Archive for March, 2016

The debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.

For developed countries debt to GDP ratio of 60% is the safe limit, while for developing countries it stands at 40%. Anything above these number can be termed unsustainable levels. India’s Debt to GDP ratio is well above 40% at 65% (2013) which means it may not be sustainable to have such huge liabilities. Only relief is that most of the debt is in local currency that’s why investors still have confidence in Indian economy.

If the Indian economy grows with steady 7.5% rate and fiscal deficit remains at 6%(Centre + State) then according to a study after 10 years of time debt to GDP ratio will come down to a level of around 59.5%.  But State govt restrict their fiscal deficit to 1% collectively, which is quite possible  after 42% devolution, and a total of 4%(Centre + State) then with growth pace of 7.5% we can achieve 47% level. This will require that states with high debt ratio borrow less, and state with less growth potential borrow less too. While Centre which left with limited resources after high devolution to the states stand justified with high level of borrowing (up to 3%). These above assumption also require a moderate high inflation rate of 5% level.

One of the reason for India’s high level of debt to GDP ratio is lower growth in previous years just after 2008 crisis. When combined (Centre + State) fiscal deficit went up to 6% from earlier  4.1% in 2007 and household savings dropped from 11.6% to 7.3%  during same period due to high level of inflation which means a squeeze in corporate investments (earlier 11.6-4.1 =7.5 left for corporate investment while after crisis only 7.3-6=1.3 left for the same).

Here is a need for establishment of an autonomous body to review fiscal performance under the FRBM Act, Similar to the recommendation of Thirteenth and Fourteenth Finance Commission. This could evolve into a statutory Fiscal Council, reporting to Parliament through the finance ministry. Such institutions have been set up in several countries, with somewhat varying mandates.

A Fiscal Council, with technical expertise, would help generate better understanding of the consistency of fiscal stance of each budget with the longer-term fiscal trajectory envisaged under the FRBM Act. It would certainly improve the quality of Parliamentary oversight and also contribute to a more informed public debate. The Council would actually strengthen the hands of the finance ministry, which is otherwise the lone guardian of fiscal prudence, battling other ministries typically keen on expanding expenditure. States as such do not require fiscal council like body because they  can’t borrow without the permission of Centre Govt.

But this does not means that Centre can’t deviate in emergencies. Thus flexibility may also be needed at fiscal targets because of non-cyclical shocks, for example a permanent increase in oil prices. In such a situation the correct approach is to go back to the drawing board, work out the implications for GDP growth and revenues, and determine a new fiscal trajectory, which takes appropriate account of crowding out and the debt/GDP ratio. The pace of fiscal adjustment can always be slowed temporarily without affecting the end period debt-to-GDP ratio target by ensuring sharper reductions in the fiscal deficit in later years. However, the harmful impact on crowding out by going for higher fiscal deficits in earlier years needs to be carefully examined.


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The Ujwal Discom Assurance Yojana (Uday) is launched to turn around power distribution companies (discoms), which are generally inefficient state government monopolies that are struggling financially.

Key features of the scheme:

  • The scheme allows DISCOMS in few selected states to convert their debt into state bonds. According to the scheme, states will take over 75% of DISCOM debt as on 30 September 2015 over two years – 50% of DISCOM debt will be taken over in 2015-16 and 25% in 2016-17.
  • States will issue non-SLR including SDL bonds in the market or directly to the respective banks / Financial Institutions (FIs) holding the DISCOM debt to the appropriate extent.
  • The centre will not include the debt taken over by the States as per the scheme in the calculation of fiscal deficit of respective States in the financial years 2015-16 and 2016-17.

However, the scheme is not free from criticisms. Main criticisms are:

  • The cost of borrowing for state governments has risen sharply since the Uday was launched.
  • Also, as state governments have tried to raise funds by selling Uday bonds, they have been blamed by some for creating a shortage of funds for other borrowers.
  • It is also argued that the gap between the costs at which the Centre and the state governments borrow — “the yield gap” — has now widened to levels only seen at a time of crisis.

Is there any shortage of funds?

Experts say, “NO”. This whole process is just debt replacement where the banks that had earlier lent to the discoms get their money back, and are then free to lend in the economy, or even buy state development loans (SDLs) from the market. Even the non-banking companies that receive the proceeds of these SDLs may deploy them in bank bonds, among others things, and these funds thus enter the market again.

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The key features of the Aadhaar Bill :

  1. Enrolment is voluntary.
  2.  It shall only be used as proof of identity and not as proof of citizenship.
  3. It enables the government to prevent fraud, corruption and waste by requiring the Aadhaar number for delivery of any benefit, subsidy or service from the Consolidated Fund of India, such as LPG subsidy, MGNREGA wages, various insurance schemes, provident fund schemes, government scholarships, and much more.
  4. It does not prohibit the usage of Aadhaar for any other purpose by any public or private entity.
  5. It provides privacy protection at an unprecedented level for Indian law. For example, it has,
    • One, “use limitation” — it can only be used for the purpose for which the user gives consent.
    • Two, “collection limitation” — no information other than demographic (name, address, date of birth, sex and, optionally, email id/ mobile number) and biometric (photo, fingerprint and iris scan) will be collected. No other personal information of an individual will be in the Aadhaar database.
    • Three, “access and rectification” — the user can access his own information and has an obligation to rectify it if it needs updating.
    • Four, no demographic information or identity information received from the Unique Identification Authority of India can be displayed publicly.
    • Five, the only exception to certain confidentiality (but not security) obligations is national security, provided an order to disclose information is issued either by a court, or by a joint secretary or higher officer, and vetted by a high-powered committee headed by the cabinet secretary. Even then, sharing of a particular piece of information will be permitted only for a limited time period.
    • Finally, the bill includes stringent penalties, including imprisonment for breach of privacy and other violations.

