that it has opened the doors for negotiation, and this has meant that countries are talking to the US.

The second fallout is that countries have resumed talking to one another on trade issues. This was abandoned once the WTO concept fizzled out. What this will mean is that more agreements will be forged by like-minded nations on trade, which can be either bilateral or within groups of countries where the MFN-like status would be incorporated. India is already in talks with the UK and the European Union, which too are significant trade partners. The impetus for this will be more on the fear of the US raising its antenna at some point to tax goods from countries that have higher tariffs than it does (currently the number is nearly 100). Over 60 have an average rate of 5% or more.

The US trade policy has become the fulcrum for world economy as the concept of reciprocal tariffs has caught on. It is not certain whether these would be applied across the board. The higher tariffs on steel and aluminium are real and signal to the world that the US means business. Also, given that most of the exporting countries to the US have higher tariffs, non-compliance may not matter if there are no fewer cheaper substitutes. This can hold good in industries like pharmaceutical, where the US has to import because it is a necessity. Even in case of steel and aluminium, the US has to continue importing as it lacks production capabilities within. It will lead to higher prices and inflation in the US and could affect imports only marginally.

It has also been noticed that when tariffs are imposed on specific countries, there is a tendency to reroute goods through a third country. This helps dodge the higher tariffs. Often countries in the Gulf Cooperation Council are used for such routing. However, countries will deliberate whether rates should be rationalised keeping this factor in mind. It can lead to a reduction in tariffs on several product lines, which would be good for global trade, but this would also come in the way of domestic industry, which will see competition increase substantially.

For Indian companies, any reduction or rationalisation in tariffs would mean the doors are open wider for imports, which can affect competition. Therefore, the inherent protection that existed due to tariffs being at relatively higher levels would be withdrawn over time, becoming a major concern for the countries as well as individual industries.

At the policy level, there is always the threat of dumping where lowering of tariffs in general can lead to predatory trade. Other nations may under-price and sell their goods. A good example is China. India has had to apply anti-dumping duties to stem the flow of such goods. Surveillance would have to be increased to watch out for such practices.

The US double-speak is evident as the talk is only on goods and not services, where ambivalence persists. There is stern talk about driving migrants back, with some moves being made already. This will be a concern, given that there will be restrictions on issuing work-related visas. But then, this is the might of the US where the President is calling the shots and has changed the entire discourse of economics, with all countries revisiting their trade and tariff structures. Hence, it can be said that Trump has done what the WTO couldn’t.

Interest Rates Have Definitely Peaked In This Cycle: March 1, 2025

 

Interest Rates Have Definitely Peaked In This Cycle

The repo rate was reduced by 25 bps in the Feb policy, and it is expected there could be two more cuts during the course of the year, though the timing will have to be aligned with the inflation scenarios.

The minutes of the monetary policy committee indicate that there is a majority view that policy, henceforth, will target growth. This means that there will be a tendency for interest rates to come down even further over time. The repo rate was reduced by 25 bps in the Feb policy, and it is expected there could be two more cuts during the course of the year, though the timing will have to be aligned with the inflation scenarios. It has been assumed that inflation will keep trending downwards, and a normal monsoon would be the norm this year too. More importantly, core inflation has been low and stable, which has given more confidence to the committee to take this stance.

But an interesting observation is that post the policy announcement, there have been few moves by banks to lower the deposit rate as well as the MCLR (marginal cost lending rate). The EBLR (external benchmark lending rate), which holds for individual loans as well as those to MSMEs, should ideally have come down by 25 bps. However, this has not necessarily been the case, and several banks have chosen not to do so and increased the mark-up or spread over the repo rate. From the point of view of borrowers, rates have remained virtually unchanged.

The main issue is deposit rates. Banks have already been challenged all through the year in terms of garnering deposits. The relatively better returns in the capital market have caused some migration of savings to mutual funds. Those with higher risk appetites have invested directly in equities. This being the case, banks would be reluctant to lower deposit rates lest households move further away from deposits. This is the puzzle for bankers where liquidity is an issue. The present situation is characterised as one where growth in credit is steady, but the same cannot be said about deposits. The RBI has been using various techniques to infuse liquidity into the system, including VRR (variable rate repos), open market operations (OMO), and forex swaps. Deposits growth is the crux. If they do not grow, then it is hard for banks to lower their deposit rates.

This has affected the MCLR, which is calculated using a formula based on the marginal cost of funds. If the deposit rate does not come down, the average cost of deposits would remain unchanged, in which case the MCLR remains unchanged. This is why few banks have changed their MCLR.

This would be a thought for the Monetary Policy Committee going forward. While there seems to be some ideological consensus on further lowering the repo rate, the transmission would be in the hands of the banks. In fact, it can be said that in case there was stable liquidity in the system, the rate cut would have been translated to deposits and lending rates. The issue in banking is that when the repo rate changes, all loans are to be repriced at a lower or higher rate. However, in the case of deposits, it is only incremental deposits that get re-priced and hence banks do tend to face pressure on margins in a declining interest rate regime. Transmission of policy rates has always been an issue flagged by the RBI even when there was an upward cycle in the repo rate. The RBI had commented that transmission was still not complete and, hence, the stance was unchanged at ‘withdrawal of accommodation’ in successive policies.

In fact, in retrospect, it can be argued that the repo rate cut could have come after the liquidity situation was stabilised in the system. March is a crucial month for banks. There is the last instalment of advance tax payments made by companies, which will peak by the 15^th of the month. Then there are the GST payments which flow post the 20th. And last, the credit growth tends to increase towards the end of the month as banks set about meeting their targets.

