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posted on 05 March 2016

Who Speaks For India? A Tale Of Three Minds: The Economic Adviser, The Finance Minster And The Central Banker

Written by

India's Annual budget for April 2016 to March 2017 was presented on February 29, 2016. A few days earlier, The Economic Survey for the fiscal year April 2014 to March 2015 was presented. Both are work products of separate teams in the Ministry Of Finance led by the Finance Minister GOI (government of India). These are complex documents and we will attempt to present some interpretation here.



Economic Surveys are normally drab affairs, as if conspired to glaze your eyes, but with good intention of being sleeping pills for people suffering from Economic Insomnia. One suspects that they are read mainly by the authors, their doting family members and faithful juniors. There is a joke that no one, including the authors, understand these surveys. The findings of the Economic Survey are promptly trashed by the Finance Minister during preparation of the Annual Budget which is presented a few days later.

We will try to come to the rescue of hapless Budget Makers and Finance Ministers.

For example The Economic Survey, published in February 2016 near the end of the current financial year April 2015 to March 2016, is for the period April 2014 To March 2015. The Budget Planners for the next financial year (April 2016 to March 2017) will have been working for two years with unreliable data in the fast paced economic world and subject to political push and pulls. So what do you normally do? Trash the newly published survey!! No wonder budget documents resemble Swiss cheese, full of holes, year after year.

We detect a paradigm shift this time. For the first time in memory, perhaps in the history of independent India, The Economic Survey published on February 26, 2016 is refreshingly different. It is an attempt to accurately capture the State of the Economy and the trends for last couple of years. It makes no attempts to "please the bosses". For a change, the budget proposals announced on February 29 by the Finance Minister, few days later have perhaps not trashed The Economic Survey, which for once seems to stand on its own merit.

In an introduction to the Economic Survey 2014-2015, main author Aevind Subramanian Chief Economic Adviser, Ministry of Finance, GOI says:

"The Survey places a premium on new ideas or new perspectives both of an academic and policy nature. The limitations of time and resources mean that new ideas may not pass the most rigorous standards of the academy. But the approach is to find new data or present old data in a new form, to make connections, and to draw insights wherever possible, all with the aim of shedding light on policy. The aim is to provoke and stimulate debate and discussion, thereby enriching the process of policy-making, and hopefully, improving its outcome.

The survey also aims to be readable, rising to the challenge of making dry economics as accessible as an op-ed (or perhaps a blog) without fully sacrificing the rigor of a more serious tome. The discipline may be dismal but, dear reader, it should not be dreary"

The Budget Proposals announced by Finance Minister Arun Jaitley on February 29, draws inputs from this survey. Despite public posturing by the "troika" who are often at odds with each other, they (Finance Minister Arun Jaitley, Chief Economic Adviser Arvind Subramanian and the central banker Raghuram Rajan) seem to have arrived at consensus on the way forward. One can fault the Budget proposals depending on one's social, political and economic leanings ( or ideologies?), but one senses teamwork that has been rare in the past. On this Prime Minister Modi deserves kudos.

Continuity and Change

Despite the bitter political acrimony between the ruling party BJP(Bharatiya Janata Party) led by PM Modi and a directionless, clueless opposition led by Congress (Indian National Congress) headed by Sonia Gandhi, India has moved forward ince Modi's dramatic win in May 2014. One major achievement has been no corruption at high levels. Four tough areas (Infrastructure, Power , Railways and Defence) are being handled competently and transparently. Raghuram Rajan has held his own. Looked at suspicion of being a Congress stooge, he has demonstrated that he is no dummy nor can be pressured by the political establishment. Many times he has spoken his mind fearlessly. The only accusation that can be made on him is, that he is a super hawk but then he has a point.

Fudging India's Economic Figures - Not Really

When the basis of accounting was changed last year, GDP growth for the April 2015 To March 2016 is estimated to be between 7 to 7.5% this year, doubts were raised on the correctness of the figures. Accusation of manipulation by the Government (mainly by opposition) were hurled, saying that the figures were dressed up to make the performance of the Narendra Modi look good. Many (including this author) opined that the situation at ground level was not good - so something is not "quite right". The Economic survey answers these questions objectively. The accusations of fudging have died down.

From the Economic Survey Volume 1, Box 1.1 page 6......

Notwithstanding the new estimates, the balance of evidence and caution counsel in favor of viewing India as a recovering rather than surging economy.