The massive savings from a limited deployment of Aadhaar show that it is a powerful instrument against retail corruption, far better than creating another bureaucratic layer that only deepens the decision-making gridlock.

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India is a 2 trillion economy today, its growing at a pace of 7% per annum from last 15 years. If the pace remains same then India will cross 10 trillion mark before 2030. It is following fiscal consolidation path and other indicators like inflation is also in manageable range. CAD also has been at manageable level, for 2015-16 it is expected to be at 1.5%. India got 41.6 billion USD in FDI and forex reserve at record 350 billion USD but still our currency went as low as 68 from 63 and Sensex fell below 24000 mark from 28000.

If the macro economic conditions are so well then why this excessive volatility in the market , which impedes whole business planning? This seems happening because there has been an outflow of 6.4 billion USD in FIIs on the account of Chinese currency devaluation , due to RBIs saying  that banks NPA should be written off by 2017 and also due to host of other reasons. But, now this is clear to us that India is too vulnerable to the sharp flows of FIIs. To cushion this India must have a Stabilization Sovereign Wealth Fund managed by a professional body such as UTI. This fund can be used to buy equity and bonds when  there is a sharp outflow and sell the same if sharp inflow takes place.

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Indian start-ups received more than $3.5 billion in venture funding in the first six months of this year alone. India is now the largest tech incubator in Asia, the third-biggest in the world, and it’s on track to become the global leader.

Start-ups are responsible for two-thirds of the jobs in the US. The same can be true of India with the implementation of streamlined policies addressing the entire life-cycle of a start-up (creation, growth and shutdown). If unleashed, Indian start-ups will employ a majority of the 10 lakh youth that join the workforce every month. Start-ups will employ the next generation.

A slew of incentive to boost start up enterprises

  1. Offering a tax holiday and inspector raj free three years
  2. Capital gains tax exemption
  3. 10000 cr corpus to fund them
  4. Self-certification scheme announced recently in respect of nine labour and environmental law
  5. Government has decided to relax the norms for Startup MSMEs. According to the decision, if the MSMEs can deliver the goods and services as per prescribed technical & quality specifications, the norms on prior experience and prior turnover will be relaxed for them. This will help the Startup MSMEs to take part in the mandatory 20% public procurement from MSMEs.

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Agrarian distress

Severity of agrarian distress shown by two common indicators:

  1. Indebtedness of the farm household, and
  2. Number of farmer suicide

Incidence of farmer suicide in India caused by

  • Falling farm income: When farmers income is chronically lower than his family expenditure, he borrows money from some source to meet the gap. Expenditure on social ceremonies and health expenditure, also forces him to borrow particularly from non-institutional sources.
  • A crisis resulting from a sudden income loss due to crop failure or price crash. In the absence of crop insurance or adequate relief, crop failure can have disastrous effect on farm income.

So what is the solution?

The textbook answer is to raise farm income. This can be done in following three ways:

  1. Enable farmers to get better prices for their produce and       encourage crop diversification. Mechanism like ‘Price deficiency payment system’ and price insurance for different crops can protect farmers from market and price risk.
  2. Augmenting farm income by scale up farms. It require transparent and formal land lease system.
  3. Provide alternative sources of livelihood to needy farm households.

Most common cause of crop failure is water stress. Irrigation is the best insurance against crop failure. The area under Irrigation through public sources has not expanded to reflect the huge investment in Irrigation made after 10th five year plan. The thrust on irrigation envisioned under the various components of the recently launched Pradhan Mantri Krishi Sinchayee Yojana offer hope as well as scope for reducing water stress in agriculture.

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    • Under Pradhan Mantri Awas Yojana , It is announced that private players constructing affordable housing of 30sqm in four metros and of 60sqm in other cities approved during june 2016 to march 2019 will get 100% exemption on tax. But will be subjected to MAT.(do away supply side constrain)
    • Service tax of 5.6 % has also been exempted on services for construction of such projects under the urban ‘Housing for All ‘ mission or PMAY.(does away supply side constrain)
    • Another measure of 100% excise duty exemption for ready mix concrete, which is also expected to aid in easing supply side constrains of real estate sector by bringing down construction cost.
    • On the demand end of housing spectrum, an additional rebate of Rs 50,000 per annum has been announced on housing loan interest for first time home buyers in the affordable housing segment. This announcement however is applicable for home loans not exceeding Rs 35 Lakh, and property not exceeding Rs 50 Lakh.
    • The finance minister also provided a boost to the rental housing market with an increase in housing rent allowance (HRA) deduction. Those not owning a house and not receiving any HRA, can now avail a standard deduction of Rs 24000 per annum; While for those already availing HRA, The limit has now been raised to Rs 60000 per annum towards rent paid for their homes.
    • Real Estate Bill will have a positive impact too.

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