Therefore, banks may not be too keen to lower their deposit rates at this point in time. Further, to the extent individuals are following the old tax scheme of taking advantage of exemptions, there would be a year-end rush to save in instruments such as PPF. All this would put some pressure on growth in bank deposits. Any which way, there will be pressure on both deposits and credit. In such a situation, there would be several interventions from the RBI to stabilise liquidity in the normal course of activity.

From the point of view of individuals, however, it can be assumed that interest rates have peaked and there would be few possibilities of banks raising deposit rates. The exceptions could be in certain tenure brackets where banks need to rebalance their portfolio. This could, hence, be the best time to book fixed deposits with banks, depending on the appetite of individuals.

The signalling on lending is also in a single direction. Rates would tend to move southwards in the coming months. As most loans are on floating rates, there would be benefits along the way even though the MCLRs may not have been altered presently. This may not happen immediately and will work through over the next couple of quarters. At any rate, the degree of reduction in bank rates (deposit and lending rates) tends to be lower than that of the repo rate. Therefore, even a 75 bps cut in the repo rate this year would probably lower the deposit rates by around 30-40 bps.

The present ideology of lowering the repo rate is based on an economic theory which says that as interest rates come down, people borrow more to consume more or invest more, which in turn leads to higher growth. The government has already worked its way through the budget to provide an impetus to both consumption (by cutting taxes for individuals) and investment (through higher capex). Monetary policy will now be supporting this effort through the next set of rate cuts.

Liquidity Management, a tightrope walk: Business Line February 28, 2025

 

RBI’s $10 billion swap: What does it hope to achieve: Indian Express 25th February 2025

 The RBI has already started on the path of cutting the repo rate. The assumption is that inflation is very much under control. The repo rate has been cut once in February and it is expected that there could be two more cuts this year. But the problem is of liquidity — the banking system has been in a deficit for a protracted period of time. This situation is likely to persist till the end of March. The challenge really is that interest rate cuts may not lead to easy transmission unless liquidity is normalised. Therefore, simultaneously, the RBI has been focusing on enhancing liquidity in the system.

The framework introduced since 2020 looks at three major instruments for inducing liquidity into the system. These are open market operations, variable rate repo auctions (for different tenures) and forex buy-sell swaps. The first two are well known measures which have been used in the past too. Open market operations involve buying government securities from banks. The VRR auctions give money to banks for fixed tenures on the back of government securities as collateral. The swap is the new concept being used when conditions are quite uncertain in the forex market.

The RBI will be holding a buy-sell swap for $10 billion on February 28 for which dollars would have to be handed over to the RBI on March 6 by successful bidders. The swap is for a period of three years which means that the redemption takes place on March 6, 2028. In simple language, on February 28 there will be an auction for $10 billion where the RBI will buy dollars from banks at a premium to be decided by the market. Under the terms of this bid, banks can sell to the RBI at the prevailing price on the 28th and receive the rupee equivalent on March 6. On March 6, 2028, the banks will have to buy back the dollars from the RBI by paying in rupees along with the premium.

The RBI had conducted one such swap on a similar basis on January 28 for $5 billion. The RBI reference rate was Rs 86.64/$ and the premium was 97 paise. The transaction would be reversed after six months on August 4. Intuitively, if the rupee remains stable during this period, banks will be better off as the cost would work out to just 1.1 per cent.

In the past, the RBI has used swaps mainly for inducing dollars into the system which involved selling dollars and then buying them back after the agreed period. The reverse is now being undertaken as the target is to infuse liquidity against the objective of providing dollars. With these two auctions of $15 billion, the RBI would have induced Rs 1.30 lakh crore into the system. This is quite substantial. This is a third window being used by the RBI which will work out to be cheaper for banks. It is not surprising that in the earlier auction for $5 billion, the bids received were around $26 billion.

The significant part of the $10 billion auction is that the buy-back by banks would take place after three years. Thus, while it has stretched the repayment period, it will again be carried out in March. March is a different kind of month in terms of liquidity as it typically tends to get sticky especially as the advance tax payments are due on March 15 and there is the usual rush to push credit by banks to meet their targets. Besides these two factors, GST payments too would tend to increase. Therefore, paying the RBI the rupee equivalent of $10 billion along with the premium after three years in March would be something to consider for banks.

It can be assumed that the RBI will continue to use all these three windows besides the overnight repo auctions (which were resurrected recently) to provide liquidity. The forex swap would fall between a permanent infusion which is what open market operations do and VRRs which are short term in nature. This is a fine blend.

There is no alternative to the dollar as the world's anchor currency : MInt 20th February 2025

 https://www.livemint.com/opinion/online-views/dedollarization-dollar-assets-forex-reserves-global-trade-currency-renminbi-yuan-yen-pound-euro-imf-donald-trump-trade-11739879691245.html

Is It Time To Have A Luxury Tax In Place? Free Press Journal: 15th February 2025

 

One of the most popular Indian cricketers is said to own 70 bikes and at least a dozen luxury cars. Data from the Federation of Automobiles Dealers Association indicates that around 35,000 luxury cars, costing at least Rs 50 lakhs each, were sold in FY24, including BMWs, Mercedes, and Audis.