"On January 30, 2014 the Central Statistics Office released a new GDP series that entailed shifting the base year from 2004-05 to 2011-12 but also using more data and deploying improved methodologies.... ....

The largest discrepancies between the two series arise in 2013-14 and relate to real GDP growth for the manufacturing sector, where the magnitude is 6 percentage points! ......Even allowing for the fact that the latter is a volume index and the former a valued added index, the discrepancy remains large. Clearly, these issues need to be examined in greater detail.

Until a longer data series is available for analysis and comparisons, and until the changes can be plausibly ascribed to the respective roles of the new base, new data, and improved methodology, the growth narrative of the last few years [ with respect to new series ] may elude a fuller understanding.

Regardless, the latest numbers will have to be the prism for viewing the Indian economy going forward because they will be the only ones on offer.

But, the balance of evidence and caution counsel in favour of an interpretation of a recovering rather than surging Indian economy.

Reconciling Not So Feel Good Factor and 7 to 7.5 percent growth

Last year has been terrible for the World Economy and India has had its fair share of trouble.

  • Industrial Production Index is down from 186 to 183, down 1.3% in the period December 2014 to December 2015. So the doom and gloom feeling in the industry sector is justified.

  • Exports have plummeted from USD 24.4 Billion to USD 21.1, down 13%.

  • Stock Markets declined 17% from January 2015 to February 2016. So doom and gloom in this sector is justified.

Yet the Economy grew not due to fudging but by consumption led growth.

Rahuram Rajan a Super Hawk or being Financially Prudent?

Rajan has been under pressure from industry as well as the Finance Minister to cut down lending rates and has been accused of a lagging response. There has been lot of public acrimony between Raghuram Rajan and Arun Jaitley taking contrary positions.

Arun Jaitley has publicly argued for rate cuts. Raghuram Rajan on the other hand has doggedly followed his twin agenda of cleaning the Balance Sheet specifically of Public Sector Banks as well as keeping inflation low by whatever limited monetary tools are at his disposal.

Translation: Raghuram Rajan has cut rates at the pace at his team in the Central Bank deems fit.

The Economic Survey interestingly takes oblique pot shots at both Raghuram Rajan and Arun Jaitley

From Page 11 Economic Survey Volume 1

"The Government and the RBI need to conclude the monetary policy framework agreement to consolidate the recent gains in inflation control and codify into an institutional arrangement what has become the de facto practice. This would signal that both Government and RBI jointly share the objectives of low and stable inflation."

However the Economic survey acknowledges that RBI (Reserve Bank of India) is making all effort to get the banks, mainly public sector banks, to come clean with their balance sheets - but comments that so far the impact has yet to trickle though

From Page 26, Economic Survey Volume 1:

"The RBI is making efforts to get banks to recognize their bad loan problems, and address them. But the impact of these initiatives has so far been limited. The stock of stalled projects remains extraordinarily high; firm profitability, especially for firms working in the infrastructure sector, remains low. So, questions on the pace and strength of recovery of private sector investment remain open."

Economic Survey Volume 2 Page 45 acknowledges the severity of the problem in banking industry and quotes from a December 2014 Financial stability Report:

" Five sub sectors, viz.infrastructure, iron & steel, textiles, mining (including coal), and aviation, hold 54 per cent of total stressed advances of PSBs [ Public Sector Banks] as on June 2014. Among bank groups, exposure of PSBs to infrastructure stood at 17.5 per cent of their gross advances as of September 2014. This was significantly higher than that of private-sector banks (9.6 per cent) and foreign banks (12.1 per cent).......

The RBI has taken a number of steps to resolve the NPA ' Non Performing Assets] issue. In January 2014,it came out with guidelines on ''Early Recognition of Financial Distress, Prompt steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy'', whereby banks have to start acting as soon as a sign of stress is noticed in a borrower's actions and not wait for it to become an NPA."

Raghuram Rajan's view prevailed and in February 2016, with perhaps tacit nod of the Government the Public Sector Banks, declared quarterly loss of Rs.12,000 Crores or USD 1.75 billion (One USD Equal to Rs 68.62).

The total recapitalization requirements for Public Sector Banks has been estimated between USD 70 billion and USD 140 billion. ( Page 77, Economic Survey Volume 1)

Many commentators are saying that the liquidity situation is bad, private sector is not investing, and that public sector banks are stressed and need recapitalization.

It has been argued that:

"RBI is an outlier among the community of central banks with a high shareholder equity-asset ratio of 32%, the RBI could reallocate a portion of its capital to the shareholder banks". RBI is next only to Norway's central bank in holding a high portion of equity (capital, retained earnings and contingencies) with itself - around USD 116 billion [Rs 8 lakh crore]. Economists with the finance ministry led by chief economic adviser Arvind Subramanian said even if the RBI were to reduce the equity-asset ratio to 16% (the median of a representative sample of central banks), considerable sums could be released to the PSBs, reducing the recapitalization burden on the exchequer."

However this has not cut much ice with PM Modi who is rumored to have booted out this suggestion. Raghuram Rajan's firmness has again prevailed.

Author's note: Econintersect had inkling of the above from its own unconfirmed sources, and carried a news byte from Bloomsberg titled "Modi and Rajan: Unlikely Allies Battling India's Oligarchy"

In a move a day prior to the budget, Vinod Rai, former Comptroller and Auditor General of India, under whose watch the CAG estimated the loss due to spectrum allocation at Rs 1,70,000-crore under the UPA II government, was appointed chairman of the Bank Board Bureau to oversee reforms in the appointment process for top-level posts and improve governance in public sector banks.

The final budget proposal has provisioned a paltry USD 3.64 billion to recapitalize government-controlled banks. Arun Jaitley said in his budget speech:

"If additional capital is required by these banks, we will find the resources for doing so."

This can turn out to be very prudent view in case of changes in the external sector. Rise of oil prices without corresponding rise in exports may put stress on USD 350 billion reserve - the companies have to buy dollars and this may deplete the foreign exchange.

To keep inflation down and not "print money", we expect Raghuram Rajan's spring cleaning of Public Sector Banks to continue. But he might accommodate a rate cut to ease liquidity.

In an ironic twist the Government holds in its war chest a 10% stake in ITC, a tobacco giant whose stock has risen by whopping 10% on March 1, 2016 despite 15% hike in excise duty of cigarettes !! . ITC opened with gap up on March 1, a day after the budget!

Talk about having the cake and eating it too!!

We are not sure if the Public sector banks will be sold off, but we do expect that the regulatory body Bank Board Bureau will be given teeth.

"Some other creative solutions like creation of Real Estate Investment Trust(REIT) and Infrastructure Investment Trust (InvIT) could release huge inventory of (historical) undervalued assets (like old premium real estate in Bank balance valued at historical cost) in Banks' balance sheets to provide much needed liquidity and investible funds to restart stalled infrastructure projects - which are significant part of non-performing assets. This initiative has the potential to be a game-changer, and with no implications for the budget." [ Internal Communications -- Rushi Bakshi]

Center Budget At a Glance

[ We have used I USD = Rs 68.62 conversions ]

[ 1 Crore = 10 Million]

Rather than numbing the reader with number crunching, our attempt is to give sense of broad direction of this budget.

Estimated Tax Revenue: USD 237.67 Billion [Rs. 1630888 Crores]

Less Contingency Fund : USD 0.94 Billion [Rs. 6450 Crores]

Less Transfer To States: USD 83.12 Billion [Rs. 570337 Crores]

Center Net Tax Revenue: USD 153.61 Billion [ Rs. 1054101 Crores]

Estimated Non Tax Revenue USD 47.05 Billion [Rs 322921 Crores]

(Dividend, Interest etc.)

Total Revenue USD 200.66 Billion [Rs 1377022 Crores]

Total Receipts USD 288.26 [Rs. 1978060 Crores]

Financing Of Fiscal Deficit USD 77.80 [Rs. 533904 Crores]

Budgetary Plan Outlay: USD 102.92 Billion [Rs 706248 Crores]

Ministry Of Railways: USD 117.63 Billion [ Rs 121000 Crores]

Ministry Of Road & Transport USD 15.05 Billion [ Rs 103286 Crores]

Ministry Of Agriculture USD 2.73 Billion [ Rs 18709 Crores]

Ministry Of Defence USD 0.0 65 Bllion [Rs 450 Crores]

Note 1: Above numbers are incomplete but have been provided to give a general feel. As an example we have not included Capital Receipts, Draw Down of Cash Balance. The reader may go to the Government Link provided in References to download all figures which are also available in Excel Format.