One of the most popular Indian cricketers is said to own 70 bikes and at least a dozen luxury cars. Data from the Federation of Automobiles Dealers Association indicates that around 35,000 luxury cars, costing at least Rs 50 lakhs each, were sold in FY24, including BMWs, Mercedes, and Audis. There were around a little less than 1000 Porsches sold in the same year. At an even higher price level, there were over 100 Lamborghinis sold, while the count for Rolls Royce was about 60. Now a Porsche can start at around Rs 1 crore, while a Lamborghini is close to Rs 3 crore. A Rolls Royce can cost upwards of Rs 7 crore.

There was also news of some industrialists buying a series of apartments in Mumbai’s prime locality at over Rs 200 crore. It is not certain if the numbers are true, but there have been similar numbers spoken of celebrities buying homes, which can go up to Rs 100 crore each. Cricketers in categories A and C have done well for the country and purchased multiple homes, which could be costing upwards of Rs 30 crore each in places like Mumbai or Delhi.

For each of these purchases, there is an official trail of the income earned or loan taken with a history of tax returns. Therefore, there can be no issue in terms of capacity to pay for such indulgences. In fact, from a capitalist standpoint, it can be argued that these are the fruits of hard work and business, where money is earned and invested in these luxuries. All such purchases add to the GDP of the country and, hence, are useful. In a way, when the general masses are unable to spend money due to inflation and consumption is down, the premium products have done well due to this class.

Now, the idea for the government should be whether or not to impose a luxury tax on such purchases. There have been talks of a wealth tax being imposed, which has arguments on both sides. Anyone who has accumulated wealth has paid all the taxes that are due, which can be a stamp duty on property or GST on vehicles or capital gains tax on equity gains. Therefore, taxing the same for retaining wealth would not be fair. However, there is scope to revisit the tax rates at the time of purchase.

example, the stamp duty in Maharashtra is fixed at 6%, which does not take into account whether the house costs Rs 1 crore or Rs 100 crore. Here it is assumed that as it is an ad valorem tax, which is on value, it is equitable as higher value homes pay higher duties. But logically, if a person is buying a home for Rs 100 crore, imposing a luxury tax or cess of 20% would be very much in order. The state government can earn substantial revenue as it falls in its jurisdiction.

In the case of automobiles, the GST is 28% at the higher end with a composition cess of 22%, which adds to 50%. But this has not been a deterrent to such purchases, as they are often style or position statements. Based on the sales of cars mentioned above in the starting range of Rs 50 lakhs, the total cost would be around Rs 17,500 crore at the lower end (as often those who can afford such vehicles would purchase higher variants, which can go up to double the price). An additional 10% luxury tax or cess can add Rs 1750 crore as revenue at the lowest end. In fact, in the past, when such luxury cars were imported, the tariff was 100%, which did not really push demand down, given that they were status symbols. Against this background, anything less than 100% is still something that sounds reasonable and will not act as a deterrent. Hence, if the money spent on 60 Rolls Royces amounted to, at least, Rs 420 crore in FY24, imposing another 50% luxury GST over the existing 50% could have garnered another Rs 210 crore.

There is reason for the government to revisit the tax structures for luxury goods, where lines can be drawn on what constitutes the same. A house over Rs 20 crore could get classified as one in a metro city, while a vehicle above Rs 50 lakhs would fall in this category. The same can be extended to even hotel stays, where there is accommodation in the higher price bands. At present, it is capped at 28%. But a room rate of say Rs 50,000 and above can be levied to garner more revenue.

Today, there is skewness when it comes to the distribution of income. While it is true that even those at the bottom levels are witnessing improvements in their standards of living, the growth in wealth at the higher level has been more pronounced. Weddings could involve a large expenditure outlay, which can be taxed, as this could be in various forms such as clothing, jewellery, food and beverages, resorts, decorations, travel, and so on. There is value added as all expenses add to consumer spending, which is based on income earned on which all taxes have been paid. There is, hence, a justification in taxing what can be called ostentatious consumption through a luxury tax or cess. This would help in garnering revenue for the government. In turn, such revenue can be used as part of the resources that are deployed for direct cash transfers to the poor through monthly payouts to women or any other vulnerable section of society.

Intuitively, it can be seen that a lot of the money that is spent on these luxuries is through the sale of securities acquired through stock options or ownership of the same or by leveraging brand value, which holds for sportspeople or film stars. Hence, these incomes may not strictly come from the core profession as salary for those in the corporate world or games for sportspersons. This tax could also serve at the limit to encourage the elites to save money once demand is satiated. Hence, it would be helpful any which way, as such demand is agnostic to price levels.

One earth, one family: Book Review Financial Express: 16th February 2025

 Being in charge of hosting G20 deliberations may sound like routine business for any nation given that this privilege is rotated among member countries. But the conditions under which India had to organise this summit were challenging. Coming close on the back of the pandemic and right in the middle of the Ukraine war, getting countries together to discuss a plethora of issues ranging from global cooperation to climate change was nothing short of an achievement.

This story has been narrated by the Sherpa for this purpose, Amitabh Kant, in this rather comprehensive book on how India successfully managed these challenges by getting everybody on the discussion table. This is why the suffix ‘Mount’ sounds quite appropriate. Kant, who headed the famous NITI Aayog, is known for his prowess in taking on such assignments in the course of his career, being also associated with transforming tourism in Kerala.

The author thanks Prime Minister Narendra Modi for enabling the successful completion of the G20, writing that the PM’s functioning can be a good template for a CEO of an organisation. There are five qualities that need to be mentioned here. The first is taking a long-term perspective of any issue, which means not thinking of today but tomorrow. This quality combines well with empathy for people, which is a potent potion for success.