Note 2: As we go to press there has been brouhaha about non provision of Rs 1 Trillion Dollar for Salary Bill. We have not verified this independently but find it hard to believe that such a black hole exists. Most probably it is tucked in some section, which careful number crunching will reveal.

No tinkering : Kiss and Forget Relief announced from "Tax Terrorism"

Other than cosmetic changes, it is a major relief that no tinkering has been done. Income Tax rates, Capital Gain Tax rates have been left untouched.

Overzealous Tax Babus with their outrageous demands and over reach have been reigned in. A one-time dispute resolution scheme for those involved in retrospective tax disputes might have to pay only arrears - The interest penalty will be waived. This should restore confidence while also send a message that creative accounting will not be tolerated. Vodafone Cairn should benefit. A tax tribunal has already struck down demands on Microsoft India.

Thrust areas: Agriculture

So far only lip service was done in the previous budgets to the Agriculture Sector.

Modi, in his typical trademark style, has announced that he would double farm incomes by 2022 almost CAGR (compound annula growth rate) of 11%.

This is really seems a tall order and is viewed with skepticism all round. It is viewed as a political grandstanding with an eye on state elections

Leaving aside the political grandstanding, much of India's low agriculture is due to faulty policies of encouraging only cereal production. Despite three dismal monsoons, India has an estimated buffer stock of 100 million tons . To add to the mess at least about 10% is lost due to rot in Government storage. Some estimates are as high as 30%.

This author believes that If the cultivation could shift to pulses production and reforms in agriculture distribution could be implemented, then doubling income is not such a remote possibility. Pulses get much higher prices. Unlike cereals, pulses are in short supply, so India has ready markets. The same is true for oil seeds India is one of the largest importer of soya beans vegetable oil.

In this budget incentives for enhancement of pulses production of USD 72 million have been allocated under National Food Security Mission for pulses production. The number of districts which will be covered initially will be 622.

There are about 2477 principal regulated markets based on geography (the APMCs) and 4843 sub-market yards regulated by the respective APMCs in India. Effectively, India has not one, not 29, but thousands of agricultural markets. This Act notifies agricultural commodities produced in the region such as cereals, pulses, edible oilseed, fruits and vegetables and even chicken, goat, sheep, sugar, fish etc., and provides that first sale in these commodities can be conducted only under the aegis of the APMC through the commission agents licensed by the APMCs set up under the Act.....Though the market fee is collected just like a tax, the revenue earned by the APMCs does not go to the State exchequer and hence does not require the approval of State legislature to utilize the funds so collected. Thus APMC operations are hidden from scrutiny. [ Economic Survey Volume 1 page 117]

These APMC's essentially work as local mafias having a vice like grip on the farmers and consumers . A firm political will could break their vice and could unite the fragmented market into all round unified market aided by technology.

Narendra Modi's government seems to have made this a major key result area. If the Essential Commodities Act is invoked then the APMC's can be overruled. But we do not see this as a remote possibility, especially in BJP ruled states like Maharashtra, Gujurat and Madhya Pradesh.

Narendra Modi has advocated a three-pronged strategy under which one-third of the farming activity will be earmarked for traditional crops like paddy, sugarcane, pulses and oilseeds, one-third for poulty, fishery, bee-keeping and one-third for planting trees to get timber.

One can expect focus on efficient irrigation - "More Crop per Drop" is is latest catchy phrase of Narendra Modi..

He has also announced launching of national agriculture market "e-platform" for farmers enabling them to know market price of their produce threough mobile phones on Ambedar Jayanti on April 14.

The Government has the experience of innovative companies like ITC and Pepsi to learn from. Theses companies have brought efficient production practices and logistics through a corporate culture sorely lacking in traditional agricultural practice.

This is rich experience to draw from.

This initiative is called Unified Agricultural Marketing E Platform; budgetary provisions have been made.

Other major incentives have been detailed in the budget . A total of USD 12.8 billion [Rs 87,765 crore] have been provisioned for.

Thrust areas: Railways:

Railways continue to be thrust area and a total of USD 31.8 billion [Rs 2,18,000 crore] has been budgeted for.

Other Areas

Other areas including education show an out of box thinking. We will leave that to to a later write up but we will mention a few.

This government is effectively using the Aadhaar Card [UID Card ]an initative of the previous government. Advocate groups and NGO had opposed it as an attack on individual privacy. Use of Aadhaar (rural banking) has resulted in lower transaction costs, reducing leakages and corruption. This has been used very effectively for transferring subsidies with direct cash transfers for targeting of subsidies without leakages.