The second is the art of listening, where leaders need to spend time listening to people. This helps in assimilating multiple views, as a final decision can be taken after weighing all considerations. It reflects humility, because being willing to listen to others requires a different kind of mindset.

The third is remaining calm even under pressure. Losing one’s temper when under pressure can cause hasty decisions to be taken, which is eschewed when one is able to deal with all provocations with equanimity. This is natural in the course of any meeting, especially when there are differing views from countries with varying governance structures. Fourth was the optimistic approach taken, which helped mould mindsets in a positive frame all the time. And last is the emphasis given to physical and mental well-being. These are the lessons in management that the author highlights after successfully completing the assignment as Sherpa for the G20.

The slogan for the G20 meet was ‘one earth, one family, one future’, which is just about what is required to keep global integration alive, such that all can benefit from this collaborative effort. Reiterating this theme throughout the long period of deliberations helped to bring all countries together and there was acceptance that they needed to work together.

The author believes that under the PM’s guidance India was able to position itself as a bridge to promote healing in a world divided by geopolitical differences. This is required to build a more sustainable future. Now strategically the G20 discussions were turned towards the priorities of the global south, which does credit to India. For example, the African Union was given a full membership to the G20, a momentous step in shaping global governance, especially as it covers the voices of 1.4 billion people (which is the size of India).

The author writes that the approach taken by the PM was responsible for building consensus on several issues. One of the examples here is the tryst with creating global climate action. As the world grappled with this subject, we were able to focus on sustainable development and hence strike a balance between economic growth and environmental conundrums. This was necessary because several global agreements put the responsibility on  developing nations, which could involve asymmetric sacrifices.

Kant goes into fairly comprehensive details on how his team went around accomplishing the job, starting from the arrangements to steering discussions in the desired manner so as to optimise the time spent on these deliberations. There was clarity of thought, as there were 15 principles drawn up that were the cornerstones of these meetings. These included a wide array of subjects starting with Ukraine to being consistent with the UN charters to war on food and energy security to peace across the world.

One of the interesting issues covered related to a new look for multilateral institutions for the 21st century. Here he speaks of how the global financial infrastructure needed to be overhauled. In particular, the IMF and World Bank have to probably also incorporate climate change and crossborder issues in their mandates. This forum was also used by India to showcase the resounding success of India’s digital public infrastructure. Here, the success of the famous JAM trinity and use of technology for better delivery of direct benefit transfers was the high point.

So how does multilateralism stand after all these talks? This is surely work in progress as there are several changes in the global economic order over the years. The Ukraine war exposed the limited power of the United Nations Security Council, which was unable to broker any kind of peace. Similarly, the US-China economic conflict is just growing by the day, which has taken a serious tone with the new US President specifically targeting the country. WTO has lost steam with most member countries now having their own regional trade agreements.

In this context he also talks of the most recent COP-29 held in Baku where the issue of climate change was the focus. The global south seems to be bearing the brunt of climate impact even though its contribution to greenhouse gas emissions is the least. The crux, according to Kant, of multilateralism surviving is the existence of political will to stay connected.

This book is quite remarkable as it gives a deep understanding of the way in which the global economic order operates. It is also a help book on how to get different entities onto a common platform for successful deliberations. In the end one would say kudos to Kant for such flawless execution of the project.

Book details:

Title: How India Scaled Mt G20: The Inside Story of the G20 Presidency 

Author: Amitabh Kant

Publisher: Rupa Publications

Number of pages: 256

Price: Rs 595

Rs 1 lakh crore to boost consumption, says Bank of Baroda's Chief Economist Madan Sabnavis: Business Today Feb 16 2025

 The Budget is a finely crafted document that starts with the fiscal deficit and manages all components in a cogent manner while embellishing the same with some forward-looking policies to deliver a very neat package. The background for the Budget was different, as the overall size of the exercise came in lower at Rs 47.16 lakh crore in FY25 as against a budgeted number of Rs 48.20 lakh core. Therefore, the increase of 7.4% in size over the Revised Estimates at Rs 50.65 lakh core for FY26 is the overall base that can be looked at closely.

Looking at all the numbers, the Budget has balanced various objectives. The income tax relief was very much on cards and the release of Rs 1 lakh crore is a booster for consumption and savings, depending on how the taxpayer uses this benefit. Interestingly, the income tax collections would be Rs1.81 lakh crore higher in FY26, against Rs 2.13 lakh crore last year. The lower amount would account for the relief offered to taxpayers. Intuitively, it can be said that if such a relief was not provided, the estimated collections would have been higher.

Second, the corporate tax collections have been taken to grow by 10.4% over 7.6% in FY24. The message is that corporate performance would be better this year. This should be encouraging for industry as corporate performance has been subdued in the first three quarters of FY25. The economy is to grow by almost the same rate of 6.3-6.8% (Economic Survey) in FY26, as compared with 6.4% in FY25 (Economic Survey). If the corporate sector does perform better, there could very well be an upside to the gross domestic product (GDP) growth forecast too for FY26.

Third, the excise collections on account of fuel have been kept unchanged. This would mean that citizens can be assured of unchanged prices in petrol and diesel. Therefore, if global prices were to rise, there would be protection provided by apportioning the cost between the government and the oil marketing companies. This is a positive from the point of view of inflation.

Fourth, there has been a plethora of changes in customs tariffs, with the proclivity to reduce, rather than increase. The customs collections have been assumed to rise by just 2%. Two conclusions can be drawn. First is that this review could have been made keeping in mind the talks that India will have with the US on tariffs being imposed here. Second, given the state of the global economy and the impact on trade, the assumption here is that imports per se may not be increasing sharply and that the currency would be largely stable.

Fifth, the non-tax revenue components also throw up some useful insights. The dividend/surplus from the Reserve Bank of India (RBI), public sector banks, public financial institutions are to be at the same level as last year at Rs 2.56 lakh crore (Rs 2.34 lakh crore last year). This means that there could be similar dividend transferred by the RBI, which had crossed the Rs 2 lakh mark in FY25. It would be interesting to see which components would generate this surplus with the sale of foreign exchange being the foremost source of income.

Sixth, the net borrowing programme has been targeted at slightly lower than last year at Rs 11.54 lakh crore. Here the gross borrowings are higher at Rs 14.82 lakh crore against Rs 14 lakh crore last year. But to ensure the market is not pressurised, the Budget has drawn from the Goods and Services Tax (GST) compensation fund to address some of the redemptions, which has helped to stabilise this amount. This is positive news for the market and bond yields will remain stable. The budgetary impact will, hence, be neutral.

Seventh, for financing the fiscal deficit the Budget is not taking into account any short-term borrowings and show less importance to small savings. This implies there is intent to stick more to market borrowings rather than dip into the National Small Saving Fund. In a way, it is more prudent as the cost of market borrowings is lower than that from the small savings account.

Eight, on the expenditure side the Budget has continued to focus on all the social welfare schemes.

The largest increases have been witnessed for the PM-Awas Yojana, which includes both rural and urban schemes. This is interesting because the revised numbers for FY25 were much lower than the budgeted numbers. Quite clearly, this scheme has to be pushed harder to ensure that more affordable homes are constructed and bought by the relevant sections of society.

Other outlays like subsidies and the Mahatma Gandhi National Rural Employment Guarantee Scheme, PM-Kisan have been retained at the FY25 levels, which will maintain the momentum. These are important because they are supplements for fostering consumption as they release funds or add to income directly when they are cash transfers.

The Budget has, hence, been drawn up quite dexterously, starting with the fiscal deficit ratio playing the role of anchor around which the other numbers have been built to deliver the best returns. Based on a conservative nominal GDP growth of 10.1%, there could be an upside benefit if it turns out to be higher in FY26. 

 

ONcoming Quadrilemma: Economic Times 11th February 2025

 

Credit policy supplements Budget growth boost: Business line online 7th February 2025

 

A perspective shift in managing growth-inflation mix, as well as bank regulation stand out in new RBI Governor’s statement

Given the virtual new look to the MPC’s composition, the Governor’s statement was bound to invite comparison with earlier ones. Quite apart from the decision to cut rates, the impression is that there has been a shift in policy perspective.

The first difference lies in acknowledging the achievements of the flexible inflation targeting framework, introduced in 2016. The fact that inflation has largely been within the band has been a vindication of its effectiveness. Further, the statement does convey the message that unlike the past when there was a focus on inflation being close to the target of 4 per cent on durable basis, a flexible band could be the driving factor to balance growth-inflation dynamics. Therefore, a band of 4-6 per cent would be more important than the 4 per cent number.

The second point made upfront was on some of the new regulations that are in the offing. There was assurance given that the central bank would be consulting with stakeholders and the implementation would be gradual, to enable the system to absorb these changes. This will bring relief to banks. Interestingly, there was mention of a trade-off between efficiency and cost when regulation is imposed.

The cut in repo rate was almost a given and opens the door for more rate cuts during the year. It can be said that as far as borrowers and lenders are concerned the peak interest rate regime has ended. The decision at the micro bank level will depend on other considerations, including liquidity.

Inflation outlook

The forecast of inflation at 4.2 per cent for next year could have an upside. This is so because two sets of factors need to be considered. The first is that even a normal monsoon always has been associated with periods of sharp increases in vegetable prices, particularly in the September-December period. This problem will remain until such time that the composition of the CPI is changed with the weights for products like tomatoes, potatoes and onions reflecting their share in consumption basket.

The second is the pressure of imported inflation. As the central bank’s position on the rupee is that the currency will be driven by market forces with intervention only in the event of excess volatility, there is reason to believe that the rupee can be pressurised depending on global factors, which are fluid as of date. Therefore, the threat of imported inflation does exist. The question is whether the government will raise prices of fuel products if the imported cost of crude oil increases sharply.

Further, core inflation would tend to be higher than that in FY25 as companies have been increasing prices of their products due to both demand (for services) and cost pressures (manufactured goods). In fact, historically, post 2012, core inflation has averaged 5-6 per cent and the low numbers witnessed in FY25 have been due to fortuitous conditions.

Growth forecast

The growth forecast made by the RBI at 6.7 per cent for the year looks reasonable; there can be an upside here, too. The push given by the government through the Budget along with the base effect should in the normal course lead to higher consumption and investment. The impediments of election uncertainty and high inflation which affected private investment, government spending and consumption in FY25 would not be potent factors in FY26. This number looks more optimistic, however, than what was projected in the Economic Survey which has placed growth in the range of 6.3-6.8 per cent.

Based on its assessment of the banking sector, the RBI appears to be fairly satisfied with financial stability. While no specific measures on liquidity were announced, it can be assumed that the central banks would continue with a combination of measures of OMO, VRR and dollar swaps to ensure that liquidity will be normalised. But interestingly, the Governor did point out to an anomaly where some banks have been parking funds with the RBI rather than lending in the call market. This was above ₹1 lakh crore on February 6. There is a clear nudge to banks to change this practice. This would help improve liquidity in the system.