There is now a much clearer linkage of expenditures on NREGA renamed MGNREGA [ Mahatama Gandhi Rural Employment Guarantee Act 2005] , and rural asset creations (rural roads, well digging, restoring ponds....). Ironically this scheme was also initaited by the previous government. Earlier, though, these were just meaningless doles assuring 100 day wages for practically doing nothing. All this has a lot to do with sustaining farmers and rural incomes considering that greater than 60% livelihoods are linked to agriculture sector.

Financial Inclusion Banking For The Unbankable:

The non-banked, previously serviced by either usurious money lenders or high interest Micro Finance Institutions, have been brought into the main line banking industry through Jan Dhan Yojna with zero balance accounts opened and Aadhaar cards.

On the opening day August 24, 2014 a whopping 15 million accounts were opened. To date over 210 million bank accounts have been opened and ₹33074 Crores or USD 4.8 billion deposited under the scheme.

RBI has published norms for Guide Lines For Licensing of Payment Banks.

To quote from RBI Web site:

"The objectives of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

We feel that use of Aaadhar and Payment Banks will go a long way in creating financial inclusion. Micro Finance will be merged with man line banking in practical manner.

Response to the Budget

Response to the budget from opposition parties have been predictable. However many industry leaders have praised the budget.

The market has given a thumbs up . Sensex has registered the biggest one day gain in 7 years rising 777 points .

Our Take

Beyond the raucous and bitter fights between the incumbent party and opposition party which often to the casual observer resemble a comic soap operas .... there is remarkable continuity , change and optimism.

This may not be the "big bang" budget, but after a long time we see a budget with a long term story created by The Troika of thhe Finance Minister, Economic Adviser and Central Banker led by a decisive and firm Prime Minister.

The team seems to understand that the gains can be upset by external shocks and headwinds in the World Economy. There are headwinds in the World Economic System. Many authors including this one argue that, since India is domestic bottoms up story, India is better positioned to weather the storm. The Troika therefore has settled for financial prudence and has not played to an audience of rating agencies or pressure groups.

On the domestic front, the period April 2016 To March 2017 will be interesting to watch. We are not sure how legislative reforms, like the Land Bill, which have stalled infrastructure projects will be carried forward.

Though industry has been vocal about non-introduction of GST our take is slightly different, even though we agree that GST reforms are necessary to create a unified national market. But businesses have created pathways to navigate through the byzantine multiple state laws creating hurdles for a unified market.

The more urgent task is to revitalize railways, agriculture, infrastructure, power and defence. The present administration is on track and the budget could not have been much better, in our opinion.

So to answer Who Spoke For India? The "Troika" led by Modi did.

Many Thanks to Rushi Bakshi for his valuable inputs, especially on Agriculture and Other Areas, and general review of the manuscript. Any errors are mine and mine alone.

References and Links

Economic Survey 2014-2015 Volume 1 Ministry Of Finance, Government of India

Economic Survey 2014-2015 Volume 2 Ministry Of Finance, Government of India

Economic Survey 2014-2015 Statistical Appendix Ministry Of Finance, Government of India

Economic Survey: Watch Analysis With Arvind Subramanian And Prannoy Roy: NDTV Video

Full Budget Speech of Arun Jaitley, Finance Minister, Government of India: Times of India

Union Budget at a Glance. Ministry Of Finance, Government Of India

Highlights of Index of Industrial Production (IIP) December, 2015 , Central Statistical Organization , Government Of India

India Industrial Production 1994-2016: Trading Economics.Com

Public Sector Bank Report biggest quarterly loss. DNA India

RBI Can Fund public Sector Bank Recapitalization: The Financial Express

Tribunal Strikes Down Tax Demand on Microsoft The Indian Express

Modi Speech To Farmers: Indian Express

Modi and Rajan: Unlikely Allies Battling India's Oligarchy: Bloomberg

Govt moves to fix PSU banks: The Indian

ITC Ticker

ITC E Choupal

Aadhar: UID

MNREGA: Mahatama Gandhi Rural Employment Guarantee Act 2005

Jan Dhan Yojna : Government Of India

Press Release RBI ob Payment Banks

Guidelines for Licensing of Payments Banks: Reserve Bank Of India

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