The credit policy can be seen as an effective supplement to the Budget, where the government had focused on growth as the primary objective.

Right prescription to give economy a boost : Businessline 4th Feb 2025

 

The targets of Trump's strikes need not chicken out: Mint 3rd February 2025

 https://www.livemint.com/opinion/online-views/madan-sabnavis-trump-tariff-targets-threats-india-tariff-king-export-duties-import-duties-colombia-usd-dollar-value-ally-11738227966803.html

Five things stand out in Budget 2025 as it works on fiscal consolidation: Business Standard 1st Feb 2025

 There are five things stand out in the Budget 2025 proposals as it works on the entire process of fiscal consolidation. To begin with, the government has assumed a rather conservative gross domestic product (GDP) growth rate of 10.1 per cent for FY26, which is the basis for all tax conjectures. Given that the world economy is in a state of flux as is the domestic economy, it always makes sense to be cautious on the GDP forecast so that there is no case of overstating revenue. 

 

The first is that the government has shown resolution in lowering the fiscal deficit which is now to be 0.4 per cent lower than last year at 4.4 per cent. This means two things. The first is that the short-term goal of meeting the 4.5 per cent mark would have been achieved and the government can seriously consider lowering the deficit to 3 per cent in the next few years. Intuitively, it can be seen that with 0.5 per cent reduction on an annual basis, we can reach the 3 per cent target by FY29. The second implication is that from a markets perspective there is nothing to worry in terms of liquidity, as the gross borrowing programme would be Rs 14.8 trillion against Rs 14 trillion in FY25. This was a concern for the market as given that liquidity is pressurized presently, a higher programme could have caused some disruption.

The second highlight has been the continued focus on capex, which is targeted to be Rs 11.2 lakh crore - higher than the revised numbers for FY25. This time, the government is better placed in the sense that there is a full-year to implement these projects, which was a handicap last year. The focus remains on roads, railways and defence that also tend to have multiplier effects on the economy relative to other sectors.

 

The third has been the approach taken to tackling the consumption issue through the income tax rates. There have been some major concessions given for individuals. As Finance Minister Sitharaman has mentioned that the revenue foregone would be Rs 1 trillion, one can assume that it would lead to Rs 70,000 crore of consumption.

Fourth, the government continues to focus on social welfare and development as seen by the allocations made for programmes like the PM Kisan, NREGA, PM Awas Yojana. This has been instrumental in the past for elevating the living standards of the poorer people. The free food scheme which will be running for another 4 years has indirectly uplifted consumption and the recipients have spent the money saved on buying foodgrains for buying other goods. This gets reflected in the household consumption expenditure surveys carried out by the NSO.

Fifth, the various measures announced to provide support to industry deserves mention. The focus has been on fostering public private partnership (PPP) deals along with states to ensure that new investments are taken on. This will be across all ministries which will work out the projects to be taken on.  The Budget 2025 also talks of fostering investment in urban infrastructure where the funding will be supported by issuance of bonds for bankable projects. 

 

Therefore, the budget has tried to deliver on all counts, to the extent possible within the realms of fiscal consolidation. It may be recollected that the fiscal deficits had spiraled to high levels during Covid, and since then, the objective has been to roll back the same gradually. This has been done in a non-obtrusive manner that has hence ensured limited disruption. More importantly, there has not been any significant strain as such on the market for funding. 

 

Ease Of Paying Taxes Should Be Considered: Free Press Journal: 1st Feb 2025

 https://www.freepressjournal.in/analysis/ease-of-paying-taxes-should-be-considered

A budget for the middle class that tries to do a balancing act: Indian Express 1st Feb 2025

 The Union Budget is a statement of accounts of the government, which says where money comes from and how it is spent. It is also the most potent policy instrument the government has as these numbers are drafted keeping in mind the larger goals of the economy in the areas of consumption, investment, inflation and interest rates. This year, two concerns were paramount: The first was consumption and the other was the government’s capex. In FY 25, there was a modicum of sluggishness in both. The budget has attempted to address both these issues from the fiscal side.

The budget has attempted to not just revive but also accelerate the processes. The income tax slabs have been moderated, which would result in Rs 1 lakh crore revenue being foregone. Intuitively, the amount in the hands of the taxpayers would be used for consumption and savings. Assuming that 70 per cent is spent, there can be expectations of higher spending by the salaried class. Typically, this would be spent on consumer goods and services. As services have been witnessing a sharp increase in recent times, it can be expected to accelerate.

he other area is capex which has high multiplier effects on the economy. The focus areas are roads, railways and defence, which account for 63 per cent of the total capital expenditure — or 75 per cent, if transfers to states are excluded. The outlay for this year has almost been maintained at last year’s budgeted number of Rs 11.2 lakh crore. With a full year to operate, this time it may be expected that there will be no shortfall, which will help to speed up capex as well as bring in private investment. Industries like cement, steel and machinery are likely to benefit from these outlays.

The government’s capex has strong backward linkages in an indirect manner as it stimulates investment made by infrastructure industries which, in turn, employ more people. In other words, this process has a distinct connection with job creation. This will continue in FY26. The difference in approach to investment that has been spelt out in the budget is important — it focuses on the PPP model to push up capital formation. This is at the industry level — here all ministries would be involved — as well as in urban infrastructure.

The spending on social welfare deserves mention here. The government has been supporting the poor through schemes like PM-Kisan, NREGA, and PM Awas. These would continue to be focus areas. The free food scheme has received an outlay of Rs 2 lakh crore and the interests of the less privileged class have been addressed. The outlays provided in the budget will ensure that the safety net remains unaffected. This is important at a time when inflation is still a concern for all.

Of late, budgets have tended to keep in mind the market impact as borrowings have increased sharply after the Covid pandemic, putting pressure on the markets as funding is an issue. However, ever since the government decided to roll back the deficits, albeit gradually, the gross borrowing programme has largely been range-bound. This has meant that the squeeze on liquidity has been limited. By bringing down the fiscal deficit ratio to 4.4 per cent for FY26, the budget continues on this path. This is good for the banking sector in particular given that there are challenges in garnering deposits. The bond markets will start off on a positive note on Monday as the fiscal numbers do indicate stable bond yields.

The budget has assumed a conservative GDP growth — 10.1 per cent. This would ensure that growth is not overstated and with attendant spinoffs on revenue collection. In other words, the possibility of a higher revenue collection cannot be ruled out. This also means that expenditure can be incurred without cutting corners.

On the tax collections side, the buoyancy seen in income tax collections would continue this year. Revenues would rise by about 10 per cent, notwithstanding the concessions given in the budget. Corporate tax collection would increase by a similar amount which indicates that profits of companies would improve next year, which is good news.

On the whole, the Finance Minister has managed the budget quite dexterously given the limited space that was available since the objective of keeping to the agenda of lowering the fiscal deficit was paramount. It does appear to have the middle class in mind which will be the biggest beneficiary of these announcements. Funds have been channeled to areas which need attention as well as to areas where there would be growth multipliers (capex). More importantly, this has been done by ensuring that liquidity in the system is not affected which is a concern today given that the RBI regularly invokes enabling measures to ease the deficit.

What to expect from the Union Budget 2025? Financial Express 28th January 2025

 The Budget is a statement of income and expenditure of the government just like the profit and loss of a company. But the thoughts that go into its formulation are important and spelled out in the Budget speech. Further, akin to a company’s balance sheet is the government’s liabilities schedule with debt statement being the critical component. While there may be limited flexibility in designing the Budget as almost all revenue components are contingent on the economy, governments do their best to provide incentives and support while drafting the document.

What can one expect from the Budget? These can be divided into three parts: macros, revenue, and expenditure. With macros, first priority is the fiscal deficit ratio target. The entire edifice is drawn up based on it, as there is a resolve to lower the ratio to 4.5% of GDP by FY26. With the revised deficit for FY25 expected to be 4.7-4.8%, a cut of 0.5% of GDP is likely this time.

Second is the assumed GDP growth rate. The first advance estimate for FY25 was relevant mainly to form the base for the Budget when targeting revenue numbers for FY26. The revised 9.8% for FY25, instead of 10.5%, will probably make the Budget take a conservative view of 10.5% for FY26. This will be the basis for calculating the tax revenue, normally taken as a proportion of this number. The ratio has been increasing in the last decade and a ratio of 12% can be expected this time.

On the revenue front, two areas need attention. The first is income tax rates. Past Budgets have sent a strong signal that ideally the government would like all individuals to move to the new tax system that has lower rates with no concessions. However, since consumption has been hit in FY24 and FY25 due to inflation, lowering tax rates could be considered. Providing relief only at the lower income levels may not lift aggregate consumption. This can be delivered in the new tax system by raising the tax slabs, including the basic exemption limit. Ideally these slabs should be adjusted with inflation. Such a cover will help protect real tax slabs.

Second, the tax rates across income streams may need a relook. All income is virtually taxed at slab rates. The exception is equity where long-term capital gains are taxed at 12.5% — the rationale is that it helps build confidence in the market leading to more investment. There is a strong reason to give similar benefits to bank deposits, as 18% of these funds are by statute invested in government securities and help finance the government borrowing programme. In FY25, there has been a migration of savings from banks to equity markets including mutual funds on this score. Both nominal and tax related returns are higher compared with deposits. So, declaring a lower tax rate on interest on all fixed deposits with maturity of above one year at, say 20%, could be a first step in narrowing the differential.

Third, given the evolving global conditions and the possible threat of dumping on the imports front, a detailed evaluation of all such steps should be done and a strategy drawn up to the counter them.

Fourth, a lower fiscal deficit ratio would mean the government’s gross borrowing programme would be stable in the range of Rs 14-15 lakh crore. An area that can be considered in light of the growing importance of climate issues is throwing open green bonds to retail with a tax-free incentive. This will address the issue of leaving more money in households for consumption.

On the expenditure side, while capex will be the primary tool to drive investment, diversification across ministries can be considered. In the last few Budgets which have witnessed spikes in capex, the three sectors that have benefitted are defence, roads, and railways. In particular, getting agriculture into the fold will help at a national level. Interlinking of rivers is a subject that demands urgency and cannot be carried out at the state level alone.

Second, the production-linked incentive scheme should be extended for micro, small and medium enterprises. Industries like auto parts, chemicals, textiles, handicrafts, etc. would benefit and are important components of the exports basket. For industry, the Centre could add an employment condition along with turnover. Last year, the government announced employment schemes involving payments made from the Budget for first-time employees, etc. By dovetailing the scheme with employment targets, the Budget can address the issue without straining finances.

Third, there can be a case for shifting social welfare spending to health and education. Budgets have concentrated on subsidies and cash transfers to vulnerable sections, improving living conditions. To make money work better by creating more social capital, the focus can also be on creating schools and hospitals as a joint venture with states.

A lot is expected from the Budget, in terms of measures to push for growth in consumption and investment. On the other hand, a more detailed look at the expenditure would be in order given that the government is well on the glide path of lowering the fiscal deficit ratio, to probably 3% in the next three-four years. That the economy is doing well is an advantage as no emergency measures are required and the focus can be on the medium term.

Same same, but different: Book review of Malcom Gladwell : Financial Express January 26, 2025

 We are aware of the fact that a sudden rise of a superstar, like say Virat Kohli in cricket, can lead to hordes of men donning the pointed beard. This is the starting of a trend. Can we call it an epidemic? Probably yes, as this is how such fashion plays out, and this is how companies create trends. This was broadly the idea of how we reach tipping points in life, wrote Malcolm Gladwell almost two and a half decades ago, when he explored reasons why ideas turn into social epidemics. He is back now with a new book, titled Revenge of the Tipping Point. There are certain turning points in life when things pivot to a larger story. Therefore, there is a super-story and a super-spreader, which are the two elements used in this book.

The themes are similar to what one came across in The Tipping Point, as he uses psychology and observation backed by research to explain things that may not be too obvious to the reader. Each story of his has a takeaway which will make the reader say—of course, it has to be this way. Gladwell’s perspective looks at the darker consequences of various phenomena. It includes the surge in bank robberies in the eighties in Los Angeles, the Medicare fraud epidemic in Miami, and the opioid crisis in the United States, etc. In each case he explores how various subjects like individuals, institutions, and environmental factors create tipping points that manipulate or exacerbate societal problems. He consciously draws parallels between criminal epidemics, institutional failures, and examines how small influencers and seemingly minor decisions can lead to widespread, sometimes devastating, consequences.

For instance, Gladwell talks of how the Covid pandemic started. He talks of a biotech firm having a meeting of all global leaders in Boston and logically explains how one person probably started the spread. He had come from China to begin with, but did not know that he was carrying the virus. A successful presentation with hugs to colleagues ensured that most of the staff returned home carrying the virus and spread it ahead. This is an example of a physical epidemic. The description could be that of the author, but the conclusions drawn are important.

On similar lines, Gladwell has some various interesting conclusions. Just like the theory of 10,000 hours of practice of learning in any profession makes one an expert, so is it when there are opinions floated. If 25% is veering in one direction, the majority follows. This is an observed fact, which is stylised by the author. Similarly, with 30% or 1/3 of members of the board of directors being women, they are able to put more weight on decisions taken. Gladwell examines this concept in the context of corporate boards, where having at least three women on a board transforms group functionality by reducing tokenism and fostering collaboration. This, he calls the magic third. So, whether it is 25% or a third, the conclusion drawn is that we do not need a majority to turn the decision. This also will resonate at the electoral level in India where often the winning team may not need to get more than a third of the popular votes!

Try and answer this question. Why do Ivy League schools care so much about sports? It is not all schools, but definitely Harvard. He gets into the process of selection of students and where the predilection to sports leads to the institution having special quota. This, along with the facilities provided, makes sure that the college is able to excel in every field. His takeaway is that the effect of lower entry criteria for athletes is not to take in disadvantaged students, but rather to tilt to the wealthy elite. This follows from the fact that to be a young tennis champion one would need to have parents with the time and wealth to support development of such children. The rather distressing side to the admission process is that there are relatively few seats for outsiders as there are fixed proportions for different categories, with merit being only one of them. The acronym of ALDC holds with privileges being given to athletes, legacies, dean’s interest and children of faculty. In short, one can say that there should not be disappointment in case one does not make it to the school with high marks.

The section where he explores the impact of media on social change is quite an eye-opener. The famous serial Will and Grace brought about the acceptance of homosexuality, which was a taboo earlier. Similarly he shows that a 1978 TV series, Holocaust: The Story of the Weiss Family, made people aware of the holocaust. Otherwise it was a foreign issue and largely unheard of in the USA. Not surprisingly, the number of memorials and museums focusing on the holocaust sprung up after it became popular on TV—a case of the overstory and the super-spreader!

Some of the case studies of Gladwell can be unsettling, especially when he talks of the Medicare fraud in Miami. As individuals we do see how hospitals in India in metro cities push everyone to undergo procedures that are very expensive and probably not necessary, while those in other cities or areas do not suggest the same. It is all about money and the insurance cover which make a difference. In a similar manner, Gladwell explores another anomaly seen across different states in the USA where opioid use was prevalent. Illinois had a low rate of opioid abuse relative to Indiana. The reason was that Indiana, like many states, did not do any monitoring and hence salespersons from Big Pharma companies came in and pushed the drug OxyContin. This made access easy for those taking drugs. Illinois, by contrast, ensured that there was a prescription given in triplicate—one each for the pharmacist, patient and regulatory agency. The three-tiered process became the overstory or governing idea of opioids being different, which made physicians pause and think before prescribing them.

If one is a fan of Gladwell, these stories will excite the reader as it sounds like vintage stuff. The mix of psychology with facts is quite alluring for anyone to draw conclusions, which the author does with some élan. His style is one that blends history, science, and narrative to reveal how subtle societal changes can snowball into transformative shifts. Some of the ideas presented here may sound repetitive, but then this holds for any author who talks about any theory or ideology—which in this case is the tipping point.

Book details:

Title: Revenge of the Tipping Point: Overstories, Superspreaders and the Rise of Social Engineering

Author: Malcolm Gladwell

Publisher: Hachette

Number of pages: 368

Price: Rs 799